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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5 votes
2 answers
2k views

Intuitive explanation for expectiles

I am looking for an intuitive explanation for expectiles. Here is a link to a paper about expectiles: Bellini and Di Bernardino: Risk Management with Expectiles, European Journal of Finance, May ...
14 votes
1 answer
860 views

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 ...
5 votes
2 answers
1k 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 ...
1 vote
0 answers
75 views

Techniques for proxying time series / stock prices

What are some good techniques for proxying time series? My purpose is for risk management / modelling and I would like proxy to missing series. Given that I also have to account for volatility, ...
0 votes
1 answer
148 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 ...
1 vote
1 answer
84 views

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 ...
3 votes
1 answer
148 views

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 ...
10 votes
1 answer
1k 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 ...
1 vote
1 answer
582 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 ...
0 votes
1 answer
54 views

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 ...
8 votes
2 answers
904 views

Is there any research on applying state-space or dynamic linear models to forecasting equity risk premia?

Is there any research on applying state-space or dynamic linear models to forecasting equity risk premia on a security-by-security basis with a medium term horizon (say 3 month to 12 months horizon)? ...
3 votes
1 answer
298 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.)...
7 votes
1 answer
733 views

Exposure calculation of a re-coupon swap

How to calculate the exposure of a recoupon swap (when the MTM of an i.r. swap is settled and the fixed rate is reset to the prevailing swap rate for the residual maturity). It's used to reduce the ...
0 votes
0 answers
39 views

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, ...
0 votes
0 answers
50 views

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 ...
0 votes
1 answer
136 views

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.) ...
2 votes
3 answers
413 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 $p = 0.01$. ...
2 votes
2 answers
254 views

What to do if certain parameters are not market observable?

Lets say I have no clue on correlation between 2 equities in the market (i.e. i don't have an observable market price). What is the best way to go about marking this correlation for lets say the best ...
0 votes
0 answers
21 views

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 ...
0 votes
1 answer
44 views

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 ...
1 vote
0 answers
39 views

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?
0 votes
2 answers
71 views

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 ...
10 votes
3 answers
10k views

What is the best alternative of Quantlib library

We need to build a Fixed Income Portfolio Risk Analytics solution. Somehow due to administrative reason we can't use Quantlib which is written in C++, even call it through SWIG via JNI. We have tried ...
0 votes
0 answers
90 views

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 ...
0 votes
1 answer
76 views

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)....
2 votes
1 answer
173 views

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 ...
3 votes
3 answers
2k views

Usefulness of simultaneously buying triangular and multiple arbitrages on the Forex

I have a limited financial background but I'm trying to figure out the usefulness of buying size-n arbitrages (n > 3), and I wonder the kind of risks - if any - associated with such a strategy. Say ...
0 votes
0 answers
48 views

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....
0 votes
0 answers
43 views

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 ...
0 votes
1 answer
146 views

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 ...
0 votes
1 answer
174 views

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, ...
0 votes
1 answer
179 views

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 ...
1 vote
1 answer
199 views

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 ...
2 votes
1 answer
131 views

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 ...
0 votes
0 answers
48 views

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 ...
1 vote
1 answer
133 views

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 ...
0 votes
0 answers
45 views

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 ...
0 votes
2 answers
137 views

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 ...
1 vote
1 answer
135 views

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 ...
2 votes
0 answers
88 views

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 ...
0 votes
0 answers
50 views

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. ...
0 votes
1 answer
151 views

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 ...
0 votes
0 answers
73 views

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 ...
0 votes
0 answers
43 views

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_{...
0 votes
0 answers
69 views

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 ?
0 votes
1 answer
52 views

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 ...
3 votes
0 answers
100 views

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 ...
1 vote
1 answer
2k views

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 ...
0 votes
1 answer
114 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 ...
2 votes
2 answers
197 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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