Lecture Notes on Risk Management & Financial Regulation

Abstract

This book contains lecture notes from the course Risk Management given at the University of Paris-Saclay/Evry. These lecture notes are divided into three parts. After an introductory chapter presenting the main concepts of risk management and an overview of the financial regulation (Basel I-IV, Solvency I-II, Dodd-Frank, UCTIS, etc.), the first part is dedicated to the risk management in the banking sector and consists of six chapters: market risk, credit risk, counter party credit risk and collateral risk, operational risk, liquidity risk and asset/liability management risk. We begin with the market risk, because it permits to introduce naturally the concepts of risk factor and risk measure and to define the risk allocation approach. For each chapter, we present the corresponding regulation framework and the risk management tools. The second part is dedicated to non-banking financial sectors with four chapters dedicated to insurance, asset management, investors and market infrastructure (including central counter parties). This second part ends with a fifth chapter on systemic risk and shadow banking system. The third part of these lecture notes develops the mathematical and statistical tools used in risk management. It contains seven chapters: risk model and derivatives hedging, statistical inference and model estimation, copula functions, extreme value theory, Monte Carlo simulation, stress testing methods and scoring models. Each chapter of these lectures notes is extensively illustrated by numerical examples and contains also tutorial exercises. Finally, a technical appendix completes the lecture notes and contains some important elements on numerical analysis.Revision (September 2016): This version contains the chapter on Monte Carlo Simulation Methods.