# Questions tagged [risk-models]

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18 views

### Cs01 computation for TRS with underlying single name bond

What’s the cs01 calculation formula for TRS with underlying bond for a single corporate issuer? Thanks in advance!
19 views

### Approximating Distortion Risk Measures by the Sum of their CVaRs

Can you please cite me to the paper that prove the theorem that any distortion risk measure can be approximated using the sum of its CVaRs? Someone said it is Axiomatic Characterization of Distortion ...
181 views

### What is the proper way to derive risk definitions from utility functions?

In typical mean-variance analysis, the risk-adjusted relative value of an individual asset takes the general form $\frac{\mu}{\sigma^2}$, with further weighting and normalization depending on the ...
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### PCA and OLS regression to transform to interest rate risk? [duplicate]

I’ve been working on different interest rate risk transformation methods for swaps and was interested in implementing PCA & OLS regression. I’m looking to bucket my exposure in all tenors to ...
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### How to create custom factors based on an existing factor model?

I'm searching some literatures or books illustrating how to create custom factors based on an existing factor model. For example, given an existing Barra factor risk model, if I want to add some ...
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1 vote
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### What is the informational content of the volatility skew?

The option-implied volatility is well-known as a measure for the risk-neutral future expected risk for the underlying asset. However, the market prices of options (across different strikes) imply ...
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### How should I create a Risk measurement Variable?

I have clients who take loans (Advances) weekly. The way that they repay the advance is after 3 weeks when their goods are sold, using the sales proceeds of the goods. But if the goods don't sell for ...
437 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 ...
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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 ...
130 views

### 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 ...
1 vote
87 views

### 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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466 views

### 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 ...
996 views

### 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 ...
1 vote
200 views

### 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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1 vote
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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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### 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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50 views

### 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 ...
1 vote
301 views

### 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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548 views

### 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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124 views

### 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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77 views

### 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 ...
205 views

### 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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### 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 ...
196 views

### 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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### 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 ...
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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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