[.ca] Value at Risk: The New Benchmark for Managing Financial Risk (ISBN 0071355022)

Seduced by VAR:
This book takes a statistical approach to risk management, but the approach is dated. Risks of many products such as exotic options and credit derivatives cannot be adequatley measured by value-at-risk (VAR) conventional methodology. The subject of credit derivatives is comprehensively - and well- covered in "Credit Derivatives and Synthetic Securitization" by Tavakoli.

Better Alternatives:
This book was rushed into print following the release of JPMorgan's landmark RiskMetrics description of VaR. Like RiskMetrics, its focus is on explaining VaR to corporate end users. For a while, it was the only book available on VaR, so it became well known. A second edition added material on topics other than VaR, but did not update the treatment of VaR. By today's standards, the book is dated. Now there are a number of excellent books available on VaR, and these cater to various audiences. Depending upon what you are looking for, they offer a more accessible, more sophisticated, or more up-to-date treatment of VaR. For an elementary introduction, you can't beat Butler. Downplaying theory, he shows you practical spreadsheet examples you can use to implement basic VaR models. He explains related topics, such as probability distributions, delta and gamma, and the Monte Carlo method, so the book is self-contained. Marrison's "Measuring Market Risk" describes VaR in the context of bank risk management. More sophisticated than Butler, this is a practical, "real world" book for people starting in bank risk management. Marrison ties VaR together with topics such as capital allocation, credit risk modeling and asset-liability management. Holton is written for practicing risk mangers or researchers. Before it even publishes, it has made a splash on trading floors where dog-eared preprint copies have become a coveted item. Holton explains in detail things like delta-gamma VaR and variance reduction for Monte Carlo VaR -- topics other books only mention. Also, Holton is the only book that offers exercises. For use of VaR in investment management, see Pearson's "Risk Budgeting." It introduces VaR and then explains how it can be used to allocate assets between investment categories or among managers -- this is known as risk budgeting. The focus of the book is a technique from calculus that allows you to decompose risks so that the parts sum to the whole. There isn't much else written on this topic, and Pearson offers the best treatment that I know of. Finally, there is Dowd's "Beyond Value-at-Risk." This provides an excellent survey of the literature on VaR. It also covers related risk management topics, including credit risk management and risk-adjusted performance measurement.

Value at 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.

No longer useful:
The first edition was for a while the only book on the subject. As such, it had to be the best. But, at that time, RiskMetrics VCV approach was the only approach. Jorion analyses this approach in detail, and derives many results (for example, attributing risks, etc.). He then implies by omission that they work for other methods, they don't. He also implies by omission that RiskMetrics is the absolute greatest, it isn't - it's probably now the weakest method. Surveys show that now only 10% of banks worldwide are using this method - and the numbers are falling. There is nothing about coherence, the problems with VaR, the fundamental problems with using it to allocate risks to portfolios... There was no reason to bring out a new edition.

Good Book for sophisticated investment analyst:
Good Book for sophisticated investment analyst