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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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16 votes
2 answers
6k 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 ...
user7056's user avatar
  • 728
10 votes
1 answer
466 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 ...
user2303's user avatar
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1 vote
1 answer
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: ...
4thSpace's user avatar
  • 167
2 votes
1 answer
487 views

Risk Decomposition of Index linked Bonds

Do you know how to decompose the risk of index linked bonds? To value a inflation linked bond, one plugs the real zero curve into the bond PV calculation, the real interest rate is as the fisher ...
Rainer's user avatar
  • 163
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 ...
jbmusso's user avatar
  • 301
7 votes
1 answer
580 views

What's the best way to test/validate an interest rate lattice model

I have some implementations of interest rate lattice models. I would like to verify their performance. What would be the best approaches? Currently I compare pricings of some interest rate dependent ...
John Smith's user avatar
7 votes
1 answer
668 views

Are there any well known methods of testing through-the-cycle rating systems?

Rating systems, as defined by the Basel II Accord, can be classified into two broad types - through-the-cycle (TTC) or point-in-time (PIT) - and the probability of default predicted by such a system ...
Mozan Sykol's user avatar
7 votes
2 answers
313 views

How many data points are required to perform a fitting of GPD?

A friend of mine told me that their firm is using Extreme Value Theory (EVT) to compute value of the Expected Shortfall 99% of a portfolio for their asset allocation process. To do so, they try to fit ...
SRKX's user avatar
  • 11.1k
14 votes
4 answers
27k 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 ...
Karamos's user avatar
  • 143
11 votes
1 answer
755 views

copula-marginal algorithm

has there been any interesting work or advances on the copula-marginal algorithm (CMA) as proposed by Attilio Meucci. I am unable to find anything on the web other then the original article, here is ...
pyCthon's user avatar
  • 2,121
7 votes
1 answer
529 views

What is the optimal strategy when there is an equal chance for gain or loss but the size of the potential gain is larger?

I'm investigating a situation where the chance for gain or loss is the same, but the amount gained is greater than the amount that is lost. For example, the gain would be about 30% of the trade ...
Ray's user avatar
  • 503
12 votes
2 answers
3k views

How to apply risk-parity portfolio construction to a dollar-neutral portfolio?

Long-only risk-parity portfolios have proliferated in recent years. An optimized long-only risk-parity portfolio requires that the asset weight * marginal contribution to risk of the asset is ...
Ram Ahluwalia's user avatar
4 votes
2 answers
252 views

How do you handle short-term asset allocation with Hedge-Funds?

Assuming I want to run an optimization over a short period, say 2 years, I would decide to take daily values in order to compute the efficient frontier of a portfolio. That works fine as long as I ...
SRKX's user avatar
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11 votes
2 answers
3k views

Links to the risk model methodologies of the major providers?

There is quite a bit of art in constructing an equity risk model. This paper summarizes some of the key decisions: choice of factors, horizon matching, cross-sectional vs. time-series method, and ...
21 votes
4 answers
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. ...
9 votes
1 answer
1k views

Monte carlo portfolio risk simulation

My objective is to show the distribution of a portfolio's expected utilities via random sampling. The utility function has two random components. The first component is an expected return vector ...
Ram Ahluwalia's user avatar
8 votes
1 answer
576 views

Which is a more appropriate choice of risk measurement in a utility function, CVaR or VaR?

What is the consensus on which risk measure to use in measuring portfolio risk? I am researching what is the best risk measure to use in a portfolio construction process for a long/short option-free ...
Ram Ahluwalia's user avatar
16 votes
12 answers
170k 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 ...
Norlyda's user avatar
  • 169
7 votes
3 answers
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.
dvegadvol's user avatar
6 votes
3 answers
184 views

Which lags or percentiles should be run in a batch when calculating Value-at-Risk?

Are there any "standard" VaR calculations run in a batch? For example, testing a VaR calculation with a lag of 1,2, 5 or 10 days over 2 years? Same question for the percentile, 1%, 2.5%, 5% etc.
ghostJago's user avatar
  • 163
38 votes
3 answers
12k 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 ...
Ram Ahluwalia's user avatar
8 votes
1 answer
2k views

Value at Risk backtesting (kupiec)

I m doing my research on estimating Value at risk using different assumptions on volatility and then compare my results based on backtesting. I obtained results and just on question based on my ...
joe888's user avatar
  • 81
8 votes
2 answers
956 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)? ...
Ram Ahluwalia's user avatar
6 votes
1 answer
3k views

Why write options on a volatility target index?

There seems to be increasing interest in risk controlled products such as volatility target indices and derivatives products on these underlyings. From a risk management perspective what are the ...
John Channing's user avatar
4 votes
1 answer
691 views

Basel II modelling vs Solvency II modelling?

How do the two modelling frameworks compare? I spent some time developing PD LGD and EAD models for banking portfolios... But I never did insurance modelling project which I suspect is based on ...
user40's user avatar
  • 2,707
6 votes
2 answers
406 views

Is it common to use multiple brokers for risk reduction?

Would it be considered appropriate risk-management or overkill to utilize multiple brokers to manage a given trading strategy? A couple specifics: I'm interested in what a reasonably-sized hedge ...
G__'s user avatar
  • 828
9 votes
2 answers
3k views

How to annualize Expected Shortfall?

I have a time series with monthly data from which I compute the expected shortfall empirically, following the classical definition which can be found, for example, in wikipedia's definition. That is, ...
SRKX's user avatar
  • 11.1k
16 votes
3 answers
5k views

How to compute the Value-at-Risk of the sum of two dependent lognormal random variables?

Hy I posted this question first at mathflow.net they suggested me this page, which I was not aware of. Question Let $(X_1,X_2)$ be a multivariate normal random vector ($X_1$ and $X_2$ need not be ...
bobbey's user avatar
  • 163
12 votes
4 answers
65k views

What are some examples of non-financial risks and contingency plans?

There are many online sources about common risk factors in investing and trading e.g. market risk, credit risk, interest rate risk. There are various factor models (Fama-French, Carhart) and risk ...
Joshua Chance's user avatar
22 votes
2 answers
1k views

How do macro funds manage risk and model asset returns? Do they use factor models?

Some of the largest funds in the world are entirely macro-based: Soros, Brevan Howard, Bridgewater. They trade across asset classes, and seemingly with very concentrated allocations. What type of risk ...
gappy's user avatar
  • 3,593
47 votes
5 answers
4k 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 ...
Shane's user avatar
  • 9,245
49 votes
8 answers
52k 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.
Jack Kada's user avatar
  • 809
27 votes
4 answers
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 ...
Kiril's user avatar
  • 905

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