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The Known, the Unknown, and the Unknowable in Financial Risk Management
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The financial risk management issues discussed under the KuU framework are highly relevant, and this especially in the light of the subprime credit crisis. Bringing them together in this timely volume will encourage further academic research and remind regulators and practitioners alike first to learn to walk before attempting to run. -- Paul Embrechts, RiskLab, ETH Zurich This book brings together a series of important and thought-provoking contributions by a group of highly distinguished academics and notable finance practitioners. The organizational principle of the book--the Known, the unknown, and the Unknowable, or KuU--is as relevant and timely as ever. I highly recommend the book to anybody interested in learning about the latest developments and thinking by some of the leading and most influential minds in the area of modern risk management. -- Tim Bollerslev, Duke University Diebold, Doherty, and Herring have provided tremendous public service in applying their considerable expertise in risk, insurance, and financial institutions to assemble this fascinating collection of papers on risk management--this book should be required reading for anyone with decision-making authority in the finance and insurance industries, and especially among regulators. -- Andrew W. Lo, author of "Hedge Funds" This book tackles the complexities of risk management head-on, directly confronting the full range of issues and challenges that permeate the field. It nicely fills a void by offering up thoughtful and disciplined analysis across highly diverse topics. A truly welcome addition to the burgeoning literature on the theory and practice of risk management. -- Torben G. Andersen, Northwestern University A very informative, interesting book. -- Paul Embrechts, coauthor of "Quantitative Risk Management" Each year when I teach my market risk management class, I have one or two senior risk officers from banks give a talk. At the end of the talk I always ask them: 'So what keeps you awake at night?' The answer is virtually always the same: 'Risks that I do not know about.' This book is therefore extremely important in my view. I thoroughly enjoyed reading it. -- Peter Christoffersen, McGill University I consider this book one of the best compendiums available today on key risk issues facing the global financial system. These are issues whose resolution will determine the nature of the world financial architecture going forward. They will be actively discussed in the months and years ahead, and this volume represents an invaluable resource in this debate. -- Ingo Walter, New York University

Table of Contents

Preface vii Chapter 1: Introduction by Francis X. Diebold, Neil A. Doherty, and Richard J. Herring 1 Chapter 2: Risk: A Decision Maker's Perspective by Sir Clive W. J. Granger 31 Chapter 3: Mild vs. Wild Randomness: Focusing on Those Risks That Matter by Benoit B. Mandelbrot and Nassim Nicholas Taleb 47 Chapter 4: The Term Structure of Risk, the Role of Known and Unknown Risks, and Nonstationary Distributions by Riccardo Colacito and Robert F. Engle 59 Chapter 5: Crisis and Noncrisis Risk in Financial Markets: A Unified Approach to Risk Management by Robert H. Litzenberger and David M. Modest 74 Chapter 6: What We Know, Don't Know, and Can't Know about Bank Risk: A View from the Trenches by Andrew Kuritzkes and Til Schuermann 103 Chapter 7: Real Estate through the Ages: The Known, the Unknown, and the Unknowable by Ashok Bardhan and Robert H. Edelstein 145 Chapter 8: Reflections on Decision-making under Uncertainty by Paul R. Kleindorfer 164 Chapter 9: O n the Role of Insurance Brokers in Resolving the Known, the Unknown, and the Unknowable by Neil A. Doherty and Alexander Muermann 194 Chapter 10: Insuring against Catastrophes by Howard Kunreuther and Mark V. Pauly 210 Chapter 11: Managing Increased Capital Markets Intensity: The Chief Financial Officer's Role in Navigating the Known, the Unknown, and the Unknowable by Charles N. Bralver and Daniel Borge 239 Chapter 12: The Role of Corporate Governance in Coping with Risk and Unknowns by Kenneth E. Scott 277 Chapter 13: Domestic Banking Problems by Charles A. E. Goodhart 286 Chapter 14: Crisis Management: The Known, The Unknown, and the Unknowable by Donald L. Kohn 296 Chapter 15: Investing in the Unknown and Unknowable by Richard J. Zeckhauser 304 List of Contributors 347 Index 359

Promotional Information

The financial risk management issues discussed under the KuU framework are highly relevant, and this especially in the light of the subprime credit crisis. Bringing them together in this timely volume will encourage further academic research and remind regulators and practitioners alike first to learn to walk before attempting to run. -- Paul Embrechts, RiskLab, ETH Zurich This book brings together a series of important and thought-provoking contributions by a group of highly distinguished academics and notable finance practitioners. The organizational principle of the book--the Known, the unknown, and the Unknowable, or KuU--is as relevant and timely as ever. I highly recommend the book to anybody interested in learning about the latest developments and thinking by some of the leading and most influential minds in the area of modern risk management. -- Tim Bollerslev, Duke University Diebold, Doherty, and Herring have provided tremendous public service in applying their considerable expertise in risk, insurance, and financial institutions to assemble this fascinating collection of papers on risk management--this book should be required reading for anyone with decision-making authority in the finance and insurance industries, and especially among regulators. -- Andrew W. Lo, author of "Hedge Funds" This book tackles the complexities of risk management head-on, directly confronting the full range of issues and challenges that permeate the field. It nicely fills a void by offering up thoughtful and disciplined analysis across highly diverse topics. A truly welcome addition to the burgeoning literature on the theory and practice of risk management. -- Torben G. Andersen, Northwestern University A very informative, interesting book. -- Paul Embrechts, coauthor of "Quantitative Risk Management" Each year when I teach my market risk management class, I have one or two senior risk officers from banks give a talk. At the end of the talk I always ask them: 'So what keeps you awake at night?' The answer is virtually always the same: 'Risks that I do not know about.' This book is therefore extremely important in my view. I thoroughly enjoyed reading it. -- Peter Christoffersen, McGill University I consider this book one of the best compendiums available today on key risk issues facing the global financial system. These are issues whose resolution will determine the nature of the world financial architecture going forward. They will be actively discussed in the months and years ahead, and this volume represents an invaluable resource in this debate. -- Ingo Walter, New York University

About the Author

Francis X. Diebold is the Paul F. and E. Warren Shafer Miller Professor of Economics at the University of Pennsylvania and professor of finance and statistics at the university's Wharton School. Neil A. Doherty is the Frederick H. Ecker Professor of Insurance and Risk Management at the Wharton School. Richard J. Herring is the Jacob Safra Professor of International Banking and professor of finance at the Wharton School.

Reviews

Winner of the 2012 Kulp-Wright Book Award, American Risk and Insurance Association Finalist for the 2010 Paul A. Samuelson Award, TIAA-CREF "It is a bold book, tackling both theory and practice and spanning the worlds of (among others) banking, insurance, real estate, and investment. It is also utterly engrossing... Although this book is most obviously addressed to risk managers and regulators, I think it should be read by every intellectually curious person with skin in the financial game. If the investor or trader doesn't come away with at least one or two ideas of practical importance to his financial life, he is a 'sleepreader.'"--Brenda Jubin, Reading the Markets blog "Peppered with anecdotes and prominent examples, the book never abandons the practical side of its topic. It will be helpful for readers interested in only specific subtopics that each article is a stand-alone piece. I recommend this book to a wide audience: academics and practitioners, of course, but even people who are not directly involved in the financial sector, but are interested in it, will find it definitely worth their time."--Tobias Nigbur, Financial Markets and Portfolio Management

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