2
votes
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 ...
9
votes
1answer
523 views

How are Expected Shortfall and Variance related?

I would like to know how Expected Shortfall $SF_\alpha$ and variance $\sigma^2$ are related. If I follow what Aaron Brown answered in this post, when the underlying distribution is Normal with ...
18
votes
4answers
5k views

What is the best way to “fix” a covariance matrix that is not positive semi-definite?

I have a sample covariance matrix of S&P 500 security returns where the smallest k-th eigenvalues are negative and quite small (reflecting noise and some high correlations in the matrix). I am ...
6
votes
2answers
207 views

Is it better to grade hedging strategies based on the sum of absolute or squared hedging errors?

Let's say I have one strategy that has a hedging error of: 2, 2, -2, -2 Let's say I have another strategy that has a hedging error of .5, .5, 3, 3 Would it be a better idea to grade the hedging ...
5
votes
1answer
3k 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 ...