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Questions tagged [risk]

The possibility that a negative event (such as a loss) will happen.

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40 views

Philosophy of Financial Risk

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 ...
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1answer
30 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 ...
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44 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 ...
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1answer
34 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 ...
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1answer
83 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 ...
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1answer
37 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 ...
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3answers
165 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 ...
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2answers
49 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} = \...
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1answer
124 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' ...
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1answer
87 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?
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0answers
45 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 ...
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0answers
27 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 ...
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0answers
46 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?
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42 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 ...
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3answers
92 views

How to estimate market based PD and LGD for small enterprises?

I am estimating CVA/DVA for derivatives... How to estimate PD and LGD (or RR) based on market data for the small enterprises, if there is no external rating for them and they don't have bonds or ...
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0answers
39 views

Does it make sense to subtract VaR from spot shocks?

I have a model to compute the Event Risk (in dollars) from a shock to the spot price of an asset. I also have the 10-day VaR PnL for the same assets returns. These two numbers are then aggregated to ...
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69 views

Whats the big deal between volatility and the risk free rate?

I am trying to understand asset price volatility. Many of the news articles I read link how stock market volatility is linked to asset price volatility? To give an example, in Mike Mackenzie's (...
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4answers
91 views

How to test the linearity assumption of a model?

Let's say I want to have a model that projects income over a stressed period. I have a marked-to-market component that shows the P&L of trading book positions during this stressed period. Along ...
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1answer
31 views

Literature on return sensitivy in respect to: growth, risk and profitability

I am currently writing my master's thesis, wherein I am looking for supporting literature. Specifically, I wanted to know if there had been any research relating to how the: growth, risk and ...
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0answers
86 views

Reference request for research on the maximum drawdown **ratio** (NOT value)

Let's suppose the asset price process follows a Geometric Brownian motion $S_t \sim GBM(\mu, \sigma),\,t\ge 0$, and define the two process: $$ \begin{align} \text{MSF}_t &:= \max_{\tau\in[0,t]} S_\...
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37 views

Transformation of random variables and second-order stochastic dominance

Suppose $X$ and $Y$ are two random variables where $X$ SOSD* $Y$. Let $g(\bullet)$ be a monotonic function and $X'=g(X)$ and $Y'=g(Y)$. Under what conditions of $g$ is $X'$ SOSD $Y'$? I know if $g$ ...
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1answer
51 views

Markowitz portfolio risk with PV01 instead of variance

As the PV01 ($= dpdy \times notional$) of a bond is a measure of its risk, as well as its price return variance, could we measure the risk of a bonds portfolio with the Markovitz portfolio variance ...
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3answers
89 views

How to determine the optimal start capital for a strategy?

Suppose my strategy generates a stream of daily profits distributed like 𝒩[μ=1€, σ=10€]. Intuitively, if I trade with 10€ start capital: I could very well be ruined on the first day, if the first ...
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30 views

How to reasonably aggregate returns across both different assets and different time-horizons?

This might be a somewhat open question, so any suggestion of improvement is welcome. Suppose at time $t=0$, we have $N$ different assets whose weights are $w_1,\cdots,w_n$ ($\sum w_i = 1$), and they ...
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1answer
270 views

Calculate unsystematic-risk of a firm in a regression with SD or R2?

i'm studying for a finance exam and i can't answer this question. It is asking me to calculate the unsystematic risk of firm A and i have the following information: Return firm A: 0,1% + 1,...
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2answers
65 views

Imputation of missing returns

I'm trying to calculate a historical VaR for a portfolio of futures, however there are certain days for which some assets are missing prices. Since the portfolio consists of many spread positions, the ...
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1answer
88 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
46 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
182 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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2answers
68 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
299 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
41 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
112 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
94 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
484 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
108 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
60 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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1answer
154 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
395 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
110 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
126 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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86 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
673 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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0answers
50 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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1answer
94 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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1answer
214 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
273 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
35 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, ...
2
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1answer
375 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
156 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 ...