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

Morini, Massimo

Hardcover

ISBN 10: 0470977612 ISBN 13: 9780470977613

Publisher: Wiley, 2011

Synopsis

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.

About this title

About the Author

Massimo 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.

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.

From the Inside Flap

"The most thoughtful and yet practical book I've seen on dealing with model risk."
―Emanuel Derman, Professor at Columbia University, former Head of Quantitative Risk Management at Goldman Sachs, and author Models.Behaving.Badly

"Massimo Morini has provided a comprehensive and practical book on model risk that well covers the practitioner's needs in these post-credit-crisis times. The various applications are woven together by a strong conceptual underpinning that provides unity and coherence to the book. Traders, product controllers, regulators, accountants and, in general, students of the reality of financial modelling will greatly benefit from this high-quality work."
―Riccardo Rebonato, Head of Front Office Risk Management and Quantitative Analytics, RBS Global Banking & Markets, Visiting Lecturer, Mathematical Finance, Oxford University, and member of the Board of Directors of ISDAand GARP.

"At last, a book (other than my own obviously!) that takes model risk seriously. And does so by hitting the "maths sweet spot," not dumbed down and not trying to impress with complexity. I wish more finance books were this sensible."
―Paul Wilmott, Founder of the CQF, the world's largest quant education program.

“The recent credit crisis taught us that model risk can have disastrous consequences if not properly accounted for. This timely contribution by Massimo Morini presents thorough studies on the types of risk that arise when modeling and pricingcv derivatives across different asset classes. The perfect blend of rigorous modeling and market wisdom makes this excellent book a must have for quants and risk managers: model risk at no book risk.”
―Fabio Mercurio, Quant Business Manager, Bloomberg L.P., New York.

"Long-neglected by risk managers and regulators, model risk was shown to be a major component of the risk of derivatives portfolios during the recent financial crisis. Massimo Morini's book offers a much-needed resource for practitioners who want to deal with the "invisible" risks associated with the widespread use of quantitative models in finance."
―Rama Cont, Columbia University, New York, and CNRS, Paris

“Massimo Morini has a deep understanding of finance, banking and credit in all their aspects. This important book masters the subtle association between risk and valuation models -from how models are built mathematically to the role that they have come to play in the modern financial world. Understanding and Managing Model Risk is a unique 360-degree analysis of the subject,a much-needed contribution in the aftermath of the Credit Crunch. Model Risk is a must-read for serious quantitative analysts, accountants, financial engineers and regulators.” "
―EMarco Avellaneda, Director, Division of Quantitative Finance, Courant Institute, New York University.

Edition details

• Publisher: Wiley
• Publication date: 2011
• Language: English
• ISBN 10: 0470977612
• ISBN 13: 9780470977613
• Binding: Hardcover
• Edition number: 1
• Number of pages: 448