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I am looking for literature on comparison of these two approaches.

It looks like many places are using some type of Factor-based Model (Barra, Axioma, Northfield, etc.) for risk management purposes. Given this and emerging Multi-Asset Class risk models based on set risk factors, will there be a place for Full Revaluation in the future? Or do we expect standardized risk factors, which will be suitable for complex, multi asset portfolios?

Any thoughts/opinions appreciated!

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  • $\begingroup$ What is “full revaluation” ? $\endgroup$ – Ezy Jan 3 at 19:30
  • $\begingroup$ pricing/valuation of an instrument using its valuation model parameters. So for BSM model based options, the option price is calculated using the underlying price, strike price, implied/historical volatility, interest rate, dividend rate ... $\endgroup$ – AK88 Jan 3 at 19:53
  • $\begingroup$ ok so then i am not sure what is the relation with Barra here ? Barra is used to decompose an equity portfolio risk whereas derivatives portfolio use the model parameters for the non-delta part of the risk. So in that sense each “approach” of risk management (in your words) is just used for different purpose, they are not alternative to each other... $\endgroup$ – Ezy Jan 3 at 20:17
  • $\begingroup$ Factor-based models can decompose any type of asset class if you know/tell how to do them. Then these risk models become an alternative to full reval based risk models. Even if you take a simple equity portfolio and calculate its VaR using factor-based risk model and compare it to full reval based VaR, there is a high probability that the result will be different. Was just curious if there was a work that discusses this. $\endgroup$ – AK88 Jan 3 at 22:14
  • $\begingroup$ I still dont understand what is for you the full reval risk of an equity portfolio, can you explain this at least ? $\endgroup$ – Ezy Jan 4 at 6:17

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