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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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 ...
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1answer
662 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 ...
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143 views

Intuition behind the Carr and Wu (2014) static hedging for ordinary options

Let $(S_t)_{t \geq 0}$ be the price of an underlying asset, $r$ be the risk-free rate of return, $q$ the dividend yield, $C_t(K,T)$ is the price of a call option written on $S_t$ at time $t$ with ...
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First principles in Finance

Every so often I hear people referring to the term "first principles". It seems to me that this term does not necessarily have a universally accepted connotation in Finance. Here is the general ...
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158 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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81 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 ...
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61 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 ...
3
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1answer
256 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.)...
3
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105 views

Using transaction data to predict default of the customer

I am trying to build a prediction model that utilize the huge transaction database of all the customers of a bank. My dataset currently looks like this: ...
3
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0answers
251 views

Non-parametric estimator - CVaR / Expected shortfall

Is the estimation of the CVaR using known non-parametric methods (histogram, kernels) different than the estimation of any other R.V.? If the answer is yes, I am interested to know whether there are ...
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38 views

conferences for credit portfolio managers

What are worth conferences for credit portfolio managers? I appreciate your recommendations! PS:I am aware that this question is not the typical quant.SE question, BUT I couldn`t find reliable ...
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772 views

Modified duration in multi-currency portfolio

I was thinking about how to figure aut duration for portfolio of bonds denominated in different currencies… I would like to compare sensitivity of portfolio to shift of yield with competitive ...
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206 views

Quantitative risk management strategy for a large participant in an illiquid market

Are there any practical quantitative risk management strategies for a large participant in an illiquid market with a few dominant players? By a large partcipant I mean someone who has significant ...
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69 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 ...
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47 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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52 views

Where could I find code to compute Potential Future Exposure

Ideally code in SAS, R, Python or Matlab for calculations involving counterparties holding positions in energy markets on multiple price curves, with a Monte-Carlo methodology or a simpified ...
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20 views

Formulating Deposit Rate Sensitivity to Market Rate Changes

I have historical deposit rate data for a specific bank. I want to determine the sensitivity of deposit rates to market rate changes (I'll be using Fed Funds rate). My question is, what would be an ...
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40 views

To price Municipal Bonds and risks I want to know the percent of unfunded pension liabilities ($3.8T) to total state and local gov liabilities

Unfunded pension liabilities keep growing and this seems alarming to both pension holders but also Municipal Bond holders. I would like to know how large this problem is to better price Munis and ...
2
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80 views

Why not to maximize Sharpe Ratio directly when computing optimal allocation of an order?

I was reading the following paper of Engle about balancing transaction costs performance and risk: https://www.nber.org/papers/w12165.pdf He deals with finding the optimal placement of the child ...
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62 views

Mean Variance Optimization vs Risk Scaling

What would be the difference between the following. Both techniques will result is an ex-ante risk of $\sigma$. However, that would be achieved via two different values of h. I want to understand ...
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3answers
359 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 $p = 0.01$. ...
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80 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 ...
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70 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 ...
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0answers
69 views

Statistical methods to compare two financial series data

I have two financial series data, x and x', where x' was formed form ...
2
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0answers
82 views

z-score of an active return with a no-volatility benchmark

I don't know how to approach the problem I am having. Basically, the statement I am trying to make is: the fund's return is X standard distribution away from the mean. Normally, for a single fund, ...
2
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0answers
71 views

DCCfit speed up formula

I am estimating the covariance matrix by using GARCH DCC model with function dccfit from package rmgarch. My code is something like: library(rugarch) library(rmgarch) ...
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0answers
66 views

VaR decomposition of non-normal portfolio by g-and-h distribution

According to Doowoo Nam (2013), VaR of non-normal portfolio returns approximated by g-and-h distribution can be decomposed pretty much in the same way as the VaR of a portfolio with normal returns. ...
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627 views

Optimal weights for portfolio optimisation (r)

The question is what R optimization could be applicable to find a vector of weights that when, multiplied by S matrix creates equal rows sums, and when set in the objective function returns the ...
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584 views

subadditivity of VaR

It is known that the VaR (Value at risk) doesn't fulfill subadditivity, i.e. $VaR(X)+VaR(Y) \le VaR(X+Y)$ But for elliptical distributions subadditivity is true. Questions: (1) Which ...
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375 views

Bayesian analysis in R: Probability of default, low default portfolios

I want to apply the knowledge of this paper (Bayesian estimation of probabilities of default for low default portfolios, by Dirk Tasche) in R, but I can't find the right bayesian package and functions ...
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106 views

In May of 2005, several large hedge funds had speculative positions in CDO tranches

These hedge funds were forced into bankruptcy. This was due to: the correct answer is: Long Mezzanine and Short Equity Tranche position when correlation of Mezzanine tranche decreased. Can anyone ...
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445 views

Vol surface changes as underlying moves

We market make in highly liquid, near term options markets. I want to build a risk report that tells us how our portfolio's greeks will change as the underlying moves. This is for risk management in ...
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80 views

Modelling the Cost of Risk

I would like to read something about the cost of risk. Could anyone recommend some reference about how it is calculated or modelled?
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105 views

Commercial Vendors for Risk Management and Portfolio Optimization and Performance Attribution

So this question is directly about companies such as Axioma, Barra, Northfield, and etc. that provide risk management, portfolio optimization, and performance attribution related services. I want to ...
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234 views

Risk measures, Risk Management and Financial Risk Area

I'm currently searching material about market risk and I learned about coherent risk measures, VaR, CVaR (or expected shortfall), volatility. All that because I have to make a Financial Risk Area for ...
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0answers
178 views

Beta distribution - Holding period

Let's say I have a risk factor that is defined between [0,1], such as recovery rates. Assuming I have daily data, I can estimate the "daily VaR", i.e. the tails over 1 day period, since the data is ...
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259 views

regarding Basel III IRB method for credit risk

Would the exposures between standard method and internal rating based method for credit risk under Basel III remain same?I could not find any documents for IRB approach under Basel III. Is it still ...
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218 views

Market Exposure and Hedging

Normally the Market exposure associated with your stock/portfolio is your delta for that stock/ portfolio. Basic idea of hedging involved here is buying/selling respective futures depending upon ...
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1answer
163 views

Energy Risk Quant--Any discussion boards for energy related quant topics?

Any discussion boards for energy related quant topics? Like VaR in energy portfolio, and pipeline option pricing.. just want to know where is the best discussion board for such energy specific topics. ...
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55 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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42 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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81 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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0answers
84 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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44 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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178 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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2answers
188 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 ...
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34 views

Equivalent constructions of risk budgeted portfolios?

When building an ERC portfolio given covariance $S$, I am familiar with the approach in optimalPortfolio. It takes the risks of a given weight vector $(w_i * (S w)_i)$, divides it by total risk to get ...
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47 views

conditional or unconditional probability in the calculation of LGD

lifetime LGD is calculated by the way of a term structure of PD. But this PD at the end are calculated using conditional or unconditional PD? I have found a Lot of different And confusing definition ...
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118 views

FRTB Spearman correlation coefficient definition

I am just writing my thesis and would like to understand the spearman correlation coefficient definition within the FRTB. Somehow it is not clear from the definition. The reason what I don't ...
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1answer
484 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 ...