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Understanding Market, Credit, and Operational Risk: The Value at Risk Approach

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Prior to 2008, the first three chapters were assigned by the global association of risk professionals (GARP) to Financial Risk Manager (FRM) candidates as part of an introduction to quantitative finance. More recently, Chapter Two (Quantifying Volatility in value at risk models) and chapter five (extending value at risk to operational risks) have been assigned to FRM candidates.

The weakness of the book is that it tries to cover all three risk major buckets. For each of market, credit and operational risk, there are better texts with better, and more current, treatments. It is an adequate introduction on each. The credit section is the weakest. Also, the assigned Chapter 5 on operational risk is a brisk conceptual catalog; my students (risk learners) have typically found the catalog of opRisks to be a bit too superficial and generally begs further exploration (e.g., there are no case study examples, and some of the operational risk approaches really need to be illustrated to be understood). In short, the book is not recommended for the ideas conveyed by the title.

However, the book's strength is the beginning, the first three chapters. That is, mostly, the quantitative setup for the rest. These introductory chapters are robust discussions of traditional volatility/VaR and especially their limitations. So, students of risk can learn valuable, lasting lessons; e.g., normality cannot be salvaged, scaling parametric volatility/VaR is a bit doomed, practical volatility calculation issues. So, these first three chapters are recommended.