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

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2
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0answers
24 views

Non-parametric estimator - CVAR / Expected shortfall

Is the estimation of the CVAR using known non-parametric methods (histogram , kernels) is different than the estimation of any other R.V.? If the answer is yes, then I am interested to know whether ...
1
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3answers
86 views

Appropriate measure of risk if return are not normally distributed

Normally standard deviation of an assets is used as an proxy for the risk in the financial market. In reality distribution of return is more peaked at the center and higher mass in the tail as ...
0
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0answers
8 views

Standardized and Advanced IRB together

Is it possible to use Standardized approach and AIRB together for the same asset class? For example sovereigns see a risk weight of 0% if AAA, but in AIRB they might not be seeing 0 weight. Is it ok ...
3
votes
2answers
77 views

Dollar-Neutral Strategy

Here is an excerpt from E. Chan's book Quantitative Trading, However, if the strategy is a long-short dollar-neutral strategy (i.e., the portfolio holds long and short positions with equal ...
3
votes
1answer
101 views

Spectral and distortion risk measures

Is there any difference between the spectral and distortion risk measure? Or is it just a different name for the same kind of risk measure?
19
votes
3answers
961 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 ...
3
votes
2answers
76 views

Mathematical definitioln of Potential Future Exposure

I have come across a risk measure called "Potential Future Exposure" and I have not really understood the meaning of it. Knowing that this has to do with counterparty credit risk, I read different ...
2
votes
3answers
111 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.
2
votes
1answer
683 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 ...
2
votes
1answer
58 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 ...
34
votes
9answers
3k 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 ...
0
votes
1answer
46 views

Is Value-at-Risk translation invariant?

Let: $X=V_1-V_0R_0$ where $R_0$ is the interest rate. Then, is it so that this risk measure is Translation Invariant as: ...
0
votes
1answer
51 views

What are “risk” or “risk numbers?”

I work in finance but do not have any formal education in the subject (I do have a PhD, but not in finance). I've picked up a lot of the jargon but there's one thing that I haven't figured out, and it ...
2
votes
1answer
71 views

Option analysis

Assume zero dividend and that the strike price for a European call option on a stock at a fixed maturity T and strike price K is given by C(K).Suppose that $C(K)=e^{-k}$ for all $K\geq 0$ ,then, I ...
1
vote
1answer
61 views

Calculate VaR for a liabilty taking a exponential distribution?

An insurance company faces the liability loss off $L = \begin{cases} 0, & \mbox{with probability } 0.75 \\ Z, & \mbox{with probability } 0.25\end{cases}$ where $Z\sim Exp(\mu)$. I want to ...
0
votes
1answer
33 views

Convex risk measure and a coherent risk measure?

A coherent risk measure is: $\rho(\lambda X_1+(1-\lambda X_2))$ How can it be shown that everey convex risk measure is indeed a coherent risk measure? I assume that it is enough to show that a ...
3
votes
2answers
89 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 ...
16
votes
1answer
504 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
1answer
180 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?
3
votes
2answers
77 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
2answers
54 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 ...
0
votes
2answers
49 views

What risks is an exchange exposed to?

Putting aside operational/reputational/business risks for a minute, a financial institution is concerned with the risk of losing money on their positions. What about an exchange ? I can only think of ...
1
vote
1answer
59 views

CVA using difference between 2 counterparty's spreads

The approximation to calculate CVA as a spread is $CVA = Spread * Expected$ $Exposure$. I assume this means the counterparty's spread over a proxy for the risk free rate such as LIBOR or OIS. Is this ...
7
votes
9answers
51k 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 ...
2
votes
1answer
34 views

efficient portfolio with given risk

Is there a formula to derive an efficient portfolio to maximise the return, x'mu, for a given risk, x'S x (where x are the portfolio coefficients, mu is the mean return for each asset and S is the ...
2
votes
1answer
75 views

Is marginal probability of default the same as conditional probability of default?

I'm thrown off by the term marginal probability of default. I've seen it defined by some authors as synonymous term for conditional probability of default conditional probability of default: ...
0
votes
0answers
24 views

Credit risk terms differences:

What are the differences between these terms: Contingent Credit Exposure Exposure profiles, Settlement Exposure, Negotiable Paper Exposure. Many thanks!
1
vote
1answer
153 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 $\pi_{cumulative} = 1-e^{-\lambda*t}$ ...
2
votes
1answer
45 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 ...
0
votes
0answers
31 views

Lambda in RiskMetrics for fixed income

What is the default lambda proposed in RiskMetrics for fixed income?
0
votes
1answer
78 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 ...
2
votes
1answer
118 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?
2
votes
0answers
26 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 ...
-1
votes
1answer
114 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 ...
0
votes
0answers
46 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 ...
3
votes
0answers
56 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 ...
1
vote
4answers
127 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 ...
9
votes
2answers
2k 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 ...
1
vote
2answers
132 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 ...
3
votes
1answer
36 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 ...
1
vote
0answers
32 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 ...
3
votes
2answers
54 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 ...
2
votes
1answer
58 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} = ...
8
votes
4answers
543 views

How to treat large (5K-10K) non-positive-definite (particularly near-singular) covariance matrices for Cholesky decomposition?

I have a very large covariance matrix (around 10000x10000) of returns, which is constructed using a sample size of 1000 for 10000 variables. My goal is to perform a (good-looking) Cholesky ...
1
vote
0answers
48 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 ...
0
votes
3answers
62 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.
2
votes
1answer
63 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 ...
0
votes
1answer
102 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 ...
2
votes
1answer
151 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 ...
7
votes
1answer
138 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 ...