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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46
votes
8answers
42k views

How does the “risk-neutral pricing framework” work?

I've struggled for a long time to understand this - What is this? And how does it affect you? Yes I mean risk neutral pricing - Wilmott Forums was not clear about that.
14
votes
12answers
148k views

How to calculate unsystematic risk?

We know that there are 2 types of risk which are systematic and unsystematic risk. Systematic risk can be estimate through the calculation of β in CAPM formula. But how can we estimate the ...
47
votes
5answers
3k views

What are the key risks to the quantitative strategy development process?

Prompted in part by this question on data snooping, I would be interested to know: What are the key risks that should be considered when developing a quantitative strategy based on: (a) historical ...
36
votes
2answers
9k views

Which approach to estimating fundamental factor models is better, cross-sectional (unobservable) factors or time-series (observable) factors?

There are many approaches to estimating fundamental factor equity models. I would like to focus on two traditional methods: The time-series regression approach of Fama and French. Factors are ...
17
votes
4answers
4k views

What books should any quantitative portfolio manager or risk manager have as reference? [closed]

I'm interested to know what are the critical reference texts you rely on for portfolio or risk management? I mean those texts that you come back to because they are chock full of insight and know-how. ...
15
votes
2answers
5k views

Modelling with negative interest rates

For a project, I am interested to model the impact of recently negative interest bonds on the portfolio. The literature on modelling negative interest rates is limited, and the only theory I could ...
9
votes
2answers
821 views

Empirical distribution function of overlapping time series data

If we model asset return volatility for periods of more than one (say more than one day) there is the square-root rule which holds true under some assumptions. The situation is more tricky if we look ...
2
votes
1answer
810 views

Get distribution for aggregate loss using Monte Carlo

I am given two data sets containing dates and losses (in some currency). Given a distribution for the amount of losses and an (a,b,0) distribution for frequency of losses, how can I use Monte Carlo ...
1
vote
1answer
218 views

Return on investment in spreads

I have a hard time getting my head around this. Let's say you have a strategy that consists in buying one future spread, for instance CL Z7-Z8 (crude oil dec17 minus dec18). It's easy to calculate the ...
13
votes
4answers
23k views

How to construct a Risk-Parity portfolio?

If I would like to construct a fully invested long-only portfolio with two asset classes (Bonds $B$ and Stocks $S$) based on the concept of risk-parity. The weights $W$ of my portfolio would then be ...
26
votes
4answers
3k views

How are risk management practices applied to ML/AI-based automated trading systems

A potential issue with automated trading systems, that are based on Machine Learning (ML) and/or Artificial Intelligence (AI), is the difficulty of assessing the risk of a trade. An ML/AI algorithm ...
7
votes
1answer
860 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 ...
8
votes
4answers
8k views

What to use as portfolio diversification measure?

Suppose that we have a portfolio of $n$ assets. A perfectly diversified portfolio is one in which each asset has equal weights, i.e. each asset has weight $\frac{1}{n}$. Of course this is usually not ...
7
votes
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 ...
7
votes
3answers
2k views

What position-sizing methods are used in futures trading?

Beyond optimal / partial f and a few other older methods, there's very little information out there for futures trading.
4
votes
2answers
846 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 ...
10
votes
1answer
443 views

What distribution should I apply to estimate the likelihood of extreme returns?

Say I have a limited sample, a month of daily returns, and I want to estimate the 99.5th percentile of the distribution of absolute daily returns. Because the estimate will require extrapolation, I ...
3
votes
1answer
3k views

Absorption ratio by Mark Kritzman

In Principal Components as a measure of systemic risk, the author Mark Kritzman defines absorption ratio (AR) as the fraction of the total variance of a set of asset returns explained or absorbed by a ...
4
votes
2answers
752 views

Risk Parity / Equal Risk Contribution with Tail Risk Measures

Risk Parity or (synonymous) Equal Risk Contribution is an approach to portfolio construction which could work in theory with a broad class of risk measures. Yet, all references I have found so far ...
1
vote
0answers
418 views

Large deviations theory and extreme value theory

I'll enter into details of both, sooner or later, but for the moment I'm concerned about the differences (and relationships, if any) between these two theories. Can someone give me a brief, but still ...
4
votes
2answers
5k views

non-subadditivity of VaR

I have been reading up on VaR and get very confused by the subadditivity concept. On wikipedia, it says "VaR is not subadditive: VaR of a combined portfolio can be larger than the sum of the VaRs ...
4
votes
1answer
283 views

Using option pricing methods to model real asset liquidity

Liquidity risk (in the sense of asset exit risk) is warranted on investments that may not be easily divested at the going market or fair-value price. I am looking at a portfolio of private assets ...
3
votes
1answer
393 views

Expected shortfall minimization as portfolio objective

I'm trying to solve portfolio problem with minimising its Expected shortfall, assuming the returns follow a stable distribution. If I'm able to calculate MLE fit to the series, calculate expected ...
1
vote
1answer
3k views

Calculating portfolio allocation beta with different asset classes?

I'd like to calculate portfolio allocation beta on a portfolio that has different asset classes. The portfolio may be made up of: ...
1
vote
1answer
101 views

How to manage risk on a call calendar when underlying is falling

Let us say I bough a call calendar spread. Now, at expiry of the short option, the underlying has decreased significantly, and I am approaching my max loss(i.e both the options are close to 0). In ...
1
vote
1answer
81 views

Compute moments of aggregate loss using Monte Carlo

Spin-off from here. Richard referred to me an article that tells me how to get parameters of a translated gamma distribution to which I should consider fitting simulated aggregated loss values. The ...