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More About This Title Corporate Risk Management: Theories and Applications
English
An updated review of the theories and applications of corporate risk management
After the financial crisis of 2008, issues concerning corporate risk management arose that demand new levels of oversight. Corporate Risk Management is an important guide to the topic that puts the focus on the corporate finance dimension of risk management. The author—a noted expert on the topic—presents several theoretical models appropriate for various industries and empirically verifies theoretical propositions. The book also proposes statistical modeling that can evaluate the importance of different risks and their variations according to economic cycles.
The book provides an analysis of default, liquidity, and operational risks as well as the failures of LTCM, ENRON, and financial institutions that occurred during the financial crisis. The author also explores Conditional Value at Risk (CVaR), which is central to the debate on the measurement of market risk under Basel III. This important book:
- Includes a comprehensive review of the aspects of corporate risk management
- Presents statistical modeling that addresses recent risk management issues
- Contains an analysis of risk management failures that lead to the 2008 financial crisis
- Offers a must-have resource from author Georges Dionne the former editor of The Journal of Risk and Insurance
Corporate Risk Management provides a modern empirical analysis of corporate risk management across industries. It is designed for use by risk management professionals, academics, and graduate students.
English
Preface by Denis Kessler
Introduction
General presentation
Contents of the book
Acknowledgements
General references
1 Risk management: definition and historical development
1.1 History of risk management
1.2 Milestones in financial risk management
1.3 Current definition of corporate risk management
1.4 Conclusion
References
2 Theoretical determinants of risk management in non-financial firms
2.1 Value of risk management
2.1.1 Expected default costs
2.1.2 Risk premium to stakeholders
2.1.3 Expected tax payments
2.2 Comparative advantages in risk taking
2.3 Risk management and capital structure
2.4 Risk management and managerial incentives
2.5 Conclusion
References
3 Risk management and investment financing
3.1 Basic model
3.2 Illustration with the standard debt contract
3.3 Model with two random variables
3.4 Conclusion
References
Appendix 1: Value of
Appendix 2: Standard debt contract
4 Significant determinants of risk management of non-financial firms
4.1 Rationale for the research
4.2 Significant determinants
4.2.1 Target variable or dependent variable
4.2.2 Main determinants and their measurement
4.2.3 Results of estimations
4.3 Governance and endogeneity of debt
4.3.1 Model
4.3.2 Statistical analysis
4.3.3 Empirical results
4.4 Conclusion
References
Appendix: Construction of the Tax-save variable
5 Value at risk
5.1 Example of VaR
5.2 Numerical method
5.3 Parametric method
5.4 Taking into consideration time periods
5.5 Confidence interval of the VaR
5.6 CVaR
5.7 Conclusion
References
6 Choice of portfolio and VaR constraint
6.1 Optimal benchmark portfolio of the firm
6.2 Optimal portfolio of a constrained manager
6.3 Conclusion
References
7 VaR in portfolios of assets and options
7.1 VaR as a risk measure
7.2 Models without derivatives
7.2.1 CAPM
7.2.2 Multifactor model
7.3 VaR with options
7.4 Black and Scholes model and risk management
7.5 Delta-Gamma VaR
7.6 VaR of a general portfolio
7.7 Application
7.8 Conclusion
References
8 CVaR or conditional VaR
8.1 Motivation for CVaR and coherence in risk measure
8.2 Notation and VaR
8.3 Definition of CVaR
8.4 Another way to derive CVaR with a return distribution
8.5 Example with a Student t-distribution and other examples
8.6 Conclusion: CVaR in Basel regulation
References
9 Regulation of bank risk and use of VaR
9.1 Basel Accords
9.2 Market risk regulation of 1996
9.3 Specific risks
9.4 Total required capital
9.5 Tests
9.6 Comparison between standard and internal methods with interest rate risk
9.6.1 Standard and internal methods
9.6.2 Comparison of the two methods
9.7 Conclusion
References
10 Optimal financial contracts and incentives under moral hazard
10.1 Optimal financial contracts and moral hazard
10.2 Theoretical model
10.3 Empirical application to air accident risk
10.4 Conclusion
References
Appendix: Synthesis of forms of financial contracts
11 Venture capital risk with optimal financing structure
11.1 Some statistics about venture capital
11.2 Role of venture capital firms
11.3 Venture capital firms and added value
11.4 Role of convertible debt
11.5 Information asymmetry and venture capital
11.6 Conclusion
References
12 Bank credit: scoring of individual risks
12.1 Theoretical model
12.2 Empirical analysis
12.3 Credit line and loan default
12.4 Conclusion
References
13 Portfolio management of credit risk
13.1 CreditMetrics
13.2 Review of chapters 2 and 3 of CreditMetrics
13.2.1 Chapter 2 of CreditMetrics
13.2.2 Chapter 3 of CreditMetrics
13.3 KMV Approach
13.4 Calculation of correlations
13.5 Conclusion
References
14 Quantification of banks’ operational risk
14.1 Context and presentation of operational risk
14.1.1 Basel Accord and regulation of operational risk
14.1.2 Examples
14.2 Measurement of regulatory capital
14.2.1 Basic approach
14.2.2 Standardized approach
14.2.3 Advanced measurement approach (AMA)
14.3 Calculation of regulatory capital for losses of over $1 million (LDA)
14.3.1 Scaling model in LDA models
14.3.2 Adding business cycles
14.4 Conclusion
References
15 Liquidity risk
15.1 Theoretical modelling of CDSs
15.2 Bond yield spread’s default portion
15.3 Empirical measurement of yield spreads’ default portion
15.4 Non-default portion of yield spreads
15.5 Illiquidity index
15.6 Illiquidity premium
15.7 Data
15.7.1 TRACE database
15.7.2 Markit database
15.8 Principal component analysis of liquidity risk
15.9 Empirical analysis of credit cycles
15.10 Regime detection model
15.11 Detection of default and liquidity regimes
15.12 Conclusion
References
16 LTCM
16.1 Brief history of the fund
16.2 Risk management, VaR and required capital
16.3 Portfolio optimization and leverage effect
16.4 Conclusion
References
17 Structured finance and financial crisis of 2007-2009
17.1 Structured finance
17.2 Poor risk management linked to the structured finance market
17.2.1 Lack of incentive contracts in the presence of information asymmetry
17.2.2 Poor evaluation of structured products by rating agencies
17.2.3 Poor pricing of complex financial products
17.2.4 Poor regulation of structured finance
17.3 Lessons to retain for risk management
References
Appendix: How to create an AAA CDO tranche from BBB loans
18 Risk management and corporate governance
18.1 Enron and corporate governance
18.2 Financial crisis and corporate governance
18.3 New 2002 governance rules
18.4 Risk management and governance
18.5 Administrative competence of board members
18.6 New regulation for financial institutions
18.7 Economic analysis of governance effect
18.7.1 Testable hypothesis
18.7.2 Data and variables
18.7.3 Model
18.7.4 Empirical results
18.8 Conclusion
References
Appendix: Governance of Canadian federal financial institutions
19 Risk management and industrial organization
19.1 Entry, production and hedging
19.2 Commitment to hedging
19.3 Conclusion
References
20 Real implications of corporate risk management
20.1 Real implications of corporate risk management: A review
20.2 Methodology
20.2.1 Instrumental variable
20.2.2 Essential heterogeneity models
20.3 U.S. oil producers
20.3.1 Sample construction
20.3.2 Descriptive statistics
20.3.3 Oil hedging activity
20.3.4 Univariate tests
20.4 Multivariate results
20.4.1 Firm value
20.4.2 Firm riskiness and firm accounting performance
20.5 Concluding remarks
References
Appendix: Estimated MTEs
21 Exercises
Exercise 1: Portfolio choice and the notion of value at risk (VaR)
Exercise 2: Backtesting of VaR models
Exercise 3: Calculation of VaR with different distributions and accuracy of VaR
Exercise 4: VaR for an equity portfolio with options
Exercise 5: CVaR – Conditional value at risk
Conclusion
General references
Index
