Extreme Financial Risk deals with the modeling of extreme events with applications in finance. Financial market crashes are one of the example of such extreme events. These events, historically, drained many bank and trading accounts. Due to such consequences there is evident need for adequate methods to model and monitor such events.
The authors present both the way to quantify extreme events, and therefore the risk associated to them, and also the problems on the applied side, i.e., the risk management of extreme events. The book is very well structured. The first chapter develops a framework for coherent measures and provides a general introduction to risk assessment. Chapter 2 deals with distributions with heavy tails. The rest of the book deals with the problem of quantifying the dependence structure of asset returns. Outlook and future research directions are given in chapter 7.
The book is applied in the sense that the theory presented can be applied to areas such as finance, geophysics, biophysics, etc. This is not, however, your average applied book where the author takes some data and calculates things. This part you should do on your own. Several "theoretical" examples are presented which can later be applied to real portfolios. But this is not the main thing the authors are trying to achieve. Their emphasis is on building the theory that describes the extreme events that we detect in our data.
The book is written in an almost narrative style. There are lots of theorems, but the authors also explain the logic behind the theory. Overall, the book is written in a very lucid style, very easy to understand. Detailed proofs of certain results are given in the appendices at the end of each chapter. Algorithms for computational purposes are presented within the text. The authors also provide a large list of references, which could make this text very attractive for researchers.
The book is most suitable for practitioners, since they would be the first to apply the theory in practice (and they really should). Students interested in extreme events in financial markets would find this an interesting text. As far as the prerequisites, some graduate probability and statistics would be more than enough to easily grasp the contents of the book.
Ita Cirovic Donev is a PhD candidate at the University of Zagreb. She hold a Masters degree in statistics from Rice University. Her main research areas are in mathematical finance; more precisely, statistical mehods of credit and market risk. Apart from the academic work she does consulting work for financial institutions.