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

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1k views

Cumulative vs marginal probability of default

I understood the cumulative (aka unconditional) probability of default to be the probability of defaulting in a given period eg: between years 1 and 5. Further $\pi_{cumulative} = 1-e^{-\lambda*t}$ ...
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1answer
63 views

Calculating probability of default with no recovery

Given two methods to calculate the 1 year conditional probability of default of a zero coupon bond, I've come up with slightly different but close results. From my approaches below, is it reasonable ...
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37 views

Lambda in RiskMetrics for fixed income

What is the default lambda proposed in RiskMetrics for fixed income?
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1answer
151 views

Calculating expected shortfall

I'm trying to calculate the expected shortfall for the below scenario. I don't understand why the 1.04% probability of 0 bonds defaulting is used as a weight when calculating ES, since the binomial ...
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0answers
29 views

How does risk attitude influence trading? (Bibliography seeking)

I wonder how risk-averse or risk-seeking investors behave in a stock market. Is there any bibliography that deals with that? For example, suppose that we have a risk-averse investor that buys a ...
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1answer
321 views

What are the pros and cons of historial and Gaussian approaches to VaR?

What is the difference between historical and Gaussian method of VaR estimation? I know how they are calculated, but what are the pros and cons of each?
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56 views

How to fit a copula to empirical data?

There are numerous types of Copulas one can choose to fit empirical data. My question is wow to select the 'best' copula to fit the data. More specifically, let's assume empirical data $f(x_1,y_1)f(...
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2answers
93 views

Meaning of conservative in risk management?

I believe this question is best asked here, as it pertains to risk, rather than English SE. What is the meaning of conservative in the context of risk management? In general, conservative would mean ...
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4answers
204 views

Bond portfolio hedging against currency risk

How do I hedge a bond portfolio against currency risk? Ideally I'm looking for books or other references on this topic.
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150 views

What is the difference between gross and net enterprise wide risk?

Reading a Basel paper on recommendations on internal economic capital models. One of the recommendations says members of the bank's board should be able to demonstrate understanding of the difference ...
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1answer
84 views

How does RAROC identify capital requirements?

I've read that RAROC is used to set economic capital requirements for different products, projects, business lines etc. Is it just a matter of solving for the required economic capital level to ...
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4answers
129 views

What is wrong with this argument?

Futures trading in stock index gives leverage. Leverage cuts both ways. It can give you huge pct gains or wipe you out. Typically stock index futures for the major markets have limited daily pct ...
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119 views

Where can I find data source for structural models?

I am starting a project to implement the Black-Merton-Scholes model from this book in R. However, I am looking for, ideally free, data sources. Still I have access to a Bloomberg terminal. Can you ...
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2answers
133 views

How are we underestimating liquidity risk?

Malz explains that marking to model can underestimate liquidity risk. From his example, I don't see it. I can see us underestimating market risk because we are using an incorrect price. Why does a ...
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41 views

Using a hybrid approach to calculate operational risk capital

I've read that a hybrid approach combing scenario analysis and loss distribution analysis can be used to calculate operational risk capital under the advanced models approach. I've read a couple ways ...
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1answer
38 views

What is the date of reserve (operational risk)

One of the BCBS papers on operational risk says the following: Consistent with other operational risk losses, a bank should use a date no later than the date of reserve for including legal ...
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2answers
63 views

Can Economic Capital cover Regulatory Capital?

If economic capital is set by the institution to cover unexpected loss (given a confidence level) and regulatory capital is set by the regulator, can one "absorb" the other? For example, if I ...
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1answer
156 views

A little help with the Single Factor model for credit risk

I'm studying the "single factor model" in Malz text "Financial Risk Management - Models, History and Institutions". He only refers to it as such and gives it no proper name. The model: $a_{i} = \...
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3answers
65 views

What information should be delivered to the client so they have enough information to manage their exchange rate risks? [closed]

The client can be a CFO or CEO. The information can indicators, charts, graphs, statistics, ratios, etc. I know the VaR is one of them.
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1answer
86 views

Is credit exposure conditional on default?

Credit exposure defines the loss in the event of a counterparty defaulting, and expected exposure is the average of all credit exposures. BUT When adjusting the CVA calculation to account for wrong-...
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59 views

Why is credit exposure higher for a smaller probability of default than for a larger default?

I'm having trouble grasping this concept; I don't see the relevance of the explanation given in the text (Gregory, Counterparty Credit Risk and CVA) either. When expected exposure and probability of ...
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1answer
264 views

Why can't marginal CVA be used in pricing?

"Marginal CVA may be useful to breakdown a CVA for any number of netted trades into trade-level contributions that sum to the total CVA. Whilst it might not be used for pricing new transactions (due ...
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1answer
238 views

Risk neutral drift vs real world

I was of the understanding that risk neutral drift was always the risk free rate. A section from Gregory's book on Credit Value Adjustment seems to say risk neutral drifts are typically estimated from ...
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1answer
205 views

How does rehypothecation cause systemic risk?

I've read in many places that rehypothecation causes systemic risk (not to be confused with systematic risk), but none offer an explanation. Is this because of the daisy-chain effect that would happen ...
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0answers
57 views

Cross-sectional moments

I got a seminar topic named Forecasting risk from cross sectional moments? Could at least someone tell me what should I write about and if there is any paper that I could read. Thank you very much in ...
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2answers
129 views

Estimating an appropriate haircut for illiquid stocks

I am trying to determine an appropriate haircut for a basket of illiquid stocks that barely traded during the year. Can someone suggest me an approach to estimate the risk? My dataset has a lot of ...
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2answers
100 views

Futures Parameters for Value at Risk

I am new to risk management. I am calculating the VaR for a portfolio of futures contracts, long and shorts. I calculated it using the historical, parametric, and ...
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0answers
69 views

how best to equalize individual pair risk in a portfolio of stock pairs?

I am building a portfolio of stock pairs in which each pair is individually hedged via beta/hedge ratio adjustment. I am looking for a method to ensure that I am taking the same risk in each pair that ...
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1answer
70 views

Rebucketing Risk using PCA/other methods

was working on a project and could use some help. New to the community and looking fwd to being an active part of it. My question is, let's say we have a vector of securities V, and it trades with ...
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105 views

GARCH filtering and extreme value theory

We are evaluating a model for risk management based on extreme value theory using peaks over threshold and markov chain monte carlo methods. In doing this, we are firstly fitting a GARCH (we have ...
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1answer
71 views

How to measure the volatility of illiquid bond with no historical prices

The basket of corporate bonds that I am following barely traded after the issuance. Hence, there is no historical data to estimate the volatility. Can you suggest me a different approach to come up ...
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3answers
126 views

To currency hedge or not to currency hedge (ETFs)?

When is it preferable to use a currency hedged ETF over a none currency hedged ETF? There has been studies which have shown over the longer term currency hedging does not make a difference. "...
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1answer
67 views

calculating portfolio volatility [closed]

Given: vector of portfolio weights $W = [w_1 w_1 ]$ correlation matrix $C = \left( \begin{array}{ccc} a & b \\ d & e \end{array} \right) $ standard deviation of the asset returns $S = [s_1 ...
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30 views

conferences for credit portfolio managers

What are worth conferences for credit portfolio managers? I appreciate your recommendations! PS:I am aware that this question is not the typical quant.SE question, BUT I couldn`t find reliable ...
4
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1answer
1k views

Why using the swap curve as riskfree rate and no longer gov bonds?

I recently had an interview where I was asked what to use as risk-free rate. In all my textbooks it was always the US treasury yield curve. But they said no its now the "swap curve". Why is the swap ...
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1answer
72 views

Expected Utility and $\log$

I've just started reading about expected utility and utility functions and have the following question. $\textbf{Question:}$ An investor has an initial wealth of 100 and a utility function of the ...
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1answer
171 views

Markowitz portfolio optimization question

I am studying the Markowitz portfolio optimization theory, and I just wanted to ask if I understood this correctly. For a stock portfolio we distinguish two kinds of risks: an unsystematic risk, which ...
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3answers
236 views

New ways of communicating risk

One of the scapegoats of the financial crisis was value at risk. Still communicating risks effectively to clients is a big challenge and hugely important (also to keep your job as a quant!) In this ...
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1answer
313 views

Difference between Risk avoidance and Risk transfer

I was hoping some could explain the two terms namely, risk avoidance and risk transfer. Also, can a risk be avoided by transferring it?
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1answer
75 views

Why normalize only data for CDSs for PCA?

I'm reading a Credit Suisse Research Report on PCA. The report says that to preprocess the data, you should "Centre data (and normalize when considering CDS data)." Why would you only normalize ...
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2answers
258 views

Semi-variance/Downside Risk, what about the rest of the covariance matrix?

I just bumped into a rather interesting article from wikipedia : http://en.wikipedia.org/wiki/Downside_risk where they define the semi-variance also called Downside risk, which bascially only ...
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1answer
542 views

Portfolio optimzation : efficient frontier with respect to risk aversion parameter with R

I am currently trying to write a little script in R to determine the optimal weights given a fixed risk aversion parameter. The problem I have is that by increasing the risk aversion parameter I think ...
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1answer
93 views

What are good online resources for credit portfolio managers?

I am aware that this question is not the typical quant.SE question, BUT I couldn`t find any site/forum/wiki, where credit portfolio managers hang out to share their experience and their methods. ...
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1answer
140 views

What are the different Credit Portfolio Management models and what are their advantages?

CreditMetrics, RiskMetrics(Algorithims), etc. are all different risk methodologies used by many banks. However, what are their advantages/disadvantages? I would appreciate your replies!
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1answer
129 views

What is the difference between these two Expected Shortfall definitions?

I have come across different ways expected shortfall is defined. e.g. $$ES_a(X)=\frac{1}{1-a}\int_a^1VaR_b(X)db$$ and $$ES_a(X)=\frac{1}{a}\int_0^aVaR_b(X)db$$ e.g. on Wikipedia's article. Are these ...
3
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1answer
135 views

What are recent important papers on credit portfolio risk modeling?

I'm interested in papers which consider mathematical models of risks of different portfolios of retail credit. This is not my area of research, so I may be misusing some terms. The idea is simple: I ...
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1answer
237 views

Convert a call spread to a butterfly to mitigate risk

I do not have a source for this (apologies), but sometimes, I hear about option traders initiating a vertical spread(short) and then converting that call spread to a butterfly spread to mitigate risk. ...
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1answer
123 views

Does DV01 grow proportionally to portfolio?

I'm having trouble understanding DV01 convention. From what I understand it stands for "Dollar value of 1 basis point." For instance, if I have a bond with DV01 = 0.05, does a portfolio composed of 1,...
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1answer
200 views

Getting Parameter of Translated Gamma Distribution from Monte Carlo

Spin-off from here. (Edit) Main question: What do I do about a parameter whose suggested values range quite vastly? (Edit) Backstory: I am given data of loss values and the dates that correspond to ...
1
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1answer
56 views

Compute moments of aggregate loss using Monte Carlo

Spin-off from here. Richard referred to me an article that tells me how to get parameters of a translated gamma distribution to which I should consider fitting simulated aggregated loss values. The ...