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16
votes
2answers
604 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 ...
15
votes
3answers
1k views

What is the necessary level of Econometrics-Know-How for a quant

It seems quants increasingly use econometric models at work. As someone who has sold his soul to probability theory and stochastical analysis I would like to catch up. What are the econometric tools ...
12
votes
2answers
1k views

Cleansing covariance matrices via Random matrix theory

I am exploring de-noising and cleansing of covariance matrices via Random Matrix Theory. RMT is a competitor to shrinkage methods of covariance estimation. There are various methods expressed usually ...
10
votes
3answers
1k views

Is Conditional Value-at-Risk (CVaR) coherent?

When the risk is defined by a discrete random variable, is CVaR a coherent risk measure? I stick to the following definition of CVaR: $$ CVaR_\alpha(R) = \min_v \quad \left\{ v + \frac{1}{1-\alpha} ...
10
votes
2answers
804 views

When should you build your own equity risk model?

Commercial risk models (e.g., Barra, Axioma, Barclays, Northfield) have evolved to a very high level of sophistication. However, all of these models attempt to solve a very broad set of problems. ...
10
votes
2answers
375 views

Stochastic modelling of derivatives on dividends

I consider pricing and risk analysis of derivatives on dividends of the members of equity indices (such as Dow Jones EuroStoxx). There are options but I focus on futures. What are common stochastic ...
10
votes
1answer
343 views

What weights should be used when adjusting a correlation matrix to be positive definite?

I have a correlation matrix $A$ for an equity market that is not positive definite. Higham (2002) proposes the Alternating Projections Method, minimising the weighted Frobenius norm $||A-X||_W$ where ...
9
votes
2answers
510 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 ...
9
votes
1answer
691 views

Models for measuring insurance risk exposure

I've recently begun working as a quant for a large bank, and one of my first tasks will be to improve the model determining the risk exposure of their insurance portfolio. The portfolio is fairly ...
9
votes
0answers
335 views

performance of historical VaR parameters

An historical VaR measure is parameterized in terms of the confidence level and also number of periods. Specifically, the $\alpha$% T-period VaR is defined as the portfolio loss x in market value over ...
8
votes
1answer
471 views

Has any research used Bayesian networks to estimate risk factor betas?

Is there any published research on estimating the beta of a security with respect to one or more risk factors via Bayesian networks? I'd like to see if this is a promising angle of research.
8
votes
3answers
1k views

Gamma vs. Volatility Risk

Original Question: What is the link between Gamma and the Volatility Risk? It leads me to ask: - What is the Volatility Risk definition and what are the good practices to measure it? Thinking about ...
7
votes
4answers
818 views

Multi Factor Credit Risk Models

I am working in the area of building credit risk models. Upto this point, the model I have been focused on using the Asymptotic Single Factor Model, more popularly known as Vasicek Single Factor ...
6
votes
2answers
1k views

Cluster analysis vs PCA for risk models?

I built risk models using cluster analysis in a previous life. Years ago I learned about principal component analysis and I've often wondered whether that would have been more appropriate. What are ...
6
votes
4answers
1k views

What does it mean to modify the factor loadings of a credit risk model?

I came across an example where a well-known weakness of a credit risk model was dealt with by augmenting some of the existing risk factors via increased factor loadings. This made the the model more ...
4
votes
7answers
30k 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
7answers
2k views

Recommendation for a book on CVA/Credit Risk and PD/LGD/EAD modeling?

I need suggestions for some good books on the following topics: Credit Value Adjustment (CVA) / Credit Risk Probability of Default / Loss-Given-Default / Exposure-At-Default modeling Any pointers ...
4
votes
2answers
420 views

Choice of prior as a shrinkage target in portfolio construction?

There's various research showing how priors such as the minimum variance portfolio turn out to be a surprisingly effective shrinkage target in portfolio construction. The sell point of these priors ...
4
votes
1answer
120 views

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 ...
4
votes
1answer
292 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
1k views

Performance Attribution : Annualizing alpha & factor return contributions

Let's say I have a factor model which I am using for Performance Attribution. I'd like to separate returns from alpha vs. returns from exposure to various risk factors. For each date, the factor ...
4
votes
1answer
427 views

Discrete time Ho lee model

This is my first question in this forum. I am stuck with my current testing the Ho Lee model. I am having difficulty computing the perturbation factor $\Delta$. The ho lee model should be completely ...
4
votes
0answers
681 views

Help With Quant Modelling Software

Im a software developer (freelance) working in investment banking, and I'm looking to improve my CV by gaining a better understanding of the financial quant role and the software used by quants to ...
3
votes
9answers
350 views

Why would there be a positive risk-free rate?

Most financial models include a risk-free rate or risk-free asset. Why should there be such thing as a positive risk-free rate? I dont see why an asset would provide a positive (real) return if it ...
3
votes
1answer
478 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
212 views

quantiative risk measure how they are implemented in R and their use

So far I have just theoretical knowledge of risk measure and never used them in application. Therefore I have some basic question how risk measures are used in reality and how they are implemented in ...
3
votes
1answer
432 views

Long-term vs short-term strategies \ investing

Suppose most investors have very short investing horizons and use appropriate (for them) strategies, but investor X has a very long horizon. He would like to trade some advantages (early withdrawal ...
3
votes
1answer
253 views

Is inverted Japanese style curve persistent when negative rates are real / market - observed?

Are the inverted (Japanese style) governmental yield curves being a sign a recession/credit risk or should they be modelled as being due to a lack of liquidity? (...with such curves evolving into a ...
3
votes
1answer
404 views

What research exists regarding implementation of reverse stress testing?

I need to implement a reverse stress testing model (definition here) I have searched around and cannot find anything substantial on the topic. Does anyone know of any good papers/references ...
3
votes
0answers
287 views

Definition of risk factors for market risk scenario testing

I am doing a research for stress testing in market risk. The usual process I found out for scenario testing is: Define risk factors upon the portfolio Define the desired scenarios Vary the risk ...
3
votes
0answers
74 views

Standard Assumption Terminology

Regulators are starting to analyse (or at least they are talking about it) model assumptions. We all know that too often our assumptions are just in the model documentation. Furthermore, we have no ...
2
votes
2answers
1k 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
2answers
214 views

Proxy for risk in portfolio theory when return can take only two values

I'm trying to adapt tools from portfolio theory for another use, and I have a question about how I might do so. Suppose that instead of having normally distributed returns, the return $R_i$ is ...
2
votes
1answer
171 views

How to compare different volatility measures?

I read the Euan Sinclair's book (Volatility trading) in which he suggests different volatility estimators (Close-to-close, Parkinson, Garman-Klass, ...). I am inquiring about what is the best stock ...
2
votes
1answer
844 views

Modelling VIX Futures for risk management

I would like to model VIX futures. The aim is not pricing but risk management. Thus I want to get risk measures like volatility right and be able to accurately calculate correlations when the VIX ...
2
votes
1answer
73 views

Expected Shortfall and Spectral Risk Measure

Not sure I am understanding spectral risk measures correctly. Why is there an equal weighting scheme placed on the tail losses in expected shortfall. Will that no bias the expected value of the loss ...
2
votes
0answers
192 views

What structural model does Reuters use for default probability?

When using Reuters, for each listed company there is credit tab that shows relevant information in terms of credit default. There is also rating class as well as one year default probability. It is ...
2
votes
0answers
93 views

Benchmarking risk

Given the portfolio return $R$ and the benchmark return $B$, I want to define a risk indicator, measuring the ability to beat the benchmark ($R>B$), given the downside risk taken; the latter not ...
1
vote
2answers
143 views

Liquidity in a market risk model based on historical simulation

I would like to model liquidity effects in my risk model which is based on historical simulation. I would like to develop a practical solution that still captures liquidity effects. Most probably I ...
1
vote
2answers
147 views

Reasoning behind multiple names for the equivalent risk measures AVaR/ETL/ES/CVaR

Doe's any one know the history behind, or background of the multiple naming conventions for the equivalent risk functions. Different quant authors prefer using different names, does any one know why? ...
1
vote
1answer
83 views

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 ...
1
vote
1answer
199 views

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) ...
1
vote
0answers
91 views

Risk factors for derivatives on dividends

I consider pricing and risk analysis of derivatives on dividends of the members of equity indices (such as Dow Jones EuroStoxx). There are options but I focus on futures. What are the main risk ...
0
votes
2answers
93 views

What does it mean if $\beta$ is insignificant in the CAPM model?

What can we say about an asset which $\beta$ calculated using the CAPM model (regressing the excess returns of the stock vs excess returns of the market) is insignificant?
0
votes
1answer
110 views

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 ...
0
votes
0answers
22 views

Solvency Problem for Financial Institutions

According to my finance lecture, the motivation for risk measures is grounded in the solvency problem: Risk measures are used to determine the amount of capital to avoid insolvency of the financial ...
0
votes
0answers
49 views

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 ...
0
votes
1answer
70 views

Separated software and physical cash flows modelling and pricing to be used with negative interest rates?

The physical cash presence in the final transactions is one of the issues in the presently observed negative interest rates bonds. Such a situation has historically been modelled within the "liquidity ...
0
votes
0answers
57 views

Should portfolio be optimized by marking to the future than marking to market (excluding currencies)?

Observing the negative interest bonds in Switzerland, Denmark, GErmany the value of higher presently (credit-free) outgoing cash flows seems less important than the value of lower future (credit-free) ...
-1
votes
0answers
28 views

How much less likely is a stop loss to be touched/hit after increasing expected return?

Firstly, let's say we have a stock ABC currently trading at $100.00 that has: (A) an expected return of 0% per year and (B) standard deviation of 20% per year Given these stats, the stock has a 50% ...