The possibility that a negative event (such as a loss) will happen.
5
votes
1answer
450 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 ...
9
votes
4answers
746 views
Is the risk-free rate really limited by inflation?
In all the classic texts on equities derivatives, there is an assumption of the risk-free rate r. We can immediately dismiss the concept of a fixed rate; all interest rates are variable (and ...
9
votes
2answers
483 views
What is the relationship between risk aversion and preference for skewness and kurtosis in portfolio optimization?
Is there any relationship between the risk aversion coefficient in an individual's utility function (commonly used in portfolio optimization) and the preference for higher moments such as skewness and ...
7
votes
1answer
875 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 ...
6
votes
4answers
495 views
Can risk aversion indicators anticipate financial crises? Research and/or strategies
In reference to this paper:
Can risk aversion indicators anticipate financial crises?
and the investable UBS Risk Adjusted Dynamic Alpha Strategy:
...
14
votes
1answer
693 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 ...
4
votes
1answer
330 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
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 ...
8
votes
4answers
597 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 ...
10
votes
3answers
790 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} ...
3
votes
6answers
901 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 ...
8
votes
2answers
460 views
Minimizing Correlation
Is there a quantitative method in monitoring trades to reduce the possibility of correlated trades?
2
votes
5answers
644 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
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), ...
7
votes
3answers
365 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
610 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 ...
5
votes
4answers
731 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? ...
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
550 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 ...
7
votes
4answers
10k 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 ...
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?
6
votes
2answers
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 ...
16
votes
2answers
476 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 ...
17
votes
2answers
481 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 ...
10
votes
1answer
262 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 ...
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 ...
14
votes
6answers
1k 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.
10
votes
4answers
1k views
What is a “coherent” risk measure?
What is a coherent risk measure, and why do we care? Can you give a simple example of a coherent risk measure as opposed to a non-coherent one, and the problems that a coherent measure addresses in ...
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 ...
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 ...
12
votes
2answers
553 views
Concentration risk in credit portfolio
How do you model concentration risk of credit portfolio in IRB/Basel II framework?
