Market Consistency (PDF)

Achieving market consistency can be challenging, even for the most
established finance practitioners. In Market Consistency: Model
Calibration in Imperfect Markets, leading expert Malcolm Kemp
shows readers how they can best incorporate market consistency
across all disciplines. Building on the author's experience as a
practitioner, writer and speaker on the topic, the book explores
how risk management and related disciplines might develop as fair
valuation principles become more entrenched in finance and
regulatory practice.

This is the only text that clearly illustrates how to calibrate
risk, pricing and portfolio construction models to a market
consistent level, carefully explaining in a logical sequence when
and how market consistency should be used, what it means for
different financial disciplines and how it can be achieved for both
liquid and illiquid positions. It explains why market
consistency is intrinsically difficult to achieve with certainty in
some types of activities, including computation of hedging
parameters, and provides solutions to even the most complex
problems.

The book also shows how to best mark-to-market illiquid assets
and liabilities and to incorporate these valuations into solvency
and other types of financial analysis; it indicates how to define
and identify risk-free interest rates, even when the
creditworthiness of governments is no longer undoubted; and it
explores when practitioners should focus most on market consistency
and when their clients or employers might have less desire for such
an emphasis.

Finally, the book analyses the intrinsic role of regulation and
risk management within different parts of the financial services
industry, identifying how and why market consistency is key to
these topics, and highlights why ideal regulatory solvency
approaches for long term investors like insurers and pension funds
may not be the same as for other financial market participants such
as banks and asset managers.