Questions tagged [risk]
The possibility that a negative event (such as a loss) will happen.
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37 views
Why Can I not estimate a CVAR from Heston Model
I fit the parameters of Heston model, using option data for SPX. Now I have the process S and P 500 is expected to follow. I make 100,000 simulations of this process and then calculate the expected ...
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0answers
22 views
Simulation VaR and CVar assuming Normal Distribution
Am I missing something?
Currently implementing a VaR and CVaR measure assuming normality of wealth value.
after executing the following script, VaR is always greater than CVaR, as expected, but ...
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3answers
70 views
Risk aversion and risk-free rates
New to finance. When I read textbook like Financial Economics by Bodie, I encountered the following idea, namely, higher risk aversion is associated with higher risk premium and lower risk-free rate.
...
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51 views
Expected Maximum Drawdown - why theory differs from practice?
I studied the formula of Expected Maximum Drawdown (eMDD) from the original article, with the intention of using eMDD to optimise my trading strategy.
However, when I validate the theoretical formula ...
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1answer
37 views
Procedures to follow when VaR model fails backtest
I was wondering what the correct procedure is to follow when a VaR model fails a backtest (either conditional coverage and/or independence tests)?
Assuming I am restricted to using a historical VaR ...
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2answers
111 views
Equal Risk Contribution portfolio scipy optimization not working
I'm trying to create a tool for an equal risk contribution portfolio,essentially following this article (https://quantdare.com/risk-parity-in-python/) but it is failing at the last step (def ...
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0answers
35 views
Are the explanatory factors for a firm's expected returns and its expected earnings/valuation multiples the same?
For example, the 3 factor Fama French model explains much of the cross-sectional variation in equity returns. Would these same 3 factors also explain the cross sectional variation in earnings/EV to ...
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1answer
66 views
Total risk from asset allocation and security selection
My company's multi-asset fund has been using risk metrics methodology to calculate ex-ante VaR and tracking error for years. Due to hardware limitation, the calculation only reflects active risk from ...
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1answer
66 views
Klein and Chow Orthogonal Transformation - Lowdin Orthogonalization
I've doing research on the orthogonal transformation in Orthogonalized Equity Risk Premia and Systematic Risk Decomposition
They borrow a mathematical technique called symmetric orthogonalization ...
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1answer
116 views
Calculate Idiosyncratic Risk?
I have basic finance background but I am trying to calculate idiosyncratic risk as measure for firm risk in my CEO gender research.
I have found the following on Alpha architect but I am unsure of ...
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2answers
106 views
How do I calculate bad debt on revolving credit?
I have a revolving credit system.
A customer purchases and then has 6 months to pay off the purchase.
i.e. Purchase for 60 in Jan and then need to pay 10 a month in Feb, Mar, Apr, May, Jun, Jul.
The ...
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0answers
58 views
Statistical methods to compare two financial series data
I have two financial series data, x and x', where x' was formed form ...
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0answers
55 views
Bubble detection: R package MultipleBubbles
I would like to use the R package "MultipleBubbles" with different variations of the ADF test (augmented Dickey-Fuller test). These methods should facilitate the detection of financial bubbles. For ...
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91 views
Portfolio risk analysis
I would like to ask you if somone knows how to generate risk measures (such as VaR, Beta, Drawdown, Volatility, etc...) over a Portfolio that hold positions for approximately 7 working days.
Imagine ...
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1answer
92 views
Why is the expected value of bias statistic one?
I have been reading about factor models recently. One of the ways in which the developer of these models (Barra/ Axioma) measure the accuracy of their models is by calculating the bias statistic for ...
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1answer
81 views
Calculating Total Risk and Idiosyncratic Risk for individual stocks?
I am working on a research project but am having some trouble wrapping my head around how I need to go about replicating two of key dependent variables from (Serfling, 2014).
Total Risk, defined as: ...
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1answer
89 views
Risk of Put-Call-Parity in practice
When $C+PV(K) \ne P + S_0$, it's an opportunity for risk-free arbitrage (excluding cost).
In practice, what potential risk could make the arbitrage fail?
I know that failure to build complete ...
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0answers
32 views
How to compute the portfolio risk when weights are negative?
In QMiF (p. 239) , the variance of a portfolio is defined as:
V(R) = w'Vw = w'DCDw = x'Cx
Does this formula hold if the weights are negative (i.e., short)?
For example, if I have a 5x5 covariance ...
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0answers
65 views
What's the advantages of $EVaR$ over $CVaR$?
$CVaR$, which is short for Conditional Value-at-Risk, has long been accepted by both academe and practice as a good coherent risk measure. Entropic value-at-risk ($EVaR$) is a comparative new coherent ...
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1answer
241 views
Absorption ratio by Mark Kritzman
In Principal Components as a measure of systemic risk, the author Mark Kritzman defines absorption ratio (AR) as the fraction of the total variance of a set of asset returns explained or absorbed by a ...
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43 views
Measuring size risk in CAPM. How one could go about?
I am using valuation methods (e.g. CAPM) in order to measure some projects "baseline" return. I'm not using these measures for stocks returns, but to evaluate specific projects (e.g. dam constructions)...
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24 views
Calculating Flat Price Risk for Physical Commodity Trades
I've been reading Craig Pirrongs Economics of Trading Firms published by Trafigura:
https://www.trafigura.com/media/1364/economics-commodity-trading-firms.pdf
Very informative read. The point I have ...
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18 views
How do I prove that every point on the CML (capital market line) has the same RAP (risk-adjusted performance)?
Every point on the CML can be an optimal portfolio when combined with the according riskaversion factor (which creates a unique point on the CML where utility is maximized. But how do I proof that ...
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1answer
112 views
What is the industry standard way of calculating and annualizing performance metrics?
Say I am looking at a performance report for a hedge fund manager who trades mostly equities, and they provide me a list of monthly returns for the past 5 years. What is the industry standard way to ...
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2answers
147 views
Risk Parity / Equal Risk Contribution with Tail Risk Measures
Risk Parity or (synonymous) Equal Risk Contribution is an approach to portfolio construction which could work in theory with a broad class of risk measures. Yet, all references I have found so far ...
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0answers
25 views
z-score of an active return with a no-volatility benchmark
I don't know how to approach the problem I am having. Basically, the statement I am trying to make is: the fund's return is X standard distribution away from the mean.
Normally, for a single fund, ...
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1answer
298 views
Calculating beta to market
Let's say we want to compute beta to S&P500 of a portfolio, using 3 years of weekly returns, as of today. We would take each stock in the portfolio and regress the weekly returns of that stock ...
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0answers
42 views
Market Risk - Trading and Banking book in light of Basel III
I can not understand whether Basel III (in the part of market risk) applies both to Trading Book and Banking book or just to the first one.
I have read that for what concerns Banking book you only ...
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2answers
63 views
Why do par-yield shifts grow faster across the curve than spot-rate shifts when looking at key-rates?
Consider the following 10y key-rate shifts of bond par yields and its implied shift of bond spot rates:
Assume we have the key-rates for 2y, 5y, 10y and 30y.
The y-axis is in basis points, and the x-...
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0answers
34 views
Cramer-Lundberg: Adjustment coefficient does not exist
The question is about Ruin theory and the Cramer-Lundberg model.
I am wondering if there is an example of distribution where the MGF is finite, but the adjustment coefficient does not exist.
Can you ...
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1answer
67 views
Using Normal Distribution to forecast active return
I wanted advice on how to go about forecasting active return via a standard normal distribution,
The asset is a security with annual volatility of 6%. The benchmark is a 5% annual return with 0% ...
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1answer
80 views
Sigma moves - annualize return or no?
This might be a very simple dumb question. But when you look at a security's annualized volatility over a 3 year period, assuming the security has an annualized vol of 5% and the drawdown over three ...
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1answer
49 views
Variance covariance matrix - number of periods required
Hi I am reviewing the example of Barra risk model in the following document page 23 there is the statement:
"Estimating a covariance matrix for, say, 3,000 stocks requires data
for at least 3,...
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1answer
81 views
Independence of initial wealth for Constant Absolute Risk Aversion
Suppose a consumer's preference over wealth gambles (lotteries) can be represented by a twice differentiable Von Neumann Morgenstern utility function. Show that the consumer's preference over gambles ...
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1answer
56 views
Value-at-Risk and dividend payments
How should dividends be considered when computing Value-at-Risk for a stock portfolio using Historic data.
To simplify let's consider a very simple portfolio of one long position on a stock. My VaR ...
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1answer
60 views
Calculating Expected Shortfall of combined portfolios
So I am reading lecture notes here:
https://courses.edx.org/c4x/DelftX/TW3421x/asset/Week3_var_3_slides.pdf
The example is this:
We have two independent portfolios of bonds. They both have a ...
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16 views
Interest risk and credit risk calculations for fung and Hsieh model
I'm running the Fung and Hsieh multifactor model (2004) for European data. I have used the ln returns based on monthly prices (in Euros) from datastream, and I had a few concerns:
1. for interest ...
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1answer
37 views
Knightian Uncertainty Iff Bayesian Probabilistic View Point
If an investor operates under knightian uncertainty, does that investor then have a Bayesian viewpoint on probability implicitly, and vice versa? Has this been answered or do I have a poor ...
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1answer
59 views
Creating riskless portfolio in black scholes
$$\begin{align}
d\pi &= \theta dV + dS
\\[3pt]
& = (\theta \partial V/\partial t + \theta \mu S \partial V/\partial S + \theta S^2 \sigma^2 \partial^2 V/2\partial S^2 +\mu S ) dt + (\theta \...
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122 views
How do I calculate total risk of a portfolio with a beta, unsystematic risk percentage and market standard deviation?
I've been given a portfolio that contains 5 stocks, with each stock having a $\beta = 0.5 $, unsystematic risk of 25% and $\sigma_m = 20% $%. How would I go by calculating the total risk? There is no ...
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1answer
215 views
Semivariance calculation (downside deviation)
what is the accurate formula for semivariance?
I see two versions up to now:
this version which considers as N (denominator) all the numbers over/under the mean-or any other number. This is the ...
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0answers
39 views
How can I find what Loss Given Default to use
I want to come up with the appropriate loss given default for a commodity derivative in my CVA calculation. would anyone know where I can find this information?
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2answers
188 views
What is time-varying risk premium? Forecasting stock returns
I am trying to understand the concept 'Time-varying aggregate risk premium'.
Here is an extract from a Forecasting book, written by Rapach and Zhou,
"However, rational asset pricing theory posits ...
1
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1answer
48 views
An ad hoc portfolio optimization scheme
Say at each time $t$ I have a covariance matrix for the next period. Call this $\Sigma_{t+1}$. If I choose portfolio weights $w$ to minimize the variance, subject to the constraint that $\sum_i w_i = ...
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1answer
110 views
What is the name of this VaR calculation strategy?
Here's a question on a passage from this paper I'm reading. Here's the quote:
Given the vector of portfolio weights $w$, and the estimate of the
conditional variance, $\Sigma_{t,k}$, the ...
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1answer
113 views
Risk Management methods for Stock portfolio with ~30 stocks
What is ideal Risk Management method/methods s for stock portfolios with 25-30 stocks and around 50.000 USD invested in those stocks. Every stock bought will be kept in the portfolio for 1 to 12 ...
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1answer
143 views
conditional probability of default
I would like to ask the following question.
I would appreciate if someone could help me out.
On what argument is based that states that conditional default rates ( loans of corporate borrowers) ...
2
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1answer
236 views
Total Return Swaps and Borrow Cost Relationship
If an investor is long a Total Return Swap (TRS), they get the total return (ie, including dividend) performance and usually pay LIBOR minus a spread. This spread should trade ...
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0answers
27 views
Choosing the DoF for a t-copula when copulafit doesn't work
I'm currently writing my Master thesis where I investigate some different methods of dimension reduction regarding Value at Risk for very large equity portfolios.
My current data set contains of 5000 ...
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1answer
107 views
Portfolio risk estimation through variance covariance matrix
Is the portfolio risk calculated through variance covariance matrix an estimate of the current risk of the portfolio? Suppose I am using the weights as of today, and I have estimated the variance ...
