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.

Filter by
Sorted by
Tagged with
0
votes
0answers
6 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(...
1
vote
2answers
126 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 ...
0
votes
1answer
23 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 ...
1
vote
1answer
49 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 ...
1
vote
1answer
89 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 ...
0
votes
0answers
20 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 ...
0
votes
0answers
19 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 ...
0
votes
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 ...
1
vote
1answer
107 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 ...
0
votes
1answer
80 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 ...
0
votes
1answer
68 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 ...
5
votes
1answer
123 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
votes
1answer
120 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
votes
1answer
126 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 ...
0
votes
2answers
50 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
votes
2answers
223 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 ...
0
votes
2answers
159 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 $p = 0.01$. ...
0
votes
0answers
44 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.
1
vote
1answer
69 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 ...
1
vote
0answers
54 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 ...
1
vote
1answer
61 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 ...
1
vote
0answers
60 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 ...
1
vote
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 ...
0
votes
0answers
54 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 ...
1
vote
2answers
100 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.
3
votes
1answer
86 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 ...
3
votes
2answers
135 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 ...
0
votes
2answers
81 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 ...
4
votes
2answers
159 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 ...
2
votes
0answers
41 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 ...
2
votes
1answer
136 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 ...
0
votes
0answers
47 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
votes
1answer
91 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 ...
0
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 ...
1
vote
1answer
122 views

Retail Algorithmic Trading

Is it possible for the retail algo traders to take the same approach to risk management as the larger quant funds? is there a risk management budget imposed on the trader beyond that which they impose ...
3
votes
2answers
223 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 ...
0
votes
0answers
217 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. ...
0
votes
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 ...
0
votes
0answers
31 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 ...
0
votes
1answer
96 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
votes
1answer
153 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 ...
0
votes
0answers
56 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 ...
-1
votes
2answers
223 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 ...
0
votes
1answer
44 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 ...
0
votes
2answers
449 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 ...
0
votes
1answer
371 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.
5
votes
1answer
351 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 ...
0
votes
2answers
97 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 ...
1
vote
1answer
113 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 ...
2
votes
0answers
54 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 ...