The possibility that a negative event (such as a loss) will happen.

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-1
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1answer
44 views

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?
-4
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0answers
38 views

Where Can I Find Risk Modelling Functions? [on hold]

I'm looking for functions that take the historical value of an asset as the input and return how much risk/uncertainty is associated with the investment. I've been searching for a while but haven't ...
13
votes
2answers
664 views

Concentration risk in credit portfolio

How do you model concentration risk of credit portfolio in IRB/Basel II framework?
3
votes
3answers
244 views

Implementing A 50/50 Prediction Model Strategy

Reworded the question for clarity (see edits for original post): How can one knowingly foresee where a 50/50 prediction model will be profitable? For previous posts: I understand that if I have a ...
0
votes
1answer
97 views

ex ante tracking error correlation between funds

I have two portfolio's called Comb & Global. They both have the same investable universe lets says 3000 stocks & are measured against the same benchmark. So it is possible that both funds hold ...
5
votes
2answers
678 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 ...
1
vote
2answers
141 views

Why is that a risk averse consumer buys the optimum insurance when there is actuarially fair insurance?

I think I understand the fact that when marginal utilities of the same function are equal (a consequence of the actuarially fair insurance), the independent variables in it must be equal -- right? But ...
1
vote
1answer
24 views

is there an accepted method for quantifying risk of inaccuracy of nascent trm systems?

Have a somewhat meta question here. I am part of a trading risk management implementation project. I also manage day to day risk reporting to management and the trading desks. Our implementation was ...
2
votes
1answer
63 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 ...
6
votes
3answers
655 views

cointegration applied to Portfolio Construction & Risk management

There are all sorts of applications of cointegration to generating alpha on mean-reverting timeseries: comparing spot vs. futures, bond spreads, identifying mean-reverting residuals, etc. But there ...
1
vote
2answers
70 views

Basis Risk for Futures/Options

I am just reading about basis risk. It is being described as risk of the price of the hedging instrument not fluctuating the same as the instrument itself. I was just wondering, if we bought a ...
0
votes
1answer
80 views

Directional/Non-Directional Risk

Can someone explain to me what is direction/non-directional risk? Went through few sites but couldn't understand much.
1
vote
1answer
69 views

regarding Basel II III model

I may have to get involved in some projects using Basel II, III model for risk modeling, to which I have no background. Are there any good book/tutorials to recommend? What are the underlying ...
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 ...
17
votes
7answers
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.
1
vote
1answer
131 views

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 ...
8
votes
5answers
2k views

Why is the Drawdown measure not used for portfolio optimization?

I was asked yesterday by a colleague why we are doing asset allocation using optimizers which target, for a minimum expected return: the portfolio with the minimum variance or the portfolio with ...
1
vote
0answers
30 views

volume augmented garch(1,1) model in matlab

Actually I want to add volume traded of a stock in my Garch(1,1) model to forecast the volatility.In Matlab I can specify the model as garch(1,1) and then use estimate and forecast commands.But I am ...
6
votes
4answers
313 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 ...
4
votes
3answers
226 views

Why are factor models so popular for risk analysis of portfolios?

As titled, my question consists on asking for why in the most of academic papers one almost always finds that when you try to model asset returns, one needs to adjust for risk factors before analyzing ...
3
votes
1answer
185 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 ...
2
votes
1answer
136 views

Divergent or Convergent Strategies? Which is the way to go?

Consider first the simple convergent strategy to invest some amount $X$ in a game, if you win you simply take the winnings and keep playing a subsequent game. In the case of a loss, you believe in ...
19
votes
4answers
5k views

What is the best way to “fix” a covariance matrix that is not positive semi-definite?

I have a sample covariance matrix of S&P 500 security returns where the smallest k-th eigenvalues are negative and quite small (reflecting noise and some high correlations in the matrix). I am ...
2
votes
1answer
110 views

Is the volatility of a trader's wealth equal to the volatility of the underlying assets traded?

Assume that a trader trades in several stocks with different volatilities. The return of the trader's portfolio would be the weighted average of returns and the risk would be a function of the the ...
0
votes
0answers
38 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
2answers
113 views

Sharpe Ratio and time spent in loss

Is it possible to express, given an annualized Sharpe Ratio value, what is an expected maximum/average time spent in a draw-down or something in this manner? E.g. with SR of 10, you'd expect to spend ...
1
vote
0answers
84 views

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 ...
1
vote
1answer
151 views

Pre-trade evaluation and risk assessment of option trading strategies (in market practice)

When a trader gets conclusion of the volatility is being underestimated (via volatility cone or some other technology), actually there are multiple ways for his trading. (Let's assume the underlying ...
1
vote
2answers
207 views

Risk management of options

Your client would like to buy a digital call option. the digital call option pays the buyer in one years time (i.e at maturity ) N=1m SGD, if the SGD USD spot rate at maturity is above a prescribed ...
-2
votes
2answers
83 views

What is the most amount of money the consumer would be willing to pay to play take this gamble?

Suppose a consumer has log-utility over wealth, defined by $u(W) = \ln(W)$. Suppose this consumer has $100$, and is considering taking a gamble in which the consumer flips a coin, and gets $20$ she ...
2
votes
1answer
57 views

Finding Credit Risk Population Data

Are there any free or relatively cheap sources of aggregate data on credit risk for specific geographic regions, ages, and so on?
-2
votes
1answer
115 views

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.
1
vote
1answer
144 views

Downside deviation

have any practitioners here worked with the downside deviation metric? I've looked a little into its concepts but wish to know its utility in practice (if any). Does it bring any value to risk ...
2
votes
1answer
173 views

How did we get $W_g=W_b$ from $\dfrac{U'(W_g)}{U'(W_b)}=1$?

My question is from Nicholson-Snyder's text , E-book here. My question is here, from page 217 of the book. (I can't post image as my reputation is not enough.) How did we get $W_g=W_b$ from ...
0
votes
1answer
116 views

What is the realized volatility's estimation error?

Given an estimation procedure and real data, how would one compute the mean squared error? What value represents the "true" realized volatility in the case of calculating the Mean Squared Error in ...
1
vote
1answer
306 views

Unsystematic/Idiosyncratic/Firm-specific volatility/variance in the market model?

I was asked to use idiosyncratic volatility as a regressor in a cross-sectional regression upon cross-sectional returns as the dependent variable. Returns can be thought of as the raw log stock return ...
2
votes
1answer
212 views

Which measure to determine Risk?

Say I hold an equity and I want to calculate the Value-at-Risk over some period. Would one calculate the Value-at-Risk of the equity under a risk-neutral (as in martingale) measure or under the ...
3
votes
1answer
127 views

Optimal Choice of exceeding time

Suppose you hold a share from company $Z$ whose vaue at time $t$ is $S_0+\sigma B_t$ where $B_t$ is Brownian Motion and $\sigma$ denotes some volatility. Now lets assume that company $Z$ may go ...
3
votes
1answer
399 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 ...
1
vote
1answer
185 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) ...
3
votes
1answer
198 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 ...
0
votes
1answer
187 views

Is the risk-reward ratio considered in Quantitative Finance?

Many discretionary traders swear by risk-reward ratio, as in "The minimum risk-reward ratio for a Forex trade is 1:2." Do quantative traders use risk-to-reward ratio as well? If so, how do you ...
0
votes
1answer
284 views

Risk-free investment strategy for european call and put option

I have some trouble solving the following question: We have an european call and put option (with the same maturity date $T$ en strike $E=10$). The stock price now is $S=11$ and we use a continuous ...
9
votes
3answers
586 views

better estimator of volatility for small samples

One commonly used sample estimator of volatility is the standard deviation of the log returns. It is indeed a very good estimator (unbiased, ...) when the sample is large. But I don't like it for ...
7
votes
2answers
593 views

How to manage equity portfolio risk intraday?

Lets assume that I have an equity strategy that generates signals intraday to buy and sell. I run this strategy across the SP500 names. Now within my strategy I want to incorporate a method to help me ...
8
votes
1answer
461 views

Fama-French 3-factor model: factors implying risk

The Fama-French three-factor risk model is given by $$ r=R_f+\beta_m(K_m-R_f) + \beta_s\cdot\mathit{SMB}+\beta_v\cdot\mathit{HML}+\alpha $$ where $r$ is the return, $R_f$ is the risk-free rate, $K_m$ ...
5
votes
0answers
322 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 ...
0
votes
1answer
77 views

Plain vanilla risk parity with trends forecasting power

I have built an asset allocation model (plain vanilla risk parity) but I would like to adapt the initial asset allocation with respect to potential futures changes in the trends of the assets under ...
0
votes
0answers
117 views

Should the standard deviation points of CML x-axis be calculated with excess returns?

By excess returns, I'm referring to the current nominal treasury rate minus the log returns of the security. I'm working to construct a dynamic CML / CAPM application, but am uncertain how standard ...
6
votes
0answers
144 views

Extreme Value Theory possible for portfolios with options?

Say you have a portfolio with long exposure to a few linear assets (stock indices) and short exposure to a nonlinear asset (say call options on one of the linear assets). I am interested in ...