Markets reflect available information. The prices they are prepared to transact at reflect the information known about the asset and help establish an equilibrium price they provide immediacy of execution. A statistical approach to risk management will be successful in capturing most of the stochastic behaviour of asset prices. As an approximation, the normal or lognormal distributions provide a reasonable description of the probabilities surrounding future outcomes. Departures from normality are a feature of financial markets.
Markets become stressed and undergo significant value shifts over short periods of time.
These radical moves are not well captured in a distribution model, nor are they readily forecastable using current math techniques. The above problems consequently require the risk manager to adopt two differing approaches to risk assessment. It is found in all Value at Risk models. 3 Case Solution 3 Case Study 3 Explain the difference between the three traditional theories of the term structure of interest rates. The expectations theory proposes that the shape of the yield curve is determined by participants view on the future course of short-term interest rates and the demand for securities of a particular maturity.