Miscellaneous: Forecasting, Risk Measurement, Risk Management

Diebold, F.X., Doherty, N.A. and Herring, R.J. (2008), "The Known, the Unknown, and the Unknowable in Financial Risk Management," Manuscript, Departments of Economics, Finance, and Risk Management and Insurance, University of Pennsylvania.

We provide a variety of glimpses into the successes and failures of various parts of modern financial risk management. However, it is not our intent -- indeed it is not logically possible -- to provide a survey of the known, the unknown and the unknowable (KuU). Instead, we aim to provide illustrations of a KuU-based perspective for conceptualizing financial risks and designing effective risk management strategies. Sometimes we focus on K, and sometimes on U, but most often our concerns blend aspects of K and u and U. Indeed K and U are extremes of a smooth spectrum, with many of the most interesting and relevant situations interior. Statistical issues emerge as central to risk measurement, and we push toward additional progress. But economic issues of incentives and strategic behavior emerge as central for risk management, as we illustrate in a variety of contexts.

Diebold, F.X., Kilian, L. and Nerlove, M. (Forthcoming), "Time Series Analysis," in L. Blume and S. Durlauf (eds.), The New Palgrave Dictionary of Economics, Second Edition. London: Macmillan.

We provide a concise overview of time series analysis in the time and frequency domains, with lots of references for further reading.

Andersen, T.G., Bollerslev, T., Christoffersen, P.F., and Diebold, F.X. (2006), "Volatility and Correlation Forecasting," in G. Elliott, C.W.J. Granger, and Allan Timmermann (eds.), Handbook of Economic Forecasting. Amsterdam: North-Holland, 778-878.

We survey the most important theoretical developments and empirical insights to emerge from the burgeoning volatility and correlation literature, with a focus on forecasting applications in financial risk management, asset management, and asset pricing.

Andersen, T.G., Bollerslev, T., Christoffersen, P.F. and Diebold, F.X. (2006), "Practical Volatility and Correlation Modeling for Financial Market Risk Management," in M. Carey and R. Stulz (eds.), Risks of Financial Institutions, University of Chicago Press for NBER, 513-548.

What academics have to offer market financial institution risk management practitioners. Improvements to current industry practice that are nevertheless parsimonious and easily estimated. Practical approaches to high-dimensional covariance matrix modeling, and pitfalls to avoid...

Campbell, S. and Diebold, F.X. (2005), "Weather Forecasting for Weather Derivatives," Journal of the American Statistical Association, 100, 6-16.

We take a simple yet sophisticated time-series approach to modeling and forecasting daily average temperature in U.S. cities, and we inquire systematically as to whether it may prove useful from the vantage point of participants in the weather derivatives market. The answer is, perhaps surprisingly, yes. In particular, we argue that the long-horizon density forecasts of crucial relevance may be produced cheaply and effectively by stochastic simulation of standard models. Seasonality in weather shock volatility dynamics turns out to play a crucial role.

DIebold, F.X. and Inoue, A. (2001), "Long Memory and Regime Switching,” Journal of Econometrics, 105, 131-159.

Bangia, A., Diebold, F.X., Schuermann, T, and Stroughair, J. (2001), "Modeling Liquidity Risk, With Implications for Traditional Market Risk Measurement and Management," in S. Figlewski and R. Levich (eds.), Risk Management: The State of the Art . Amsterdam: Kluwer Academic Publishers, 2002, 1-13. Published in abridged form as "Liquidity on the Outside," Risk, 12, 68-73, 1999.

Diebold, F.X., Schuermann, T. and Stroughair, J. (1998), "Pitfalls and Opportunities in the Use of Extreme Value Theory in Risk Management," in A.-P. N. Refenes, J.D. Moody and A.N. Burgess (eds.), Advances in Computational Finance, 3-12. Amsterdam: Kluwer Academic Publishers. Reprinted in Journal of Risk Finance, 1 (Winter 2000), 30-36.

Christoffersen, P., Diebold, F.X., and Schuermann, T. (1998), "Horizon Problems and Extreme Events in Financial Risk Management," Economic Policy Review, Federal Reserve Bank of New York, October, 109-118.

Diebold, F.X. Hickman, A., Inoue, A. and Schuermann, T. (1998), "Converting 1-Day Volatility to h-Day Volatility: Scaling by Root-h is Worse than You Think," Wharton Financial Institutions Center, Working Paper 97-34. Published in condensed form as "Scale Models," Risk, 11, 104-107.

Diebold, F.X. and Mariano, R. (1995), “Comparing Predictive Accuracy,” Journal of Business and Economic Statistics, 13, 253-265.

Diebold, F.X., Lee, J.-H. and Weinbach, G. (1994), "Regime Switching with Time-Varying Transition Probabilities,” in C. Hargreaves (ed.), Nonstationary Time Series Analysis and Cointegration. (Advanced Texts in Econometrics, C.W.J. Granger and G. Mizon, eds.), 283-302. Oxford: Oxford University Press.