Preface
Chapter 1: Time Series Analysis
Working with time series data
Linear time series modeling and forecasting
Modeling and forecasting UK house prices
Model identification and estimation
Model diagnostic checking
Forecasting
Cointegration
Cross hedging jet fuel
Modeling volatility
Volatility forecasting for risk management
Testing for ARCH effects
GARCH model specification
GARCH model estimation
Backtesting the risk model
Forecasting
Summary
Chapter 2: Portfolio Optimization
Mean-Variance model
Solution concepts
Theorem (Lagrange)
Working with real data
Tangency portfolio and Capital Market Line
Noise in the covariance matrix
When variance is not enough
Summary
Chapter 3: Asset Pricing Models
Capital Asset Pricing Model
Arbitrage Pricing Theory
Beta estimation
Data selection
Simple beta estimation
Beta estimation from linear regression
Model testing
Data collection
Modeling the SCL
Testing the explanatory power of the individual variance
Summary
Chapter 4: Fixed Income Securities
Measuring market risk of fixed income securities
Example – implementation in R
Immunization of fixed income portfolios
Net worth immunization
Target date immunization
Dedication
Pricing a convertible bond
Summary
Chapter 5: Estimating the Term Structure of Interest Rates
The term structure of interest rates and related functions
The estimation problem
Estimation of the term structure by linear regression
Cubic spline regression
Applied R functions
Summary
Chapter 6: Derivatives Pricing
The Black-Scholes model
The Cox-Ross-Rubinstein model
Connection between the two models
Greeks
Implied volatility
Summary
Chapter 7: Credit Risk Management
Credit default models
Structural models
Intensity models
Correlated defaults – the portfolio approach
Migration matrices
Getting started with credit scoring in R
Summary
Chapter 8: Extreme Value Theory
Theoretical overview
Application – modeling insurance claims
Exploratory data analysis
Tail behavior of claims
Determining the threshold
Fitting a GPD distribution to the tails
Quantile estimation using the fitted GPD model
Calculation of expected loss using the fitted GPD model
Summary 124
Chapter 9: Financial Networks
Representation, simulation, and visualization of financial networks
Analysis of networks’ structure and detection of topology changes
Contribution to systemic risk – identification of SIFIs
Summary
Appendix: References
Time series analysis
Portfolio optimization
Asset pricing
Fixed income securities
Estimating the term structure of interest rates
Derivatives Pricing
Credit risk management
Extreme value theory
Financial networks
Index