Questions tagged [risk]
The possibility that a negative event (such as a loss) will happen.
418
questions
1
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0answers
21 views
Rate of increase of position risk problem
Beginning with no position, you start to increase your position in two assets, X and Y, which are both Gaussian distributed. You increase your position in asset X by \$4 of standard deviation per day, ...
1
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0answers
33 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, $R_{i}$...
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0answers
23 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:
...
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0answers
50 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
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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
19 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
50 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
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0answers
45 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 ...
2
votes
1answer
76 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
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0answers
39 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-θ}...
4
votes
1answer
88 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
50 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
178 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 ...
1
vote
2answers
84 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
183 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
87 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
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0answers
16 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
84 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
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0answers
46 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
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0answers
44 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
120 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 €.
I have the z-value, the daily ...
0
votes
0answers
58 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
103 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
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0answers
39 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
91 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
45 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 ...
1
vote
1answer
113 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
74 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
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2answers
125 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
68 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
79 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
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0answers
62 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 ...
2
votes
1answer
76 views
Modified Sharpe ratio
I would like to model different type of investors, hence I need to find some kind of utility functions to optimize. Apart from very abstract exponential utility function, I couldn't find any proper ...
1
vote
1answer
110 views
Prove Subadditivity - Entropic Value at Risk
Any insight in how to prove the following risk measure is subadditive?
$\rho_{1-\alpha}(X) = \inf_{z>0}\{z^{-1}\ln(\frac{E[e^{zX}]}{\alpha})\}$, with $\alpha \in ]0,1]$
I want to prove it is a ...
1
vote
1answer
52 views
Backtesting model results, but backtesting output sampled at different frequency than model output
So, I'm trying to backtest a model that computes P&L. This model pulls sensitivities on a weekly basis and applies market shocks to these sensitivities to project quarterly P&L. I want to ...
5
votes
1answer
98 views
What is the purest way to get exposure to Jump risk premia, is there a jump swap
So to get exposure to Variance risk premia one could use variance swaps, is there a equivalent security for jumps. Hedging against jump but not diffusion risk could allow one to take targeted exposure ...
1
vote
1answer
76 views
Should one calculate CVA even when exposure is negative?
I have an example, where two companies have the bilateral nature of derivative contract. Companies have exchanged collateral a number of times, so at a certain point in time each sides holds some ...
1
vote
3answers
456 views
What does Volatility Smile tell? [closed]
Could you please share your opinions about Volatility Smile? What does it tell us when it gets more convex or when its level changes over time or any other change on it. Any paper/work/blog ...
0
votes
2answers
51 views
Annualisation of Downside Deviation
Is it possible to annualise the downside deviation? If so, on the basis of what theory?
The downside deviation (DD) of a series of daily returns is computed according to the formula:
$\text{DD} = \...
3
votes
1answer
146 views
Risk-return ratio using ML default probability
I have access to a very large bond database (>20m rows) where 50% of the set are matured bonds for which a dummy variable identifies whether the bond defaulted or not. The remaining 50% are 'live' ...
1
vote
1answer
116 views
What is a counterparty risk trading desk
Can someone explains what does the above mentioned desk do?
What are their responsibilities and how do they manage them, where do they fit into the rest of the organization?
1
vote
0answers
55 views
Quantitative model for investing in ETFs [closed]
I want to build a model for asset allocation of my own personal pension in ETFs across four main asset classes: equity, bonds, commodity and property. I am familiar with Python and the basics of risk ...
2
votes
0answers
30 views
Flattening a Credit Loss Curve
I have a credit loss curve for 36 months and I want to transform that curve into a 20 months curve without changing its final loss. My credit loss vector is a % of unpaid principal balance in a ...
1
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0answers
54 views
Preferred Stock pricing model
I am trying to build a model to price a preferred stock. I want to model the dividends as random payments. I can't find any papers online on the subject. Does anyone have a reference for me?
0
votes
0answers
49 views
Risk mapping a zero-coupon bond portfolio
I'm trying to understand example 2.6 taken from McNeil and Embrechts "Quantitative Risk Management". The example consists of obtaining the risk mapping of a portfolio of $d$ zero-coupon bonds.
The ...
