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
67 views

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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53 views

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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37 views

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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23 views

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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1answer
64 views

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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10 views

Calculate core deposit bucket percentages

I need to forecast core deposits in a commercial bank. One technique that I saw consists in dividing the amounts in buckets and applying a percentage to each bucket to obtain the core deposit. For ...
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1answer
67 views

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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35 views

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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1answer
68 views

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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1answer
112 views

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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17 views

Variable transformation for probit regression model

I am trying to understand a credit rating model which is used in my company to assess company customers with large exposures. This model is provided by Moody's and assigns grades (similar to Aaa, Aa1, ...
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1answer
76 views

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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79 views

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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1answer
36 views

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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1answer
100 views

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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64 views

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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0answers
10 views

How to model run-off ratio for non-defined maturity deposit?

I'm trying to model run off ratios for different deposit products as well as how long it takes to lose all deposits, would anyone please suggest any methodology? In addition, would I be able to define ...
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35 views

Implications of modeling operational risks without frequency distribution

When modeling operational risk, the Loss Distribution Approach (LDA) is widely used. Usually, we model the loss frequency distribution and the loss severity distribution and then aggregate both to ...
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57 views

Exercise on Delta-Neutal-Hedging

Suppose you have three positions in the following assets in euros: long on 10.000 calls (maturity T = 3 months, strike= 0.55, Delta (1 call) =0.533), short on 210000 calls (maturity T = 3 months, ...
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73 views

Resources for Bayesian methods

I will be joining a risk management firm in a few months, and I was wondering if some of you could help we with resources on certain methods. Some of the things that I would be called upon to work on ...
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61 views

Optimal withdrawal rate based on alpha and drawdown

My trading returns is about 50% monthly(alpha) and maximum drawdown is about 20%. Is there a mathematical way to define the optimal withdrawal rate X%(say when profit level reach y%) to avoid risk of ...
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3answers
464 views

Deep Reinforcement Learning in Quant Finance?

I've been struggling to find engaging papers on the application of deep reinforcement learning in quantitative risk analysis, portfolio management, algorithmic trading and/or options pricing. What are ...
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26 views

What is the shadow cost of capital for a bank?

With regard to banks RWAs (risk weighted assets), what does it mean a trade leads to a positive shadow cost of capital?
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1answer
77 views

how do we use portfolio optimization to hedge an existing portfolio?

I am working on a risk management project and want to create a custom hedge portfolio to add on to an existing portfolio. I am wondering how do we treat the existing portfolio in the optimization ...
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44 views

Extreme value theory in QRM: Lemma 5.16 from Quantitative Risk Management: Concepts, Techniques and Tools

From the slides: https://raw.githubusercontent.com/qrmtutorial/qrm/master/slides/qrm_05.pdf Lemma 5.16 Assume, for some $u$, $F_u(x) = G_{\xi, \beta}$ for $0 \leq x < x_F - u$. Then $F_v(x) = G_{\...
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1answer
62 views

VAR interpretation

I definitely struggle to understand the following interpretation of VAR (value at risk) provided by Jorion $$VAR(c)=E[X]−Q(X,c)$$ where $X$ is a random variable, $E[X]$ its expected value, $Q(X,c)$ ...
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76 views

How to set a portfolio turnover ratio threshold according to volatility?

With the various crises affecting the financial markets, here a pandemic, this ratio skyrockets almost every time, which limits its interpretability. We know that the ratio increased during the ...
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0answers
41 views

How to link market risk and the transition to the new risk-free rates?

I'm a market risk analyst intern and I've the opportunity to do a project related to it. So I would like to move towards SOFR and €ster transitions, I have seen quite a lot of documentation on this ...
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2answers
165 views

The best “risk measure” for an investor who does not want to lose any of his seed money

Question There is an investor who is afraid of losing any of his seed money (initial investment). Variance of investment returns is not a problem to him. He is willing to take variance as long as he ...
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1answer
170 views

Code (Python or R) references for operational risk models (AMA/COM)

I have to build an operational risk model and to be compliant with Basell II and III regulations I thought of using AMA (Advanced measurement approach) or COM (change of measurement). We have no ...
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1answer
345 views

Core Deposits when modelling Non-Maturity Deposits according to IRRBB

When modeling Non-maturity deposits (NMDs) the Basel Committee suggests the following (see 31.109 of the guidelines): Banks should distinguish between the stable and the non-stable parts of each NMD ...
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71 views

Counterparty Risk [duplicate]

I am looking for some good text books for Counterparty risk management and measurement with many working examples. Could you please suggest few such books. Thanks for your help.
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1answer
51 views

A simple question about VaR estimation

"A 99% VaR using 1,000 (simulation) replications should be expected to have only 10 observations in the left tail, which is not a large number. The VaR estimate is derived from the 10th and 11th ...
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1answer
88 views

Looking for non-GAUSS Code for Thiery Roncalli's book on Risk Parity and Budgeting

I am going through the book 'Introduction to Risk Parity and Budgeting' by Thierry Roncalli (2013). The author provides software for the various concepts illustrated in the book, but it is all done in ...
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1answer
76 views

Option proofing: Analytical solution for option math

How do I prove the following equation: P(X=100)≤(P(X=110)-P(X=90))/2 I am not sure how to start and whether it involves using the Black-Sholes formula or not (something like this: https://www.youtube....
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1answer
55 views

Good ways to select best decision among N decisions, each with a profit/loss distribution? [closed]

I'm working on a problem where an asset owner (e.g., owner of a factory, power plant, etc.) can take a number of possible decisions (say 10). Each of those 10 decisions entails certain actions, but ...
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1answer
136 views

Interest rate swap performance attribution

I have learned some attribution models such as Campisi. It decomposes the return of bond into treasury return, spread return, and coupon return. It works like: $$r = y\times dt - D \times dy_\text{...
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159 views

CVar optimization algorithms

An alternative measure of losses to Var, with more attractive properties, is Conditional Value-at-risk or CVar which is also called Mean Excess Loss, Mean Shortfall, or Tail Var. CVar is a more ...
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124 views

What put options would the Universa Tail Fund have bought?

According to this Bloomberg article, Universa was up 3,600% in March 2020, by hedging with extremely out-of-the-money puts: https://www.bloomberg.com/news/articles/2020-04-08/taleb-advised-universa-...
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1answer
301 views

How to derive the expected loss from the credit risk of a bond?

I am trying to work out a formula to derive the expected loss from the credit risk of a bond. My idea is to tie the credit risk to credit valuation adjustment and derive the expected loss from there, ...
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1answer
49 views

Can I say VAR is a prediction report?

We use Algorithmics RiskWatch where portfolios are analyzed by VaR over scenarios. Can I say that they are predictions reports? or descriptions reports?
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27 views

lot size formula for cfd and forex based on risk percentage

I have a question regarding the calculation of the lot size for cfd and forex instruments when we have a risk amount as a percentage of the balance. So how to compute the lot size to trade knowing the ...
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1answer
123 views

PnL due to model recalibration and its relationship with hedging error

Consider the case where at t=0, I calibrate my model to the market, but at t=1 my model is no longer able to recover the price in the market, so it needs recalibration. Say I have delta hedged my ...
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2answers
45 views

Calculating the allocation of a fund given two correlated variables

Imagine this hypothetical situation: I have a time series of cumulative performance of a fund and two time series of equities that are highly correlated to them. I know that that this fund ONLY ...
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3answers
1k views

Which is riskier: a call option or the underlying?

From Joshi's Quant Interview Questions and Answers: What is riskier: a call option or the underlying? (Consider a one day time horizon and compute which has bigger Delta as a fraction of value). I ...
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0answers
26 views

Credit Migration: Risk [duplicate]

Hi I am given two tables of two tables showing data about fictional corporate business partners and relevant credit risk data – ID, rating, probability of default (PD, defined by rating), loss given ...
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1answer
163 views

What is the intuition of CAPM model with Intercept at 0?

I only have a very general theory-based knowledge on Jensen's Alpha. I'm very curious about Capital Asset Pricing Model with intercept at 0. May I know what is the intuition behind this? What does it ...
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2answers
166 views

How does a pricing model 'understand' the cost of hedging?

Suppose I am pricing a multi asset at the expiry payoff. Theoretically I define their joint distributions in the risk neutral measure, and price using expectation. However, how do I know that the ...
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0answers
58 views

Pricing/Hedging a yield curve spread option (YCS)

I have 2 perspectives as to what model to use for a YCS option: It is an at the expiry option, so hit the marginals, correlate them with a copula, and be done with it. To hedge the vega, I will need ...
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2answers
101 views

Definition of drawdown

Say I am considering the entire time horizon, is max drawdown what I've drawn in blue, or what's in purple? Likewise, how about the current drawdown for the period in black (in practice, I am asked ...

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