NBS8201 : Risk Modelling

Semester 2 Credit Value: 10
ECTS Credits: 5.0


This module aims to provide students with a detailed understanding of the key mathematical and statistical techniques used by financial institutions (e.g. investment banks, insurance companies, hedge funds) for modelling the risks associated with their assets and liabilities. The module will also explain in detail how financial regulators influence the risk management strategies employed by financial institutions.

Outline Of Syllabus

This module concentrates on the techniques used for modelling three particular types of risk;
(i) interest rate risk
(ii) credit risk
(iii) market risk.

These techniques range from simple mathematical models, through to more complex statistical techniques such as Monte Carlo simulation. Empirical applications at the individual, company and country level will be employed to illustrate the techniques in action. Relevant financial regulations will also be critically analysed. A summary of the lecture schedule is given below.

1. Introduction and interest rate risk
- types of risk, the repricing model, the maturity model.
2. Interest rate risk
- duration, immunization, convexity.
3. Interest rate risk and credit risk
- forecasting interest rates, linear discriminant models, linear probability models.
4. Credit risk
- linear probability models, limited dependent variable models.
5. Credit risk and market risk
- default rate models, modelling and forecasting volatility.
6. Market risk
- VaR by historical simulation, VaR by the delta-normal approach, VaR by Monte Carlo simulation, backtesting VaR models.
7. Market risk
- backtesting VaR models, VaR and financial regulation, VaR and the 2008-2009 global financial crisis.

Teaching Methods

Teaching Activities
Category Activity Number Length Student Hours Comment
Scheduled Learning And Teaching ActivitiesLecture72:0014:00N/A
Guided Independent StudyAssessment preparation and completion132:0032:00N/A
Guided Independent StudyDirected research and reading125:0025:00N/A
Scheduled Learning And Teaching ActivitiesSmall group teaching41:004:00N/A
Guided Independent StudyIndependent study125:0025:00N/A
Teaching Rationale And Relationship

• Lectures provide the basic structure of the methods and theories that are introduced and an overview of the current issues.
• Seminars provide an opportunity to enhance understanding of the empirical methods and the theoretical aspects of the module.

Assessment Methods

The format of resits will be determined by the Board of Examiners

Description Length Semester When Set Percentage Comment
Written Examination902A100N/A
Exam Pairings
Module Code Module Title Semester Comment
2London equivalent module
Formative Assessments
Description Semester When Set Comment
Prob solv exercises2MQuiz in lectures
Assessment Rationale And Relationship

The examination tests understanding of how econometrics can be used to model credit risk.

Reading Lists