Foundations of Risk management

Objective

This course will provide an overview of the theory and practice of Risk Management within financial institutions. The latter are now at the heart of the concerns of the various players. The course will approach these themes from various complementary angles: the various types of risks, the regulatory framework, the position within the company and the relations with the business lines, the usual risk models and indicators, the problems of implementation and estimation, etc. The objective is to provide students, future finance professionals, with a significant risk culture, whether or not they go on to work in specific "Risk" departments.

At the end of this course, students should be able to
- understand the main financial risks and the basics of banking regulation
- know the usual risk measures (definitions, estimation, tests)
- propose risk models for selected asset portfolios 
- evaluate the practical problems to which risk managers and financial analysts may be exposed

Planning

1. Introduction to financial risks & banking mechanisms
   – Solvency & Liquidity Risk and focus on Credit/Market/ Operational risk/Interest Rate Risk
2. Banking regulation & supervision
   –  Main actors, focus on Banking Regulation in the EU
3. Main features applicable to the current regulatory framework
   – Basel III : the 3 pillars, Pillar 1: focus on solvency & liquidity ratios, overview on Pillar 2.
4. Market risk models
   – Value-at-Risk and Expected Shortfall (parametric, historical, Monte-Carlo)
   – Marginal risk measures
   – Backtests and Stress-tests
   – Some elements of extreme value theory
5. Credit Risk models
   – ratings and rating agencies
   – structural (Merton-style) and reduced-form approaches
   – Credit Portfolio models (KMV,  CreditMetrics, CreditRisk+)
   – Multiname credit derivatives (CDO), CVA

References

Alexander, C. ed. (1998) Risk management and analysis. Wiley.
Crouhy, M., Galai, D. and Mark, R (2000). Risk Management. McGraw-Hill.
Embrechts, P., McNeil, A. and R. Frey (2005). Quantitative Risk Management : concepts, techniques and tools. Pinceton.
Jorion, P. (1997) Value at risk : the new benchmark for controlling market risk. McGraw Hill.
Poncet, P., Portait,R. (2023) Capital Market Finance. Springer.