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Questions tagged [risk-management]

The identification, assessment, and prioritization of risks, followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities.

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122 views

Kelly criterion for normally distributed returns

If the returns of my strategy are distributed like 𝒩[μ,σ], what is the optimal fraction of capital to invest in each single trade, as a function μ and σ? Help! PS. I know that normally distributed ...
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33 views

Full Revaluation vs Factor-based Model for risk management

I am looking for literature on comparison of these two approaches. It looks like many places are using some type of Factor-based Model (Barra, Axioma, Northfield, etc.) for risk management purposes. ...
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Calculating Prepayment and Actual Term of Loan Portfolio

I'm attempting to calculate the prepayment speed of group of loans (ex:60-month auto loans) and determine the real term length (60 month term repaid in 49 months). I also have a large amount of ...
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3answers
80 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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29 views

Reference: Journal on Risk Measures

I'm wondering, where can I find a list of the journals which specialize (partly) in publishing risk-measure related topics? If no such standard list exists, what are some top and mid-tier journals ...
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1answer
91 views

Which market developments are we likely to see within the next years?

I am working on an analysis to estimate financial risks, especially for pension funds. More specifically, I am trying to define some stress scenarios which could have an affect on the solvency of a ...
2
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1answer
69 views

Construct a butterfly interest rate portfolio to eliminate PCA exposures

I have data from 2012 to 2016 for interest rates whose term range from 2 month to 30 years, a total of 10 Principal components can be calculated. Then I want to construct a portfolio, $$WFLY = w_1 *5Y ...
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29 views

GARCH(1,1) and Value at Risk: Rolling window or non-overlapping samples

Currently studying on financial risk management. I want to test different methods of VaR estimation. I want to model volatility using a GARCH(1,1) model. My question is what should the size of the ...
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2answers
75 views

Position Sizing Algorithm for Multi Asset Portfolio

I'm currently working on a position sizing algorithm for my trading system. By combining fixed ratio money management and setting the stop loss based on the current ATR value I receive reasonable ...
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1answer
39 views

When estimating P/L through greeks based on zero rate curves, does it contain time (theta) PNL?

Suppose on day 1 we calculate a delta wrt. a point on an interest curve of zero rates, we then let 1 day pass, recalculate the interest curve of zero rates with the same bonds (though now day 20 bond ...
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2answers
143 views

Hull White help needed

I've been trying to calibrate Hull-White 1 Factor & 2 Factor model using Caps but I've some major doubts about my methodology, and would really appreciate some help. I am using these formulas ...
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1answer
65 views

How is internal risk transfer different than moving from banking book to trading book?

Reading the FRTB paper, I'm not clear on what an internal risk transfer is. To me, it sounds like moving an asset from the banking book to the trading book or vice versa.
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1answer
130 views

Risk management tools for long term Gamma/Vega sellers subject to margin calls

TL;DR: if you're a retail investor and you systematically sell long-term vertical spreads while staying Delta-neutral, your main risk comes from Vega and the Gamma of opening gaps that can throw you ...
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2answers
78 views

How to calculate the multi-asset class portfolio vega?

I am viewing a risk report of a hedge fund and the portfolio vega seems to be a plain summation of the vegas of the different asset classes the fund invests in (i.e. Equity, Credit etc) As far as I ...
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1answer
80 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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0answers
53 views

Pricing default risk in cryptos

I'm looking to figure out how to price "insurance" against a counter-party defaulting in an OTC cryptocurrency transaction. I think the first measure would be to calculate VaR? I'm planning on ...
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0answers
59 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
97 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
41 views

Risk attribution model without weights data

I was just wondering if there are risk attribution model that does not require the asset weights data. It appears that most risk attribution models do require asset weight data. I am looking for model ...
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0answers
40 views

Calculating daily underlying move from options volatility?

My broker has provided a risk report that shows our options book shocked at various standard deviation moves of the underlying. Their report has the future at $66.64, ATM Vol at 23.74% with 2 days ...
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0answers
55 views

Constrained Optimization for performance attribution

I am trying to perform constrained opmitization for portfolio performance attribution analysis. Specifically, I am trying to determine the impact of sectors performance on the S&P 500 index. Min ...
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0answers
88 views

Backtest Portfolio Analysis

I actually finished an algorithm that i can use to extract all the trades for each stock (each file for each stock). Essentially, i run this code on Excel where there are the input about one stock, ...
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0answers
51 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 ...
3
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1answer
468 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
53 views

CreditGrades model calibration and initial values

Currently doing a project on structural models, and I want to apply the CreditGrades model. My question is what values are the parameters going to take, in order to update the implied probability of ...
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0answers
38 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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0answers
44 views

Jump diffusion model and Firm probability of default

I want to examine whether corporate events affect firm's probability of default. My initial thought was a jump diffusion model, although in the literature, the only work I found, involved CDS market ...
4
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1answer
83 views

Using option pricing methods to model real asset liquidity

Liquidity risk (in the sense of asset exit risk) is warranted on investments that may not be easily divested at the going market or fair-value price. I am looking at a portfolio of private assets ...
4
votes
2answers
192 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 ...
2
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0answers
31 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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0answers
22 views

Altman Z-Scoring and unknown variables [closed]

Assume we have the known Altman Z-Scoring model $Z= 0.012X_1 + 0.014X_2 + 0.033X_3 + 0.006X_4 + 0.999X_5$ But the variables $X_i ,i=1,2,3,4,5$ are unknown. Is it statistically correct to make an ...
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0answers
14 views

DCCfit speed up formula

I am estimating the covariance matrix by using GARCH DCC model with function dccfit from package rmgarch. My code is something like: library(rugarch) library(rmgarch) ...
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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
77 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
71 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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0answers
13 views

question concerning SMM and CPR in prepayment model

assume that I have a monthly time series of SMMs (single-month mortalities) $(SMM_t)_{t \in \{1,\dots,T\}}$. My goal is to determine one single CPR (constant prepayment rate) from that. I see two ...
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0answers
113 views

Stop loss strategy using options

I normally trade stocks using Robinhood, and use a simple stop loss strategy for 2:1 P/L trades. I recently got invited to use their options via their phone app, and was interested in trading some ...
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1answer
463 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
44 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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1answer
81 views

Where can I find free security and derivative pricing software?

I am looking for a free derivative valuation software that can compute value and sensitivities. It should be easy and straightforward to use, e.g., I can get results by supplying market data and trade ...
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0answers
26 views

Goodness of fit test for different classes of copulas

The question is: how the goodness of fitting for different copula-function can be compared. I can compare them by AIC criteria since they belong to the same class (for example elliptical). But how can ...
4
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1answer
67 views

Measuring interest rate sensitivity for illiquid private investments?

There seems to be surprisingly little literature on this topic. If you had a portfolio consisting of an unlisted illiquid private asset class (eg private real estate, direct infrastructure or private ...
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0answers
53 views

Portfolio Duration Immunization Strategy Intuition

It makes sense if we think of portfolio duration with duration, say 6, as a 6 year zero bond which you will receive the amount at maturity no matter the interest rate change. But if we define duration ...
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1answer
115 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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3answers
110 views

Structured product sellers and div swaps

From a Barclays primer on dividend swaps: We note that for shorter periods of time, implied dividends can be more volatile than spot as dividends often trade away from ...
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0answers
62 views

Methods to generate multiple yield curves

I need to run a model to value bank mortgages using a Monte Carlo simulation, where mortgages will be valued based on future interest rates. To that end, I build a yield curve taking rates of US ...
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0answers
119 views

Multiple regression on hedge fund returns

I have a data set of long/short equity hedge funds returns and their associated benchmarks (market indices). I need to form multiple regression on the fund returns using the benchmarks returns as ...
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0answers
24 views

What are the key risks to manage in a option on a vol target index?

What are the key risks to manage in a option on a vol target index from trade date to maturity?
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3answers
117 views

Does longer time horizon necessarily imply reduced risk?

Is there a mathematical/statistical basis for the commonly-held belief that the longer certain assets (particularly equities) are held, the less risk the investor is exposed to? Alternatively, is ...
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0answers
42 views

VaR decomposition of non-normal portfolio by g-and-h distribution

According to Doowoo Nam (2013), VaR of non-normal portfolio returns approximated by g-and-h distribution can be decomposed pretty much in the same way as the VaR of a portfolio with normal returns. ...