Questions tagged [risk-models]
The risk-models tag has no usage guidance.
153
questions
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
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. ...
- 13.4k
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 ...
- 3,583
22
votes
3
answers
3k
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
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
18
votes
1
answer
615
views
performance of historical VaR parameters
An historical VaR measure is parameterized in terms of the confidence level and also number of periods. Specifically, the $\alpha$% T-period VaR is defined as the portfolio loss x in market value over ...
- 13.5k
18
votes
2
answers
1k
views
Stochastic modelling of 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 common stochastic ...
- 13.6k
16
votes
12
answers
167k
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
16
votes
3
answers
7k
views
Gamma vs. Volatility Risk
Original Question: What is the link between Gamma and the Volatility Risk?
It leads me to ask:
- What is the Volatility Risk definition and what are the good practices to measure it?
Thinking about ...
- 608
15
votes
1
answer
1k
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 ...
- 1,830
14
votes
1
answer
811
views
Has any research used Bayesian networks to estimate risk factor betas?
Is there any published research on estimating the beta of a security with respect to one or more risk factors via Bayesian networks?
I'd like to see if this is a promising angle of research.
- 13.5k
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 ...
- 9,797
12
votes
1
answer
1k
views
Models for measuring insurance risk exposure
I've recently begun working as a quant for a large bank, and one of my first tasks will be to improve the model determining the risk exposure of their insurance portfolio. The portfolio is fairly ...
- 263
12
votes
1
answer
683
views
What weights should be used when adjusting a correlation matrix to be positive definite?
I have a correlation matrix $A$ for an equity market that is not positive definite. Higham (2002) proposes the Alternating Projections Method, minimising the weighted Frobenius norm $||A-X||_W$ where $...
- 699
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
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 ...
10
votes
2
answers
2k
views
Hierarchical Risk Parity with allocation constraints?
In the really interesting paper by Marcos Lopez de Prado a variation of risk parity is applied whereby the underlying assets of the portfolio are first split in 'correlation clusters' and the ...
- 441
9
votes
2
answers
2k
views
Quantitative Real Estate Investment Finance
I'm wondering if there is an application of quantitative finance to real estate investment? Specifically I'm wondering about models for pricing small neighborhoods (or even single houses) that take ...
- 91
8
votes
4
answers
3k
views
What does it mean to modify the factor loadings of a credit risk model?
I came across an example where a well-known weakness of a credit risk model was dealt with by augmenting some of the existing risk factors via increased factor loadings. This made the the model more ...
- 2,687
8
votes
4
answers
3k
views
Multi Factor Credit Risk Models
I am working in the area of building credit risk models. Upto this point, the model I have been focused on using the Asymptotic Single Factor Model, more popularly known as Vasicek Single Factor Model....
- 193
7
votes
7
answers
4k
views
Recommendation for a book on CVA/Credit Risk and PD/LGD/EAD modeling?
I need suggestions for some good books on the following topics:
Credit Value Adjustment (CVA) / Credit Risk
Probability of Default / Loss-Given-Default / Exposure-At-Default modeling
Any pointers on ...
- 421
6
votes
2
answers
637
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
6
votes
1
answer
3k
views
Performance Attribution : Annualizing alpha & factor return contributions
Let's say I have a factor model which I am using for Performance Attribution. I'd like to separate returns from alpha vs. returns from exposure to various risk factors.
For each date, the factor ...
- 13.5k
5
votes
5
answers
1k
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
5
votes
1
answer
480
views
questions on VAR manipulation
The book of Financial Risk forecasting by Danielsson gives the following example about VAR manipulation. I have two questions:
1) If $0> VAR_1 > VAR_0$ , why the following figure plots it as $-...
- 173
5
votes
1
answer
689
views
Quantitative risk model for an open real estate mutual fund in Europe
How useful are quantitative techniques for the risk analysis/management of a open real estate fund?
I am thinking about an approach for Europe (US and other markets are probably quite different - ...
- 13.6k
5
votes
2
answers
531
views
quantiative risk measure how they are implemented in R and their use
So far I have just theoretical knowledge of risk measure and never used them in application. Therefore I have some basic question how risk measures are used in reality and how they are implemented in ...
- 1,718
5
votes
1
answer
1k
views
Definition of risk factors for market risk scenario testing
I am doing a research for stress testing in market risk. The usual process I found out for scenario testing is:
Define risk factors upon the portfolio
Define the desired scenarios
Vary the risk ...
- 482
5
votes
0
answers
117
views
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 ...
- 295
4
votes
9
answers
3k
views
Why would there be a positive risk-free rate?
Most financial models include a risk-free rate or risk-free asset.
Why should there be such thing as a positive risk-free rate?
I dont see why an asset would provide a positive (real) return if it ...
- 5,749
4
votes
1
answer
1k
views
Can portfolio Value-at-Risk be calculated analytically for multivariate t-distributed returns?
It is widely known that VaR is generally not sub-additive in all but the most restrictive cases (typically when a Gaussian return distribution is assumed, which fails when it matters the most).
...
- 622
4
votes
2
answers
188
views
How do energy companies measure the magnitude of the risks of buying energy at a variable price and selling it at a fixed price?
Power and gas retailers are exposed to a variety of risks when selling to domestic customers. Many of these risks arise from the fact that customers are offered a fixed price, while the retailer must ...
- 213
4
votes
1
answer
555
views
What structural model does Reuters use for default probability?
When using Reuters, for each listed company there is credit tab that shows relevant information in terms of credit default. There is also rating class as well as one year default probability. It is ...
- 319
4
votes
1
answer
223
views
Dominating credit risk modeling approaches for capital calculation in banks
In Basel/CRR (capital requirement regulation) there are various approaches for the estimation of capital requirements.
For corporate exposures there is the Foundations IRB approach (F-IRBA, own ...
- 13.6k
4
votes
1
answer
120
views
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 ...
- 5,662
4
votes
2
answers
3k
views
How to add Risks-Not-In-VaR (RNIV) to VaR under Basel III
I am trying to generate/prove the magnitude of the over-conservativeness of the regulatory VaR (internal models) under Basel III against what a more accurate VaR would be.
However, I can't seem to ...
- 622
4
votes
1
answer
99
views
Measuring interest rate sensitivity for illiquid private investments?
There seems to be surprisingly little literature on this topic. If you had a portfolio consisting of an unlisted illiquid private asset class (eg private real estate, direct infrastructure or private ...
- 1,074
4
votes
1
answer
675
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 ...
- 2,687
4
votes
1
answer
2k
views
Modelling VIX Futures for risk management
I would like to model VIX futures. The aim is not pricing but risk management. Thus I want to get risk measures like volatility right and be able to accurately calculate correlations when the VIX ...
- 13.6k
4
votes
1
answer
768
views
Long-term vs short-term strategies \ investing
Suppose most investors have very short investing horizons and use appropriate (for them) strategies, but investor X has a very long horizon. He would like to trade some advantages (early withdrawal ...
- 131
4
votes
1
answer
835
views
Discrete time Ho lee model
This is my first question in this forum. I am stuck with my current testing the Ho Lee model. I am having difficulty computing the perturbation factor $\Delta$.
The ho lee model should be completely ...
- 41
4
votes
1
answer
467
views
What research exists regarding implementation of reverse stress testing?
I need to implement a reverse stress testing model (definition here)
I have searched around and cannot find anything substantial on the topic. Does anyone know of any good papers/references ...
- 791
4
votes
0
answers
84
views
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, ...
- 421
4
votes
0
answers
108
views
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 ...
- 141
4
votes
0
answers
162
views
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 ...
- 41
4
votes
0
answers
124
views
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 ...
- 73
4
votes
0
answers
9k
views
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 ...
- 153
4
votes
0
answers
181
views
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 ...
- 13.6k
4
votes
0
answers
828
views
Help With Quant Modelling Software [closed]
Im a software developer (freelance) working in investment banking, and I'm looking to improve my CV by gaining a better understanding of the financial quant role and the software used by quants to ...
- 149
3
votes
2
answers
2k
views
Determining portfolio risk return in R given historical data for individual holdings?
Currently we compute portfolio risk and return via our own C# program. Historical data is stored in a SQL database. We want to compute the risk and return parameters - given a portfolio (i.e. not ...
- 183