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Risk Management in a Fair Valuation World

Published online by Cambridge University Press:  10 June 2011

M. H. D. Kemp
M. H. D. Kemp
Affiliation:
Threadneedle Asset Management Limited, 60 St Mary Axe, London EC3A 8JQ, U.K.
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Abstract

This paper considers the impact that the current trend towards fair valuation of assets and liabilities is likely to have on risk measurement and management practices within the financial services industry. The paper analyses the different sorts of risks faced by organisations such as asset managers, pension funds, banks and insurers, and seeks to identify how their approach to the measurement and management of these sorts of risks might change as fair valuation becomes more entrenched. It argues that what it describes as traditional ‘time series’ based risk measurement is likely to be progressively displaced over time by a greater emphasis on what the paper refers to as ‘derivative pricing’ (or ‘fair value’ or ‘market consistent’) based risk modelling. It comments on the trend towards liability driven investment. The paper focuses on ‘financial’ risks (market, credit, liquidity and, more generally, asset/liability risk) rather than ‘operational’ risks, whilst noting that the dividing line between the two can be open to interpretation. Insurance risk is seen as in some respects straddling both camps.

Keywords

Fair ValuesFair Valuation TechniquesRisk ModelsRisk MeasurementRisk ManagementValue-at-RiskTracking ErrorTime Series Based Risk ModelsDerivative Pricing Based Risk ModelsPerformance MeasurementMarket RiskCredit RiskLiquidity RiskLiability Driven InvestmentCollateralised Debt ObligationsRisk BudgetingRisk AttributionQuantitative Return Forecasting
Type
Sessional meetings: papers and abstracts of discussions
Information
British Actuarial Journal , Volume 11 , Issue 4 , 01 October 2005 , pp. 595 - 712
Copyright
Copyright © Institute and Faculty of Actuaries 2005

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