Bubble Value at Risk: A Countercyclical Risk Management Approach -- Copyright -- Contents -- About the Author -- Foreword -- Preface -- Audience -- Overview of the Contents -- Additional Materials -- Acknowledgments -- Part One: Background -- Chapter 1: Introduction -- 1.1: The Evolution of Riskometer -- 1.2: Taleb's Extremistan -- 1.3: The Turner Procyclicality -- 1.4: The Common Sense of Bubble Value-at-Risk (BuVaR) -- Notes -- Chapter 2: Essential Mathematics -- 2.1: Frequentist Statistics -- 2.2: Just Assumptions -- i.i.d. and Stationarity -- Law of Large Numbers -- The Quest for Invariance -- PDF and CDF -- Normal Distribution -- Central Limit Theorem -- 2.3: Quantiles, VaR, and Tails -- 2.4: Correlation and Autocorrelation -- Correlation -- Autocorrelation -- 2.5: Regression Models and Residual Errors -- 2.6: Significance Tests -- How to Compute t-Ratio for Regression -- Hypothesis Testing -- Stationarity Tests -- 2.7: Measuring Volatility -- 2.8: Markowitz Portfolio Theory -- 2.9: Maximum Likelihood Method -- 2.10: Cointegration -- 2.11: Monte Carlo Method -- 2.12: The Classical Decomposition -- 2.13: Quantile Regression Model -- 2.14: Spreadsheet Exercises -- Notes -- Part Two: Value at Risk Methodology -- Chapter 3: Preprocessing -- 3.1: System Architecture -- 3.2: Risk Factor Mapping -- Rationale for Risk Factor Mapping -- Market Risks and Nonmarket Risks -- Risk Dimensions -- Risk Factor Universe -- 3.3: Risk Factor Proxies -- 3.4: Scenario Generation -- Different Returns -- Negative Rates -- 3.5: Basic VaR Specification -- The Case for Mean Adjustment -- Notes -- Chapter 4: Conventional VaR Methods -- 4.1: Parametric VaR -- Weakness of pVaR -- 4.2: Monte Carlo VaR -- Weakness of mcVaR -- 4.3: Historical Simulation VaR -- Weaknesses of hsVaR -- 4.4: Issue: Convexity, Optionality, and Fat Tails -- Convexity -- Optionality -- Fat Tails.

4.5: Issue: Hidden Correlation -- 4.6: Issue: Missing Basis and Beta Approach -- Basis Risks -- Beta Approach -- 4.7: Issue: The Real Risk of Premiums -- 4.8: Spreadsheet Exercises -- Notes -- Chapter 5: Advanced VaR Methods -- 5.1: Hybrid Historical Simulation VaR -- 5.2: Hull-White Volatility Updating VaR -- 5.3: Conditional Autoregressive VaR (CAViaR) -- 5.4: Extreme Value Theory VaR -- Classical EVT -- Peaks-over-Thresholds (POT) Method -- 5.5: Spreadsheet Exercises -- Notes -- Chapter 6: VaR Reporting -- 6.1: VaR Aggregation and Limits -- 6.2: Diversification -- 6.3: VaR Analytical Tools -- The Tail Profile -- Component VaR -- Incremental VaR -- 6.4: Scaling and Basel Rules -- Basel Rules -- Time Scaling -- Quantile Scaling -- 6.5: Spreadsheet Exercises -- Notes -- Chapter 7: The Physics of Risk and Pseudoscience -- 7.1: Entropy, Leverage Effect, and Skewness -- 7.2: Volatility Clustering and the Folly of i.i.d. -- 7.3: "Volatility of Volatility" and Fat Tails -- 7.4: Extremistan and the Fourth Quadrant -- 7.5: Regime Change, Lagging Riskometer, and Procyclicality -- The Lagging Nature of VaR -- Hardwired Procyclicality -- 7.6: Coherence and Expected Shortfall -- 7.7: Spreadsheet Exercises -- Notes -- Chapter 8: Model Testing -- 8.1: The Precision Test -- 8.2: The Frequency Back Test -- 8.3: The Bunching Test -- 8.4: The Whole Distribution Test -- 8.5: Spreadsheet Exercises -- Notes -- Chapter 9: Practical Limitations of VaR -- 9.1: Depegs and Changes to the Rules of the Game -- 9.2: Data Integrity Problems -- 9.3: Model Risk -- Pricing Model Risk -- Strategies and Futuristic Information -- 9.4: Politics and Gaming -- Notes -- Chapter 10: Other Major Risk Classes -- 10.1: Credit Risk (and CreditMetrics) -- Step 1: Defining Various States of the World -- Step 2: Revaluation of Loan Portfolio -- Step 3: Building Correlation -- 10.2: Liquidity Risk.

What Exactly Is Liquidity Risk? -- Liquidity-Adjusted VaR or L-VaR -- A Possible Add-On Formula -- Taking Probability into Account -- 10.3: Operational Risk -- 10.4: The Problem of Aggregation -- The Danger of Adding Apples to Oranges -- Adding across Different Forecast Horizons -- 10.5: Spreadsheet Exercises -- Notes -- Part Three: The Great Regulatory Reform -- Chapter 11: Regulatory Capital Reform -- 11.1: Basel I and Basel II -- 11.2: The Turner Review -- Fundamental Theoretical Issues -- Avoiding Procyclicality in Basel II -- 11.3: Revisions to Basel II Market Risk Framework (Basel 2.5) -- Incremental Risk Charge -- Banking Book Treatment of Securitized Credit Products -- Stressed VaR -- Counterparty Credit Risk: CVA VaR -- 11.4: New Liquidity Framework -- 11.5: The New Basel III -- 11.6: The New Framework for the Trading Book -- 11.7: The Ideal Capital Regime -- Notes -- Chapter 12: Systemic Risk Initiatives -- 12.1: Soros' Reflexivity, Endogenous Risks -- 12.2: CrashMetrics -- CrashMetrics for One Stock -- Extension to Multiasset/Multibenchmark Model -- Simple Illustration -- 12.3: New York Fed CoVaR -- Estimation of CoVaR -- 12.4: The Austrian Model and BOE RAMSI -- 12.5: The Global Systemic Risk Regulator -- 12.6: Spreadsheet Exercises -- Notes -- Part Four: Introduction to Bubble Value-at-Risk (BuVaR) -- Chapter 13: Market BuVaR -- 13.1: Why an Alternative to VaR? -- 13.2: Classical Decomposition, New Interpretation -- 13.3: Measuring the Bubble -- The Notion of Equilibrium -- Adaptive Moving Average -- Using Rank Filter -- 13.4: Calibration -- 13.5: Implementing the Inflator -- 13.6: Choosing the Best Tail-Risk Measure -- Coherence -- Responsiveness -- Stability -- 13.7: Effect on Joint Distribution -- 13.8: The Scope of BuVaR -- Price-Based Risk Factors -- Rates-Based Risk Factors -- Credit Spread Risk Factors.

Volatility-Based Risk Factors -- 13.9: How Good Is the BuVaR Buffer? -- 13.10: The Brave New World -- Hidden Conditions -- Beyond i.i.d. -- Living with Extremistan -- 13.11: Spreadsheet Exercises -- Notes -- Chapter 14: Credit BuVaR -- 14.1: The Credit Bubble VaR Idea -- 14.2: Model Formulation -- 14.3: Behavior of Response Function -- 14.4: Characteristics of Credit BuVaR -- 14.5: Interpretation of Credit BuVaR -- 14.6: Spreadsheet Exercises -- Notes -- Chapter 15: Acceptance Tests -- 15.1: BuVaR Visual Checks -- 15.2: BuVaR Event Timing Tests -- 15.3: BuVaR Cyclicality Tests -- 15.4: Credit BuVaR Parameter Tuning -- Notes -- Chapter 16: Other Topics -- 16.1: Diversification and Basis Risks -- 16.2: Regulatory Reform and BuVaR -- Cushioning Fat-Tail Losses -- Overtly Countercyclical -- Other Advantages -- 16.3: BuVaR and the Banking Book: Response Time as Risk -- 16.4: Can BuVaR Pick Tops and Bottoms Perfectly? -- 16.5: Postmodern Risk Management -- 16.6: Spreadsheet Exercises -- Note -- Chapter 17: Epilogue: Suggestions for Future Research -- Note -- About the Website -- Bibliography -- Index -- Descriptions of the Spreadsheets for the Book -- Website.