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This presentation explores the main types of models used in financial markets, including instrument valuation, risk measurement / management, idea generation and portfolio construction. For each type it explores the purpose and main characteristics of such models and the principal areas of model risk

Slides

1	Modelling in financial markets
2	Modelling in financial markets
3	(1) Instrument valuation
4	Axioms underlying instrument valuation
5	Issues with axioms
6	Black-Scholes and generalisations
7	Other derivative pricing models
8	Model risk
9	(2) Risk measurement
10	At portfolio level
11	Issues include
12	Fat-tailed behaviour
13	Selection effects, see e.g. Kemp (2010, 2010a, 2010b)
14	Selection effects are potentially very important
15	(3) Idea generation
16	Techniques and characteristics
17	(4) Portfolio construction, see Kemp (2010)
18	Risk-return trade-off
19	Why the sensitivity to input assumptions?
20	Summary
21	References
22	Appendix: What causes fat-tailed behaviour
23	Time-varying volatility
24	Explains some market index fat tails, particularly on upside
25	Not just a developed market phenomenon
26	A longer term phenomenon too
27	Time-varying volatility
28	Regime switching
29	Regime switching (continued)
30	Crowded trades
31	Leverage
32	Other examples of leverage
33	Impact that leverage can have on portfolio behaviour
34	Important Information

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