3. Risk measures

3. Risk measures

1. 1. Basic Statistics

   • mean, variance, range, skew, kurtosis, correlation (3 measures)

2. 2. Credit risk

   • Nature: 3 risk factors, VaR vs credit risk, analogy to put option, portfolio effect
   • Default + Recovery risk
     • Actuarial models
       • Default risk: assessment (actuarial models and market prices), cumulative default rates, survival rate, prob of default
       • Recovery risk: formula, factors (4),
     • Market-based models
       • Reduced form models: initial price, credit spread, risk-neutral probability, factors in actual PD
       • Structural Models: background, put-call parity converted into capital structure framework
       • Default comovements: causative models, steps to calc default corr btw 2 firms,
   • Credit exposure: bonds vs derivatives, 3 factors affecting exposure profile, expected and worst exposure, exposure modifiers
     • RM controls: netting arrangements
   • Measuring credit risk
     • pricing, PVECL, Pf credit risk, horizon and confidence level
   • Managing credit risk
     • uses of credit-risk models, pf management, risk concentration, pf credit risk models, regulatory capital (Basel II: standardized vs IRB)

3. 3. VaR shortcomings

   • 1. coherency, subadditivity and tail risk 2. normal distribution 3. methodology 4. historical data + obs period 5. agency problems 6. regulatory disclosure
     • alternatives: expected shortfall, conditional VaR, Modified VaR, CoVaR
       • complementary tools: stress testing, alternatives to VaR, stressed VaR, sound judgment

4. 4. Coherent measures of risk

   • Maximum, VaR, CTE, E[Loss], STD[Loss], E[Loss] +2*STD[Loss]

5. 5. ASOP 23 - Data quality

   • Purpose, definition, selection, review, limitation of actuary's responsibility, use of data, documentation and disclosure