Correlation Risk Modeling and Management

A thorough guide to correlation risk and its growing importance in global financial markets

Ideal for anyone studying for CFA, PRMIA, CAIA, or other certifications, Correlation Risk Modeling and Management is the first rigorous guide to the topic of correlation risk. A relatively overlooked type of risk until it caused major unexpected losses during the financial crisis of 2007 through 2009, correlation risk has become a major focus of the risk management departments in major financial institutions, particularly since Basel III specifically addressed correlation risk with new regulations. This offers a rigorous explanation of the topic, revealing new and updated approaches to modelling and risk managing correlation risk.

• Offers comprehensive coverage of a topic of increasing importance in the financial world
• Includes the Basel III correlation framework
• Features interactive models in Excel/VBA, an accompanying website with further materials, and problems and questions at the end of each chapter

Table of Contents

Chapter 1: Some Correlation Basics: Properties, Motivation, Terminology
Chapter 2: Empirical Properties of Correlation: How Do Correlations Behave in the Real World?
Chapter 3: Statistical Correlation Models—Can We Apply Them to Finance?
Chapter 4: Financial Correlation Modeling—Bottom-Up Approaches
Chapter 5: Valuing CDOs with the Gaussian Copula—What Went Wrong?
Chapter 6: The One-Factor Gaussian Copula (OFGC) Model—Too Simplistic?
Chapter 7: Financial Correlation Models—Top-Down Approaches
Chapter 8: Stochastic Correlation Models
Chapter 9: Quantifying Market Correlation Risk
Chapter 10: Quantifying Credit Correlation Risk
Chapter 11: Hedging Correlation Risk
Chapter 12: Correlation and Basel II and III
Chapter 13: The Future of Correlation Modeling