Latest Module Specifications
Current Academic Year 2025 - 2026
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Description The purpose of this module is to provide students a core body of knowledge of financial risk management, to assess, measure, and monitor risk for industries and individuals. The module will explore the concepts of market, credit, liquidity and operational risk and quantitative methods such as Value-at-Risk and Expected Shortfall. The students will be exposed to the use of software and case study of real-world situations. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Learning Outcomes 1. Articulate the theoretical frameworks and empirical evidence in respect of quantitative methods desgined for financial risk meausurement and management purposes. 2. Apply Value-at-Risk and Expected Shortfall risk measurement approaches within a simulation framework and analyse outcomes for a range of risk management settings. 3. Perform and appraise practice relevant risk assessment as an input to capital adequacy decisions within financial institutions. 4. Deepen financial risk analysis skills and competency in implementing risk management solutions effectively. 5. Interpret the evolving regulations in respect of capital adequacy and position the risk management function within this regulatory context. 6. Collaborate effectively within a group to interpret theoretical and empirical risk-measurement frameworks, demonstrating professional communication and equitable contribution when jointly evaluating methodological assumptions and limitations. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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All module information is indicative and subject to change. For further information,students are advised to refer to the University's Marks and Standards and Programme Specific Regulations at: http://www.dcu.ie/registry/examinations/index.shtml |
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Indicative Content and Learning Activities
Preliminaries The course opens with a recap of the concept of risk, the risk-return trade-off, and the distinction between between systematic and non-systematic risk. The discussion then proceeds to distinguishing between real world and risk neutral environments in a risk management context. The exposition will then move into how traders manage risks, making a distinction between linear and non-linear products. Foundational concepts will also be covered, including the measurement and monitoring of volatility and correlation. In the former case, the modelling of backward looking realised volatility will be covered with an emphasis on the GARCH framework. Implied volatility will also be introduced as a forward looking measure, with an analysis of the VIX index. In the latter case, the distinction between correlation and dependence will be made, parallels in the modelling of volatility and correlation will be established, while the copula method will be introduced as a method of default risk estimation. Market Risk Management Market price exposure will be the topic of this component of the module. Stylized facts of asset returns will be introduced, spanning expected returns predictability, conditional volatility, and conditional distributions. The market risk context will be used to introduce the key models and risk measures of Value-at-Risk (VaR) and Expected Shortfall (ES). The theoretical properties of both measures will be presented, including key parameter choices. Calculation of these measures under both continuous and discrete distributions will be explored. In respect of VaR, the extended concepts of marginal VaR, incremental VaR, and component VaR will be explained. The allocation and aggregation of VaR and ExS will close the discussion. Simulation Methods for Risk Management This section will begin with a presentation of the Historical Simulation (HS) approach to risk measurement. The non-parametric nature of the HS approach will be emphasised, along with the advantages from an implementation and interpretation perspective. The calculation of VaR and ExS will be demonstrated in the HS setting, to include the calculation of standard errors and confidence intervals for VaR. Distributional smoothing via Extreme Value Theory (EVT) will also be explored. Focus will then shift the parametric approaches and the use of Monte Carlo (MC) simulation for risk measurement. Model specification, discretisation and implementation will be demonstrated. The use of Principal Component Analysis will be explored as a dimension reduction technique and for covariance estimation. The calculation of VaR and ExS will similarly be demonstrated in the MC simulation setting. Based on these implementations, the backtesting of VaR and ExS will close the topic. Credit Risk Management The treatment of credit risk management will begin with an exhibition of how to estimate default probabilities, spanning the use of historical data, credit spreads, and equity prices. This discussion will be used to distinguish between real-world (physical) and risk-neutral (implied) default probabilities. The Credit Default Swap (CDS) and Asset Swap Spread concepts will be introduced, with the latter allowing for the calculation of credit spreads. The formal conversion of credit spreads to hazard rates will be explained. The discussion will then move onto the Credit Value Adjustment (CVA) based assessment of counterparty credit risk. The related concept of Debt Value Adjustment (DVA) will also be introduced. The use of Monte Carlo simulation in this setting will be showcased. The topic will close with the concept of Credit Value at Risk. The idea of transition metrics will be formalised. The three main methods of Vasicek's model, Credit Risk Plus, and CreditMetrics will be explored. Other Risk Pillars This topic will navigate a number of important risk pillars beyond market risk and credit risk. In respect of operational risk, the Advanced Measurement Approach (AMA) will be covered, along with the Basel Committee’s recommendation to move to a historical loss experience. Moving to liquidity risk, the distinction between liquidity trading risk and liquidity funding risk will be established. In respect of the former, topics such as proportional bid-offer spreads, costs of liquidation, liquidity-adjusted VaR, and optimal portfolio position unwinding, will be discussed. In respect of the latter, discussion topics will be sources of liquidity and liquidity planning. Given the prevalence of model usage in financial institutions, discussions will next move to the area of model risk management. The concept of model risk and model uncertainty will be clarified, with a working distinction made between parametric risk in a context of a given model and model specification risk in the context of a suite of models. The measure of model risk will be demonstrated, spanning fundamental model risk spread measures and more advanced distributional approaches. The integration of model risk in setting capital reserves will be addressed, with application to VaR and ExS. The topic will close with some introductory material in the area of environmental and climate risk, and efforts to manage such risk exposure in the context of overall risk management practice. Regulatory Context The theoretical and empirical treatment of financial risk management as set out above, will be positioned within the context of the evolving regulatory context. Discussions will move along the timeline from Basel I, Basel II, Solvency II, Basel II.5, Basel III, and other post-crisis changes. This will lead to a presentation of the Fundamental Review of the Trading Book, and what this implies for front office and back office functions and the move from VaR towards ExS from a capital adequacy perspective. This topic will not be a standalone topic but one that is interweaved appropriately within the quantitative treatment of financial risk management. Such a regulatory context is important for students who need to know the regulatory landscape as well as the risk management tools to work effectively within risk management areas in practice. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Indicative Reading List Books:
Articles:
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Other Resources None | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Module for new MSc in Finance as approved by Programme Board 26th March 2014. Submitting final document for T&L to Jonathan 28th March 2014. [Note: this is an updated version of a previously existing 10-credit module] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||