A guest post by Christian Reusch giving a book review for the book “Financial Risk Forecasting” by Jon Danielsson.
As an academic-turned hedge fund professional with a particular interest in financial econometrics and quantitative money management, this book written by one of my former lecturers at the London School of Economics caught my attention: Having (had to) read through quite a number of books on the topic of financial market risk ranging from purely academic to practitioners’ texts, from very technical to entirely descriptive material, I was intrigued by the balance between these different ends of the spectrum this book manages to strike: I have not yet come across a book on the topic that has managed to be as comprehensive and deep on the technical background underpinning quantitative risk modelling as this one while at the same time managing to stay “user-friendly” and not losing the perspective of a practitioner with an interest in using and actually applying the methods discussed in it.
While the discussion of univariate as well as multivariate models is very exhaustive and provides sufficient background on the underlying econometrics, the book is not over-boardingly technical and also manages to incorporate and document concise methods of back/stress-testing, forecast evaluation as well as the implementation of such models in practice. The relatively “standard” risk modelling techniques are also complemented by a discussion of rather more specialised methods such as extreme value theory (EVT) as well as a treatment of the slightly more academic, albeit pretty new topic of endogenous risk that has gained considerable attention since the recent financial crisis. To my knowledge this has not been done in this fashion anywhere before.
The biggest advantage of the book is, however, the inclusion of useful pieces of MATLAB and R code that supplement the discussion of the material and allow the user to test and apply the models in practice. As a practitioner who has spent some considerable time writing similar code in an industry environment I must say that the code provided both in the book but even more so on the website accompanying the book is very useful and, with some modification, could even be used in professional applications.
In summary, a very useful and handy book to have – both for advanced undergraduates and postgraduate students studying the subject as well as for academics and practitioners looking for a concise reference or “cookbook” on financial risk modelling.
About Dr Christian Reusch:
My background: I hold a PhD in Financial Econometrics from the LSE and have been working in quantitative money management and systematic trading for a large quant hedge fund and an investment bank in London. In my work I have used R extensively for various testing and modelling tasks.