Tunis Business School - Fall 2020

Quantitative Analysis

Eymen Errais, PhD, FRM

 Plan

• Appreciate the need for the management and review of risk

• Provide a framework & process for the management of risk
Objectives • Understand a variety of techniques to identify, assess, manage & monitor risks
• understand the overall management of risk process

1. Introduction to Risk Management 2. Market Risk 3. Credit Risk

• VaR as a risk measure
• Finance and Risk Basics (Chap I) • Introduction to Credit Risk
o VaR definition
o Understanding the Risk,Return o Overview of credit risk
o VaR parameters
couple o Settlement Risk
o Elements of VaR systems
o CAPM, APT

o Value of Risk Management • Measuring default Risk

• Identification of Risk factors
Program

o Credit Event
o Market risks
• Quantitative Analysis o Default rates
o Discontinuity and Event Risk
o Fundamentals of probability o Recovery rates
o Fundamentals of statistics
• Sources of Risk
o Monte Carlo Methods • Managing Credit Risk
o Currency Risk
• Financial Markets and Products o Distribution of credit losses
o Equity Risk
o Bond and Fixed Income Markets o Expected credit losses
o Commodity Risk
o Equity, Currency and o Credit VaR
Commodities Markets o Portfolio Credit Risk Models
• VaR methods

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 Plan

• Appreciate the need for the management and review of risk

• Provide a framework & process for the management of risk
Objectives • Understand a variety of techniques to identify, assess, manage & monitor risks
• understand the overall management of risk process

4. Operational Risk 5. Interest Rate Risk 6. Risk Capital and Structure

• Introduction to Operational Risk • Introduction interest rate risk • RAROC

o Case histories o Fixed income securities and o Risk capital
o Business Lines interest rate risks o Raroc methodology
o Factors affecting yields
• Assessing Operational Risk • Performance evaluation
Constructing yield curves
Program

o Comparison of approaches • o Credit Event

o Actuarial Models o Bootstrapping o Default rates
o Nelson Siegel Model o Recovery rates
• Managing Operational Risk
o Capital allocation and insurance • Managing interest rate risk • Firmwide Risk Management
o Mitigating Operational Risk o Duration o Three pillar framework
o Convexity o Organizational structure

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Fundamentals of Probability
 Characterizing Random Variables

▪ Univariate Distribution Functions

▪ Discrete Random Variables

▪ Continuous Random Variables

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 Random Variables Moments

▪ Mean :

▪ Quantile :

▪ Variance :

▪ Standard deviation :

▪ Skewness :

▪ Kurtosis :

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 Mutlivariate Distribution Functions

▪ Joint Distributions

▪ Conditional density

▪ Covariance

▪ Pearson Correlation

▪ Spearman Correlation

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 Functions of Random Variables

▪ Linear transformation of random variables

▪ Sum of random variables

▪ Portfolio of random variables

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 Functions of Random Variables

▪ Product of random variables

in case of independence
▪ Distributions of transformations of random variables

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 Distribution Functions

▪ Uniform distribution

▪ Normal distribution

▪ Lognormal distribution

▪ Student distribution

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 Distribution Functions

▪ Binomial distribution

▪ Poisson distribution

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 Central Limit Theorem

▪ The normal distribution is extremely important because of the Central Limit

Theorem (CLT), which states that the mean of n independent and identically
distributed (i.i.d.) variables converges to a normal distribution as the number of
observations n increases.

▪ This very powerful result is valid for any underlying distribution, as long as the
realizations are independent. For instance, the distribution of total credit losses
converges to a normal distribution as the number of loans increases to a large
value, assuming defaults are always independent of each other.

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Fundamentals of Statistics
 Parameter Estimation

▪ A good estimator should have several properties

o It should be unbiased, meaning that its expectation is equal to the parameter of
interest. For example, E[m] = mu. Otherwise, the estimator is biased.
o It should be efficient, which implies that it has the smallest standard deviation of
all possible estimators; for example, V[m− mu] is lowest.
▪ The sample mean, for example, satisfies all of these conditions. An estimator that
is unbiased and efficient among all linear combinations of the data is said to be
best linear unbiased estimator (BLUE).
▪ A weaker condition is for an estimator to be consistent. This means that it
converges to the true parameter as the sample size T increases, or asymptotically.

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 Regression Analysis

▪ In a linear regression, the dependent variable y is projected on a set of N

predetermined independent variables, x. In the simplest bivariate case, with two
variables, we write

▪ The OLS beta :

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