Portfolio Construction and Risk Budgeting (5th Edition)

Portfolio Construction and Risk Budgeting (5th Edition)

Long-Term Portfolio Simulation


This book written by leading industry expert, Alexander Sokol, provides a comprehensive reference of market practice and advanced techniques for constructing and calibrating long-term portfolio simulation models.

Long-Term Portfolio Simulation is a must-read for anyone dealing with the unique challenges of simulating large portfolios over long time horizons in the context of CVA, funding, liquidity, collateral optimisation, PFE-based limits and regulatory capital.


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The changes in financial markets and regulatory environment following the financial crisis created many new analytics requirements.

These requirements include those for computing CVA. In addition, advanced limit management based on potential future exposure (PFE) has taken an increased role following the crisis. Calculation of PFE-based limits also requires simulation of portfolio to maturity in either risk neutral or real measure. Other important requirements include modelling funding (FVA), collateral needs and cheapest to deliver collateral, and projection of portfolio cashflows for liquidity management.

Previously many of these calculations were only performed by the largest sell side firms. Now, most of them are also required by small and medium banks, as well as asset managers and corporates.

These new requirements can only be met by performing path consistent Monte Carlo simulation of portfolios involving a large number of risk factors over long time horizon (up to and exceeding 30 years).

Written by industry expert Alexander Sokol, this is the first book to focus specifically on model construction and calibration for long-term portfolio simulation. The book offers insider knowledge and techniques for the unique modelling methodologies required in simulating entire portfolios.

More Information
ISBN 9781782720959
Navision code MLDP
Publication date 1 Sep 2014
Size 155mmx235mm
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Alexander Sokol

Alexander Sokol

Alexander Sokol is founder and CEO of CompatibL, a software and custom development company specialising in trading and risk management applications, financial analytics, and technical computing. Prior to starting CompatibL in 2003, Alexander was founder and chief technology officer of Numerix, the leading provider of derivatives pricing software, where from 1996 to 2003 he was responsible for the entire R&D effort including quant research and product development.

Alexander’s academic career included faculty positions in theoretical physics at the University of Illinois at Urbana-Champaign and L. D. Landau Institute for Theoretical Physics (Moscow). He holds a PhD in Theoretical Physics from L. D. Landau Institute and an MSc in Physics (with distinction) from the Moscow Institute of Physics and Technology (PhysTech).

1. Methodology fundamentals

2. Risk neutral measure models

3. Real world measure models

4. Interest rate and inflation

5. FX

6. Equity

7. Commodity

8. Credit

9. Valuation

10. Collateral

11. Wrong way risk

12. Applications