On April 19, 2017, NHC held the second session of the 2017 Market Risk Salon. The topic of this session was Market Risk Measurement. The 2-hour session was composed of two parts:
a 1-hour presentation by Dr. Molly Sun, Senior Director in Model Validation at CIBC; and a 1-hour panel discussion in which she was joined by Dr. Paul Kim, Director at BMO Financial Group, and Bin Li, Senior Risk Manager at TD Bank Group, moderated by Dr. Dmitri Rubisov, Managing Director at BMO Capital Markets.
In the presentation, Dr. Molly Sun first reviewed the evolution of Basel capital requirement and highlighted the upcoming challenge of implementing the Fundamental Review of the Trading Book (FRTB) in 2019. Then she gave a comprehensive overview of key market risk models and key market risk measures. Two types of market risk models were covered in the presentation: Pricing Models and Value-at-Risk (VaR) Type Models. When explaining the selection of pricing models, Dr. Sun emphasized the importance of understanding the trading products and the focus of the models on enhancing accuracy and model performance. Speaking of VaR, she started from the definition of VaR and Stressed VaR and then compared Historical Simulation with Monte-Carlo Simulation – the two main VaR calculation methods. She also introduced other key market risk measures, such as Greeks, Equity-Specific-Risk (ESR), and Debt-Specific-Risk, as well as the roles of Stress Testing and Backtesting in risk management. Detailed examples were given to explain these concepts. At the end of her presentation, Dr. Sun listed some key enhancements under FRTB and talked about the associated challenges and also opportunities.
In the panel discussion, Dr. Dmitri Rubisov first asked the panelists to share their views on new challenges arising from new regulations. Both Dr. Paul Kim and Bin Li talked about the increasing difficulty of balancing business needs and regulatory requirements, and Dr. Sun commented on the challenge of interpreting the new regulations. Then Dr. Rubisov asked for panelists’ preference between the Historical Simulation and Monte-Carlo Simulation, and this triggered an in-depth discussion about the advantages and disadvantages of these two VaR calculation methods. Generally, Monte-Carlo Simulation is time-consuming, heavily relies on assumptions and proxies, and has difficulties in results interpretation. As a result, Historical Simulation increasingly becomes the industry preference. During the panel discussion, the panelists also welcomed questions from the audience. Answering those questions, they discussed the shift from VaR to Expected Shortfall (ES), compared Stressed VaR and Stress Testing, explained how to define stress periods, etc. For the benefits of the audience, Dr. Rubisov also asked panelists what kind of talents they are looking for in market risk management area. The general answer was that the ideal candidates are people equipped with solid quantitative skills and have strong business sense as well.
In summary, this Market Risk Measurement session helped the audience to understand the key concepts and trending topics in market risk measurement and highlighted the challenges and opportunities faced by the industry. NHC Risk Salon provides an effective learning platform and invaluable networking opportunities with industry leaders to the participants.