Value at Risk: The New Benchmark for Managing Financial Risk

The financial and banking sectors have changed dramatically over the last two decades. The traditional commercial banks are shying away from loans and relying on riskier (??) products such as derivatives to bolster the income. Non-bank financials have been consistently adding products and product lines to their inventory (insurance & loans??). As these firms change themselves, their need for risk measurement and management has also increased which in turn has driven the advances and increased focus on Value at Risk type concepts during this time.Despite improvements in measuring risk the newspapers are full of stories where risks have been mismanaged. Jorion?s introductory chapters on risk management failures are good at proving why risk management is important. I think beginners would find the chapters that define the different types of risks (credit, liquidity, operational, legal & market), the role of VaR in regulatory capital measurements, and the first part of the VaR discussion as being useful. The chapters that specifically deal with credit, operational, and liquidity risks are also important though the author does not cover these topics as deeply as he covers VaR.I understand that this book used to be the bible for managing financial risk. I still think it?s an extremely useful book, but agree with some of the other commentators that it could have been more than it is. With an industry that changes as quickly as the financial sector you?d hope for some more detail on current trends and events besides Basel II. (Role of new products such as credit derivatives? Do firms really care about incremental VaR or Marginal VaR, and if they do when? When is it practical to use? How do firms use it? Who are the current leaders in the techniques?). I would also have liked to see more on reputational risk (how do firms decide if a product is appropriate for a client? how would the public perceive a firm?s transactions with a particular client? Enron and WorldCom are current examples).The difficulty in writing about this subject is that it?s very easy to be too complicated and detailed for beginners but not complicated or detailed enough for professionals. For example, beginners may have difficulties with the material if they don?t understand basic financial concepts, but professionals are probably looking for more specifics on how these concepts are applied for specific products. I?d imagine that there aren?t many readers in that middle ground. This book is definitely geared more towards the professional.

I had the privilege to take the Value At Risk course by Prof. Jorion himself. As part of the course, we had to read most of the book. It is thick book, very well written, and I feel it is suitable not only for finance students, but to anybody who wants to learn about risk valuation. It doesn't deal with high mathematics, but still presents the material in a concise way, easy to understand, and to easy apply.I recommend!!!

If you have ever wondered what financial risk management is about this is a good introduction. It demystefies the subject matter without sacrificing rigour.The mathematics used is not much higher than first year college level.The approach is also intuitive.It concentrates on market risks .Its treatment of credit risk is minimal.A very good buy. Value for money

As demonstrated by the bankruptcies of Britain's Barings Bank and Orange County, Calif., any organization that dabbles in derivatives investments needs sophisticated risk-assessment tools like "Value at Risk." The concept of VAR is simple - this single number shows just how much an institution's investment portfolio stands to lose. But calculating VAR is anything but simple, as author Phillippe Jorion's complex formulas and dense prose illustrate. Jorion does an admirable job of explaining exactly why Barings went broke, but his book is not for the uninitiated. Without skipping a beat, Jorion throws around impenetrable phrases like "generalized autoregressive heteroskedastic model." Nevertheless, we at getAbstract recommend this necessarily complex book to money managers who need to gauge the downside of sophisticated derivative investments; the rest of us can simply peruse its intriguing sagas of financial disaster, take an aspirin and lie down.

From the late 1970s onwards, a number of major financial institutions started work on internal models to measure and aggregate risks across the institution as a whole. The best known of these is JP Morgan's RiskMetrics system. This is said to have originated when the chairman, Dennis Weatherstone, asked his staff to give him a daily one-page report indicating risk and potential losses over the next 24 hours, across the firm's entire trading portfolio. To meet this demand, Morgan staff had to develop a system to measure risks across different trading positions over the whole institution, and then aggregate these risks into a single risk measure. The measure used was Value at Risk (VaR), or the maximum likely loss over the next trading day. The VaR was estimated from a system based on standard portfolio theory, using estimates of the standard deviations of and various correlations between the returns to different traded instruments. Other financial institutions were also working on their own VaR systems. Some of these were also based on portfolio theory, although there were major differences in subsidiary assumptions, use of data, procedures to estimate volatility and correlation, and many other `details'. Since then, VaR systems have spread rapidly among securities houses and investment banks and, increasingly, among commercial banks, pension funds, other financial institutions, and non-financial corporates. Risk and uncertainty have dominated the financial landscape ever since the term 'globalisation' crept into every boardroom's major new goal. But after a continuous run of financial failures and risk-averse attitudes for nearly three decades, the world's major companies and financial institutions starting paying attention to what the academics knew all along - risk can be measured so long as history can be measured. Philippe Jorion's new book 'Value at Risk' offers a brief outline of the major components of his theory that has emerged onto the global financial scene in recent years. Much of the intense mathematical analysis techniques have been ommitted, perhaps due to the relatively adolescent and untested nature of this field. Hundreds of PhDs now focus on this very topic and the intricacies of the extent to which it is useful is still quite debatable.Philippe Jorion's treatment of VaR opens up the possibility of a radically new approach to enterprise-wide risk management (EWRM). This EWRM approach goes well beyond traditional risk management and requires a major transformation in the way that firms structure and govern themselves.This is not an action-packed hard-hitting bestseller, nor is it a triumph of literature. It is an objective portrayal of a financial analysis technique. It doesn't promise to keep you awake at night, but it does promise many firms the opportunity to save a lot of money (and thus get you a promotion!).