Risk Management with respect to Value-at-Risk (VaR) and the recent developments

Outline of the dissertation

(Key school guideline for the context of dissertation)
– Full guideline will be uploaded. It is from page 25 of handbook uploaded.

The first part of the dissertation should summarize the theoretical concepts that are being used in the practical application. The second part should give some institutional context. The third part is the most important, and should explain how the theory (summarized in the first part) can shed light on the specific practical context. The second and third part can be descriptive, or can include some data and (even better) some rudimentary empirical analysis.

Topic: Risk Management with respect to Value-at-Risk (VaR) and the recent developments

(Key context in the dissertation)
The course for this dissertation is Risk Management (Please see the course descriptions far below in red). It is mainly about the analysis and management of risk within financial markets, and I would like to focus on VaR which is the one of popular and widely used measures of risk in Financial Institutions.

In the course, I have studied and discussed about VaR and its implementation. Furthermore, other measurements such as Expected Shortfall and Extreme value theory which are complement to VaR were discussed and backtesting and stress testing were also discussed as a way of verification of VaR.

(Please refer to the course book. The relevant chapter is Topic 4 (Value at Risk) and some of Topic 7 (Regulation and the credit crisis).

However, there was not much detailed about the shortcoming of VaR, why VAR have failed to capture the risk in real world, what is the merit of other supplement measurements. Furthermore, it would be also important (but not discussed) what the current regulatory environment is for VaR and how the implementation may have differed before and after the crisis (such as debt crisis in 2007 to 2009 and other individual failures).

One of examples is that JP Morgan had a massive loss in FY2012 although JP Morgan was a first-mover to develop VaR to estimate a risk in financial market. They were under the risk control using VaR, but the actual loss was beyond their expectations, thus they needed to modify their VaR model. I found this in the newspaper during researching.

Therefore, the main agenda (especially for the third part) of the dissertation will be the change of regulatory environment for VaR and how implementation may be different. It would be also better to comment briefly with regard to Basel because VaR is one of key baseline of their Regulatory framework for the capital of financial institutions.

The approach to the dissertation above is what I discussed with the professor and am recommended.

I would like to have any empirical evidences to back up the agenda, particularly to check the validity of VaR, expected shortfall and Extreme value theory to the extent to find their inherent problem. And also it would find the new measurement to be better model (or worse?) to capture the risk.

The problem I have is I do not have much information about the current regulatory environment for VaR and how the implementation may have differed before and after the crisis, thus it would be important to research any relevant topic, information, news, other publications to get these information and explain.

To summary, the structure of the dissertation I think,
– First part: the summary of the theoretical concepts learned during the course and used in the practical applications (I.e., VaR (mainly), Expected Shortfall, Extreme value theory, etc.). It would include the comparison from each other (pros and cons) but this would be included in the second part.
– Second part: how to use the concepts in the real world and identify the issues, shortcoming of the real applications (with empirical evidences), the failure of real world, and this would introduce the third part of the main part.
– Third part: what the current regulatory environment is for VaR and how the implementation may have differed before and after the crisis. Furthermore, it would be better to identify any issues of the changed regulation and expectation of future environment of VaR.

There is no limitations of the numbers of sources/references. There is only word limit around 6,000 words (please see the full guideline uploaded).

Please use the same symbols or marks with the course book if possible.

FM409E Risk Management in Financial Markets (was Risk Management in Financial Institutions)

Market Risk, Value at Risk and Expected Shortfalll
Endogenous Risk and Limits to Arbitragel
Credit risk and structured productsl

The aim of this course is to give an introduction to the analysis and management of risk within financial markets. The objective of the course is to develop a conceptual framework for thinking about financial risk and to show how these concepts are implemented in practice in a variety of contexts. First, the course gives an overview of risk management in the context of portfolios of fixed income securities and derivatives. Next, we will discuss the implementation and the merits of Value at Risk measures. We will spend some time on endogenous risk and limits to arbitrage. In the context of credit risk we will cover ratings based and structural models, as well as credit risk on portfolios and credit derivatives. A final topic covers regulation and the recent credit crisis. Throughout, the course spends a significant amount of time on practical applications of the theories that are introduced. Some limitations of current approaches are also discussed.

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