The possibility that a negative event (such as a loss) will happen.
7
votes
0answers
193 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 ...
1
vote
0answers
158 views
How would I calculate a stop on a pair trade? [closed]
I have a trading strategy that I use on single tickers. I'd like to start using it with pairs as well. However, I'm somewhat math challenged and not sure how to best calculate the stops of the ...
4
votes
2answers
325 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 ...
7
votes
1answer
402 views
How to compute modified-CVaR in the PerformanceAnalytics package?
My objective is to measure the modified-CVAR for a portfolio given its weights and matrix of security returns. Luckily the wonderful package PerformanceAnalytics has an ES() function that does just ...
2
votes
0answers
366 views
How to Calculate Risk of Ruin [closed]
I'm reading a book titled "A Trader's Money Management System" and it discusses risk of ruin(ROR) tables. It says that you can have a zero probability of ROR with a payoff ratio of 2 to 1 and a win ...
6
votes
2answers
191 views
Is it better to grade hedging strategies based on the sum of absolute or squared hedging errors?
Let's say I have one strategy that has a hedging error of:
2,
2,
-2,
-2
Let's say I have another strategy that has a hedging error of
.5,
.5,
3,
3
Would it be a better idea to grade the hedging ...
4
votes
1answer
326 views
How to model the risk of a CFD
I'm struggling to understand why the risk on an equity CFD is not the same as for the corresponding equity. The RiskMetrics FAQ mentions two ways to model a CFD, but it does not explain why this is ...
5
votes
3answers
99 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.
8
votes
2answers
478 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. ...
17
votes
2answers
475 views
How are distributions for tail risk measures estimated in practice?
Let's say you want to calculate a VaR for a portfolio of 1000 stocks. You're really only interested in the left tail, so do you use the whole set of returns to estimate mean, variance, skew, and shape ...
11
votes
2answers
2k views
How does left tail risk differ from right tail risk?
How does left tail risk differ from right tail risk? In what context would an analyst use these metrics?
7
votes
2answers
278 views
Do you know a good article on ETF's counterparty risk analysis?
I am at the moment considering investing into ETFs, but I am looking first to understand how these products really work.
Indeed, it is my understanding that ETF can vary in terms of structure, thus ...
5
votes
4answers
726 views
Do low volatility stocks outperform high volatility stocks over the long run?
A recent article from Forbes seems to indicate that low volatility stocks outperform high volatility stocks over the long run. Does anyone have any supporting or contradicting evidence to this claim? ...
8
votes
4answers
593 views
What are the risk factors in analysing strategies?
What do you think of strategies displayed on timelyportfolio.blogspot.com?
I really like the fact that there is some code to reproduce the strategies, but they seem very elementary because he does ...
16
votes
2answers
465 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 ...
5
votes
1answer
435 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 ...
14
votes
1answer
672 views
Portfolio optimization with monte carlo sampling from predictive distribution
Let's say we have a predictive distribution of expected returns for N assets. The distribution is not normal. We can interpret the dispersion in the distribution as reflection of our uncertainty (or ...
7
votes
1answer
842 views
What is the basis risk between cash and futures government bonds?
I am currently working in a team responsible for maintaining a simple risk application for our bond desk and I am interested in knowing how to provide some sort of basic basis risk metric.
Our desk ...
8
votes
2answers
2k views
Equity Risk Model Using PCA
I'm trying to build a simple risk model for stocks using PCA. I've noticed that when my dimensions are larger than the number of observations (for example 1000 stocks but only 250 days of returns), ...
22
votes
2answers
2k views
What is the difference between the methods for calculating VaR?
There are three different commonly used Value at Risk (VaR) methods:
Historical method
Variance-Covariance Method
Monte Carlo
What is the difference between these approaches, and under what ...
5
votes
1answer
2k views
Annualzing the log of daily returns riddle
Two popular ways to measure returns are Arithmetic returns and Log returns. Let's define arithmetic (simple period) returns as: P(t) - P(t-1) / P(t-1). Let's define log return as Ln( P(t)/P(t-1) ) or ...
2
votes
5answers
638 views
Do binary options make any sense?
Reading from "www.nadex.com" - the copy reads "Binaries are similar to traditional options but with one key difference: their final settlement value will be 0 or 100. This means your maximum risk and ...
8
votes
2answers
457 views
Minimizing Correlation
Is there a quantitative method in monitoring trades to reduce the possibility of correlated trades?
29
votes
5answers
1k views
Lévy alpha-stable distribution and modelling of stock prices.
Since Mandelbrot, Fama and others have performed seminal work on the topic, it has been suspected that stock price fluctuations can be more appropriately modeled using Lévy alpha-stable distrbutions ...
7
votes
3answers
353 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 ...
3
votes
2answers
605 views
Covariance for arbitrarily large portfolios
I am implementing a method in Java to calculate the variance, covariance, and value at risk for a portfolio, which should be flexible for use with any number of assets in a portfolio. I am struggling ...
2
votes
1answer
182 views
Picking from two correlated distributions
Can anyone provide a simple example of picking from two distributions, such that the two generated time series give a specified value of Pearson's correlation coefficient? I would like to do this in ...
7
votes
3answers
546 views
Price of Brent versus West Texas Intermediate
As of right now, the price of Brent Crude is $\$$111.59/bbl and the price of WTI Crude is $\$$98.36/bbl. I'm well aware that futures markets don't set the spot price for oil, but actual ...
10
votes
1answer
259 views
What approaches are there for stress testing a portfolio?
Wikipedia lists three of them:
Extreme event: hypothesize the portfolio's return given the recurrence of a historical event. Current positions and risk exposures are combined with the historical ...
