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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29
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5answers
2k views

What are the key risks to the quantitative strategy development process?

Prompted in part by this question on data snooping, I would be interested to know: What are the key risks that should be considered when developing a quantitative strategy based on: (a) historical ...
16
votes
6answers
4k views

How does the “risk-neutral pricing framework” work?

I've struggled for a long time to understand this - What is this? And how does it affect you? Yes I mean risk neutral pricing - Wilmott Forums was not clear about that.
16
votes
2answers
552 views

How do macro funds manage risk and model asset returns? Do they use factor models?

Some of the largest funds in the world are entirely macro-based: Soros, Brevan Howard, Bridgewater. They trade across asset classes, and seemingly with very concentrated allocations. What type of risk ...
14
votes
4answers
1k views

How are risk management practices applied to ML/AI-based automated trading systems

A potential issue with automated trading systems, that are based on Machine Learning (ML) and/or Artificial Intelligence (AI), is the difficulty of assessing the risk of a trade. An ML/AI algorithm ...
11
votes
3answers
1k views

Value-at-Risk of the sum of two dependent lognormal random variables

Hy I posted this question first at mathflow.net they suggested me this page, which I was not aware of. Question: Let $(X_1,X_2)$ be a multivariate normal random vector ($X_1$ and $X_2$ need not be ...
11
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1answer
758 views

Modelling with negative interest rates

For a project, I am interested to model the impact of recently negative interest bonds on the portfolio. The literature on modelling negative interest rates is limited, and the only theory I could ...
10
votes
4answers
1k views

What books should any quantitative portfolio manager or risk manager have as reference? [closed]

I'm interested to know what are the critical reference texts you rely on for portfolio or risk management? I mean those texts that you come back to because they are chock full of insight and know-how. ...
10
votes
1answer
285 views

A non parametric study of VaR with kernel density

I'm working in order to compare the calculation of the VaR between the methodology of copulas and kernel density, all this by using the software r. The process that I follow is: Obtain a sample ...
9
votes
1answer
364 views

copula-marginal algorithm

has there been any interesting work or advances on the copula-marginal algorithm (CMA) as proposed by Attilio Meucci. I am unable to find anything on the web other then the original article, here is ...
9
votes
2answers
405 views

Links to the risk model methodologies of the major providers?

There is quite a bit of art in constructing an equity risk model. This paper summarizes some of the key decisions: choice of factors, horizon matching, cross-sectional vs. time-series method, and ...
8
votes
1answer
2k views

Which approach to estimating fundamental factor models is better, cross-sectional (unobservable) factors or time-series (observable) factors?

There are many approaches to estimating fundamental factor equity models. I would like to focus on two traditional methods: The time-series regression approach of Fama and French. Factors are ...
7
votes
4answers
16k views

What are some examples of non-financial risks and contingency plans?

There are many online sources about common risk factors in investing and trading e.g. market risk, credit risk, interest rate risk. There are various factor models (Fama-French, Carhart) and risk ...
7
votes
1answer
414 views

What is the optimal strategy when there is an equal chance for gain or loss but the size of the potential gain is larger?

I'm investigating a situation where the chance for gain or loss is the same, but the amount gained is greater than the amount that is lost. For example, the gain would be about 30% of the trade ...
7
votes
2answers
473 views

Is there any research on applying state-space or dynamic linear models to forecasting equity risk premia?

Is there any research on applying state-space or dynamic linear models to forecasting equity risk premia on a security-by-security basis with a medium term horizon (say 3 month to 12 months horizon)? ...
7
votes
2answers
1k views

How to apply risk-parity portfolio construction to a dollar-neutral portfolio?

Long-only risk-parity portfolios have proliferated in recent years. An optimized long-only risk-parity portfolio requires that the asset weight * marginal contribution to risk of the asset is ...
7
votes
1answer
496 views

Monte carlo portfolio risk simulation

My objective is to show the distribution of a portfolio's expected utilities via random sampling. The utility function has two random components. The first component is an expected return vector ...
7
votes
1answer
212 views

Consistency of economic scenarios in nested stochastics simulation

I am interested in references on research regarding the consistency of economic scenarios in nested stochastics for risk measurement. Background: Pricing by Monte-Carlo: For pricing complex ...
7
votes
0answers
146 views

Regression in liquidity risk model of Jarrow/Protter

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 ...
6
votes
3answers
738 views

What position-sizing methods are used in futures trading?

Beyond optimal / partial f and a few other older methods, there's very little information out there for futures trading.
6
votes
1answer
358 views

What distribution should I apply to estimate the likelihood of extreme returns?

Say I have a limited sample, a month of daily returns, and I want to estimate the 99.5th percentile of the distribution of absolute daily returns. Because the estimate will require extrapolation, I ...
6
votes
2answers
247 views

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 ...
6
votes
1answer
501 views

How to annualize Expected Shortfall?

I have a time series with monthly data from which I compute the expected shortfall empirically, following the classical definition which can be found, for example, in wikipedia's definition. That is, ...
6
votes
2answers
986 views

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 ...
6
votes
1answer
255 views

Which is a more appropriate choice of risk measurement in a utility function, CVaR or VaR?

What is the consensus on which risk measure to use in measuring portfolio risk? I am researching what is the best risk measure to use in a portfolio construction process for a long/short option-free ...
6
votes
1answer
142 views

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?
5
votes
3answers
104 views

Which lags or percentiles should be run in a batch when calculating Value-at-Risk?

Are there any "standard" VaR calculations run in a batch? For example, testing a VaR calculation with a lag of 1,2, 5 or 10 days over 2 years? Same question for the percentile, 1%, 2.5%, 5% etc.
5
votes
1answer
253 views

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 ...
5
votes
3answers
919 views

Papers about risk managment in algorithmic trading systems?

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 ...
5
votes
1answer
711 views

Value at Risk backtesting (kupiec)

I m doing my research on estimating Value at risk using different assumptions on volatility and then compare my results based on backtesting. I obtained results and just on question based on my ...
5
votes
1answer
565 views

Why write options on a volatility target index?

There seems to be increasing interest in risk controlled products such as volatility target indices and derivatives products on these underlyings. From a risk management perspective what are the ...
5
votes
2answers
205 views

How many data points are required to perform a fitting of GPD?

A friend of mine told me that their firm is using Extreme Value Theory (EVT) to compute value of the Expected Shortfall 99% of a portfolio for their asset allocation process. To do so, they try to fit ...
5
votes
0answers
266 views

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 ...
5
votes
0answers
181 views

How to build an electricity portfolio for an electricity production company?

I am referring to an electricity production company. Company is located in AsiaPac. The power is generated using Natural Gas fired combined-cycle power plants. Then this electricity is distributed to ...
4
votes
5answers
21k views

How to calculate unsystematic risk?

We know that there are 2 types of risk which are systematic and unsystematic risk. Systematic risk can be estimate through the calculation of β in CAPM formula. But how can we estimate the ...
4
votes
2answers
308 views

Is it common to use multiple brokers for risk reduction?

Would it be considered appropriate risk-management or overkill to utilize multiple brokers to manage a given trading strategy? A couple specifics: I'm interested in what a reasonably-sized hedge ...
4
votes
1answer
121 views

What is the analytic value of an asset's risk contribution, if $n=2$?

The marginal risk contribution of asset $i$ is defined by Roncalli in his paper on ERC as follows: $$\frac{\partial \sigma(x)}{\partial x_i} = \frac{1}{\sigma(x)} \left( w_i \sigma_i^2 + ...
4
votes
2answers
129 views

How do you handle short-term asset allocation with Hedge-Funds?

Assuming I want to run an optimization over a short period, say 2 years, I would decide to take daily values in order to compute the efficient frontier of a portfolio. That works fine as long as I ...
4
votes
1answer
378 views

Stability of correlations and volatility

I had a discussion recently about the stability of volatilities and correlations. If we take for example stocks and bonds (think of DAX and Bund) then I have seen changing volatilities (something like ...
4
votes
1answer
219 views

Quantitative risk model for an open real estate mutual fund in Europe

How useful are quantitative techniques for the risk analysis/management of a open real estate fund? I am thinking about an approach for Europe (US and other markets are probably quite different - ...
4
votes
1answer
226 views

Applying interest rate shocks under Solvency II

I'm trying to figure out how one would apply the stress scenarios defined under the interest rate risk sub module of Solvency II. I understand that all future cash flows of an interest rate sensitive ...
4
votes
1answer
234 views

What's the best way to test/validate an interest rate lattice model

I have some implementations of interest rate lattice models. I would like to verify their performance. What would be the best approaches? Currently I compare pricings of some interest rate dependent ...
4
votes
1answer
187 views

Are there any well known methods of testing through-the-cycle rating systems?

Rating systems, as defined by the Basel II Accord, can be classified into two broad types - through-the-cycle (TTC) or point-in-time (PIT) - and the probability of default predicted by such a system ...
4
votes
2answers
240 views

How to reactivate a risk mangement rule in an automated process

If some conditions are met (stop loss, trailing stop, take profit...) we will close ours positions (sell/buy) to avoid having more loss or to ensure profit. In an automatic trading system, it is easy ...
3
votes
1answer
190 views

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 ...
3
votes
1answer
276 views

Calculating portfolio VaR for (custom) leveraged products

I have been searching online for a few days regarding how to calculate portfolio VaR for a portfolio consisting of leveraged products - but so far, I have not been able to come up with anything ...
3
votes
1answer
414 views

Basel II modelling vs Solvency II modelling?

How do the two modelling frameworks compare? I spent some time developing PD LGD and EAD models for banking portfolios... But I never did insurance modelling project which I suspect is based on ...
3
votes
1answer
204 views

Liquidity diversification

The liquidity diversification can be measured by the liquidity score, defined here as the ratio between the pure market P&L CVaR and the market+liquidity P&L CVaR. I have tried to reproduce ...
2
votes
2answers
665 views

Usefulness of simultaneously buying triangular and multiple arbitrages on the Forex

I have a limited financial background but I'm trying to figure out the usefulness of buying size-n arbitrages (n > 3), and I wonder the kind of risks - if any - associated with such a strategy. Say ...
2
votes
2answers
763 views

Determining portfolio risk return in R given historical data for individual holdings?

Currently we compute portfolio risk and return via our own C# program. Historical data is stored in a SQL database. We want to compute the risk and return parameters - given a portfolio (i.e. not ...
2
votes
1answer
2k views

Risk Parity portfolio construction

If I would like to construct a fully invested long only portfolio with two asset classes (Bonds $B$ and Stocks $S$) based on the concept of 'risk parity' the weights $W$ of my portfolio would be the ...