Questions tagged [risk]
The possibility that a negative event (such as a loss) will happen.
494
questions
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30 views
Where can I get historical updates to equity risk models (e.g. Barra)?
In risk models (such as Barra), new factors are added over time, and the model structures are also changed over time. I hope to get as much information on historical changes as possible.
Apart from ...
0
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1answer
64 views
Non financial risk management
I am looking for some discussion papers, research insights on the Digital risk for fintech companies, bank etc. what they should. consider when offering their services (banking, lending etc.) ...
2
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2answers
116 views
Dependence between Credit Default Risk and Credit Spread Risk
I am trying to understand the difference and similarities between Credit Spread Risk and Credit Default Risk.
Here is brief (and not all too precise) definition.
Credit Spread Risk: Losses due to ...
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0answers
32 views
How to use CAPM model to calculate expected value of portfolio?
Let's assume that vector $(R_1, R_2, R_3)$ has multivariate normal distribution $N(\mu, \Sigma)$ where $\mu = (2, 6, 4)$ and
$$\Sigma^{-1} = \begin{bmatrix}
2 & 2 & 2\\
2 & 4 & 4 \\
2 &...
1
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1answer
182 views
Realized Variance (realized volatility)
I'm confused about realized variance. I roughly know the theory around Ito Calculus and quadratic variation and integrated volatility so I understand what realized variance measures (even though as ...
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0answers
12 views
Capital Charge or Capital add on for Concentration risk using Model-free measure standardised HHI (Herfindahl Hirschman Index)
I am looking to calculate the Capital Charge or Capital Add on for Concentration risk using standardised approach using HHI
Below is the HHI index calculation
What is procedure to calculate the ...
0
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0answers
46 views
Sharpe ratio differs from Tradingview
I tried to backtest a simple strategy on TradingView, it made 6 trades with these results:
Now I want to calculate Sharpe ratio using definition provided by TradingView.
So, my daily returns(...
1
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0answers
55 views
Interest rate risk calculation for Banking book
There is a detailed discussions on the Interest rate risk for Banking book. For Floating rate bond, this states like below -
such positions generate cash flows that are not predictable past the
next ...
1
vote
1answer
59 views
Joint probability of default
Had a couple of questions from Jorion's FRM book (5th edition, page 438, Table 18.2 shown below). The book has a very stylized example as shown in the table below. The example shows how to calculate ...
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0answers
22 views
Estimate of loan risk due to change in income
Disclaimer: despite working at a bank, my background is in data science and not in quantitative finance. I'm very likely to miss certain technical terms of the domain and if that's the case, I'd ...
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0answers
30 views
Statistical Inference of Variance Risk Premia
Good afternoon,
I am currently following Carr and Wu (2009) to compute variance risk premia from options written as (RV-EV)*100 for the payoff of a long var swap position.
Now I want to see whether my ...
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votes
2answers
52 views
What happens if my risk factor caught by statistical risk model using PCA turns out to be totally different from other PM's risk factor? [closed]
In order to explain systematic risk we use risk factors and I've learned that since they try to explain 'systematic' risk, risk factors are relatively well-known.
However, what happens if the risk ...
2
votes
2answers
98 views
Deriving the risk-aversion coefficient
By considering the parametrised formulation of the mean-variance criterion by Markowitz, the risk aversion coefficient $\lambda$ can be derived as follow.
As suggested by Arrow and Pratt, given the ...
2
votes
0answers
80 views
What are some advanced methods for bond risk transformations?
Consider a portfolio of bonds within a given yield curve (e.g. Gilt curve), consisting of positions in every bond in the curve. I'm looking for ways to transform the risk of the portfolio into ...
1
vote
1answer
77 views
Equivalence of Standard Deviation and Variance as a risk measure - WRONG?
In Modern Portfolio Theory, I often see that people seem to view Standard Deviation and Variance as equivalent. Example from Markowitz himself:
"Thus far I have used the standard deviation ...
1
vote
1answer
69 views
VaR and Expected Shorfall estimations with negative shape parameter of a GPD (Extreme Value Theory )
So im trying to replicate an code from the Quantative Risk Management Book (https://github.com/qrmtutorial/qrm/blob/master/code/09_Market_Risk/09_Standard_methods_for_market_risk.R). But when i try a ...
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0answers
35 views
Implications of modeling operational risks without frequency distribution
When modeling operational risk, the Loss Distribution Approach (LDA) is widely used. Usually, we model the loss frequency distribution and the loss severity distribution and then aggregate both to ...
2
votes
2answers
102 views
Does “risk premium” imply a difference in expected value?
I'm trying to understand the term "risk premium". I keep seeing statements like
this (from
Investopedia) "A risk
premium is the investment return an asset is expected to yield in excess ...
9
votes
2answers
771 views
Knightian uncertainty versus Black Swan event
I struggle to understand the difference between Knightian uncertainty versus Black Swan event. If I understand at least the basic premises, both views say that uncertainty is different from risk, and ...
0
votes
1answer
61 views
Estimating delta of VX futures to S&P 500
I'm trying to think about the right way to estimate the delta of a VX contract to the S&P 500. VX futures are on the VIX index, which is a basket of S&P 500 options. By extension, VX and ES (E-...
1
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0answers
319 views
FX Delta of a cross currency basis swap
I would like to understand in which case there is a presence of FX delta risk factor when trading a Cross-currency basis swap.
By FX Delta, I mean the sensitivy of my swap PV with respect to FX Spot ...
0
votes
2answers
77 views
10-day VaR for a portfolio
So, Bank ANZ owns a portfolio of options on the USD/GBP exchange rate. The delta equivalent position of the portfolio is GBP 56.00. The current exchange rate is 1.5, with a daily volatility of 0.7 ...
0
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1answer
53 views
Calculation of Regulatory Capital
As per my understanding, the Regulatory capital for a Financial institution is calculated as sum of ...
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0answers
87 views
Portfolio Risk Contribution
I came across a paper that shows calculations for two types of portfolio risk contribution. The first shows "Asset risk contributions" and the second shows "Correlation-weighted asset ...
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4answers
113 views
Where can I find a current tail risk indicator?
The definition of tail risk (risk of 3-standard deviations movement) seems to imply there would be a current market indicator for this.
Is there such an indicator available somewhere?
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2answers
165 views
The best “risk measure” for an investor who does not want to lose any of his seed money
Question
There is an investor who is afraid of losing any of his seed money (initial investment).
Variance of investment returns is not a problem to him. He is willing to take variance as long as he ...
3
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0answers
50 views
What is relationship Risk,Market Price of Risk and it's sign?
Now I'm studying this textbook ( Fixed Income Securities by Veronesi ).
But this page gets me some trouble.
I know that yield and Bond Price have negative relationship. But in this image, it says ...
1
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1answer
188 views
Monte Carlo simulations of correlated stocks by Geometric Brownian motion
I am trying to simulate using a Geometric Brownian Motion process three autocorrelated stocks.
In particular, I need to simulate three different matrices with 1000 scenarios each using a Monte Carlo ...
1
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0answers
79 views
Show that portfolio's percentage contribution to loss (PCL) equals PCR (risk)
I came across this question during self study on a quantitative book (Question 3.6 on Page 75 of Quantitative Equity Portfolio Management: Modern Techniques and Applications By Edward E. Qian, Ronald ...
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0answers
35 views
Is there no fix to improving portfolio risk estimation under small sample size?
When asked if copula are needed to calculate portfolio Value-at-Risk, it is said that "You can use historical method if you have sufficiently enough data". But actually copula are also ...
1
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1answer
68 views
Risk-Neutrality: Discount factors of the $P$ world according to risk preferences?
I am coming to terms with the connections between the so-called $P$ world and the $Q$ world. In my understanding, the risk-neutral measure $Q$ induces a probability space under which investors are ...
1
vote
2answers
74 views
Industry or academic standard frequency to report the return, standard deviation, and Sharpe ratio?
Everyone (funds, banks, academics, financial information sites etc.) reports the annualized return, standard deviation, and Sharpe ratio. Yet we never get to know what the basis of their computation ...
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1answer
49 views
Why is standard error used to show diversification effect for unsystematic risk?
quite long text incoming, sorry for that: While reading a corporate finance textbook, i came across a section describing the effect of diversification as well as the systematic and unsystematic risk. ...
3
votes
1answer
199 views
Are momentum returns negatively skewed?
In the academic literature, I found that momentum returns are negatively skewed (e.g. Daniel and Moskowitz, 2002). As far as I understand, this usually happens when the "past losers" rebound ...
1
vote
3answers
376 views
Approximating Sharpe and Sortino ratios from Exponential moving averages
So I've been studying the paper "Learning To Trade via Direct Reinforcement" Moody and Saffell (2001) which describes in detail how to use exponential moving estimates (EMAs) of returns at ...
1
vote
1answer
93 views
Portfolio vs individual security Sharpe and Sortino ratios
For an individual security calculating it's Sharpe and Sortino ratios is straightforward.
What I'm curious about is the following:
Let's say I have a portfolio of several securities, which is a ...
0
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0answers
45 views
Multi-period Basel/Vasicek formula
I need to apply Basel/Vasicek formula to a 20-years horizon, both from a 20-years cumulative perspective and year-on-year basis.
Please find below the formula of the Basel Capital (ie. unexpected loss)...
0
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2answers
460 views
Why is portfolio optimization a convex problem if variance is concave?
Variance is concave, so portfolio risk must be too.
The mean-variance model employs quadratic programming to optimize (minimize) portfolio risk. My understanding is that quadratic programming requires ...
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votes
1answer
55 views
Good ways to select best decision among N decisions, each with a profit/loss distribution? [closed]
I'm working on a problem where an asset owner (e.g., owner of a factory, power plant, etc.) can take a number of possible decisions (say 10). Each of those 10 decisions entails certain actions, but ...
2
votes
3answers
359 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 <...
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0answers
27 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
320 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
47 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
53 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
...
7
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
67 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
87 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
37 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 ...
1
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1answer
186 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, ...
6
votes
1answer
267 views
Optimizing a portfolio whose risk is target expected shortfall
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]$$
under the constraint
$$...
