42 books like Financial Risk Management

Having read or browsed many books dedicated to the mathematics of options and other derivative instruments, I unquestionably consider Neftci’s book as by far the best choice.

Starting with the fundamentals, it goes much further than a simple “introduction”, and typically fits with the needs of a “quant” specializing in options, with a good balance between pure theoretical, mathematical developments (such as Partial Differential Equations, Girsanov theorem, Markov processes, etc) and practical applications on option pricing. 

In the vast array of quantitative finance relative to financial markets instruments and related risks, the case of credit or counterparty risk remains by far the most complex one, and thus, unsurprisingly, the least mastered by financial markets professionals.

A lot has been done, but a lot remains to be done: covering this is precisely the goal of this book. In a nutshell, the main obstacle to succeed in developing grounded and useful models of default prediction is due to the fact that a default is (fortunately) a rare event, in other words, with a (very) low probability of occurrence, and statistical tools are uncomfortable with very low probability levels. Hence the need of this book, to help the practitioner to go ahead in this matter.

The valuation of options has been the subject of numerous studies, papers, and books.

The originality of this one is that it is collecting the resulting formulae to be used in practice, and for each of them, proposing related Excel spreadsheets, and VBA coding (also with a CD included). All types of options are covered, from “vanilla” to “exotics”, on every kind of underlyings (from traditional ones up to commodities and energy).

It also develops calculation methods for the options “greeks” and volatility. But the book is not only such a catalog of formulae, these are assorted by useful comments about the best way to apply them, and their validity limits. Not surprisingly, this book is qualified as the “bible” of options valuation.

Technical Analysis is traditionally denigrated by the academic community, not without good reasons. But as a matter of fact, traders and practitioners used them (also, not without good reasons) extensively, to the extent that Technical Analysis is often qualified as “self-fulfilling prophecy”.

There is therefore a good reason to be more or less familiar with these techniques, at worst, following the adage “Know your enemy”. The problem, with Technical Analysis, is that, as it is not a true science, it is not easy to find books about it, written in a serious way. This is however the case with this one, covering all the usual technical analysis methods, both the graphic and the numeric ones, in a clear, concise, and exemplified way.

What I loved about this book is that Norman Marks, a global expert on risk, wrote about the complex field of risk management in an accessible (lay) voice. I loved that, as a contributor to the ISO standards, he then pointed out the imperfections in the standards he had contributed to.

Intellectual humility is not often seen. I appreciated the way he explained world-class management as if he were having a conversation with the major risk management theories, pointing out strengths and weaknesses and boldly stating what he disagrees with or doesn’t actually work. I loved hearing his voice: “If I ruled the world, [I’d do it this way…].” Of course, I was curious to keep reading.

We’ve all felt like a Cassandra at times, imploring people to see the obvious disaster to come - only to be ignored.

And even when that disaster as predicted materializes, we are rarely credited for having successfully seen what others could not so easily imagine. That said, for every accurate prediction, there are dozens, if not hundreds or even thousands of predictions that prove false.

As risk managers, our job is to reduce uncertainty by predicting the future as accurately as possible. So how do we sift through the chatter and find the most accurate warnings?

This book, written by former national security experts, offers an interesting methodology that can help us do that.  

This is the obvious recommendation, but a ‘must read’ nonetheless. 

Whereas Cialdini’s text focuses on our response to messaging (on risk or otherwise), Ripley’s book focuses on our response to the incident itself (…and so where the former leaves off, the latter picks up).

The Unthinkable gives readers a deep look into our own psyche to prepare us for how we are likely to response when faced with physical or mortal danger. Nobody knows exactly how they will respond in a high-hazard incident because so many instinctual processes take over.

But as Ripley so effectively explains, it is possible to know what these phenomena look like so that when we are experiencing them we can adjust accordingly to be more effective responders.

Amanda Ripley’s approachable journalistic style effectively turns a collection of meaningful risk management messages into a hard-to-put-down page-turner. 

I started working at Depository Trust Company in New York in September 1987 – a month later the “Black Monday” stock market crash happened! At the time, it was very difficult to see exactly what caused it. “When you are up to your neck in alligators, it is hard to remember why you drained the swamp!” This book explains how Wall Street banks hatched all those alligator eggs by hiring MIT math-whizz-kids and turning them loose without explaining the simplest thing about the stock market to them. One of the errors in their models was that they did not take bank holidays into account when calculating the time value of stocks and option prices.

Mark Minervini is undoubtedly one of the greatest traders to ever live. This book is an absolute gem, building on what O’Neil wrote in his book. Minervini has gotten his trading down to absolute precision, from when to buy, when to sell, and how to screen for stocks. It’s all in here. A must-read for anyone looking to learn about trading.

Forget bromides such as buying a stock because your experience with the company’s product has been good. The hugely successful money manager Howard Marks makes the essential point that the goal is not to find good companies but to make good purchases. “It’s not what you buy,” he says, “it’s what you pay for it.”  Investors who are interested in good outcomes rather than thrills will find many more sound principles in this book.