Financial Risk Forecasting Notebook
Version 3
These notes accompany Financial Risk Forecasting written by Jón Daníelsson at the London School of Economics. You can find his blog and other writing on the topic of risk on his main webpage ModelsandRisk.org and his academic research on RiskResearch.org.
The book is focused on practical quantitative methods for forecasting market risk with implementations in the four most common mathematical and statistical programming languages: Julia, Matlab, Python and R. Of those, R is the easiest to implement because of the richness of its statistical libraries and high-quality user interface, RStudio. While the accompanying website contains basic code in all four languages, these pages provide in-depth instructions on implementing risk forecasting in R.
Almost every financial institution in the world needs to forecast and manage risk, and the financial regulators mandate risk management for most financial institutions. For example, the Basel committee oversees the Basel Capital Accords. While they apply to member states of the G20, every country with a market-based financial system also implements the Basel regulations. While those regulations cover a wide spectrum of risk-taking activities, the aspect relevant to what we do here is the trading book. While we do not discuss financial regulations in this notebook, see Chapter 13 on regulations.
These notes do not cover the mathematics of risk forecasting or R programming basics, as better sources exist for such information. The accompanying textbook and lecture slides contain much of the necessary mathematics and statistics, and we have links to some of the best training information for R in Section Section 6.2 below. Instead, our focus here is on bringing all of these together — including mathematics and statistics, code and data — in order to produce market risk forecasts.
These notes are written in Quarto. Thanks to Alvaro Aguirre, Jia Rong Fan and Qinxian Wu for assisting with this notebook.
Comments on these notes can be sent here.