Questions tagged [risk]
The possibility that a negative event (such as a loss) will happen.
430
questions
3
votes
1answer
45 views
What are non-variance (non Markowitz) based theories of capital allocation between non-correlated assets?
A large amount of literature in finance accepts the standard deviation in return as if it were an accurate measure of "risk."
What are some other financial theories for how to allocate capital ...
0
votes
0answers
26 views
Is time diversification effective?
If the returns are log-normal, how do I find the probability of negative returns, since log can only take positive values as an argument. Also, for time = more than 1 year, how do I find the ...
0
votes
0answers
48 views
Why is VaR metric still used?
It is well know that VaR is not subaddtive measure which means that condition
$$
\text{VaR}(X+Y) \leq \text{VaR}(X) + \text{VaR}(Y),
$$
where $X$ and $Y$ are portfolios, is not satisfied. As a ...
0
votes
0answers
35 views
FRTB Spearman correlation coefficient definition
I am just writing my thesis and would like to understand the spearman correlation coefficient definition within the FRTB.
Somehow it is not clear from the definition. The reason what I don't ...
-1
votes
2answers
126 views
Hedging a stock with its index constituents?
Problem: select and weight 4 constituents of an index to hedge a particular stock
I would appreciate any feedback on my approach, here is I would go about it:
Create a new index of four ...
0
votes
1answer
43 views
Is it possible for rating agencies to rate a security higher than what it should be rates without maleficence?
In the run up to the 2008 financial crisis, many securities that were risky were rated much higher, at say, AAA. Raghuram Rajan in his book "Fault Lines" argues that this could does not necessarily ...
0
votes
0answers
27 views
Coherent and convex risk measure for a ZCB portfolio
I have the composition of one ZCB portfolio at the time $\ {t_1,...,t_n}$.
I have to estimate the volatility of the single ZCB following (Bruder et al., p.6, 2011) https://mpra.ub.uni-muenchen.de/...
0
votes
0answers
42 views
Can simultaneous trades happen?
Investigating about matching engines i found that none of them acknowledges the scenario when two identical orders arrive at the exact same time.
I get that it is very unlikely for this to happen, ...
2
votes
2answers
76 views
PD and LGD for ECL calculations needs to be time dependent?
I'm studying the implementation of an expected credit loss (ECL) model. I have encountered a complication. Do I need to calculate a probability of default (PD) and loss given default (LGD) with a time ...
0
votes
0answers
41 views
Why price with lower volatility yield higher expectation under risk neutral measure
Suppose $S_1$ and $S_2$ are two asset prices, such that, E[$S_1$] = E[$S_2$] under physical measure and $\sigma(S_1)$ > $\sigma(S_2)$. Then why E[$S_1$] < E[$S_2$] under the risk neutral ...
0
votes
0answers
39 views
Classical Ruin Theory - Lundberg Model
In classical risk/ ruin theory, I see this formula crop up in my notes but my lecturer didn't explain to me why/ when it's employed:
$M_X(r) = \int_{-\infty}^{\infty} e^{rx} f(x) dx$
I understand ...
0
votes
0answers
32 views
Skewness and kurtosis measures when full distribution is not available
I have asked this question here, but did not get any answer. I was wondering if anybody knows a method of deriving skewness and kurtosis measures from different quantiles, mean, and/or variance. I do ...
0
votes
0answers
19 views
Portfolio construction with volume based bars
In the book Efficiently Inefficient, Lasse Pedersen interviews Myron Scholes:
LHP: Why do spreads tend to widen during some periods of stress?
MS: Well, capital becomes more scarce, both physical ...
2
votes
1answer
121 views
Credit VaR Formula
in Chapter 23 of Hull's Options, Futures, and Derivatives he has an example (i.e. example 23.4) which shows how the Credit VaR formula is applied. The answer in the formula is 0.128. I can't seem to ...
1
vote
0answers
50 views
Mean Semivariance Optimization VS PMPT
Mean Semivariance optimization defines semivariance, variance only below the benchmark/required rate of return, as:
$(1/T).\sum_{t=1}^{T} [Min(R_{it}-B,0)]^2$
where $B$ is the benchmark rate, $R_{i}$...
0
votes
0answers
31 views
How to calculate R for strategies with dynamic exit points
Calculating R is easy when trading a straight forward strategy which has its entry and exit points clear:
...
1
vote
0answers
54 views
One periodic binomial model
I need to look into a one-period Binomial model $(B_t, S_t)$ with interest rate $r = 0.1$ , $S_0 = 100$ and
$$
S_t= 120 \, \text{with probability}\, 0.5
$$
$$
S_t= 60\, \text{with probability}\, 0.5
$$...
2
votes
0answers
33 views
To price Municipal Bonds and risks I want to know the percent of unfunded pension liabilities ($3.8T) to total state and local gov liabilities
Unfunded pension liabilities keep growing and this seems alarming to both pension holders but also Municipal Bond holders.
I would like to know how large this problem is to better price Munis and ...
1
vote
0answers
17 views
Are Muni REVENUE bonds secured or can the local gov. use the revenues for other purposes not paying the bond holders if its going bankrupt? [closed]
Municipal bonds are of two kinds: GO (General Obligation) Bonds or Revenue Bonds. My question on Revenue Bonds is: are the revenues from the specific project secured or can the local government use ...
0
votes
0answers
24 views
American Option - Early exercise risk management
This is for American Option Book Management in real trading.
Let`s suppose,
American Option seller(Book manager) only do delta hedging, which means seller cannot do Vega hedging,
American Option ...
3
votes
0answers
56 views
Using transaction data to predict default of the customer
I am trying to build a prediction model that utilize the huge transaction database of all the customers of a bank. My dataset currently looks like this:
...
0
votes
0answers
56 views
Options trade - statistically expected return calculation?
I am calculating expected return for composite option strategies based on event probabilities provided by the broker. For example, consider the following spread
On the left hand side we see:
maximal ...
3
votes
1answer
138 views
What does 5 year OIS actually mean?
I am aware that OIS is the new reference/risk-free rate for collateralized cashflows. OIS is by definition an overnight rate (annualized, I assume). So once I have constructed my OIS yield curve, what ...
0
votes
0answers
52 views
CRRA Utility Function Problem
"Assume an investor with total wealth of $100 that has a constant relative risk aversion (CRRA) utility function. The functional formula for the CRRA utility function is given as
$\ U[W]=\frac{W^{1-Īø}...
4
votes
1answer
94 views
Why is change in risk premium not a violation of the Efficient Markets Hypothesis?
A passage in my textbook is confusing me. It states that various market indicators (e.g. yield spreads between high/low grade bonds, earnings yields) lead to predictability in the security's risk ...
2
votes
1answer
108 views
Allow drift in weights in a risk benchmark?
I am tracking the risk of portfolios using a standard 2-asset benchmark (S&P500 / Agg bond) and I want to throw a flag if the risk of a portfolio goes outside of a certain range relative to that ...
1
vote
0answers
17 views
single period security market with two assets
Consider a single period security market with two assets. Assume the current prices
are
There are two states at time one and the payoff matrix is
1.Suppose the investor believes that each state has ...
2
votes
4answers
388 views
Which rate to use as a risk free rate in emerging markets?
By looking at Fama and Frenchs global Portfolios, they just use the USD-RF rate as the risk free rate, because they converted their Returns to US-Dollar.
Im currently estimating Strategy Returns in ...
2
votes
3answers
108 views
How do I derive a blend of a 3Y future and 10Y future risk?
So I have a portfolio of Govt. bonds that I'm trying to hedge with futures. Let's take one of the bonds out of the portfolio as an example.
In bloomberg, every bond and its future counterparts has a ...
1
vote
2answers
362 views
Absorption Ratio
I'm actually trying to implement Mark Kritzman's absorption ratio (Principal Components as a Measure of Systemic Risk by Kritzmam, Li, Page and Rigobon, 2010, SSRN 1633027) using Python, but I'm not ...
1
vote
1answer
170 views
Barra model: why standardize the fundamental risk factors?
The two main types of risk factors included in the famous Barra model are called the "fundamental factors", and "industry factors," and the thing that I do not understand is why are only the former ...
0
votes
0answers
23 views
Adjust the Capital Market Line For Margin Interest
Modern Portfolio Theory assumes unlimited borrowing and investing at the risk-free rate. Of course, this is not realistic; margin interest costs several multiples of the RFR, especially for portfolios ...
0
votes
1answer
85 views
Having only 2 Industry risk factors?
Is it possible to build a risk model that only has 2 industry risk factors? For example, if I wanted just Tobacco and Healthcare industries as risk factors can I do that? If I did that do I have to ...
0
votes
0answers
41 views
Put-call parity for equity share and debt share
Considering Merton's structural approach" for credit risk modeling, we arrive to prove that the pricing formules are $S_t=V_t\phi(d_{T,1})-Fe^{-r(T-t)}\phi(d_{T,2})$ for equity share and $F_t=FP_0(t,T)...
0
votes
0answers
52 views
Factor Loading with multiple exposures?
How do I decompose portfolio exposures when assets may have exposure to a few of my risk factors?
For instance I have some sector and state specific risk factors. If I have a bond with exposure to ...
0
votes
0answers
51 views
Poisson distribution and counting process
Let $\begin{Bmatrix}
N_t
\end{Bmatrix}_{(t\in[0,T])}:=\mathbb{I}_{(\tau \leq T)}:=k, \forall t \in [\tau_{k}\leq \tau_{k+1})\sim \mathrm{Po}(\lambda_{t}:=\int_{0}^{t}\lambda_{s}ds<+\infty)$ a ...
1
vote
0answers
46 views
Definitions of bubbles
In Financial Bubbles: Mechanisms and Diagnostics, Sornette and Cauwels define the concept of "bubble":
More technically, during a bubble phase, the price follows a faster-than-exponential power law ...
0
votes
2answers
132 views
understanding Value-at-Risk correclty
The are several types how to calculate the VaR. I am focussing on the method of calculation the VaR in percentage.
$VaR=I*z*std*\sqrt{t}$
This gives the VaR in ā¬.
I have the z-value, the daily ...
0
votes
0answers
70 views
Wave Method and Implied Duration
I am pricing an MBS under three different rate scenarios: a base case, +5bps and -5bps
I compute partial durations on the base case using the wave method (P. Hagan: Calculating Delta Risks and Hedges ...
3
votes
1answer
181 views
How to interpret the (expected) exposure and CVA of an option or a single share
I have a quick (hopefully simple) question regarding the interpretation of the expected exposure of a call option and a single share. I've done some computations on the formula for the expected ...
0
votes
0answers
41 views
Choquet integral risk measure
I have one question that cannot fully understand why. What is the definition of the Choquet integral risk measure?
2
votes
1answer
102 views
what are the underlying transactions for SOFR?
Recently I am reading about SOFR (Secured Overnight Financing Rate), which is projected to replace LIBOR to be the reference for risk-free rate in the market.
But I still don't understand or imagine ...
0
votes
0answers
47 views
What 10 year bond data to use when making a risk/return scatter plot?
I am making a risk/return scatter plot (seen below) (from this site):
What data must be used for bonds (e.g. 3 month or 10 year US bonds)? I thought you would use this data, but if you take the years ...
2
votes
1answer
144 views
PCA on a portfolio of spot and forward contracts
I have a portfolio of spot and FX forwards on various currencies all based to AUD. I need to able to quantify how the changes in amount, tilt and curvature of the AUD curve would impact my p/l.
...
1
vote
1answer
79 views
Averaging Correlation Matrices based on different Periodicity
Averaging correlation matrices based on different models, but the same data, is commonly done. If the correlation matrices are derived from return series, is it proper/common to also average the ...
1
vote
2answers
133 views
Financial Statement Analysis [closed]
So i have just completed a beginners course on understanding financial statements. As part of the final assignment, we are supposed to pick a real company, study its financial statements and conclude ...
4
votes
0answers
84 views
Why are thousand-ish-factor vendor risk models not extremely overfit and inaccurate?
Many vendor risk models have many hundreds, or even thousands of factors (many of which are highly correlated with each other). Underlying all these risk models is some sort of covariance matrix in ...
1
vote
0answers
76 views
Risk-aversion parameters estimation in utility functions
Are there any "typical" risk-aversion parameters for power utility function and exponential utility function? Once I've seen an articel, in which author stated that for extremely risky person gamma in ...
4
votes
1answer
80 views
Bregman Mean of a Distribution
In a paper (link), author writes, given that $\gamma:R\rightarrow \bar{R}$ is a convex function, $dom_{\gamma}:=\{x\in R:\gamma(x)<+\infty\}$ is a non-empty open set and $\gamma$ a closed proper ...
1
vote
0answers
66 views
Philosophy of Financial Risk [closed]
Do you think that there exists a framework on that you can build risk measures?
What are the necessary and desirable properties of a risk measure? (necessary means compulsory and desirable means more ...
