What Is Financial Risk Modeling?
Financial risk modeling is the process of determining how much risk (measured in volatilityVIXThe Chicago Board Options Exchange (CBOE) created the VIX (CBOE Volatility Index) to measure the 30-day expected volatility of the US stock market,) is present in a particular business, investment, or series of cash flows. The process also includes assessing which independent variablesIndependent VariableAn independent variable is an input, assumption, or driver that is changed in order to assess its impact on a dependent variable (the outcome). Think of the independent variable as the input and the dependent variable as the output. In financial modeling and analysis, an analyst typically performs sensitivity analysis make the greatest impact on dependent variables in a model. Financial analysts will attempt to model riskSystemic RiskSystemic risk can be defined as the risk associated with the collapse or failure of a company, industry, financial institution or an entire economy. It is the risk of a major failure of a financial system, whereby a crisis occurs when providers of capital lose trust in the users of capital as a means of comparing the attractiveness of different investment opportunities.
