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Red-Blooded Risk: The Secret History of Wall Street

توضیحات

"Aaron Brown combines his characteristic no-nonsense approach to risk management with the latest, cutting-edge research in behavioral finance. The result makes other books on risk look pale and anemic by comparison."
—Dylan Evans, author of Risk Intelligence

"I highly recommend these ruminations on the history, philosophy, and practice of risk management; on risk, money, and the social value of derivatives markets; and much else written by a prominent risk management practitioner. This unconventional book is not only a good read but is also a treasure trove of valuable insights into trading and markets."
—Jim Gatheral, professor at Baruch College and author of The Volatility Surface

"Aaron Brown is the dean of Wall Street risk managers, and the one I respect the most. He describes risk clearly and presents techniques for managing it. My disagreement is with the applicability of those techniques to extreme tail events. Aside from that he has been my principal recourse in the field owing to his acuity, depth, and clarity of exposition."—Nassim Nicholas Taleb, professor at the Polytechnic Institute of New York University and author of The Black Swan

"Aaron Brown eloquently explains the history of money and risk, and predicts a future with an increasing role for financial derivatives. After decades of serious poker playing and front-line risk management, he has a unique perspective. His blood is considerably redder than mine, which is looking rather pink after reading this book. I'm not sure I've got the nerve to follow all of his advice, but then again I like quiche."
—Paul Wilmott, mathematician and winner of thePeel sandcastle-building competition, August 2001

"Aaron is a modern-day alchemist, able to transform complex and somewhat esoteric mathematical concepts into something easily understandable through the use of everydayexamples. He's a master of one of the most important skills required of any risk manager: the ability to communicate effectively. Red-Blooded Risk is uniquely written to appeal to both the novice and the professional."
—Richard Apostolik, President and CEO, Global Association of Risk Professionals

"An original and provocative introduction to risk by an experienced Wall Street manager. Entertaining and informative for beginners and professionals alike."
—Edward O. Thorp, author of Beat the Dealer and Beat the Market


Aaron Brown is risk manager at AQR Capital Management and the author of The Poker Face of Wall Street (Wiley), selected one of the ten best books of 2006 by BusinessWeek, and A World of Chance with Reuven and Gabrielle Brenner. In his thirty-year Wall Street career, he has been a trader, portfolio manager, head of mortgage securities, and risk manager for institutions including Citigroup and Morgan Stanley. He also served a stint as a finance professor and was among the top poker players in the world during the 1970s and 1980s. He holds degrees in applied mathematics from Harvard and in finance and statistics from the University of Chicago.

Acknowledgments xi

Chapter 1 What This Book Is and Why You Should Read It 1

Risk, Danger, and Opportunity 2

Red- Blooded Risk Management 4

Risk and Life 7

Play and Money 9

Frequentism 11

Rationality 13

Bets 15

Exponentials and Culture 18

Payoff 20

Chapter 2 Red Blood and Blue Blood 23

Chapter 3 Pascal's Wager and the Seven Principles of Risk Management 29

Principle I: Risk Duality 32

Principle II: Valuable Boundary 33

Principle III: Risk Ignition 35

Principle IV: Money 38

Outside the VaR Boundary 40

Principle V: Evolution 45

Principle VI: Superposition 48

Principle VII: Game Theory 49

Chapter 4 The Secret History of Wall Street: 1654– 1982 57

Pascal and Fermat 58

Poker 61

Advantage Gamblers 62

Sports Betting 63

Quants to Wall Street 66

Finance People 68

Real Finance 69

Chapter 5 When Harry Met Kelly 73

Kelly 74

Harry 76

Commodity Futures 79

If Harry Knew Kelly 84

Investment Growth Theory 88

eRaider.com 92

MPT Out in the World 96

Chapter 6 Exponentials, Vampires, Zombies, and Tulips 101

Types of Growth 102

The Negative Side 105

Tulips 106

Tulip Propaganda 108

Quantitative Tulip Modeling 111

Money 112

Chapter 7 Money 117

Chapter 8 The Story of Money: The Past 125

Property, Exchange, and Money 126

Paleonomics 128

Transition 131

What Money Does 134

Risk 135

Government and Paper 138

Paper versus Metal 142

1776 and All That 145

Andrew Dexter 147

A Short Digression into Politics and Religion 150

Chapter 9 The Secret History of Wall Street: 1983– 1987 155

Effi cient Markets 157

Anomalies 159

The Price Is Right . . . Not! 161

Effi ciency versus Equilibrium 162

Beating the Market 165

Paths 170

Sharpe Ratios and Wealth 174

1987 177

Chapter 10 The Story of Money: The Future 179

Farmers and Millers 180

Money, New and Improved 183

A General Theory of Money 185

Value and Money 189

Numeraire 191

Clearinghouses 196

Cash 197

Derivative Money 200

The End of Paper 203

Chapter 11 Cold Blood 207

Chapter 12 What Does a Risk Manager Do?—Inside VaR 213

Professional Standards 213

Front Offi ce 215

Trading Risk 217

Quants on the Job 218

Middle Office 222

Back Office 225

Middle Office Again 227

Looking Backward 228

Risk Control 230

Beyond Profi t and Loss 232

Numbers 234

The Banks of the Charles 236

Waste 238

The Banks of the Potomac 241

The Summer of My Discontent 245

Validation 247

Chapter 13 VaR of the Jungle 251

Chapter 14 The Secret History of Wall Street: 1988– 1992 255

Smile 256

Back to the Dissertation 258

Three Paths 262

An Unexpected Twist 265

Surprise! 267

Computing VaR 271

Chapter 15 Hot Blood and Thin Blood 277

Chapter 16 What Does a Risk Manager Do?— Outside VaR 283

Stress Tests 283

Trans- VaR Scenarios 287

Black Holes 289

Why Risk Managers Failed to Prevent the Financial Crisis 290

Managing Risk 296

Unspeakable Truth Number One: Risk Managers Should Make Sure Firms Fail 299

Unspeakable Truth Number Two: There’s Good Stuff beyond the VaR Limit 305

Unspeakable Truth Number Three: Risk Managers Create Risk 309

Chapter 17 The Story of Risk 313

Chapter 18 Frequency versus Degree of Belief 323

Statistical Games 324

Thorp, Black, Scholes, and Merton 329

Change of Numeraire 333

Polling 336

The Quant Revolution 341

Chapter 19 The Secret History of Wall Street: 1993– 2007 345

Where Did the Money Come From? 348

Where Did They Put the Money? 359

Where Did the Money Go? 364

Chapter 20 The Secret History of Wall Street: The 2007 Crisis and Beyond 369

Postmortem 379

A Risk Management Curriculum 387

One Hundred Useful Books 393

About the Author 401

About the Illustrator 403

Index 405