Questions tagged [risk-models]
The risk-models tag has no usage guidance.
45
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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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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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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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Why are thousand-ish-factor vendor risk models not extremely overfit and inaccurate?
Many vendor risk models have many hundreds, or even thousands of factors (many of which are highly correlated with each other). Underlying all these risk models is some sort of covariance matrix in ...
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credit risk - How to calculate the probability of default (private companies)?
Part of my master thesis I am working with a company. I have the project to use their financial database with all the financials data (7 years) of approximately 3’000 companies.
They have their own ...
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Risk factors for derivatives on dividends
I consider pricing and risk analysis of derivatives on dividends of the members of equity indices (such as Dow Jones EuroStoxx). There are options but I focus on futures.
What are the main risk ...
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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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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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Standard Assumption Terminology
Regulators are starting to analyse (or at least they are talking about it) model assumptions. We all know that too often our assumptions are just in the model documentation. Furthermore, we have no ...
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Benchmarking risk
Given the portfolio return $R$ and the benchmark return $B$, I want to define a risk indicator, measuring the ability to beat the benchmark ($R>B$), given the downside risk taken; the latter not ...
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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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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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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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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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Need to solve the stochastic differential equation of Vasicek Model
How to solve the stochastic differential equation of the Vasicek model for the analysis of credit risk? I search in the article "The Distribution of loan portfolio value" (Vasicek) but he doesn't ...
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Hedging jump models with a infinite number of derivatives
First of all, I inform you that I am not a financial mathematician and have vague knowledge about an incomplete market.
Stochastic volatility models are incomplete so derivatives cannot be ...
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Derivative and Credit Risk Modelling
I am looking at acquiring a system to help with multi-instrument modelling. Across the spectrum Equity/FI/Swap/Repo/CDS/FxSwap/Forward/Future/etc for vanilla and more complex derivatives. The modeling ...
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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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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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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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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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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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Regression model: short vs long history
There is a dilemma between choosing short history (1-2 years) and long history (5-10 years) for a regression model. Are there any resources that offer some findings on pros and cons of these two? From ...
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Markowitz models with uncertain returns
I am analyzing the Markowitz models with uncertain returns as follows: after calculating the expected returns and the covariances of 30 monthly historical series of 30 stocks, I resolve the Markowitz ...
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Does it make sense to subtract VaR from spot shocks?
I have a model to compute the Event Risk (in dollars) from a shock to the spot price of an asset. I also have the 10-day VaR PnL for the same assets returns. These two numbers are then aggregated to ...
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Barra covariance matrix construction
I am trying to replicate the covariance matrix used by Barra risk models.
All Barra models have half life parameters for volatilities and correlations (e.g. if the half life for volatlity is 90 days, ...
- 1,830
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Trouble verifying roll rate model
I found this paper on roll rate analysis via a google search. I would post a link, but every page is stamped with "CONFIDENTIAL" at the bottom (humorous since it is easily found). In a nut-shell, ...
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Market risk calculation for Fixed income position
I have come across a somewhat strange formula (atleast to me) for Value at Risk calculation for a Bond position. This typical formula looks like below:
PnL = Beta * "Some industry Credit spread" * ...
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Create Markets Bubble Indicator
I am trying to replicate a Bubble Indicator described here.
The indicator is strictly based on calculating the regularity of price behavior to determine herding in multiple time frames. I tried the ...
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Should portfolio be optimized by marking to the future than marking to market (excluding currencies)?
Observing the negative interest bonds in Switzerland, Denmark, GErmany the value of higher presently (credit-free) outgoing cash flows seems less important than the value of lower future (credit-free) ...
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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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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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How to Risk and Return using Carhart 4 factor model
I have to calculate firm risk and return for a group of firms. I have firm CUSIPs. I also have access to CRSP data from WRDS. Can someone explain to me how I can use CRSP and data from Ken French’s ...
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Factor Loading with multiple exposures?
How do I decompose portfolio exposures when assets may have exposure to a few of my risk factors?
For instance I have some sector and state specific risk factors. If I have a bond with exposure to ...
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Barra Equity Risk Model Methodology
I am interested in learning about the Barra's Equity risk model methodology. When I google, this is the first file that comes up: http://www.alacra.com/alacra/help/barra_handbook_US.pdf
However, it ...
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Full Revaluation vs Factor-based Model for risk management
I am looking for literature on comparison of these two approaches.
It looks like many places are using some type of Factor-based Model (Barra, Axioma, Northfield, etc.) for risk management purposes. ...
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Risk-neutral probabilities
I will use this theorem 3.2 from the book "Quantitative modeling of Derivative Securities" by Marco Avellandea:
Theorem 3.2 - Assume that there is no arbitrage, i.e. there exists a risk neutral ...
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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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Backtesting a stock scoring model
I'm working on a simple stock scoring model consisiting of 3 factors:
1.market cap
2.liquidity of the stock
3.the value at risk
we defined 3 intervals for each factor and we assigned the ...
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Math basics of Equally-weighted Risk contributions
i'm writing my BA Thesis about "Equally-weighted Risk contributions". Can anyone recommend math books for further understanding of Risk contributions?
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