Day 1: Var/Stress tests/Back-testing
Types of risk
- Concept of risks and risk factors
- Regulatory requirements: Basel II
- Risk factors and valuation results (mark-to-market)
VaR approaches
- Consistent risk measurement
- Statistical reminders: kurtosis, skewness, etc.
- Probable loss concept
- Overview of historical VaR
- Overview of parametric VaR
- Monte Carlo VaR concept
- Comparative analysis of the three VaR methods
Exercises: Implementing a VaR process for an option position
Day 2: Beyond VaR
Limitations of and alternatives to VaR
- Advantages and disadvantages of VaR
- Estimating the VaR tail
- Usefulness of back-testing and stress tests
Back-testing and stress tests
- The back-testing technique
- Overview of the main tests used for back-testing
- Identifying extreme scenarios not taken into account within VaR
- Implementing historical and hypothetical stress tests
The subprime crisis: the outlook for Basel II
- Lessons from the crisis
- New regulatory requirements: Stressed VaR
Exercises: Crisis simulation: analysis and implementation of VaR and stress tests
