Questions tagged [risk-models]
The risk-models tag has no usage guidance.
153
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Can PCA be used to transform a ladder of interest rate risk?
The context
For traders/market makers on interest rate swaps desks, it is essential to have a model that transforms risk from its most complex representation (i.e. a ladder of every tenor) into a less ...
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equities hedging betas for a cross-sectional risk model
This question is on equities risk models. I would like to know how to define betas when using a cross-sectional regression approach, rather than the time series approach. My goal is beta hedging of a ...
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Probability Theory: Maximizing the difference between distribution functions
Given a sample of observations $X$, by changing a parameter $p$ we can divide $X$ into two subsamples $X_1$ and $X_2$ (this division is done in a non-trivial way which is nonetheless irrelevant to ...
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Simulating of short rate model
I'm trying to simulate the risk factor of PFE from the interest rate model.
For example, under Vasicek model :
$$dr_t = k(\theta-r_t)dt + {\sigma}dW_t$$
with the analytic solution, we can simulate N ...
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2
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Risk mapping for Brazilian IPCA bonds [closed]
On Jorion's 'Value at Risk' chapter about risk mapping, interest rate swaps are decomposed in a portfolio of forward contracts so they can be mapped into risk factors.
I'm trying to implement this for ...
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Minimizing variance of a long short equity portfolio in practice
I understand the finance 101 explanation of how to minimize variance of a long-short portfolio using a covariance matrix. I also know that it doesn't really work because the covariance matrix is ...
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Market risk factor proxies examples [closed]
I am reading some corporate documentation, including the notion of market risk factor proxy. Could you provide some examples of risk factors and their proxies?
What I find obvious is the observable ON ...
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Is "extreme CVaR" (CVaR from extreme value theory) elicitable or conditionally elicitable with some other statistical mapping (like VaR)? [closed]
I am not able to find loss function (scoring function) extreme CVaR (CVaR from extreme value theory) which is a conditionally elicitable statistical mapping (conditioned on VaR).
In this regard, can ...
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Aggregation of (cross-sectional) Factor model
Suppose I have a large factor model for security returns, i.e. I have a vector $\mathbf{Y}(t) \in \mathbb{R}^{P}$, with factor loadings $\mathbf{\beta} \in \mathbb{R}^{P \times K}$ over a set of $K$ ...
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240
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Question on effective days of an exponentially weighted moving average model
I have been reading the book "RiskMetrics —Technical Document" by Longerstaey (J.P.Morgan) and Spencer (Reuters) (4th Edition, 1996). I am wondering what the effective days of the ...
user64706
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584
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Marginal Risk Contribution under Factor structure
Given the factor structure below with K factors, the return for N assets is given by (under matrix notation):
$R =\alpha + \beta F + \epsilon$
where $F$ is matrix of K factor returns and $\beta$ is ...
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117
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How to test a risk model?
I'm reading the Barra risk model handbook (2004) available online and trying to understand the methodology. I've read a few materials on portfolio theory, so I can get at least the theoretical ideas ...
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94
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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, ...
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116
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Introductory Books to Network Theory
Can anyone please suggest a good introductory book to Network Theory which is the area of mathematics that is widely used for systemic risk and contagion modeling in finance. If the book contains some ...
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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?
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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 ...
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Why does Hierarchical Risk Parity ignore the clusters generated?
I am currently working through the Hierarchical Risk Parity algorithm (Lopez de Prado (2016) link ) and trying to understand each of the steps.
I have completed the step of creating the clusters, and ...
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are there any good papers on sector-specific versions of factor models?
Does anyone know of any good papers that build sector-specific (utilities, financials, energy, etc.) versions of factor models like the Fama French 3-factor or Carhart 4-factor models?
For example, ...
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299
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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 ...
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107
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Practical implications of Andy Lo paper on Sharpe ratio using quarterly returns?
I am hoping to determine the practical implications of the Andy Lo paper criticizing the use of a scaling factor in converting periodic Sharpe ratio to annualized Sharpe ratio. I am particularly ...
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Ruin theory with infinite-mean Pareto-distributed claims: how to characterize the ruin time and the reserve prior to ruin
Consider the Cramér–Lundberg model
$$\hspace{8em}R(t)=u+c\,t-\sum_{j=1}^{N(t)}V_{j}\,,\hspace{8em}(1)$$
where $c$ and $u$ are positive constants, $N(t)$ is a Poisson process with a rate $\lambda$ (in ...
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Market Risk FRTB - How to demonstrate that the linear transformation of the alternative definition of Vega reflects the actual vega risk?
I have a question regarding the use of alternative vega sensitivities (bank system sensitivities) in the context of the Vega Risk Charge of the SBM.
The article 325t.6 of the CRR allows banks to ...
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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 ...
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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 ...
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Variables for retail lending of bank
Typically to estimate the credit-worthiness of customers in retain bank lending, banks generally consider many demographic and socio-economic variables most importantly -
Age, number of dependents, ...
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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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166
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Calculation of Expected Shortfall using IMA Approach ( FRTB)
I am trying to calculate the Expected shortfall of a FX portfolio through IMA Approach of FRTB in excel . I have used several combinations in excel to get the liquidity horizons and then calculate the ...
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2
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141
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What happens if my risk factor caught by statistical risk model using PCA turns out to be totally different from other PM's risk factor? [closed]
In order to explain systematic risk we use risk factors and I've learned that since they try to explain 'systematic' risk, risk factors are relatively well-known.
However, what happens if the risk ...
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Is implied volatility really all that usefull?
I take implied volatility as the positive floating point number which lets the BS formula match an observed option price (assuming we have some useful interest rate, some underlying, etc).
How useful ...
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Arrow Debreu Price vs Green's function
How is the Arrow Debreu Price related to Green's function at an intuitive level and how is this used in practice?
Note Added 2021/02/01
I came across this in the Black Derman Toy model paper by Boyle, ...
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Downside deviation (semivariance) in m.v. portfolio optimization
Currently I am considering the downside deviation or semivariance in a m.v. optimization framework.
For this specific measure of risk I have found in papers different formulae. The majority of them ...
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Mean Absolute Deviation in m.v. portfolio optimization
I just read some articles about $MAD$ as a measure of risk in finance.
Is the following formulation a correct way to implement a $MAD$ portfolio optimization model which minimizes risk without ...
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Implied Gamma VS Implied Volatility
Reading this paper, I'm struggling to understand what the author is saying with paragraphs below (see pages 39-42):
We define Implied Gamma ($\Gamma_{\operatorname{implied}}$) as the value of the ...
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Capital Allocation, VaR, Expected Shortfall
Are there any serious drawbacks / weaknesses in the Euler allocation method, when used to allocate VaR capital (and potentially Expected Shortfall) to risk factors in a portfolio? I notice that ...
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Model Validation Aggregation Documentation (Binomial, Hosmer-Lemeshow, Tolerance) - Credit Risk et cetera
I came across some document that says for a PD (Probability of Default) model in order to assess its accuracy you need to first look at the Binomial Test, then the Hosmer-Lemeshow Chi-square test, ...
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I’m trying to construct a binomial model that uses 2 risky model - number of steps varied
So with this question I am unsure how to even do a binomial model with 2 risky assets never mind having n-steps. All the examples I’ve found are either not containing any risky assets or only have one....
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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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Do the weights of the exponentially weighted moving average (EWMA) have to sum to 1?
I am currently trying to calculate a volatility by using the EWMA model because it is said to yield better results than just using an equal weighted calculation approach. However I am a bit confused ...
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ESG risk factors
In the context of EU action on sustainable finance, the European Commission has initiated a series of regulations in order to achieve the goals of Paris Agreement on sustainability.
One of those ...
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Ratios or combinations of risk measures
In finance, alternative risk measures such as value-at-risk (VaR) and GARCH are introduced as replacements to standard deviation volatility.
Is there any application or value where several risk ...
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874
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Open source projects to gain demonstrable experience in implementing modeling in C++
I have a mathematics background with a PhD in mathematics (not related to stochastic processors or financial mathematics) and have been in derivatives valuation for around 6 years. When applying for ...
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Why didn't stock markets drop in response to COVID-19 earlier, way before Feb 21 2020?
The S&P500 started to drop only on Feb 20 2020, and the Nikkei 225 and the FTSE 100 on Feb 21 2020. Yet as early as Jan 120, COVID-19 was reported in Hong Kong, South Korea, and Japan. Their ...
user31928
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How to model/price the risk of Covid-19 and other pandemics
How would you model and price the risk of Covid-19 pandemic? These large cost low probability events with very little history seems to pose a particular challenge when quantitatively modeling and ...
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Quantitative risk management for energy markets
I'm currently preparing an exam about energy markets. The knowledge of notions of quantitative risk management accounts for the 50% of the total exam. During my university education, though, I didn't ...
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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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3
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PD and LGD for ECL calculations needs to be time dependent?
I'm studying the implementation of an expected credit loss (ECL) model. I have encountered a complication. Do I need to calculate a probability of default (PD) and loss given default (LGD) with a time ...
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1
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179
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Demonstration of the Schweinler-Wigner Orthogonalization procedure
Can anyone give me a practical demonstration of the Schweinler-Wigner Orthogonalization procedure? The steps of performing it or possibly a code snippet.
The Schweinler-Wigner Orthogonalization ...
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4k
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Absolute and Relative Value at Risk
Is it correct to calculate the VaR as 99% max between loss and profit. E.g. if 99% VaR on the loss side of the distribution is -100, and on the positive side of the distribution there is a value ...
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435
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Stop-Loss strategies
Does anyone know some bibliography about the problems or limitations of using Stop-Loss strategies in a portfolio?
Let me explain better: for example you can have a portfolio of 30 stocks from ...
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How to correctly simulate volatility shocks?
I am working on the comparison of different volatility timing/target strategies on portfolios starting from different conditions (data, asset classes, calculation of realized volatility, different ...
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