Questions tagged [risk]
The possibility that a negative event (such as a loss) will happen.
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1answer
15 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 ...
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0answers
31 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
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1answer
62 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 ...
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0answers
39 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
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1answer
71 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.
...
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1answer
63 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 ...
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2answers
89 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 ...
3
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0answers
63 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 ...
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0answers
41 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
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1answer
76 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 ...
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0answers
59 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
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1answer
66 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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1answer
76 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
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1answer
44 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
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1answer
84 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
44 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
253 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
50 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
132 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
90 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
47 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
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0answers
28 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
47 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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0answers
45 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
111 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
41 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 ...
4
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0answers
72 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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votes
4answers
94 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 ...
2
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1answer
36 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 ...
4
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0answers
88 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_\...
2
votes
0answers
39 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 $g$ ...
2
votes
1answer
61 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
93 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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0answers
41 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 ...
0
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1answer
357 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
72 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 ...
2
votes
1answer
90 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
60 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 ...
2
votes
3answers
191 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
74 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 ...
0
votes
2answers
369 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
129 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 ...
1
vote
1answer
105 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 ...
-1
votes
1answer
565 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 ...
2
votes
2answers
112 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 ...
2
votes
0answers
64 views
Statistical methods to compare two financial series data
I have two financial series data, x and x', where x' was formed form ...
1
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1answer
170 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 ...
2
votes
1answer
486 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: ...
2
votes
1answer
124 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 ...
