AI Innovations in Market Risk Analysis and VaR Modelling

Abstract

This chapter examines how AI is transforming financial risk analysis and valuation. Traditional models often overlook tail risks and complex market dynamics, but AI introduces innovative techniques that enhance risk assessment and monitoring, addressing the shortcomings of VaR models. It delves into AI fundamentals, particularly deep learning and machine learning. It offers advanced methods for data processing, predictive modeling, and feature engineering, all crucial for integrating AI into the VaR estimation process. The chapter also emphasizes the significance of AI in risk management, especially in regulatory compliance, by exploring capabilities like natural language processing and portfolio optimization, which are vital for adapting to evolving regulations. The chapter provides a comprehensive overview of AI-based market risk analysis, highlighting AI's essenAI's role in helping financial institutions navigate volatile markets and increased regulatory scrutiny. It discusses current challenges and future directions, showcasing AI's pivotAI'sontribution to the industry.