Questions tagged [risk]
The possibility that a negative event (such as a loss) will happen.
465
questions
2
votes
3answers
246 views
Backtesting of Risk models
I am wondering if there is any difference between 2 terms call model backtesting and model validation from the perspective of <...
0
votes
0answers
22 views
lot size formula for cfd and forex based on risk percentage
I have a question regarding the calculation of the lot size for cfd and forex instruments when we have a risk amount as a percentage of the balance.
So how to compute the lot size to trade knowing the ...
2
votes
2answers
177 views
Cashflow Risk vs Discount Risk
Studying asset pricing, I often hear the terms cashflow risk and discount risk but I'm not sure what they mean? The Campbell/Shiller (1988) decomposition includes cashflows (future dividends) and ...
3
votes
0answers
30 views
ESG risk factors
In the context of EU action on sustainable finance, the European Commission has initiated a series of regulations in order to achieve the goals of Paris Agreement on sustainability.
One of those ...
0
votes
1answer
35 views
Textbook about methodologies for computing margins (TIMS and SPAN)
I'm reading and trying to understand TIMS and SPAN methodologies for margin calculations. In the internet I found these 2 great resources and that's what I'm using to get familiar with things:
TIMS
...
4
votes
3answers
1k views
Which is riskier: a call option or the underlying?
From Joshi's Quant Interview Questions and Answers:
What is riskier: a call option or the underlying? (Consider a one day time horizon and compute which has bigger Delta as a fraction of value).
I ...
2
votes
1answer
61 views
liquidity of a portfolio of options
In the asset management industry, many reports contain liquidity metrics such as the no. of days to liquidate 95% of a position, based on a certain participation rate.
If that position is a stock or a ...
-1
votes
2answers
75 views
Is there a way to formulate a Martingale series that will never explode?
Martingale's betting method can be seen here:https://www.investopedia.com/articles/forex/06/martingale.asp My question is if there is a way to put a non-exploding martingale,
[There is one attempt to ...
4
votes
0answers
25 views
Is there a clear mathematical statement of what problem Hierarchical Risk Parity is solving?
Prado's paper is really just an algorithm for solving some inverse problem. Has anyone seen a clear statement of that inverse problem? Or do you know how to write it simply?
The first step is just a ...
0
votes
1answer
44 views
Risk-Weighted assets and Risk Weight
I am not really sure I understand the meaning of Risk weight defined as
RW = RWA/EAD,
where
EAD = Exposure at Default
RWA = Risk-Weighted assets
From a bank's perspective: If I have two portfolios, ...
5
votes
0answers
124 views
Optimizing a portfolio under known risk
I want to maximize the return of a $n$-asset portfolio under known risk:
$$\max_{\{w \in \mathbb{R}^{n}|w_{1}+...+w_{n}=1\}} \; \mathbb{E}\left[\sum_{i=1}^{n}w_{i}R_{i}\right]$$
under the constraint
$$...
0
votes
1answer
47 views
Ratios or combinations of risk measures
In finance, alternative risk measures such as value-at-risk (VaR) and GARCH are introduced as replacements to standard deviation volatility.
Is there any application or value where several risk ...
0
votes
0answers
6 views
Valuating risky annuities. (Default & Recovery)
As the topic says, I want to price a risky annuity. There are 2 things that I'm uncertain of.
Whether the probability of default is correctly defined.
Value of payments in the event of default.
In ...
0
votes
0answers
15 views
scenario-specific covariance matrices for minimum regret portolio allocation
I am trying to follow the paper here https://www.wiwi.uni-siegen.de/banken/dokumente/2._szenariobasierte_aa_englisch.pdf and implement the minimum regret approach. In particular, the decision under ...
1
vote
0answers
46 views
Why is Calmar ratio considered not to satisfy monotonicity?
We have the following definitions
$\text{Gain-loss ratio} = \frac{E[X^+]}{|E[X^-]|}=\frac{E[X^+]}{-E[X^-]}=\frac{E[X]}{-E[X^-]}+1$;
where $X$ are the returns, $E[X^+]$ is the expected gain, i.e. $E[X|...
1
vote
2answers
84 views
Definition of drawdown
Say I am considering the entire time horizon, is max drawdown what I've drawn in blue, or what's in purple?
Likewise, how about the current drawdown for the period in black (in practice, I am asked ...
0
votes
1answer
44 views
how to relate risk aversion and sharpe ratio in optimisation
I am trying to optimise the following:
U(w)=wā²Ī¼āĪ»/2wā²Ī£w
which is the typical risk aversion problem.
I would like to set lambda in order to have the max sharpe but I cannot find in literature what is ...
0
votes
2answers
45 views
Binomial model and delta hedging
I've got a question about theory which is probably a one line answer. I use to understand it but I'm stuck right now.
In the Binomial model, we define the progression of the price as:
$$
S_k = S_{k-...
-1
votes
5answers
204 views
Why worry about fat tails, if you can use stoploss?
Sorry this might sound a silly question, but -humbly- I don't understand why models assume that returns range from [-ā,+ā] instead of [-stoplimit, +takeprofit].
A common objection to most models is "...
0
votes
0answers
34 views
Sign of DV01 for FRA and IR Swap and Their Relationship
I'm confused with the sign notion (positive or negative) of DV01 for FRA and IRS.
Say if I short FRA and also long IRS (pay fixed receive Float) with same underlying, does that mean both dv01 of these ...
0
votes
0answers
17 views
Results of Fama french three factors model and Fama MacBeth cross sectional regression
I am doing research work on āIdiosyncratic volatility and stock returnā.
I have calculated Idiosyncratic volatility with the help of Fama french three factor model. IV is defined as the standard ...
1
vote
0answers
40 views
Results of Fama MacBeth regression
I have run Fama MacBeth cross section regression of of Excess Return of stocks on Idiosyncratic volatility, the log of market capitalization, book to equity ratio and Beta. I'm getting all significant ...
1
vote
0answers
30 views
Currency of CDS and adjustment of interest rated for country risk
I have question concered currency of the CDS spreads.
In the analysis I am conducting, I perform adjustment of interest rates for country risk (CDS could be a reference to reflect a country risk).
...
4
votes
1answer
62 views
CRRA Ultilityļ¼ simple question
for CRRA, does increasing gamma leads to increase in risk-aversion?
Looking at the curve, I think increasing gamma leads to less in risk-aversion (since the risk preimum is less). But in terms of ...
2
votes
1answer
31 views
Properties of risk aversion
What are some common properties for risk aversion?
I know the basic definition of the risk premium, absolute risk adversion, relative absolute risk adversion. Besides the basic definition, what are ...
0
votes
1answer
58 views
The ratio of upside deviation to downside deviation in portfolio weighting
I've been calling this ratio "acceleration" in my head, so I'll do the same in this post. The question is, is this relationship used anywhere and if so, how? My thought process is as follows.
Risk ...
-1
votes
1answer
79 views
Risk Neutral Pricing, a quick question [closed]
I am a newbie.
The risk neutral pricing has the following formulation:
$$P=\frac{\hat{E(d)}}{R}$$,
But the discounted expected value has the formulation of:
$$P=\frac{E(d)}{R}$$.
The text book ...
0
votes
0answers
25 views
relation between duration and credit risk
I am curious if there is a relation between duration and Credit risk measure for callable bonds. I recall seeing it somewhere but can't find the details. Credit risk measure would be sensitivity of 1 ...
0
votes
1answer
96 views
Computing covariance matrix with historical data
I have been reading Active Portfolio Management by Grinold and Khan. In the chapter about risk, they mention,
"The third elementary model relies on historical variances and covariances. This ...
1
vote
1answer
69 views
Determining Value at Risk of a Poisson distribution
If my discrete random variable had a poisson distribution with both moments say equal to 10, how can I find the Value at Risk for a 95 percent confidence interval?
I have seen that I need to ...
3
votes
1answer
60 views
Economic interpretation of Time-varying beta (systematic risk) in portfolio analysis
What is the economic interpretation of Time-varying beta (systematic risk) in portfolio analysis and the main economic difference with costant beta. I'm not interested in how to estimate it but just ...
1
vote
0answers
65 views
CVaR portfolio optimization with risk aversion parameter
I'm trying to implement the Rockafellar's function described in this paper http://past.rinfinance.com/agenda/2009/yollin_slides.pdf with a risk aversion parameter for my thesis.
The function to ...
2
votes
1answer
42 views
Incremental/marginal contribution to VaR in a simulation setting
Estimating marginal contributions to VaR in a simulation setting is apparently quite difficult (see e.g. this blog post) due to issues with sampling variability. My question is whether the following ...
0
votes
0answers
33 views
QuantConnect Strategy Metrics
I am new here and trying to write new strategies. I am a good computer engineering student working on robotics now, but I want to see the opportunities(money) in the financial fields.
Currently, I am ...
0
votes
2answers
68 views
How is the risk premium of the index estimated?
In the construction of an index model, we often use the expected return of a security, including surprises, for analysis. To calculate this, we must estimate the risk premium of the index.
Since we ...
0
votes
0answers
36 views
Advantage of copula over estimation based on historical data
It seems to me hard to intuitively understand the concept of copulas and their advantages. For example, why would it be better to estimate value at risk of portfolio by modelling its asset returns ...
1
vote
2answers
261 views
Ways most financial institutions measure risk
Does most financial institutions measure risks in terms of https://en.wikipedia.org/wiki/Coherent_risk_measure? Or are they using other/newer theoretical tools?
1
vote
1answer
40 views
Assymmetric Risk Call Option
I'm reading in Radu Tunaru's book "Model Risk in Financial Markets" and he argues that two parties in the ļ¬nancial contract do not have the same magnitude of exposure to model risk. The reason for ...
4
votes
1answer
82 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
28 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
59 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
48 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
132 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
46 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 ...
0
votes
0answers
29 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
44 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
93 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
42 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
41 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
33 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 ...
