I this weeks class we learn about Conditional Value at Risk and Stress Testing.
Learning all about derivatives and quantitative finance. if this is the more content like this. i’ve just done a series of videos the end of this video you’ll understand the expected shortfall and stress also known as conditional value at risk or cvar is related to var but is maybe losses in the worst x percent of cases var might tell you that a loss of the average return of
All of those worst at a given confidence level will always be a larger negative number than far at will also carry out stress testing now stress testing is a big part of risk understand the risks on their books and kind of how bad things can get so what have performed in extreme market conditions now there’s a few ways of say for example if you looked at how your portfolio
Would perform if the that’s one way of doing it you can come up with all sorts of stressful scenarios actual real events and see how your portfolio would have held up during september 11 2001 or during the worst days of the financial crisis of 2007 var or s var which is a measure of market risk tailored to stress market setting so in wrapping up this series of videos on
Value at risk i’d like to well there’s a lot of useful formulas out there to help the risk manager and risk management is significant a good risk manager at a financial institution to understand what they do and how they think about risk and what kind of risks manager understands the engine that generates the firm’s profits they’ll be quantitative screens on a spreadsheet
And goes around the floor telling people management a good risk manager is going to understand the true risks at the firm hedge fund manager david einhorn has compared var to an airbag that works all truth to that you know as i explained in you what a normal but there an average bad day looks like but that doesn’t the market can get now wild var does have many flaws it does
Still add some quantitative finance var does suffer from the garbage in that i’ve done that explains a formula in quantitative finance we do use a lot these formulas are often derived from places like physics or engineering and answers they’ll tell you the perfect price for a given option or the exact estimates or numbers so for a variety of reasons can change very quickly
So the understanding the risk on the books today compared to the risks on the books in quantitative finance on by no means knocking the usefulness of these keeps in mind the assumptions that are underlying the various formulas and student of finance and risk management needs to spend some time studying king’s college london i devote one whole class to discussing examples
Of financial crisis is different important lessons can be learned from the past all financial derivatives which is available on amazon and there is a link below hit subscribe button and the bell but next to it in order to see more videos like video is that the subscribe button just kind of puts this type of video in your
Transcribed from video
Conditional Value at Risk and Stress Testing in Financial Risk Management By Patrick Boyle