Carol Alexander. Market Risk Analysis: Practical Financial Econometrics

Volume 2 — Wiley, 2008. — 430 p.For well over a decade, econometrics has been one of the major routes into finance. I took this route myself several years ago. Starting an academic career as an algebraist, I then had a brief encounter with game theory before discovering that the skills of an econometrician were in greater demand. I would have found econometrics much more boring than algebra or game theory had it not been for the inspiration of some great teachers at the London School of Economics, and of Professor Robert Engle who introduced me to GARCH models some twenty years ago.At that time finance was one of the newest areas of applied econometrics and it was relatively easy to find interesting problems that were also useful to practitioners. And this was how my reputation grew, such as it is. I was building GARCH models for banks well before they became standard procedures in statistical packages, applying cointegration to construct arbitrage strategies for fund managers and introducing models for forecasting very large covariance matrices. In the end the appreciation of this work was much greater than the appreciation I received as an academic so I moved, briefly, to the City. Then, almost a decade ago, I returned to academic life as a professor of financial risk management. In fact, I believe I was the first professor to have this title in the UK, financial risk management being such a new profession at that time. It was the late 1990s, and by then numerous econometricians were taking the same route into finance that I had. Some of the top finance journals were populating many of their pages with applied financial econometrics, and theoretical econometric journals were becoming increasing focused on financial problems.
Of course I wanted to read and learn all about this so that I could publish the academic papers that are so important to our profession. But I was disappointed and a little dismayed by what I read. Too few of the papers were written by authors who seemed to have a proper grasp of the important practical problems in finance. And too much journal space was devoted to topics that are at best marginal and at worst completely irrelevant to financial practitioners.