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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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1answer
56 views

Time to Put or Call a Bond

I was studying putable bond and callable bond on my own, there is an exercise question that was a little confusing to me: I understand what the answer explains, but I am confused that, is a bond "...
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2answers
69 views

Why is higher the call price, the higher the price of a callable bond?

I am preparing for FRM level 2, but I ran into a question whose answer was confusing to me: In the answer, it says "all other things remaining the same, the higher the call price, the higher the ...
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35 views

Pca for Portfolio Theory

given the fact that if you take the portfolio returns for different assets in a portfolio the first principle component represents the market exposure of the portfolio and the second principle ...
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3answers
305 views

Is there a way to figure out “hot” strategies?

Apparently, short vol strategies have gotten crowded, according to the recent Bloomberg piece. When I read this, I thought how about factor based strategies -- value, growth, etc.? Aren't they ...
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1answer
78 views

Backtesting a stock scoring model

I'm working on a simple stock scoring model consisiting of 3 factors: 1.market cap 2.liquidity of the stock 3.the value at risk we defined 3 intervals for each factor and we assigned the ...
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0answers
57 views

Portfolio Systematic Risk, Breaking it down into factor % contributions

I have a portfolio (p) of N equities, with let's say weights vector (m) at the start of the calculation period. Each equity has its own set of factors (like corresponding country, industry index, etc.)...
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18 views

Formulating Deposit Rate Sensitivity to Market Rate Changes

I have historical deposit rate data for a specific bank. I want to determine the sensitivity of deposit rates to market rate changes (I'll be using Fed Funds rate). My question is, what would be an ...
2
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0answers
33 views

To price Municipal Bonds and risks I want to know the percent of unfunded pension liabilities ($3.8T) to total state and local gov liabilities

Unfunded pension liabilities keep growing and this seems alarming to both pension holders but also Municipal Bond holders. I would like to know how large this problem is to better price Munis and ...
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123 views

First principles in Finance

Every so often I hear people referring to the term "first principles". It seems to me that this term does not necessarily have a universally accepted connotation in Finance. Here is the general ...
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0answers
34 views

Manually calculating and backtesting VaR and CVaR from DCC-GARCH R

I estimated a GARCH fit to the log returns of three series (CAC 40, a french real estate index and french T10 bond yield series) using rugarch. I then manually ...
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49 views

Using transaction data to predict default of the customer

I am trying to build a prediction model that utilize the huge transaction database of all the customers of a bank. My dataset currently looks like this: ...
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44 views

Options trade - statistically expected return calculation?

I am calculating expected return for composite option strategies based on event probabilities provided by the broker. For example, consider the following spread On the left hand side we see: maximal ...
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0answers
37 views

Why not to maximize Sharpe Ratio directly when computing optimal allocation of an order?

I was reading the following paper of Engle about balancing transaction costs performance and risk: https://www.nber.org/papers/w12165.pdf He deals with finding the optimal placement of the child ...
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39 views

Mean Variance Optimization vs Risk Scaling

What would be the difference between the following. Both techniques will result is an ex-ante risk of $\sigma$. However, that would be achieved via two different values of h. I want to understand ...
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1answer
43 views

Allow drift in weights in a risk benchmark?

I am tracking the risk of portfolios using a standard 2-asset benchmark (S&P500 / Agg bond) and I want to throw a flag if the risk of a portfolio goes outside of a certain range relative to that ...
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16 views

single period security market with two assets

Consider a single period security market with two assets. Assume the current prices are There are two states at time one and the payoff matrix is 1.Suppose the investor believes that each state has ...
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0answers
41 views

Normal default probability vs forward default probability/conditional default

is the diagram correct in calculating foward PD(conditional default) ? Or should the formula be Probability of default = probability of survival x forward PD Which of this is equal to marginal PD(...
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2answers
157 views

Absorption Ratio

I'm actually trying to implement Mark Kritzman's absorption ratio (Principal Components as a Measure of Systemic Risk by Kritzmam, Li, Page and Rigobon, 2010, SSRN 1633027) using Python, but I'm not ...
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1answer
56 views

How to model the maturity term of non maturing deposit accounts

My client (bank) currently follows a naive method to model the maturity term of chequing accounts. We need to model the maturity to correctly calculate the FTP pricing of these chequing accounts. The ...
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1answer
80 views

Barra model: why standardize the fundamental risk factors?

The two main types of risk factors included in the famous Barra model are called the "fundamental factors", and "industry factors," and the thing that I do not understand is why are only the former ...
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1answer
96 views

Applying Interest Rate Shock to Equities, FX, etc

I am looking for resources on practical applications of non-parallel Interest Rate shock for a portfolio that contains different types of investments. Specifically: how to identify the tenors and how ...
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0answers
29 views

What variables are important to describe a loan dataset?

I have a dataset of loans currently paid or charged off and as the dataset is very large I would like to to do a short summary of things I would think is worth knowing about. Yet I don't know a lot ...
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20 views

Portfolio Values based on reference interest rates

How do I approach the following question? A portfolio has 100 million invested in equities. It has also transacted an interest rate derivative issued by counterparty X, which the value is 0 if the ...
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0answers
20 views

Operational Risk Loss Distribution with Insurance

** Referring to part (c) First is 5000. Am I supposed to replace the 8000 with 5000 while maintaining its probability? For the second part, which includes the cost of insurance, do I add it to the ...
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1answer
141 views

How to derive portfolio weights from risk budget

Goal: I'm trying to frame target volatility investments given some view on what asset to overweight. For example, starting with a risk-parity allocation, tweak the marginal risk contribution of each ...
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1answer
83 views

Having only 2 Industry risk factors?

Is it possible to build a risk model that only has 2 industry risk factors? For example, if I wanted just Tobacco and Healthcare industries as risk factors can I do that? If I did that do I have to ...
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1answer
75 views

Why does risk aversion use variance instead of standard deviation?

The risk-aversion component of a portfolio utility function is expressed as the variance of the portfolio. Why the variance, instead of standard deviation, is used in here? I'm asking this question ...
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1answer
153 views

How frequently is local volatility calibrated to implied vol surface, in practice?

This has two related questions - How frequently do equity derivative traders re-mark the implied volatility surface - (i) once a day (e.g. at start of trading day, or end-of-day), or (ii) ...
3
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1answer
125 views

CVaR formulation

I am a research intern and I am working on a topic about a profit maximization of a risk-averse newsvendor by using Conditional Value-at-Risk.The problem is that I found different expressions of CVaR. ...
3
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1answer
193 views

What's Hedge Curve Template

what's a Hedge Curve Template (HCT)? How does it help value a bond? It appears to me it normally is used together with another curve where x,y-axis being maturity dates and discount factors ...
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2answers
52 views

From risk limits to pnl projection?

As a fresh risk manager, today I got an assignment to check whether our risk measurements / limits are setup properly (whether the limits are so tight that affect our p&l) . Better if I can ...
4
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2answers
485 views

How to add Risks-Not-In-VaR (RNIV) to VaR under Basel III

I am trying to generate/prove the magnitude of the over-conservativeness of the regulatory VaR (internal models) under Basel III against what a more accurate VaR would be. However, I can't seem to ...
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2answers
188 views

Portfolio - Default Probability

Suppose we want to identify the frequency of default on a portfolio with a 1000 loans. In the independence case, each firm’s default process follows a Bernoulli distribution with parameter $p = 0.01$. ...
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45 views

How can I manually calculate the VAR of a call and put portfolio?

How would I solve the following question? Im unsure how to estimate the stock price using MCS.
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1answer
73 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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0answers
57 views

Regression model: short vs long history

There is a dilemma between choosing short history (1-2 years) and long history (5-10 years) for a regression model. Are there any resources that offer some findings on pros and cons of these two? From ...
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1answer
64 views

Why do some exchanges require clearing participants to post margins for cash products?

As the title reads, why do some exchanges require participants to post margins for cash products? I do understand why they require margins to be posted for futures, but why for cash products like ...
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0answers
62 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 ...
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0answers
44 views

Risk Measure-identication

Let X be a variable with existing moment generating function $M_x(z)=E[e^{zX}]$. Define the following risk measure: $\rho_{\alpha}(X)=inf_{z>0}(z^{-1}ln(\frac{M_x(z)}{1-\alpha}))$ Does anyone know ...
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56 views

Scenario Analysis - Real life application

Given a portfolio consists of Stock = usd 40, Bond = usd 40, commodity =usd 20. Also given the correlation between these assets. Scenario 1 : stock down by 30% When performing scenario analysis, do ...
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2answers
101 views

Portfolio volatility - Real life application

Given that a portfolio consists of Stock=USD 30, High-yield bonds(duration=5 years,spread duration=5 years) =USD 40 , Commodity = USD 30.
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1answer
89 views

how to simplify Inflation year-on-year option to Zero-coupon option

Belgrade 2004 paper basically proposes that inflation year-on-year volatilities (and hence yoy options) are basically the spread vols between the Zero-coupon vols from (t0 to T) minus the zero-coupon ...
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2answers
139 views

Verifying two properties of the Clayton Copula

So I'm trying to verify the first two properties of a copula for the Clayton model. The first two properties being: $C(u_1,…,u_d)$ is non-decreasing in each component, $u_i$ The $i^{th}$ marginal ...
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2answers
86 views

Value-at-Risk theory papers

I am looking for some papers related to the value-at-risk theory. I would like to focus on mathematical aspects of VaR. I would like to read something about modern approaches to VaR (maybe using ...
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2answers
174 views

How does one make money from CVA (Credit Valuation Adjustment)?

I am new to Quantitative Finance but have been doing a lot of reading on Counterparty Credit Risk. I understand the definition of CVA being: "the difference between the risk-free portfolio value ...
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0answers
46 views

Example of Coherent Risk measure with Compact Representation

Every coherent risk measure $\rho$ can be represented as $$ \rho(X)\triangleq \sup_{Q \in \mathcal{Q}} \mathbb{E}\left[ -X \right], $$ for a set of probability measures $\mathcal{Q}$ defined on the ...
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1answer
145 views

How to check if a portfolio has momentum bias

I am wondering what methodology exists to check if a fund/portfolio is having momentum bias or chasing the past performance, assuming you have their full returns and full portfolio holdings for past ...
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0answers
48 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 ...
2
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1answer
92 views

Co-variance of Portfolio A with Portfolio B

I'm trying to calculate the correlation between two separate portfolios. I've used A*COV(AB)*B to calculate the co-variance of each portfolio where: A = Array ...
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4answers
97 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 ...