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Questions tagged [risk-models]

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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 ...
• 169
22 votes
4 answers
6k views

When should you build your own equity risk model?

Commercial risk models (e.g., Barra, Axioma, Barclays, Northfield) have evolved to a very high level of sophistication. However, all of these models attempt to solve a very broad set of problems. ...
• 13.5k
2 votes
1 answer
551 views

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 ...
• 439
25 votes
3 answers
7k views

What is the necessary level of Econometrics-Know-How for a quant

It seems quants increasingly use econometric models at work. As someone who has sold his soul to probability theory and stochastical analysis I would like to catch up. What are the econometric tools ...
• 3,377
22 votes
3 answers
4k views

Cleansing covariance matrices via Random matrix theory

I am exploring de-noising and cleansing of covariance matrices via Random Matrix Theory. RMT is a competitor to shrinkage methods of covariance estimation. There are various methods expressed usually ...
• 13.5k
15 votes
1 answer
2k 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 ...
• 1,860
3 votes
1 answer
1k 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 ...
• 923
18 votes
3 answers
6k views

Is Conditional Value-at-Risk (CVaR) coherent?

When the risk is defined by a discrete random variable, is CVaR a coherent risk measure? I stick to the following definition of CVaR:  CVaR_\alpha(R) = \min_v \quad \left\{ v + \frac{1}{1-\alpha} \...
• 593
13 votes
2 answers
3k views

Cluster analysis vs PCA for risk models?

I built risk models using cluster analysis in a previous life. Years ago I learned about principal component analysis and I've often wondered whether that would have been more appropriate. What are ...
• 9,877
11 votes
1 answer
1k views

Is volatility for the next day forecastable? To any extent?

In a more general way: is there 1) a methodological approach to quantify the correctness of a model that produces a probability distribution for the, say, S&P 500 index return for the next ...
• 153
6 votes
2 answers
643 views

Choice of prior as a shrinkage target in portfolio construction?

There's various research showing how priors such as the minimum variance portfolio turn out to be a surprisingly effective shrinkage target in portfolio construction. The sell point of these priors ...
• 13.5k
5 votes
5 answers
2k views

Physical commodity trading quantitative risk return model

I am very new to commodities, I was previously in portfolio management/optimization (Black Litterman Markowitz etc). I am now a Buy-Sell analyst for Petrochemicals, and need to understand the basic ...
• 193
1 vote
1 answer
95 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 ...
• 923