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FIN 660 – Quantitative Risk Management

General Information

In the spring semester 2022, the first sessions of the class will be offered online as live meetings on Zoom. In April, we plan to continue with in-person meetings on campus. More detailed information on the indivdual sessions and updates will be provided via the ILIAS group for this class.

The course consists of five chapters on the following topics:

Chapter 1: Introduction

We first cover definitions and types of financial risk. Then, we define financial risk management and its objectives. Furthermore, we introduce the risk management process and recall important risk management instruments. Finally, we discuss limitations of quantitative methods in risk management.

Chapter 2: Tail Risk Measures

We introduce quantiles as the statistical foundation of modern tail risk measures. Then, we define Value-at-Risk (VaR) and learn how to calculate it for a selection of probability models. Next, we discuss strengths and weaknesses of VaR based on the notion of coherent risk measures. Motivated by this discussion, we introduce Expected Shortfall (ES) and Conditional-Value-at-Rik (CVaR) as alternative tail risk measures. We then proceed to the measurement of tail risk for financial time series and finally cover backtesting methods for VaR.

Chapter 3: Market Risk

In this chapter, we first learn about delta normal approximations and simulation techniques as important building blocks for market risk measurement. Then, we discuss the calculation of VaR and ES for equity positions including equity options and bond positions. Furthermore, we learn how to account for exchange rate risk and how to obtain aggregate risk assessments on the portfolio level. Moreover, we cover the application of VaR and ES for the determination of market risk capital requirements according to the Basel accords.  

Chapter 4: Credit Risk

In Chapter 4, we introduce different notions of credit risk and its determinants. Then, we study selected modeling techniques for credit risk. These include factor models for credit portfolios and the large homogenous portfolio approximation. Furthermore, we learn about firm value models, mainly focusing on Merton’s credit risk model. We then briefly cover reduced form models for credit risk. Finally, we discuss the main techniques used within the Basel framework to capture credit risk.

Chapter 5: Risk-Adjusted Performance Management

In the last chapter, we introduce the notion of risk-adjusted capital and risk-adjusted performance measures such as the return on risk-adjusted capital (RORAC). Then, we focus on capital allocation principles that allow to calculate risk contributions of individual positions within a portfolio accounting for diversification benefits.

Person in charge

Dr. Markus Huggenberger

Dr. Markus Huggenberger

Contact person for Quantitative Risk Management

For further information please contact Markus Huggenberger.

Further Information

  • Dates and Rooms

    Lectures and exercise sessions are offered on Tuesdays, 12:00 pm – 1:30 pm, from February 15, 2022 until May 31, 2022. There will be no lectures on April 12 and April 19 (Easter Break). 

    The first lectures will take place as live sessions on Zoom. In April, we plan to continue with in-person classes on campus in the room O 145. 

    Zoom links and room details will be provided via Portal 2. 

  • Language

    The course is fully taught in English. Supplementary material as well as the final exam are in English as well.

  • Requirements

    Formal: none

    Recommended: The course requires a basic knowledge of probability theory and statistics. In addition, students should have participated in a master's course on investment and/or derivatives.

  • Lecture Materials

    Lecture slides and exercise materials will be provided via the ILIAS group FIN 660 Quantitative Risk Management [V] [1. PG] (FSS 2022).

    Additional textbook and paper references will be provided at the of each chapter. 

  • Assessment

    To obtain a grade for the class, students have to pass a written exam (45 minutes) at the end of the semester. Date and time will be anounced by the student offices. 

    Further information on the exam will be provided during the lectures and exercise sessions.