# Tagged Questions

The identification, assessment, and prioritization of risks, followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities.

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### risk report factor exposures calculations

I am looking at a risk report which I have inherited. There are 5 lines of code that I want to make sure I understand. The risk report breaks down the exposures, contribution to variance and marginal ...
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### Index creation from multiple time-series and variable weights

I am trying to compose one index out of several (three) indices with variable weights, 50%, 25% and 25%. After normalizing and calculating the log returns, what would be the best way to create the ...
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### What is the difference between asset management and wealth management?

What is the difference between this two concepts?
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### Variability in the Expected Shortfall estimator

Are there any results for calculating the variability in the Expected Shortfall measure. I am looking for Large sample confidence intervals under Normality for Expected Shortfall or calculation of ...
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### Institutional compliance : is reference data available via the browser?

That is, assuming one has the correct accounts and credentials, is it possible to access reference data (counterparty, trading, and other categories of related meta-data) over the web? The reason I ...
327 views

### Is there anyone still using Markowitz modern portfolio theory?

I was reading about the MPT (Use standard deviation as risk measure) on "Mathematics for Finance by Marek Capinski". I was just wondering is there anyone actually applying this theory to their ...
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### Question 1.18 from Hull's Financial Risk management CAPM

A portfolio manager maintains an active portfolio with beta of 0.2. Risk-free rate is 5% The market return for a particular year is -30% The fund produced a result of -10%. He claimed the return was ...
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### Beta distribution - Holding period

Let's say I have a risk factor that is defined between [0,1], such as recovery rates. Assuming I have daily data, I can estimate the "daily VaR", i.e. the tails over 1 day period, since the data is ...
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### conservative approach payoff table

With the conservative approach, we choose the decision which maximises minimum payoff. I was wondering which decision is chosen if 2 decisions have equal minimum payoff (which is the maximum)? ...
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### Standard errors clustered along the time dimension in pooled panel logit model

I'm trying to estimate a logit model on pooled panel data set (unit of observation is firm-year). My dependant variable is default indicator and I have several macro variables as independant ...
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### Estimate correlation of time series whose histories differ in length

Very often in quantitative analysis (e.g. calculating portfolio volatility) we have to analyze various time series - mostly returns - whose lenghts differ. Risk systems usually apply a one-factor ...
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### How to create a model or formula for evaluating trade opportunities

I want to build a formula to produce a score for a potential trade based on 4 variables, time, return, liquidity of security, and probability of failure. For a set of potential trades I first ...
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### Doubt on risk cost criterion

I want to minimize some kind of risk sensitive cost. But, I am confused what cost criterion should I use. I am aware of only expected exponential utility. I want to know what are the other such ...
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### proper choice of risk aversion parameter in the risk-sensitive cost-criterion

Suppose I want to minimize certain risk sensitive cost. Is it a valid question to ask what is the proper (also in which sense) choice of risk aversion parameter in the risk-sensitive cost-criterion ? ...
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### How to projectP&L or drawdowns on pair trading , trading and portfolios?

This is for planning and risk management. I am stuck on the following thoughts - Back-test the trading strategy for a period similar to the one you expect and then project. Do the above using ...
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### Math basics of Equally-weighted Risk contributions

i'm writing my BA Thesis about "Equally-weighted Risk contributions". Can anyone recommend math books for further understanding of Risk contributions?
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### How to distinguish total return and absolute return funds in the KIID

I hope this question is on-topic. It is not relally a quant question but it is a question that quants in risk management in asset management firms have to answer: In the KIID (key investor ...
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### questions on VAR manipulation

The book of Financial Risk forecasting by Danielsson gives the following example about VAR manipulation. I have two questions: 1) If $0> VAR_1 > VAR_0$ , why the following figure plots it as ...
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### Controling ex-post volatility by ex-ante limits

In the context of mutual funds the KID directive forces us to calculate 5 year ex-post volatility of a (market) fund (weekly returns). Thus each week we look back in the past and calculate volatility ...
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### At what point does it make sense to start using a system?

This is an issue I've been struggling with for quite a while, and haven't found a satisfactory answer yet. The basic problem is this: Lets say you set up a black box system which gives you anywhere ...
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### Capital Allocation for Portfolio of Multi-Strategy and Multi-Instrument

I would like to know if there is a way (or theory) to manage a multi-strategy, multi-instruments portfolio that would calculate the optimal weight to allocate capital for each combination of strategy ...
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### What's the disadvantage of ARMA-GARCH model?

I want to ask why ARMA-GARCH is more and more popolar, and what's the advantage of this model.
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### Controlling portfolio concentration

I'm working with a heterogenous basket of instruments (in volatility terms). Risk parity allocation seems to be useful for the portfolio( * 1/Volatility). However, there are times when the ...
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### Ex-Ante tracking error how to determine the look back period

I am looking to compare the ex-ante predictions against the post values. I am using a look back period of ranges from 1 year to 5 years to construct my covariance matrix that I am using for my ex-ante ...
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### Minimum PD under Basel II retail asset?

I have been told that under Basel II the minimum PD that one can assign to any portfolio/segment classified under the retail asset class is 0.33%. But Google searches return nothing and I can't seem ...
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### regarding Basel III IRB method for credit risk

Would the exposures between standard method and internal rating based method for credit risk under Basel III remain same?I could not find any documents for IRB approach under Basel III. Is it still ...
226 views

### Is it wrong to use 'real world' probabilities for option valuation?

Is it wrong to use 'real world' probabilities for option valuation, even when the market is not liquid enough to delta hedge the option? My instinct is that it is wrong, because the time value of ...
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### Interest Rate Swaps on Mortgages [closed]

Is it possible to get interest rate swaps on mortgages? If not, why not? Are there models that describe this? Any direction would be great.
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### Is there any open-source library, implementing “exchange” to be used for algorithms running on the same computer?

Question: Is there any open-source project/library, which can act as a "local exchange" for agents (algorithms), running on the same computer? Clarification: by "local exchange" I mean, that the ...
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### any introduction on beta adjustment for basis risk?

On beta adjustment for basis risk, I could only find an online definition: Gap reports modified to mollify the errors caused by basis risk. The essential concept of beta-adjusted gap is that all ...
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### What are the math topics involved in FRM 1

Is there a way to get the math curriculum for FRM level 1 without purchasing the Exam? I wish to take a look at the math topics and see if I have any chance of cracking it. But I could not find an ...
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### When did volatilities start to smile in capital markets?

Glimpsing through literature, I read that volatilities in the equity market started to display a smile after the crash in 1987. But when did volatilities start to smile in capital markets?
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### Large (5K-10K) non positive definite (particularly near singular) covariance matrices and treatments for Cholesky decomposition

I have a very large covariance matrix (around 10000x10000) of returns, which is constructed using a sample size of 1000 for 10000 variables. My goal is to perform a (good-looking) Cholesky ...
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### Portfolio risk decreased by increasing share of riskiest asset?

In Parker's The Economics of Entrepreneurship he explains how certain theoretical models predict seemingly bizzare things (e.g. people becoming more risk-averse resulting in them taking riskier jobs) ...
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### Risk and Reward in practice

My question is a bit philosophical. As a risk manager I often have to tell portfolio managers to reduce risk (e.g. due to VaR limits or exposure limits). Then usually the discussion arises that if ...
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### What is the best alternative of Quantlib library

We need to build a Fixed Income Portfolio Risk Analytics solution. Somehow due to administrative reason we can't use Quantlib which is written in C++, even call it through SWIG via JNI. We have tried ...
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### Examples of Spectral Risk Measures

Let's take the usual definition of a spectral risk measure. If we look at the integral we see that spectral risk measures have the property that the risk measure of a random variable $X$ can be ...
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In his paper Budgeting and Monitoring the Risk of Defined Benefit Pension Funds, Bill Sharpe writes: [...] the sum of the weighted marginal risks of the portfolio components will equal twice the ...
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### Asynchronous Data Across Time Zones - RiskMetrics

I'm currently involved with a project to integrate RiskMetrics into our business and one issue we've identified is the treatment of market data timing across time zones. This can have the effect of ...
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### why banks shall keep short term gap position low?

I'm reading "Insights for Bank Directors" (http://www.stlouisfed.org/col/director/reference_view.htm), a good introduction to commercial banks, based on a virtual bank "Insight". It talks about Gap ...
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### Quantitative risk management strategy for a large participant in an illiquid market

Are there any practical quantitative risk management strategies for a large participant in an illiquid market with a few dominant players? By a large partcipant I mean someone who has significant ...
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I am currently doing my research for my master thesis, which will clearly focus on the question of risk managment in algorithmic trading systems. I have done research about this topic and found some ...
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### Is Unexpected Loss ever used in Basel II?

In Basel II, EL is useful. It's calculated as $$EL = PD \cdot EAD \cdot LGD$$ in advance IRB (internal rate-based approach), Correlation R = 0.12 \frac{1 – e^{-50 \cdot PD}}{1 – e^{-50}} + 0.24 ...
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### Market Exposure and Hedging

Normally the Market exposure associated with your stock/portfolio is your delta for that stock/ portfolio. Basic idea of hedging involved here is buying/selling respective futures depending upon ...
In the paper "Liquidity Risk and Risk Measure Computation" authors describe a linear supply curve model for liquidity risks in presence of market impact, i.e. impact-affected asset price $S(t,x)$ is ...