Risk Management The State of the Art

Very often, we associate the dawn of modern financial theorywith Harry Markowitz who in the 1950s introduced the formalmathematics of probability theory to the problem of managing risk inan asset portfolio. The 1970s saw the advent of formal models forpricing options and other derivative contracts, whose primary purposewas also financial risk management and hedging. But events in the1990s made it clear that effective risk management is a criticalelement for success, and indeed, for long term survival, not only forfinancial institutions, but also for industrial firms, and even fornonprofit organizations and governmental bodies. These recent eventsvividly show that the world is filled with all manner of risks, and sorisk management must extend far beyond the use of standard derivativeinstruments in routine hedging applications.The articles in this volume cover two broad themes. One themeemphasizes methods for identifying, modeling, and hedging specifictypes of financial and business risks. Articlesin this categoryconsider the technology of risk measurement, such as Value at Risk andextreme value theory; new classes of risk, such as liquidity risk; newfinancial instruments and markets for risk management, such asderivative contracts based on weather and on catastrophic insurancerisks; and finally, credit risk, which has become one of the mostimportant areas of practical interest for risk management. The secondtheme stresses risk management from the perspective of the firm andthe financial system as a whole. Articles in this category analyzerisk management in the international arena, including payment andsettlement risks and sovereign risk pricing, risk management from theregulator'sviewpoint, and risk management for financial institutions.The articles in this volume examine the "State of the Art" in riskmanagement from the standpoint of academic researchers, marketanalysts and practitioners, and government oFiglewski, Stephen is the author of 'Risk Management The State of the Art' with ISBN 9780792374275 and ISBN 0792374274.