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

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1answer
141 views

Are there quantitative models which can guide one's choice of target risk?

Note: This question was written for the weekly topic challenge. Many asset allocation funds presume the investor knows his target risk level, typically on some spectrum from conservative (mostly G7 ...
5
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0answers
271 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 ...
5
votes
1answer
478 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 ...
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votes
5answers
21k 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 ...
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votes
7answers
1k 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
385 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
2answers
183 views

What is the significance of Relative Risk Aversion

I know that the relative risk aversion is defined as $$R(c) = cA(c)=\frac{-cu''(c)}{u'(c)}$$ where $u(c)$ denotes the utility curve as a function of wealth $c$. But I do not understand the intuition ...
4
votes
1answer
188 views

Are there any well known methods of testing through-the-cycle rating systems?

Rating systems, as defined by the Basel II Accord, can be classified into two broad types - through-the-cycle (TTC) or point-in-time (PIT) - and the probability of default predicted by such a system ...
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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
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1answer
144 views

Estimating investor's utility from the trades data

Is it possible to infer investor's utility function from the set of decisions she is making? Let's assume for simplicity that the market consists of a single traded asset whose return distribution is ...
4
votes
1answer
374 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 ...
3
votes
2answers
720 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 ...
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3answers
378 views

Why should there be an equity risk premium?

After years of mathematical finance I am still not satisfied with the idea of a risk premium in the case of stocks. I agree that (often) there is a premium for long dated bonds, illiquid bonds or ...
3
votes
1answer
191 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 ...
3
votes
1answer
138 views

How do I model risks for specific short-term short calls in a portfolio with limited data?

I'm trying to do some risk analysis on a portfolio of bonds, currency, stocks and short calls. The short calls expire in approximately 15-30 days and I've only got around 20 days of pricing data on ...
3
votes
2answers
890 views

Computing the Sharpe Ratio

The building blocks of the Sharpe ratio—expected returns and volatilities—are unknown quantities that must be estimated statistically and are subject to estimation error. The main problem I have is ...
3
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1answer
80 views

Is this comment right about subadditivity?

I found this comment in a book I bought about risk management: Risk Management in Banking by Joel Bessis. This is the well-known rule that states that the sum of individual risks is less than ...
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
155 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
3answers
254 views

Risk prediction based on financial statements

I have a profit loss statement and balance sheet with the following fields: Example P&L Turnover420,363 - Cost of sales £118,730 £140,169 - Gross Profit ...
3
votes
1answer
419 views

Risk-free rate for ex-post evaluation of investment strategy

When evaluating the strategy ex-post using e.g. Sharpe ratio, what should one use as the risk-free rate? Let's suppose I am using a 1Y sample of weekly returns, sampled between 2012-01-01 and ...
3
votes
1answer
387 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
0answers
228 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 ...
2
votes
5answers
792 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 ...
2
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1answer
210 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 ...
2
votes
1answer
467 views

Is it possible to derive the “risk tolerance” from the portfolio efficient frontier?

I am trying to solve the Portfolio Optimization Problem using a "Multi-objective Evolutionary Algorithm". After obtaining the efficient frontier, I would like to know if we can infer for each point of ...
2
votes
1answer
2k views

Drawdown calculation for strategies

I am developing a trading strategy for currencies. I am trying to find an indication for risk, something like Sharpe ratio or Sterling ration; for that, I thought of using the (maximum) drawdown ...
2
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1answer
107 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 ...
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1answer
118 views

Hedging differences between equity and index options?

Suppose we hedge an index option using futures on that index. How would the hedging strategy be different if the underlying could be traded directly (from a risk point of view)?
2
votes
1answer
102 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 ...
2
votes
1answer
48 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
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 ...
2
votes
1answer
202 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 ...
2
votes
2answers
178 views

Portfolio risk-return when assets have limited and inconsistent historical data / time series?

Lets say we have "today's" snapshot of asset allocation and need to determine the 6mo, 1 yr and 5 yr risk and returns of this portfolio. If the time series for every asset is very long, longer than ...
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0answers
213 views

Market risk stress testing?

I am doing a research for a paper for market risk stress testing. In fact I found some information on the web about this important topic such as: Stress Testing from Art to Science Stress Testing ...
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0answers
89 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 ...
2
votes
0answers
465 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 ...
1
vote
1answer
275 views

Why does $\hat{\epsilon}'\hat{\epsilon}$ of a factor model measure risk?

$\hat{\epsilon}'\hat{\epsilon}$ from the market model: $R_{it} - \hat{\alpha} - \hat{\beta}R_{mt} = \hat{\epsilon}$, or from a factor model such as the Fama-French 3 factor model, is often used in the ...
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vote
2answers
197 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 ...
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1answer
138 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 ...
1
vote
1answer
175 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
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1answer
199 views

Regression giving the return on a stock

I have this regression equation: $$ R_{stock} = 3,28\% + 1,65*R_{market} $$ Where $R_{stock}$ is the expected return on a stock and $R_{market}$ being the market risk premium. I have a one-year ...
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vote
1answer
282 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 ...
1
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1answer
112 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 ...
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1answer
221 views

Additive portfolio risk decomposition

In his paper Budgeting and Monitoring the Risk of Defined Benefit Pension Funds, Bill Sharpe writes: [...] the sum of the weighted marginal risks of the portfolio components will equal twice the ...
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1answer
154 views

reinsurance pricing equivalent to option pricing

Is it true that pricing a reinsurance contact is equivalent to pricing an option. Basically a reinsurance just cuts off the risk exposure of the insured institution to a threshold say $K$. So if we ...
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vote
0answers
53 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 ...
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0answers
176 views

Modeling asset performance to Bitcoin revenue

I'm attempting to model asset performance to Bitcoin revenue, which is a driving force in the Bitcoin community. Question Is there any model, or research being done that tracks "hashes per second" ...
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0answers
203 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 ...
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2answers
97 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 ...