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Risk Management in Turbulent Times$
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Gilles Beneplanc and Jean-Charles Rochet

Print publication date: 2011

Print ISBN-13: 9780199774081

Published to Oxford Scholarship Online: April 2015

DOI: 10.1093/acprof:osobl/9780199774081.001.0001

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The Basic Tools of Risk Modeling

The Basic Tools of Risk Modeling

Chapter:
(p.29) 4 The Basic Tools of Risk Modeling
Source:
Risk Management in Turbulent Times
Author(s):

Gilles Bénéplanc

Jean-Charles Rochet

Publisher:
Oxford University Press
DOI:10.1093/acprof:osobl/9780199774081.003.0005

This chapter discusses two methods for quantifying risks: the frequentist approach and the subjective approach. The frequentist approach can be applied in stationary environments when enough past observations are available, while the subjective approach has to be applied when there are not enough observations. In practice, corporations have to deal with combinations of risks and require a combination of the frequentist and subjective approach, called Bayesian updating. Bayesian updating is based on the Bayes formula, which shows how to revise subjective probabilities on the basis of new information.

Keywords:   quantifying risks, frequentist approach, subjective approach, Bayesian updating, Bayes formula, probabilities

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