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

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363 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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2answers
224 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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199 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) ...
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1answer
223 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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1answer
357 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 ...
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1answer
135 views

Which sports are generally the best for trading on betting exchanges for a profit?

I am looking at trading bets on tennis, football and horse racing in particular as these appear to have the most liquidity. How much background research and how much trial and error is generally ...
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1answer
47 views

Hedging using relative values

Consider I have two stocks $A$ and $B$, $A$ is trading at $\$40$ and $B$ at $\$30$. The standard deviation of its returns are $\sigma_A=25\%$ and $\sigma_B = 30\%$. Correlation between the returns is ...
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1answer
95 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 ...
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1answer
350 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 ...
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1answer
283 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
187 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 ...
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1answer
335 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
174 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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37 views

Comparing cost of two alternative given their distribution

I have distribution for cost of two alternative through Monte Carlo simulation. The distributions are not normal. Given the benefit of the two alternatives is the same but ungiven, I want to choose ...
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1answer
50 views

Longevity risk modelling

What is Longevity risk, and how to model it under DC and DB pension plans? characters|characters|characters|characters|characters|
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1answer
154 views

What Matlab packages to I need as a Risk Analyst?

What toolbox are more suitable for a risk analyst. I found this: Optimization toolbox Global optimization toolbox Econometrics toolbox Financial toolbox Statistics toolbox And also I have as a ...
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55 views

Risk measures, Risk Management and Financial Risk Area

I'm currently searching material about market risk and I learned about coherent risk measures, VaR, CVaR (or expected shortfall), volatility. All that because I have to make a Financial Risk Area for ...
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44 views

how to find CVaR/AVaR for triangular fuzzy no

While going through different methods of risk measure i came across AVaR/CVaR, while i was calculating AVaR/CVaR in credibilistic environment using VaR, i got stuck in the calculations eg. For ...
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1answer
171 views

Which is the better risk sensitive measure?

Consider the two following optimization problem 1) $$ \min_{\theta} \ln E_{\theta}[ e^{X}]$$ 2) $$ \min_{\theta} E_{\theta}[ X]$$ with the constraint $$ Var_{\theta}[X] <c$$ Is it true that ...
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33 views

Doubt on risk cost criterion

I want to minimize some kind of risk sensitive cost. But, I am confused what cost criterion should I use. I am aware of only expected exponential utility. I want to know what are the other such ...
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0answers
44 views

proper choice of risk aversion parameter in the risk-sensitive cost-criterion

Suppose I want to minimize certain risk sensitive cost. Is it a valid question to ask what is the proper (also in which sense) choice of risk aversion parameter in the risk-sensitive cost-criterion ? ...
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2answers
90 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 ...
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2answers
98 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 ...
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0answers
54 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 ...
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1answer
226 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 ...
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2answers
292 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 ...
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157 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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200 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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237 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
138 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 ...
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1answer
52 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 ...
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1answer
203 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 ...
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1answer
119 views

Asynchronous Data Across Time Zones - RiskMetrics

I'm currently involved with a project to integrate RiskMetrics into our business and one issue we've identified is the treatment of market data timing across time zones. This can have the effect of ...
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1answer
58 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
31 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 ...
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1answer
24 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 ...
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1answer
82 views

Get distribution for aggregate loss using Monte Carlo

I am given two data sets containing dates and losses (in some currency). Given a distribution for the amount of losses and an (a,b,0) distribution for frequency of losses, how can I use Monte Carlo ...
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3answers
146 views

Parametric/Analytical VaR

Suppose I want to calculate VaR for a known distribution with mean $\mu$, variance $\sigma^2$ and $\alpha$-quantile as, $VaR_{\alpha}$ = $\mu + \sigma q_{\alpha}$. For a Gaussian distribution it is ...
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1answer
91 views

CAPM (SML) Problem

I got 1.3636 for beta for the problem below(165/121). But I became so unsure about the answer when I solved (c) because then the market risk becomes larger than the variance of Stock A. ...
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1answer
363 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.
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124 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 ...
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1answer
89 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 ...
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62 views

Is it possible to generate Alpha by taking only systematic risks?

I read somewhere that to generate Alpha one has to take idiosyncratic risks. But is it not possible to generate alpha by taking just systematic risks. There could be a asset allocation strategy where ...
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25 views

Solvency Problem for Financial Institutions

According to my finance lecture, the motivation for risk measures is grounded in the solvency problem: Risk measures are used to determine the amount of capital to avoid insolvency of the financial ...
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34 views

volatility grouping

I was working on risk levels of a combined portolfio (includes options,futures as well as stock). While using greeks we can asses some value of a portolio, but when one needs to assess some kind of ...
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1answer
104 views

Factoring risk premium in to Forward Rate calculation

This is a self study question. I'm calculating a forward rate. Specifically, I have that in a country X, the Spot Rate is 5X/1US. I also have that the 1 year interest rate is 13% in country X and ...
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3answers
331 views

How to create a model or formula for evaluating trade opportunities

I want to build a formula to produce a score for a potential trade based on 4 variables, time, return, liquidity of security, and probability of failure. For a set of potential trades I first ...
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0answers
177 views

Difference between “basic risk” and “basis risk”

Returning to Futures contracts, basic risk refers to the risk remaining after the hedge has been put in place and essentially represents the difference between the Futures price – should the ...
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58 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 ...
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1answer
337 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 ...