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View Full Version : Disambiguation: Risk Theory | DFA | ERM


diegol
11-19-2007, 10:08 PM
I would like to know what you understand by these terms, how you believe they relate to each other and how they are different:

- Risk Theory
- DFA
- ERM

I've read some articles but they either focus on DFA or ERM alone and not on their similitude/differences, when apparently there are some points of contact.

Any input will be greatly appreciated.

TIA

Banquet of Chestnuts
11-19-2007, 11:18 PM
Just my understanding:

Risk Theory - Mathematics, probability theory, stochastic processes, time series etc...
DFA - Setting up a model of some financial problem and playing around with the inputs. Possibly substituting random numbers according to various distributions for the inputs and running simulations. I think of Excel and @Risk.
ERM - The business end of risk, can be quantitative but doesn't have to be. For example, this could be aggregate loss distrubutions across lobs but also creating a contingency plan for when the board of directors dies in a plane crash.

campbell
11-20-2007, 06:43 AM
I am in agreement with Banquet of Chestnuts.

Part of ERM is not only a larger view of risks (operational, legal, financial, etc.) but also setting limits on those risks and monitoring them.

DFA is just a tool for quantifying financial risks. So DFA is one of the tools used by those doing ERM.

Risk theory is the theoretical basis for quantitative measurement of financial risk. So this is what the people who are building the models for DFA need to know.

diegol
11-20-2007, 10:39 PM
My thoughts are in line with yours.

I'd add, if you agree, that DFA extends the reach of classic risk theory by using simulation techniques, which permit less restrictive (in terms of hipotheses) and more realistic (e.g. taking into account correlation and variables interdependence, which is related to hipotheses definition anyway) analyses.

Brad Gile
11-21-2007, 09:27 AM
Yes. The "D" in DFA is "Dynamic", and is the ingredient that gives DFA the potential to be a very powerful and useful tool. The key to its use, however, is knowing exactly what you want to use it for.

My thoughts are in line with yours.

I'd add, if you agree, that DFA extends the reach of classic risk theory by using simulation techniques, which permit less restrictive (in terms of hipotheses) and more realistic (e.g. taking into account correlation and variables interdependence, which is related to hipotheses definition anyway) analyses.

diegol
12-11-2007, 11:12 PM
I've decided to base my thesis work on DFA, so I'd appreciate any references to books / articles / papers you consider worth taking a look at.

I'm also willing to receive suggestions on ERM readings.

Thank you in advance

Actuarialsuck
12-14-2007, 11:29 AM
I've decided to base my thesis work on DFA, so I'd appreciate any references to books / articles / papers you consider worth taking a look at.

I'm also willing to receive suggestions on ERM readings.

Thank you in advance

This might be a nice intro.

http://www.business.uiuc.edu/%7Es%2Ddarcy/Fin432/2007/Finance%20432%20-%20Managing%20Financial%20Risk%20Schedule.htm

http://www.business.uiuc.edu/%7Es%2Ddarcy/Fin590/2005/index.html

diegol
12-16-2007, 11:48 AM
This might be a nice intro.

http://www.business.uiuc.edu/%7Es%2Ddarcy/Fin432/2007/Finance%20432%20-%20Managing%20Financial%20Risk%20Schedule.htm

http://www.business.uiuc.edu/%7Es%2Ddarcy/Fin590/2005/index.html

I've taken a quick peek. They will be helpful. Thank you.