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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 accounting ledger of tradeable financial assets, or of a fund manager's portfolio value; see Financial risk management.
[3] [4] Their work borrowed heavily from the theoretical and mathematical ideas found in John Burr Williams 1938 book "The Theory of Investment Value," which put forth the dividend discount model 18 years before Gordon and Shapiro. When dividends are assumed to grow at a constant rate, the variables are: is the current stock price.
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The Benjamin Graham formula is a formula for the valuation of growth stocks. It was proposed by investor and professor of Columbia University , Benjamin Graham - often referred to as the "father of value investing".
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The Gordon–Loeb model is an economic model that analyzes the optimal level of investment in information security. The benefits of investing in cybersecurity stem from reducing the costs associated with cyber breaches. The Gordon-Loeb model provides a framework for determining how much to invest in cybersecurity, using a cost-benefit approach.
Another approach to model risk is the worst-case, or minmax approach, advocated in decision theory by Gilboa and Schmeidler. [22] In this approach one considers a range of models and minimizes the loss encountered in the worst-case scenario. This approach to model risk has been developed by Cont (2006). [23]
RiskMetrics assumes that the market is driven by risk factors with observable covariance. The risk factors are represented by time series of prices or levels of stocks, currencies, commodities, and interest rates. Instruments are evaluated from these risk factors via various pricing models.