Bayesian Risk Management: A Guide to Model Risk and Sequential Learning in Financial Markets
Most financial risk models assume the future will look like the past, but effective risk management depends on identifying fundamental changes in the marketplace as they occur. Bayesian Risk Management details a more flexible approach to risk management, and provides tools to measure financial risk in a dynamic market environment. This book opens discussion about uncertainty in model parameters, model specifications, and model-driven forecasts in a way that standard statistical risk measurement does not. And unlike current machine learning-based methods, the framework presented here allows you to measure risk in a fully-Bayesian setting without losing the structure afforded by parametric risk and asset-pricing models.Recognize the assumptions embodied in classical statisticsQuantify model risk along multiple dimensions without backtestingModel time series without assuming stationarityEstimate state-space time series models online with simulation methodsUncover uncertainty in workhorse risk and asset-pricing modelsEmbed Bayesian thinking about risk within a complex organization
Ignoring uncertainty in risk modeling creates an illusion of mastery and fosters erroneous decision-making. Firms who ignore the many dimensions of model risk measure too little risk, and end up taking on too much. Bayesian Risk Management provides a roadmap to better risk management through more circumspect measurement, with comprehensive treatment of model uncertainty.
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