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Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, which is the study of production, distribution, and consumption of money, assets, goods and services . Finance activities take place in financial systems at various scopes, thus the field can be roughly divided into personal, corporate, and public finance.
Value at risk (VaR) is a measure of the risk of loss for investments. It estimates how much a set of investments might lose, given normal market conditions, in a set time period such as a day. VaR is typically used by firms and regulators in the financial industry to gauge the amount of assets needed to cover possible losses.
Financial engineering is a multidisciplinary field involving financial theory, methods of engineering, tools of mathematics and the practice of programming. It has also been defined as the application of technical methods, especially from mathematical finance and computational finance, in the practice of finance.
Nassim Nicholas Taleb is a Lebanese-American essayist, mathematical statistician, former option trader, risk analyst, and aphorist whose work concerns problems of randomness, probability, and uncertainty. The Sunday Times called his 2007 book The Black Swan one of the 12 most influential books since World War II.
Financial risk is any of various types of risk associated with financing, including financial transactions that include company loans in risk of default. Often it is understood to include only downside risk, meaning the potential for financial loss and uncertainty about its extent.
A fat-tailed distribution is a probability distribution that exhibits a large skewness or kurtosis, relative to that of either a normal distribution or an exponential distribution. In common usage, the terms fat-tailed and heavy-tailed are sometimes synonymous; fat-tailed is sometimes also defined as a subset of heavy-tailed. Different research communities favor one or the other largely for historical reasons, and may have differences in the precise definition of either.
Financial risk modeling is the use of formal mathematical and econometric techniques to measure, monitor and control the market risk, credit risk, and operational risk on a firm's balance sheet, on a bank's trading book, or re a fund manager's portfolio value; see Financial risk management. Risk modeling is one of many subtasks within the broader area of financial modeling.
The following outline is provided as an overview of and topical guide to finance:
The black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight. The term is based on an ancient saying that presumed black swans did not exist – a saying that became reinterpreted to teach a different lesson after they were discovered in Australia.
The RiskMetrics variance model was first established in 1989, when Sir Dennis Weatherstone, the new chairman of J.P. Morgan, asked for a daily report measuring and explaining the risks of his firm. Nearly four years later in 1992, J.P. Morgan launched the RiskMetrics methodology to the marketplace, making the substantive research and analysis that satisfied Sir Dennis Weatherstone's request freely available to all market participants.
Probability of default (PD) is a financial term describing the likelihood of a default over a particular time horizon. It provides an estimate of the likelihood that a borrower will be unable to meet its debt obligations.
Credit analysis is the method by which one calculates the creditworthiness of a business or organization. In other words, It is the evaluation of the ability of a company to honor its financial obligations. The audited financial statements of a large company might be analyzed when it issues or has issued bonds. Or, a bank may analyze the financial statements of a small business before making or renewing a commercial loan. The term refers to either case, whether the business is large or small. A credit analyst is the finance professional undertaking this role.
In economics and finance, a Taleb distribution is the statistical profile of an investment which normally provides a payoff of small positive returns, while carrying a small but significant risk of catastrophic losses. The term was coined by journalist Martin Wolf and economist John Kay to describe investments with a "high probability of a modest gain and a low probability of huge losses in any period."
Tail risk, sometimes called "fat tail risk," is the financial risk of an asset or portfolio of assets moving more than three standard deviations from its current price, above the risk of a normal distribution. Tail risks include low-probability events arising at both ends of a normal distribution curve, also known as tail events. However, as investors are generally more concerned with unexpected losses rather than gains, a debate about tail risk is focused on the left tail. Prudent asset managers are typically cautious with the tail involving losses which could damage or ruin portfolios, and not the beneficial tail of outsized gains.
In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value, often focusing on negative, undesirable consequences. Many different definitions have been proposed. The international standard definition of risk for common understanding in different applications is “effect of uncertainty on objectives”.
IT risk management is the application of risk management methods to information technology in order to manage IT risk, i.e.:
Under the Basel II guidelines, banks are allowed to use their own estimated risk parameters for the purpose of calculating regulatory capital. This is known as the internal ratings-based (IRB) approach to capital requirements for credit risk. Only banks meeting certain minimum conditions, disclosure requirements and approval from their national supervisor are allowed to use this approach in estimating capital for various exposures.
Mathematical finance, also known as quantitative finance and financial mathematics, is a field of applied mathematics, concerned with mathematical modeling of financial markets.
In marketing, Bayesian inference allows for decision making and market research evaluation under uncertainty and with limited data.
Dragon king (DK) is a double metaphor for an event that is both extremely large in size or impact (a "king") and born of unique origins (a "dragon") relative to its peers (other events from the same system). DK events are generated by or correspond to mechanisms such as positive feedback, tipping points, bifurcations, and phase transitions, that tend to occur in nonlinear and complex systems, and serve to amplify DK events to extreme levels. By understanding and monitoring these dynamics, some predictability of such events may be obtained.
References
- ↑ Franklin, James (Oct 2008). "Operational risk under Basel II: A model for extreme risk evaluation" (PDF). Banking and Financial Services Policy Report. 27 (10): 10–16. Retrieved 29 June 2021.
- ↑ Franklin, J.; Sisson, J.A.; Burgman, M.A; Martin, J.K. (2008). "Evaluating extreme risks in invasion ecology: learning from banking compliance" (PDF). Diversity and Distributions. 14 (4): 581–591. doi:10.1111/j.1472-4642.2008.00478.x. S2CID 8875197 . Retrieved 29 June 2021.