Understanding and Managing Model Risk: A Practical Guide for Quants, Traders and Validators (The Wiley Finance Series)Massimo Morini (Author)

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Product Details

• Hardcover: 448 pages
• Publisher: Wiley; 1 edition (December 20, 2011)
• Language: English
• ISBN-10: 0470977612
  

Book DescriptionPublication Date: December 20, 2011 | Series: The Wiley Finance Series
A guide to the validation and risk management of quantitative models used for pricing and hedging
Whereas the majority of quantitative finance books focus on mathematics and risk management books focus on regulatory aspects, this book addresses the elements missed by this literature--the risks of the models themselves. This book starts from regulatory issues, but translates them into practical suggestions to reduce the likelihood of model losses, basing model risk and validation on market experience and on a wide range of real-world examples, with a high level of detail and precise operative indications.






From the Back Cover


The proliferation of increasingly complex pricing models has vastly expanded the operational capabilities of financial institutions within financial markets. However, it has also increased the industry’s reliance on quantitative instruments, and created massive model risk. Consequently, model validation and model risk management are crucial tools for success in the market. Understanding and Managing Model Risk: A Practical Guide for Quants, Traders and Validators brings together a wide range of detailed real world examples, quantitative analysis and regulatory issues. It investigates the interaction between mathematics and the reality of markets, including the explanation of model errors and misunderstandings, providing readers with the operative indications and practical insight to help mitigate the likelihood of model losses. Taking an operative as opposed to a bureaucratic approach to model validation, the book:

• Examines the risks arising from the use of models in calibration, pricing, hedging, correlation modelling, extrapolation and statistical arbitrage.
• Tackles modern day modelling issues including funding and market liquidity, CSA discounting, basis risk, counterparty risk, approximation errors, regulatory uncertainties and stress-testing.
• Investigates consensus models and how consensus can suddenly break down.
• Explores in detail examples from interest rate, credit and hybrid markets, covering also equity and cross-currency risks.
• Analyzes and compares a range of models including stochastic and local volatility, jumps, Libor and SABR models, copulas, structural and reduced-form models.
  

Understanding and Managing Model Risk offers an in-depth understanding of the financial implications of mathematical assumptions, and provides the right tools to identify, quantify and manage the risks inherent in the use of quantitative models.


About the AuthorMassimo Morini is Head of Credit Models and Coordinator of Model Research at IMI Bank of Intesa San Paolo. He has spent the last ten years inventing new models, implementing them, and helping practitioners in using them for buying, selling, and hedging derivatives. This has exposed him to the most practical side of model risk, and has led him to investigate model uncertainty, model robustness, and the management of the risk of model losses. Massimo is also Professor of Fixed Income at Bocconi University and was a Research Fellow at Cass Business School, City University London. He regularly delivers advanced training in London New York and worldwide on model risk management, credit modelling, interest rate models and correlation modelling, where he teaches cutting edge innovations in quantitative finance and discusses their implications with practitioners from the major institutions. He has led workshops on financial modelling and the financial crisis at major international conferences, including Global Derivatives, the Quant Congress, and the Fixed Income Conference. He has published papers in journals including Risk Magazine, Mathematical Finance, and the Journal of Derivatives. Massimo holds a PhD in Mathematics and an MSc in Economics.