Cover

Title

Copyright

Contents

Acknowledgments

Introduction

Key Notation

1 Measures of Risk and Return

1.1 Measuring Return

1.2 The Key Portfolio Risk Measures

1.3 Risk–Return Preferences and Portfolio Optimization

1.4 The Capital Asset Pricing Model and Its Applications to Risk Analysis

1.5 The Objectives and Limitations of Portfolio Risk Analysis

2 Unstructured Covariance Matrices

2.1 Estimating Return Covariance Matrices

2.2 The Error-Maximization Problem

2.3 Portfolio Choice as Decision Making under Uncertainty

3 Industry and Country Risk

3.1 Industry–Country Component Models

3.2 Empirical Evidence on the Relative Magnitudes of Country and Industry Risks

3.3 Sector–Currency Models of Corporate Bond Returns

4 Statistical Factor Analysis

4.1 Types of Factor Models

4.2 Approximate Factor Models

4.3 The Arbitrage Pricing Theory

4.4 Small-n Estimation Methods

4.5 Large-n Estimation Methods

4.6 Number of Factors

5 The Macroeconomy and Portfolio Risk

5.1 Estimating Macroeconomic Factor Models

5.2 Event Studies of Macroeconomic Announcements

5.3 Macroeconomic Policy Endogeneity

5.4 Business Cycle Betas

5.5 Empirical Fit and the Relative Value of Macroeconomic Factor Models

6 Security Characteristics and Pervasive Risk Factors

6.1 Equity and Fixed-Income Characteristics

6.2 Characteristic-Based Factor Models of Equities

6.3 The Fama–French Model and Extensions

6.4 The Semiparametric Approach to Characteristic-Based Factor Models

7 Measuring and Hedging Foreign Exchange Risk

7.1 Definitions of Foreign Exchange Risk

7.2 Optimal Currency Hedging

7.3 Currency Covariances with Stock and Bond Returns

7.4 Macroeconomic Influences on Currency Returns

8 Integrated Risk Models

8.1 Global and Regional Integration Trends

8.2 Risk Integration across Asset Classes

8.3 Segmented Asset Allocation and Security Selection

8.4 Integrated Risk Models

9 Dynamic Volatilities and Correlations

9.1 GARCH Models

9.2 Stochastic Volatility Models

9.3 Time Aggregation

9.4 Downside Correlation

9.5 Option-Implied Volatility

9.6 The Volatility Term Structure at Long Horizons

9.7 Time-Varying Cross-Sectional Dispersion

10 Portfolio Return Distributions

10.1 Characterizing Return Distributions

10.2 Estimating Return Distributions

10.3 Tail Risk

10.4 Nonlinear Dependence between Asset Returns

11 Credit Risk

11.1 Agency Ratings and Factor Models of Spread Risk

11.2 Rating Transitions and Default

11.3 Credit Instruments

11.4 Conceptual Approaches to Credit Risk

11.5 Recovery at Default

11.6 Portfolio Credit Models

11.7 The 2007–8 Credit-Liquidity Crisis

12 Transaction Costs and Liquidity Risk

12.1 Some Basic Terminology

12.2 Measuring Transactions Cost

12.3 Statistical Properties of Liquidity

12.4 Optimal Trading Strategies and Transaction Costs

13 Alternative Asset Classes

13.1 Nonsynchronous Pricing and Smoothed Returns

13.2 Time-Varying Risk, Nonlinear Payoff, and Style Drift

13.3 Selection and Survivorship Biases

13.4 Collectibles: Measuring Return and Risk with Infrequent and Error-Prone Observations

13.5 Summary

14 Performance Measurement

14.1 Return-Based Performance Measurement

14.2 Holdings-Based Performance Measurement and Attribution

14.3 Volatility Forecast Evaluation

14.4 Value-at-Risk Hit Rates

14.5 Forecast and Realized Return Densities

15 Conclusion

15.1 Some Key Messages

15.2 Questions for Future Research

References

Index

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