Cover -- Title page -- Copyright page -- Dedication -- Contents -- Foreword -- Acknowledgments -- About the Author -- Introduction -- Chapter One: Introduction to Financial Markets -- 1.1 The Money Market -- 1.2 The Capital Market -- 1.2.1 The Bond Market -- 1.2.2 The Stock Market -- 1.3 The Futures and Options Market -- 1.4 The Foreign Exchange Market -- 1.5 The Commodity Market -- Further Reading -- Chapter Two: The Efficient Markets Theory -- 2.1 Assumptions behind a Perfectly Competitive Market -- 2.2 The Efficient Market Hypothesis -- 2.2.1 Strong EMH -- 2.2.2 Semi-Strong EMH -- 2.2.3 Weak-Form EMH -- 2.3 Critics of Efficient Markets Theory -- 2.4 Development of Behavioral Finance -- 2.5 Beating the Market: Fundamental versus Technical -- 2.5.1 Fundamental Methods -- 2.5.2 Technical Analysis -- Further Reading -- Chapter Three: Return and Volatility Estimates -- 3.1 Standard Deviation -- 3.2 Standard Deviation with a Moving Observation Window -- 3.3 Exponentially Weighted Moving Average (EWMA) -- 3.4 Double (Holt) Exponential Smoothing Model (DES) -- 3.5 Principal Component Analysis (PCA) Models -- 3.6 The VIX -- 3.7 Geometric Brownian Motion Process -- 3.8 GARCH -- 3.9 Estimator Using the Highest and Lowest -- 3.9.1 Parkinson Estimator -- 3.9.2 Rogers Satchell Estimator -- 3.9.3 Garman-Klass Estimator -- Further Reading -- Chapter Four: Diversification, Portfolios of Risky Assets, and the Efficient Frontier -- 4.1 Variance and Covariance -- 4.2 Two-Asset Portfolio: Expected Return and Risk -- 4.3 Correlation Coefficient -- 4.3.1 Correlation Coefficient and Its Impact on Portfolio Risk -- 4.3.2 The Number of Assets in a Portfolio and Its Impact on Portfolio Risk -- 4.3.3 The Effect of Diversification on Risk -- 4.4 The Efficient Frontier -- 4.5 Correlation Regime Shifts and Correlation Estimates -- 4.5.1 Increased Correlation.

4.5.2 Severity of Correlation Changes -- 4.6 Correlation Estimates -- 4.6.1 Copulas -- 4.6.2 Moving Average -- 4.6.3 Correlation Estimators in Matrix Notation -- 4.6.4 Bollerslev's Constant Conditional Correlation Model -- 4.6.5 Engle's Dynamic Conditional Correlation Model -- 4.6.6 Estimating the Parameters of the DCC Model -- 4.6.7 Implementing the DCC Model -- Further Reading -- Chapter Five: The Capital Asset Pricing Model and the Arbitrage Pricing Theory -- 5.1 Implications of the CAPM Assumptions -- 5.1.1 The Same Linear Efficient Frontier for All Investors -- 5.1.2 Everyone Holds the Market Portfolio -- 5.2 The Separation Theorem -- 5.3 Relationships Defined by the CAPM -- 5.3.1 The Capital Market Line -- 5.3.2 The Security Market Line -- 5.4 Interpretation of Beta -- 5.5 Determining the Level of Diversification of a Portfolio -- 5.6 Investment Implications of the CAPM -- 5.7 Introduction to the Arbitrage Pricing Theory (APT) -- Further Reading -- Chapter Six: Market Risk and Fundamental Multifactors Model -- 6.1 Why a Multifactors Model? -- 6.2 The Returns Model -- 6.2.1 The Least-Squares Regression Solution -- 6.2.2 Statistical Approaches -- 6.2.3 Hybrid Solutions -- 6.3 Estimation Universe -- 6.4 Model Factors -- 6.4.1 Market Factor or Intercept -- 6.4.2 Industry Factors -- 6.4.3 Style Factors -- 6.4.4 Country Factors -- 6.4.5 Currency Factors -- 6.4.6 The Problem of Multicollinearity -- 6.5 The Risk Model -- 6.5.1 Factor Covariance Matrix -- 6.5.2 Autocorrelation in the Factor Returns -- Further Reading -- Chapter Seven: Market Risk: A Historical Perspective from Market Events and Diverse Mathematics to the Value-at-Risk -- 7.1 A Brief History of Market Events -- 7.2 Toward the Development of the Value-at-Risk -- 7.2.1 Diverse Mathematics -- 7.3 Definition of the Value-at-Risk -- 7.4 VaR Calculation Models -- 7.4.1 Variance-Covariance.

7.4.2 Historical Simulation -- 7.4.3 Monte Carlo Simulation -- 7.4.4 Incremental VaR -- 7.4.5 Marginal VaR -- 7.4.6 Component VaR -- 7.4.7 Expected Shortfall -- 7.4.8 VaR Models Summary -- 7.4.9 Mapping of Complex Instruments -- 7.4.10 Cornish-Fisher VaR -- 7.4.11 Extreme Value Theory (EVT) -- Further Reading -- Chapter Eight: Financial Derivative Instruments -- 8.1 Introducing Financial Derivatives Instruments -- 8.1.1 Swap -- 8.1.2 The Forward Contract -- 8.1.3 The Futures Contract -- 8.1.4 Options -- 8.1.5 Warrant -- 8.2 Market Risk and Global Exposure -- 8.2.1 Global Exposure -- 8.2.2 Sophisticated versus Nonsophisticated UCITS -- 8.2.3 The Commitment Approach with Examples on Some Financial Derivatives -- 8.2.4 Calculation of Global Exposure Using VaR -- 8.3 Options -- 8.3.1 Different Strategies Using Options -- 8.3.2 Black Scholes Formula -- 8.3.3 The Greeks -- 8.3.4 Option Value and Risk under Monte Carlo Simulation -- 8.3.5 Evaluating Options and Taylor Expansion -- 8.3.6 The Binomial and Trinomial Option Pricing Models -- Further Reading -- Chapter Nine: Fixed Income and Interest Rate Risk -- 9.1 Bond Valuation -- 9.2 The Yield Curve -- 9.3 Risk of Holding a Bond -- 9.3.1 Duration -- 9.3.2 Modified Duration -- 9.3.3 Convexity -- 9.3.4 Factor Models for Fixed Income -- 9.3.5 Hedge Ratio -- 9.3.6 Duration Hedging -- Further Reading -- Chapter Ten: Liquidity Risk -- 10.1 Traditional Methods and Techniques to Measure Liquidity Risk -- 10.1.1 Average Traded Volume -- 10.1.2 Bid-Ask Spread -- 10.1.3 Liquidity and VaR -- 10.2 Liquidity at Risk -- 10.2.1 Incorporation of Endogenous Liquidity Risk into the VaR Model -- 10.2.2 Incorporation of Exogenous Liquidity Risk into the VaR Model -- 10.2.3 Exogenous and Endogenous Liquidity Risk in VaR Model -- 10.3 Other Liquidity Risk Metrics -- 10.4 Methods to Measure Liquidity Risk on the Liability Side.

Further Reading -- Chapter Eleven: Alternatives Investment: Targeting Alpha, Idiosyncratic Risk -- 11.1 Passive Investing -- 11.2 Active Management -- 11.3 Main Alternative Strategies -- 11.4 Specific Hedge Fund Metrics -- 11.4.1 Market Factor versus Multifactor Regression -- 11.4.2 The Sharpe Ratio -- 11.4.3 The Information Ratio -- 11.4.4 R-Square (R2) -- 11.4.5 Downside Risk -- Further Reading -- Chapter Twelve: Stress Testing and Back Testing -- 12.1 Definition and Introduction to Stress Testing -- 12.2 Stress Test Approaches -- 12.2.1 Piecewise Approach -- 12.2.2 Integrated Approach -- 12.2.3 Designing and Calibrating a Stress Test -- 12.3 Historical Stress Testing -- 12.3.1 Some Examples of Historical Stress Test Scenarios -- 12.3.2 Other Stress Test Scenarios -- 12.4 Reverse Stress Test -- 12.5 Stress Testing Correlation and Volatility -- 12.6 Multivariate Stress Testing -- 12.7 What Is Back Testing? -- 12.7.1 VaR Is Not Always an Accurate Measure5 -- 12.8 Back Testing: A Rigorous Approach Is Required -- 12.8.1 Test of Frequency of Tail Losses or Kupiec's Test -- 12.8.2 Conditional Coverage of Frequency and Independence of Tail Losses6 -- 12.8.3 Clean and Dirty Back Testing -- Further Reading -- Chapter Thirteen: Banks and Basel II/III -- 13.1 A Brief History of Banking Regulations -- 13.2 The 1988 Basel Accord -- 13.2.1 Definition of Capital -- 13.2.2 Credit Risk Charge -- 13.2.3 Off-Balance Sheet Items -- 13.2.4 Drawbacks from the Basel Accord -- 13.2.5 1996 Amendment -- 13.3 Basel II -- 13.3.1 The Credit Risk Charge -- 13.3.2 Operational Risk Charge -- 13.3.3 The Market Risk Charge -- 13.4 Example of the Calculation of the Capital Ratio -- 13.5 Basel III and the New Definition of Capital -- The Introduction of Liquidity Ratios -- Further Reading -- Chapter Fourteen: Conclusion -- Index.