Allan M. Malz, currently a senior analytical advisor in the Markets Group at the Federal Reserve Bank of New York and a faculty member at Columbia University and earlier a trader and risk manager, has written a thorough account of the principles of risk management and the challenges facing risk managers today.
Financial Risk Management: Models, History, and Institutions (Wiley, 2011) is a big book, over 700 pages. And for those who are not steeped in the basic math of risk management it is a difficult book. The fault, I am the first to admit, lies with the reviewer, not the author. I have a knack for getting in over my head when it comes to quant books.
Despite my obvious handicap, I learned a lot from this wide-ranging book. Start with macro/central bank issues such as the structure of the banking industry, stress tests, and financial regulation--especially in the wake of the most recent financial crisis. And since, lest we myopically forget, the world has experienced many financial crises, Malz devotes a chapter to the topic, analyzing such issues as panics, runs, and crashes; the causes of financial crises; and the behavior of asset prices during crises.
For those who are charged with managing portfolio risk Malz takes them through the ins and outs of VaR. Especially intriguing to me, albeit mentally tasking, was the chapter on nonlinear risks and the treatment of bonds and options. And, although I would like to believe it’s Monday morning quarterbacking but I know it’s not, we can read about credit and counterparty risk and structured credit risk.
Malz’s Financial Risk Management will never be a best seller. But those who need to know how to manage risk—and I would hope that their numbers are not limited to risk managers themselves--would do well to add this book to their must-read list.