This book provides a quantitative, technical treatment of portfolio risk analysis with a focus on real-world applications. It is intended for both academic and practitioner audiences, and it draws its inspiration and ideas from both the academic and practitioner research literature. Quantitative modeling for portfolio risk management is an active research field. Virtually all institutional investment management firms use quantitative models as an integral part of their portfolio riskmanagement procedures. Research and development on these models takes place at investment management firms, brokerage houses, investment consultants, and risk-management software providers. Academic researchers have explored the econometric foundations of portfolio risk analysis models, the relative performance of the various types of models, the implications of the various models for the understanding of capital market behavior, and the models' implications for asset pricing equilibrium. This book attempts to synthesize the academic and practitioner research in this field. We argue that portfolio risk analysis requires a balanced, multidisciplinary perspective combining statistical modeling, finance theory, microeconomics, macroeconomics, and a behavioral–institutional understanding of modern capital markets.
Among practitioners, an ideal reader of this book would be someone with a good background in finance and statistics working in the riskmanagement office of an institutional fund manager. He or she1 may be relying entirely on vendor software for portfolio risk analysis, or entirely on routines developed in-house, or on a combination of in-house and vendor products. The book is not a how-to manual for building a portfolio risk analysis model, but it gives the reader a solid understanding about the many difficult issues and choices in model design and estimation and about current research frontiers in estimating and evaluating these models. Practitioners working in related functions, including
1 To avoid unnecessary verbal clutter, in the remainder of the book we use the male
pronoun for gender-neutral third-person singular.