Risk Management: The State of the Art, 2002
The New York University Salomon Center Series on Financial Markets and Institutions Series, Vol. 8

Very often, we associate the dawn of modern financial theory with Harry Markowitz who in the 1950s introduced the formal mathematics of probability theory to the problem of managing risk in an asset portfolio. The 1970s saw the advent of formal models for pricing options and other derivative contracts, whose primary purpose was also financial risk management and hedging. But events in the 1990s made it clear that effective risk management is a critical element for success, and indeed, for long term survival, not only for financial institutions, but also for industrial firms, and even for nonprofit organizations and governmental bodies. These recent events vividly show that the world is filled with all manner of risks, and so risk management must extend far beyond the use of standard derivative instruments in routine hedging applications.
The articles in this volume cover two broad themes. One theme emphasizes methods for identifying, modeling, and hedging specific types of financial and business risks. Articles in this category consider the technology of risk measurement, such as Value at Risk and extreme value theory; new classes of risk, such as liquidity risk; new financial instruments and markets for risk management, such as derivative contracts based on weather and on catastrophic insurance risks; and finally, credit risk, which has become one of the most important areas of practical interest for risk management. The second theme stresses risk management from the perspective of the firm and the financial system as a whole. Articles in this category analyze risk management in the international arena, including payment and settlement risks and sovereign risk pricing, risk management from the regulator's viewpoint, and risk management for financial institutions. The articles in this volume examine the "State of the Art" in risk management from the standpoint of academic researchers, market analysts and practitioners, and government observers.

I. Identifying, Modeling and Hedging Risks.- 1. Modeling Liquidity Risk.- 2. Credit Risk Capital: More Than One Way to Guard a Guarantee.- 3. Qualitative and Quantitative Derivatives Risk Management.- 4. Remarks on the Legal Risks of Derivatives.- 5. The Evolving Market for Catastrophic Event Risk.- 6. Industrial Risk Management with Weather Derivatives.- 7. Designing and Pricing New Instruments for Insurance and Weather Risks.- 8. Measuring Credit Risk: The Credit Migration Approach Extended for Credit Derivatives.- 9. The Y2K Enigma.- II. Managing Risk in Financial Institutions.- 10. Payment and Settlement Risks in International Financial Markets.- 11. Risks, Regimes and Overconfidence.- 12. The Bi-Currency Balance Sheet Model of Latent Currency Risk.- 13. Does Contagion Exist?.- 14. An Analysis and Critique of the BIS Proposal on Capital Adequacy and Ratings.- 15. Hedge Fund Transparency is no Silver Bullet!.- 16. Capital Adequacy in Financial Institutions: Basel Proposals.- 17. Risk Management: Where Are We Heading? Where Have We Been?.- Author Index.