Customer Reviews

Value at Risk: The New Benchmark for Managing Financial Risk

5 star:		(2)
4 star:		(5)
3 star:		(4)
2 star:		(5)
1 star:		(3)

 

 

This book was rushed into print following the release of JPMorgan's landmark RiskMetrics description of VaR. Like RiskMetrics, its focus is on explaining VaR to corporate end users. For a while, it was the only book available on VaR, so it became well known. A second edition added material on topics other than VaR, but did not update the treatment of VaR. By today's standards, the book is dated.

Now there are a number of excellent books available on VaR, and these cater to various audiences. Depending upon what you are looking for, they offer a more accessible, more sophisticated, or more up-to-date treatment of VaR.

For an elementary introduction, you can't beat Butler. Downplaying theory, he shows you practical spreadsheet examples you can use to implement basic VaR models. He explains related topics, such as probability distributions, delta and gamma, and the Monte Carlo method, so the book is self-contained.

Marrison's "Measuring Market Risk" describes VaR in the context of bank risk management. More sophisticated than Butler, this is a practical, "real world" book for people starting in bank risk management. Marrison ties VaR together with topics such as capital allocation, credit risk modeling and asset-liability management.

Holton is written for practicing risk mangers or researchers. Before it even publishes, it has made a splash on trading floors where dog-eared preprint copies have become a coveted item. Holton explains in detail things like delta-gamma VaR and variance reduction for Monte Carlo VaR -- topics other books only mention. Also, Holton is the only book that offers exercises.

For use of VaR in investment management, see Pearson's "Risk Budgeting." It introduces VaR and then explains how it can be used to allocate assets between investment categories or among managers -- this is known as risk budgeting. The focus of the book is a technique from calculus that allows you to decompose risks so that the parts sum to the whole. There isn't much else written on this topic, and Pearson offers the best treatment that I know of.

Finally, there is Dowd's "Beyond Value-at-Risk." This provides an excellent survey of the literature on VaR. It also covers related risk management topics, including credit risk management and risk-adjusted performance measurement.

Based upon its marketing, this book over-promises and under-delivers. Yes, the author uses big words like "autoregressive conditional heteroskedasticity." He also tosses around: "principal component analysis", "importance sampling" and "Quasi Monte Carlo." Anyone who needs to understand these concepts will be disappointed. The explanations are shallow ... often just a single paragraph. The reader is left with an elementary book that adds little to the original RiskMetrics document. If you are new to VAR, I recommend Dowd. For more experienced professionals (especially those who need to implement a VAR system) you will need to read the original literature.

The first edition was for a while the only book on the subject. As such, it had to be the best. But, at that time, RiskMetrics VCV approach was the only approach. Jorion analyses this approach in detail, and derives many results (for example, attributing risks, etc.). He then implies by omission that they work for other methods, they don't. He also implies by omission that RiskMetrics is the absolute greatest, it isn't - it's probably now the weakest method. Surveys show that now only 10% of banks worldwide are using this method - and the numbers are falling.

There is nothing about coherence, the problems with VaR, the fundamental problems with using it to allocate risks to portfolios...
There was no reason to bring out a new edition.

Currently the VaR literature is cluttered with books all clamoring for your attention. Thus the potential student of the subject is blessed with being in a position to make a choice. The 'reader from New York' provided a good overview of the relevant literature. IMHO, this book tried to hit a balance between breadth of coverage (different models in practice) and depth (rigour), but the result is a compromise that leaves neither the student of the subject nor the practitioner satisfied. Since other reviewers have done such a good job dissecting this book, I will just concentrate on recommending the books that I feel are better values: For beginning students I feel Kevin Dowd's provides a good overview of the VaR literature in a clear and concise way. For pracitioners and more advanced risk mangement students, I HIGHLY recommend Glyn Holton's new Value-at-Risk Theory and Practice book. His approach is totally refreshing. Instead of starting at the top of the pyramide (the value-at-risk metrics), he starts out at the bottom. He breaks down VaR into its most basic elements. By providing a detailed explanation of difference between exposure and uncertainty, he introduces readers to the mathematical and probabilitistic background material needed to formulate the VaR measure (methodology) and the metrics (resulting VaR value). Both Kevin Dowd and Glyn Holton's presentations are organized and their writing are crisp and easily understandable. You won't go wrong with either book.

This second edition has evolved into a general treatise on risk management. There are new chapters on credit risk, liquidity risk and operational risk. It covers integrated risk management and the risk management profession. The actual material on VAR has changed little from the first edition.

I began using this book as part of my audit job at a major trading/investment firm. I'm currently an FRM candidate, and this is the FRM-recommended book for a bulk of readings on VaR methods and implementation. The first few chapters are a general survey of the risk management world, and informative by themselves. Unfortunately, that's where it stops. As the book starts to dive deeper into VaR, the ideas quickly become disjointed, incoherent and difficult to follow - I have a mathematical background, but it is very frustrating to have to read repeatedly to try and decipher entire sections of the book, especially the whole chapter on backtesting. While VaR as a concept is easy to grasp, the devil is very largely in the details, which this book fails to present in any organized way. So, it is more like an advertisement for the idea of VaR-based risk management, but certainly not a practical guide.

From the late 1970s onwards, a number of major financial institutions started work on internal models to measure and aggregate risks across the institution as a whole.

The best known of these is JP Morgan's RiskMetrics system. This is said to have originated when the chairman, Dennis Weatherstone, asked his staff to give him a daily one-page report indicating risk and potential losses over the next 24 hours, across the firm's entire trading portfolio.

To meet this demand, Morgan staff had to develop a system to measure risks across different trading positions over the whole institution, and then aggregate these risks into a single risk measure. The measure used was Value at Risk (VaR), or the maximum likely loss over the next trading day.

The VaR was estimated from a system based on standard portfolio theory, using estimates of the standard deviations of and various correlations between the returns to different traded instruments. Other financial institutions were also working on their own VaR systems. Some of these were also based on portfolio theory, although there were major differences in subsidiary assumptions, use of data, procedures to estimate volatility and correlation, and many other `details'.

Since then, VaR systems have spread rapidly among securities houses and investment banks and, increasingly, among commercial banks, pension funds, other financial institutions, and non-financial corporates.

Risk and uncertainty have dominated the financial landscape ever since the term 'globalisation' crept into every boardroom's major new goal. But after a continuous run of financial failures and risk-averse attitudes for nearly three decades, the world's major companies and financial institutions starting paying attention to what the academics knew all along - risk can be measured so long as history can be measured. Philippe Jorion's new book 'Value at Risk' offers a brief outline of the major components of his theory that has emerged onto the global financial scene in recent years. Much of the intense mathematical analysis techniques have been ommitted, perhaps due to the relatively adolescent and untested nature of this field. Hundreds of PhDs now focus on this very topic and the intricacies of the extent to which it is useful is still quite debatable.

Philippe Jorion's treatment of VaR opens up the possibility of a radically new approach to enterprise-wide risk management (EWRM). This EWRM approach goes well beyond traditional risk management and requires a major transformation in the way that firms structure and govern themselves.

This is not an action-packed hard-hitting bestseller, nor is it a triumph of literature. It is an objective portrayal of a financial analysis technique. It doesn't promise to keep you awake at night, but it does promise many firms the opportunity to save a lot of money (and thus get you a promotion!).

I began using this book as part of my audit job at a major trading/investment firm. I'm currently an FRM candidate, and this is the FRM-recommended book for a bulk of readings on VaR methods and implementation. Despite improvements in measuring risk the newspapers are full of stories where risks have been mismanaged. Jorion?s introductory chapters on risk management failures are good at proving why risk management is important. I think beginners would find the chapters that define the different types of risks (credit, liquidity, operational, legal & market), the role of VaR in regulatory capital measurements, and the first part of the VaR discussion as being useful. The chapters that specifically deal with credit, operational, and liquidity risks are also important though the author does not cover these topics as deeply as he covers VaR. This book is long on words but short on content. You spend so much time reading that you wonder when you are going to learn something. Instead, you keep reading. I don't know about the reviewer who says "Dr. Jorion is clearly THE authority as far as Value-at-Risk goes." Maybe it is the author.

I used to like this book much more before reading Kevin Dowd's book ("Beyond Value at Risk"). Jorion's book contains a bit too much fluff, in my opinion. Nonetheless, the book is insightful and well-written.

I believe that this book is not at all helpfull since it does not explain thouroughly the material. It just provides the reader with tables and calculations that sometimes are not easily understood. Moreover it refers to important material such as the calculation of VAR in SWAPS and FRAs without really explaining!!!