Achieving market consistency can be challenging, even for the mostestablished finance practitioners. In Market Consistency: ModelCalibration in Imperfect Markets, leading expert Malcolm Kempshows readers how they can best incorporate market consistencyacross all disciplines. Building on the author's experience as apractitioner, writer and speaker on the topic, the book exploreshow risk management and related disciplines might develop as fairvaluation principles become more entrenched in finance andregulatory practice.
This is the only text that clearly illustrates how to calibraterisk, pricing and portfolio construction models to a marketconsistent level, carefully explaining in a logical sequence whenand how market consistency should be used, what it means fordifferent financial disciplines and how it can be achieved for bothliquid and illiquid positions. It explains why marketconsistency is intrinsically difficult to achieve with certainty insome types of activities, including computation of hedgingparameters, and provides solutions to even the most complexproblems.
The book also shows how to best mark-to-market illiquid assetsand liabilities and to incorporate these valuations into solvencyand other types of financial analysis; it indicates how to defineand identify risk-free interest rates, even when thecreditworthiness of governments is no longer undoubted; and itexplores when practitioners should focus most on market consistencyand when their clients or employers might have less desire for suchan emphasis.
Finally, the book analyses the intrinsic role of regulation andrisk management within different parts of the financial servicesindustry, identifying how and why market consistency is key tothese topics, and highlights why ideal regulatory solvencyapproaches for long term investors like insurers and pension fundsmay not be the same as for other financial market participants suchas banks and asset managers.