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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What is Leverage?

What would you consider leverage? I know this may sound like a basic question but I have spoken with several industry professionals with a significant amount of experience and all of them have a ...
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How to estimate the lambda parameter in EWMA in excel solver

So I have a simple enough assignment question. I was asked to find the EWMA for daily stock returns of a given firm. When I was answering the Garch problem, I had multiple variables- alpha, beta, ...
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Does tail risk disappear in the long horizon in any rolling over strategy with shorter frequency?

Say I am investing to gain weekly yields ${y_{i}}$ for over a year, gaining the overall yield: $\prod_{n=1}^{52} (1+y_i) -1$ The most dominant term in the above product is the sum of all yields, which ...
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Counterparty Credit Risk - Reference book for a mathematical introduction [duplicate]

Which book would you recommend for an introduction to CCR from a mathematical perspective? I would like to complement the Jon Gregory's book "the XVA Challenge" with a more quant oriented ...
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IR risk sensitivity to curve instruments

I need to understand if the 2 approaches are equivalent: assume I am constructing a yield curve with N instruments. I would like to compute IR delta for a product using this curve. One approach is to ...
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Core deposits forecasting in stress testing

I’m designing a stress test at a commercial bank. What are the advantages/disadvantages of forecasting core NMD deposits vs. total deposit balances?
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Does VaR calculations consider my portfolio past

I am relatively new to trading and decided to become more quantitative about it. I have had a portfolio for about two years, where I changed my positions several times. I now learnt about VaR ...
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How does an Options Market Maker (OMM) deal with an asymmetric inventory?

Let us use an example of a market maker quoting the ATM straddle. Under Black-Scholes: S = 100 K = 100 DTE = 3 IV: 20 r = 0 q = 0 No rates or dividends for ...
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Calculation of Total Credit Risk Capital % but seeing lower capital percentage for higher risk band. Is there any correction required?

I am trying to calculate the Total Credit Risk capital % for my learning purpose as given below. Assuming adding 1 single loan with different pds. i have noticed one point in the table and have two ...
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May banks ignore the vol surface for far OTM, distantly-dated options, and make risk decisions only on near-term implied ATM vol?

Here is a difficult "real-life" skew / surface options problem that actually occurred. Please help me judge its validity or falsity. In 2018 a Chinese communications stock was falling, and ...
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Aggregating greeks to portfolio level

I have been asked to calculate/aggregate certain Greeks (delta, gamma, and vega) up to portfolio level for a portfolio consisting of a range of (long and short) equities, convertible bonds, and ...
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pooling equilibrium

I was hoping for some help on how to answer a question about pooling equilibrium. Suppose a bank wants to give loans of 1 million dollars to people, but it cannot differentiate between high risk ...
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Finding stock pairs whose spread is used for a risk neutral long-term investment

I am currently working on researching about ways to improve returns in pairs trading. I had previously posted a reference request here, where I had described a toy pair that seemed to be co-integrated....
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Backtesting Hedged Equity Portfolio with Options

I am trying to find some papers and methodologies on backtesting an Equity portfolio with broad-based index options as hedge. For example, take SPY and systematically hedge it with 9 months 30 delta ...
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How to set VaR and other Risk Limits

I have read a lot of literature on how to calculate VaR and it's advantages and disadvantages. But I am struggling to find anything on how to set a VaR limit. For example, say if I am a Risk Manager ...
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How to adjust a strategy's alpha assuming a zero-value starting portfolio (\$0 cash, \$0 assets)?

A simple paper test of a trading strategy is to assume one borrows all money to purchase assets and see if trading increases the liquidation value of the portfolio (cash + liquidation value of assets)....
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Strategies for trading on a forecast

I have been experimenting with multiple methods of forecasting the daily high and low for a certain security. I have found a very basic ensemble of several common forecasting approaches is, well, ...
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How to measure Steepener/Flattener/Butterfly sensitivity? (in 01)

This seems like a simple concept but I'm a bit lost. How can I calculate the dollar value sensitivity for a yield curve slope or butterfly position? I understand how DV01 can be calculated, but it ...
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Pragmatic question about use of Stress Tests/metrics

I have been looking at the onboarding of some derivative products, and the subject of our internal stress framework. I suspect like similar businesses, we have a set of stress scenarios, mostly based ...
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Reference request (Risk Management + Insurance Theory) [duplicate]

I have to study the following topics: Market and credit risk assessment models Technical risk assessment models: non-life and life Models for the valuation of bonds and for the determination of the ...
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What are some references for risk management of professional equity fund portfolios?

In particular, I am looking for methodologies for equity portfolios that are primarily managed by fundamental-based methods rather than quantitative strategies. Even though the portfolio is not based ...
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ML in Factor Models

I have recently learned about (implicit) factor models of the form: $$ R = Xf + \epsilon $$ where $R \in \mathbb{R}^{n}$ are security returns, $X \in \mathbb{R}^{n \times F}$ are factor loadings for ...
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Filtered Historical Simulation VaR for swaps

I am trying to understand how to calculate FHS VaR for a portofolio of vanilla swaps. I think I understand the main ideas behind FHS VaR and how to implement it for other assets such as equities. I ...
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How do I estimate the factor sensitivity in a Vasicek Single Factor Model?

I understand the formula of an asset return for an obligor i is given by the following: $$A_i = \sqrt{w_i}*Z + \sqrt{1-w_i}*\epsilon_i $$ My question is - How do I calculate $w_i$? I have the PD, LGD ...
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Risk-managing vanilla books (sell-side)

I am interested in learning more about how traders risk-manage books of vanilla options. I presume there should be a fairly standard list of facts. For the moment, the area of interest is FX, as ...
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What is an appropriate Risk Metric for Portfolio Construction when returns are predicted instead of using mean returns?

I am trying to build a portfolio management system as my college project, and the approach I have chosen is that of combining machine learning and mathematical optimization. I am using weekly data. ...
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How do you hedge your inventory when doing arbitrage?

Say I want to do arbitrage between Exchange A and Exchange B on USD/AAPL. This requires that I hold equal parts USD and AAPL. I don't want exposure to the movement in AAPL. How do I hedge my AAPL ...
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Is this an Example where Maximum Adverse Excursion (MAE) is not useful for a Stop-Loss?

Below is an attached screenshot of a scatter plot of a long position Percentage Return of a Asset Security on the Y-axis, and the Maximum Adverse Excursion (MAE) Percentage on the X-axis. Green dots ...
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Industry standards for vol control index options

Consider an index of the type: $I(t)/I(t-1) = 1+ a(t) (S(t)/S(t-1)-1)+(1-a(t))r(t-(t-1))$ It is arbitrarily initialized. $r$ is the risk free rate. a(t) is determined piecewise as: $a(t)=s_{target}/s_{...
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Maximum Adverse Excursion Formula - Short Trade Position?

Is the formula for the Maximum Adverse Excursion for a Short Selling Trade the (Open - High) / Open, or (High - Open) / Open ?
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Quantifying climate change risk

I am looking for resources on applicable and practical solutions for estimation and quantifying climate change risk from asset owners perspective (for example, a portfolio of equity, fixed income, and ...
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Testing severity of VaR by changing portfolio component weights

Let's assume that I have a portfolio with two components:$$\omega_i = 0.3$$ $$\omega_j = 0.7$$ I also have two P&L vectors, $v_i$ and $v_j$ each containing 1000 P&Ls. I would like to play ...
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How to "best" exit multiple trades?

Let say I have N opened trades (N = s + b) that are partialy hedged, and paritaly not. In general s != b. Some of them are market sell orders (s), and the rest of them are market buy orders (b). They ...
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What is the market share of MSCI Barra Equity Model?

My understanding is that MSCI/Barra's model has a very large market share in funds and banks, but I cannot find out how large is the exact market share. Is there any data on this, or can someone ...
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Quick rule of thumb for DV01 and CS01 calculations

If someone tells me there is a IRS and a CDS both with 10M notional and 5y maturity, is there a reliable quick calculation that I could easily do mentally to approximately calculate their ...
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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.) ...
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2 answers
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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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Modigliani risk-adjusted performance - marginal contribution

I would like to carry out risk-adjusted return attribution using the M^2 excess return, such that i can express M^2 excess return = risk free rate + sharpe ratio x benchmark vol - benchmark return in ...
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2 votes
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Martingale corrections to historical Value at Risk?

I am looking for a bit of advice. I have recently used to a new firm, which uses Value at Risk in a manner that is unfamiliar from previous places I have worked that I find less than ideal. Previous, ...
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Q determined by the market in Binomial Model

I read in a book about change of measure, so that the discounted stock price in a binomial model is equal to the current price. Namely: $$E_{Q}[S_{1}/ \beta |S_{0}]= S_{0} $$ It then says: " Q is ...
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Why not calculate Kelly using semivariance? As w Sortino

Kelly is calculated as mu / sigma^2. If we remove our highest performing returns from our calculations this actually increases our Kelly leverage, which does not make sense to me. A less profitable ...
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Standard market risk platform Value-at-Risk (VaR)

if possible, could you share publicly available methodological guides/pamphlets or post links to specialised websites which give sufficient detail of the basic assumptions, algorithms and possible ...
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Calculating performance decay of a strategy

Came across this thread which basically advises t-test for difference in means across periods to calculate whether our edge is deteriorating. The catch being that this test will probably not be ...
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Estimating VaR of bond due to changes in the US yield curve

I am attempting estimate the 99% 10-day VaR of an investment grade bond due to changes in the US yield curve. The data provided is the daily prices of the bond over time. In addition I have the Daily ...
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3 votes
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Correlation for Trading vs. Risk Management

Assume a portfolio that contains some asset A and that I am contemplating hedging my delta in A by taking a position in asset B. I would determine how much of B to buy/sell based on the linear ...
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1 vote
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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 ...
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From annualized Sharpe Ratio to number of daily losses

I have seen a few statements that link a particular annualised Sharpe Ratio to the likely frequency of 'loss day' across a given period: e.g. "A annualised Sharpe Ratio of X, implies the ...
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Do equity mutual funds typically have industry-level diversification constraints? [closed]

For instance, are there limits to how concentrated a portfolio in terms of industry allocation? If so, where can I find such information about the constraints each fund has?
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Risk measurement of multicallable bonds

Assume you have bought a multicallable bond where the issuer has the right to redeem the notional at various dates, e.g. a $10$ yr maturity, $5$% coupon yearly and each year one call date. Next, ...
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How to calculate contributions to the granularity adjustment

In the Basel pillar 2 framework a granularity adjustment is introduced. While the capital requirements in pillar 1 do not take concetrations into account, this is meant to be covered with this ...
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