Hoffmann Assessing Risk Assessment

Towards Alternative Risk Measures for Complex Financial Systems
1. Auflage 2017
ISBN: 978-3-658-20032-9
Verlag: Springer
Format: PDF
Kopierschutz: 1 - PDF Watermark

E-Book, Englisch, 377 Seiten, eBook

Christian Hugo Hoffmann undermines the citadel of risk assessment and management, arguing that classical probability theory is not an adequate foundation for modeling systemic and extreme risk in complex financial systems. He proposes a new class of models which focus on the knowledge dimension by precisely describing market participants’ own positions and their propensity to react to outside changes. The author closes his thesis by a synthetical reflection on methods and elaborates on the meaning of decision-making competency in a risk management context in banking. By choosing this poly-dimensional approach, the purpose of his work is to explore shortcomings of risk management approaches of financial institutions and to point out how they might be overcome.

Zielgruppe

Research

Autoren/Hrsg.

Hoffmann, Christian Hugo

Inhaltsverzeichnis

1;Table of Contents;5
2;List of Tables and Figures;8
3;Abstract;10
4;Zusammenfassung;12
5;Introduction;14
6;Part I:Concepts, Model Level and Risk Assessment;33
6.1;1. Introduction to Part I;34
6.2;2. Literature Synthesis, Theoretical Background and Research Focus;36
6.2.1;2.1. Complexity and Modern Financial Systems;36
6.2.2;2.2. Risk and Risk Management in the Financial World;43
6.2.2.1;2.2.1. Risk modeling;48
6.2.2.2;2.2.2. Value at Risk (VaR);52
6.2.2.3;2.2.3. Expected Shortfall (ES);58
6.2.3;2.3. Systemic Risk Assessment;60
6.2.3.1;2.3.1. Tools primarily for regulators: Conditional Value at Risk (CoVaR) and Systemic Expected Shortfall (SES);62
6.2.3.2;2.3.2. Extreme Value Theory (EVT);64
6.2.4;2.4. General Appraisal;66
6.2.4.1;2.4.1. Advantages of conventional risk models and measures;67
6.2.4.2;2.4.2. Weaknesses of conventional risk models and measures;69
6.2.5;2.5. Excursus: Benoît Mandelbrot's Plea for Fractal Methods;74
6.3;3. Research Questions;83
6.4;4. On an Adequate Concept of Risk and Systemic Risk in the realm of Banking;85
6.4.1;4.1. The Notion of Risk;85
6.4.2;4.2. The Concept of Systemic Risk;101
6.5;5. On the Relevance of Systemic Risks for Banks;113
6.5.1;5.1. Why should Banks take account of, and try to deal with, Systemic Risks?;113
6.5.2;5.2. What are concrete Systemic Risk Scenarios for Banks?;125
6.6;6. Dealing with Quantitative Risk Management in Banking as a Complex Systems Problem;132
6.6.1;6.1. A Trichotomy of Scientific Problems – Warren Weaver’s Scheme as a General Answer to How to Manage Complexity;137
6.6.1.1;6.1.1. Tackling disorganized complexity versus organized simplicity;137
6.6.1.2;6.1.2. Disorganized complexity and statistical techniques;140
6.6.1.3;6.1.3. Tackling organized complexity: open questions remain;143
6.6.1.4;6.1.4. Synopsis;145
6.6.2;6.2. Weaver’s Taxonomy Revisited: Attempts of Clarification, Extension and Refinement;148
6.6.2.1;6.2.1. Approaches towards the operationalization of Weaver’s concept of organized complexity;148
6.6.2.2;6.2.2. The bigger picture of complexity and randomness;151
6.6.3;6.3. Organized Complexity, Financial Systems and Assessing Extreme and Systemic Risks;161
6.6.3.1;6.3.1. On the level of structures;163
6.6.3.2;6.3.2. On the level of events;164
6.6.4;6.4. A Tentative Bottom Line;166
6.7;7. The Fundamental Inadequacy of Probability Theory as a Foundation for Modeling Systemic and Extreme Risk in a Banking Context;168
6.7.1;7.1. Philosophical Roots of the Problem of Induction: some Preliminaries;170
6.7.2;7.2. Probability Theory in a Nutshell, its Embeddedness and its Applications;173
6.7.3;7.3. The Central Argument against using Probability Theory for Financial Risk Management;184
6.7.4;7.4. Linking the Central Argument with the Current State of the Literature (IIIa)-c));192
6.8;8. Conclusion to Part I;195
6.8.1;8.1. Résumé;196
6.8.2;8.2. Outlook: Explanatory Models for In-House Risk Management in Banking;199
7;Part II:The Transition to the Decision Level, Risk Assessment andManagement;203
7.1;9. Introduction to Part II;204
7.2;10. The Critical Turn: The Renaissance of Practical Wisdom;206
7.3;11. Scenario Planning in a Nutshell and its Role in Risk Management in Banking;212
7.4;12. Strengths and Weaknesses of Scenario Planning as a Risk Management Tool;220
7.5;13. Deriving Lessons for Rethinking the Approach to Assessing Extreme and Systemic Risks;226
8;Part III:In Search of a New Paradigm: The Third Way as a Road toLogic-Based Risk Modeling (LBR);230
8.1;14. Introduction to Part III;231
8.2;15. Theoretical Foundations of a Logic-Based Risk Modeling (LBR) Approach;236
8.2.1;15.1. A less Restrictive Axiomatization;236
8.2.2;15.2. Non-Probabilistic Models of Uncertainty;244
8.2.3;15.3. Ranking Theory;248
8.2.4;15.4. Syntax of a Language for Describing Contracts and Correlations;251
8.2.5;15.5. Semantics: Financial Contracts as Uncertain Sequences in a Non-Probabilistic Risk Model Context;257
8.2.5.1;15.5.1. Uncertain sequences by example;258
8.2.5.2;15.5.2. From contract value to risk;262
8.2.5.3;15.5.3. Formalization of the approach;263
8.2.5.4;15.5.4. Concrete instantiations of uncertainty monads: ranking functions;1
8.2.5.5;15.5.5. Evaluating risk models;275
8.2.6;15.6. Model Interpretation and Output: An Exact, Explanatory Scenario Planning Method;280
8.3;16. Case Study: LTCM and Extreme Risk;284
8.3.1;16.1. Example Trade;285
8.3.2;16.2. A Fixed Income Portfolio in LBR;286
8.3.3;16.3. Analysis;289
8.3.3.1;16.3.1. Overview;290
8.3.3.2;16.3.2. Zoom and filter;291
8.3.3.3;16.3.3. Details on demand;293
8.3.4;16.4. Discussion and Conclusion;293
8.4;17. Managerial Implications;296
8.5;18. Scales of Measurement and Qualitative Probabilities;302
8.6;19. Model Validation;308
9;Part IV:Meta Level: Thinking about Thinking and Practices – What itMeans to Reach Effective Risk Management Decisions;325
9.1;20. Introduction to Part IV as Overall Conclusion;326
9.2;21. Escaping the Traps for Logicians: Towards Decision-Making Competency in Risk Management;328
9.3;22. Final Remarks and a Path for Future Research;341
10;References;346
11;Appendices;377

Über Autor(innen)

Christian Hugo Hoffmann completed his doctoral studies at the University of St. Gallen and Yale University. He co-founded a financial risk management start-up which translates these theoretical results into practical impact.