Questions tagged [risk]

The possibility that a negative event (such as a loss) will happen.

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9
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3answers
6k views

Where can I find a list of VaR and CVaR formulas for continuous distributions?

Where can I find more VaR and CVaR formulas for continuous distributions? I collected a list here:
2
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2answers
62 views

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 ...
-1
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2answers
118 views

Hedging a stock with its index constituents?

Problem: select and weight 4 constituents of an index to hedge a particular stock I would appreciate any feedback on my approach, here is I would go about it: Create a new index of four ...
0
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1answer
40 views

Is it possible for rating agencies to rate a security higher than what it should be rates without maleficence?

In the run up to the 2008 financial crisis, many securities that were risky were rated much higher, at say, AAA. Raghuram Rajan in his book "Fault Lines" argues that this could does not necessarily ...
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0answers
27 views

Coherent and convex risk measure for a ZCB portfolio

I have the composition of one ZCB portfolio at the time $\ {t_1,...,t_n}$. I have to estimate the volatility of the single ZCB following (Bruder et al., p.6, 2011) https://mpra.ub.uni-muenchen.de/...
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0answers
39 views

Can simultaneous trades happen?

Investigating about matching engines i found that none of them acknowledges the scenario when two identical orders arrive at the exact same time. I get that it is very unlikely for this to happen, ...
1
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1answer
512 views

Market Risk - Trading and Banking book in light of Basel III

I can not understand whether Basel III (in the part of market risk) applies both to Trading Book and Banking book or just to the first one. I have read that for what concerns Banking book you only ...
2
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3answers
107 views

How do I derive a blend of a 3Y future and 10Y future risk?

So I have a portfolio of Govt. bonds that I'm trying to hedge with futures. Let's take one of the bonds out of the portfolio as an example. In bloomberg, every bond and its future counterparts has a ...
0
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0answers
41 views

Why price with lower volatility yield higher expectation under risk neutral measure

Suppose $S_1$ and $S_2$ are two asset prices, such that, E[$S_1$] = E[$S_2$] under physical measure and $\sigma(S_1)$ > $\sigma(S_2)$. Then why E[$S_1$] < E[$S_2$] under the risk neutral ...
2
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1answer
110 views

Modified Sharpe ratio

I would like to model different type of investors, hence I need to find some kind of utility functions to optimize. Apart from very abstract exponential utility function, I couldn't find any proper ...
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0answers
38 views

Classical Ruin Theory - Lundberg Model

In classical risk/ ruin theory, I see this formula crop up in my notes but my lecturer didn't explain to me why/ when it's employed: $M_X(r) = \int_{-\infty}^{\infty} e^{rx} f(x) dx$ I understand ...
2
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4answers
308 views

Risk aversion and risk-free rates

New to finance. When I read textbook like Financial Economics by Bodie, I encountered the following idea, namely, higher risk aversion is associated with higher risk premium and lower risk-free rate. ...
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0answers
31 views

Skewness and kurtosis measures when full distribution is not available

I have asked this question here, but did not get any answer. I was wondering if anybody knows a method of deriving skewness and kurtosis measures from different quantiles, mean, and/or variance. I do ...
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0answers
17 views

Portfolio construction with volume based bars

In the book Efficiently Inefficient, Lasse Pedersen interviews Myron Scholes: LHP: Why do spreads tend to widen during some periods of stress? MS: Well, capital becomes more scarce, both physical ...
1
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1answer
81 views

Backtesting model results, but backtesting output sampled at different frequency than model output

So, I'm trying to backtest a model that computes P&L. This model pulls sensitivities on a weekly basis and applies market shocks to these sensitivities to project quarterly P&L. I want to ...
2
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1answer
88 views

Credit VaR Formula

in Chapter 23 of Hull's Options, Futures, and Derivatives he has an example (i.e. example 23.4) which shows how the Credit VaR formula is applied. The answer in the formula is 0.128. I can't seem to ...
6
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1answer
213 views

Non-contractual accounts behavioural study

I need to carry a non-contractual accounts behavoiural study for a bank. The objective is to estimate core/non core ratios and then bucket and ftp them. Any recipe where to start? I have 3yrs of ...
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0answers
45 views

Mean Semivariance Optimization VS PMPT

Mean Semivariance optimization defines semivariance, variance only below the benchmark/required rate of return, as: $(1/T).\sum_{t=1}^{T} [Min(R_{it}-B,0)]^2$ where $B$ is the benchmark rate, $R_{i}$...
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0answers
30 views

How to calculate R for strategies with dynamic exit points

Calculating R is easy when trading a straight forward strategy which has its entry and exit points clear: ...
20
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4answers
4k 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. ...
14
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4answers
4k views

Equity Risk Model Using PCA

I'm trying to build a simple risk model for stocks using PCA. I've noticed that when my dimensions are larger than the number of observations (for example 1000 stocks but only 250 days of returns), ...
1
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1answer
117 views

PCA on a portfolio of spot and forward contracts

I have a portfolio of spot and FX forwards on various currencies all based to AUD. I need to able to quantify how the changes in amount, tilt and curvature of the AUD curve would impact my p/l. ...
1
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1answer
205 views

Calculating Flat Price Risk for Physical Commodity Trades

I've been reading Craig Pirrongs Economics of Trading Firms published by Trafigura: https://www.trafigura.com/media/1364/economics-commodity-trading-firms.pdf Very informative read. The point I have ...
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0answers
54 views

One periodic binomial model

I need to look into a one-period Binomial model $(B_t, S_t)$ with interest rate $r = 0.1$ , $S_0 = 100$ and $$ S_t= 120 \, \text{with probability}\, 0.5 $$ $$ S_t= 60\, \text{with probability}\, 0.5 $$...
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1answer
1k views

Portfolio optimzation : efficient frontier with respect to risk aversion parameter with R

I am currently trying to write a little script in R to determine the optimal weights given a fixed risk aversion parameter. The problem I have is that by increasing the risk aversion parameter I think ...
10
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2answers
9k views

Annualzing the log of daily returns riddle

Two popular ways to measure returns are Arithmetic returns and Log returns. Let's define arithmetic (simple period) returns as: P(t) - P(t-1) / P(t-1). Let's define log return as Ln( P(t)/P(t-1) ) or ...
2
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0answers
33 views

To price Municipal Bonds and risks I want to know the percent of unfunded pension liabilities ($3.8T) to total state and local gov liabilities

Unfunded pension liabilities keep growing and this seems alarming to both pension holders but also Municipal Bond holders. I would like to know how large this problem is to better price Munis and ...
3
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1answer
780 views

Which sports are generally the best for trading on betting exchanges for a profit?

I am looking at trading bets on tennis, football and horse racing in particular as these appear to have the most liquidity. How much background research and how much trial and error is generally ...
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0answers
17 views

Are Muni REVENUE bonds secured or can the local gov. use the revenues for other purposes not paying the bond holders if its going bankrupt? [closed]

Municipal bonds are of two kinds: GO (General Obligation) Bonds or Revenue Bonds. My question on Revenue Bonds is: are the revenues from the specific project secured or can the local government use ...
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0answers
22 views

American Option - Early exercise risk management

This is for American Option Book Management in real trading. Let`s suppose, American Option seller(Book manager) only do delta hedging, which means seller cannot do Vega hedging, American Option ...
3
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0answers
55 views

Using transaction data to predict default of the customer

I am trying to build a prediction model that utilize the huge transaction database of all the customers of a bank. My dataset currently looks like this: ...
0
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0answers
51 views

Options trade - statistically expected return calculation?

I am calculating expected return for composite option strategies based on event probabilities provided by the broker. For example, consider the following spread On the left hand side we see: maximal ...
23
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7answers
8k views

When does delta hedging result in more risk?

A question from an interview book: When can hedging an options position make you take on more risk? The answer provided is the following: Hedging can increase your risk if you are forced to ...
1
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1answer
15k views

Cumulative vs marginal probability of default

I understood the cumulative (aka unconditional) probability of default to be the probability of defaulting in a given period eg: between years 1 and 5. Further $\pi_{cumulative} = 1-e^{-\lambda*t}$ ...
7
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4answers
1k views

Why should there be an equity risk premium?

After years of mathematical finance I am still not satisfied with the idea of a risk premium in the case of stocks. I agree that (often) there is a premium for long dated bonds, illiquid bonds or ...
2
votes
1answer
101 views

What does 5 year OIS actually mean?

I am aware that OIS is the new reference/risk-free rate for collateralized cashflows. OIS is by definition an overnight rate (annualized, I assume). So once I have constructed my OIS yield curve, what ...
4
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1answer
91 views

Why is change in risk premium not a violation of the Efficient Markets Hypothesis?

A passage in my textbook is confusing me. It states that various market indicators (e.g. yield spreads between high/low grade bonds, earnings yields) lead to predictability in the security's risk ...
0
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0answers
47 views

CRRA Utility Function Problem

"Assume an investor with total wealth of $100 that has a constant relative risk aversion (CRRA) utility function. The functional formula for the CRRA utility function is given as $\ U[W]=\frac{W^{1-θ}...
2
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1answer
84 views

Allow drift in weights in a risk benchmark?

I am tracking the risk of portfolios using a standard 2-asset benchmark (S&P500 / Agg bond) and I want to throw a flag if the risk of a portfolio goes outside of a certain range relative to that ...
1
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1answer
157 views

Total risk from asset allocation and security selection

My company's multi-asset fund has been using risk metrics methodology to calculate ex-ante VaR and tracking error for years. Due to hardware limitation, the calculation only reflects active risk from ...
1
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0answers
17 views

single period security market with two assets

Consider a single period security market with two assets. Assume the current prices are There are two states at time one and the payoff matrix is 1.Suppose the investor believes that each state has ...
1
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2answers
283 views

Absorption Ratio

I'm actually trying to implement Mark Kritzman's absorption ratio (Principal Components as a Measure of Systemic Risk by Kritzmam, Li, Page and Rigobon, 2010, SSRN 1633027) using Python, but I'm not ...
10
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2answers
6k views

Why using the swap curve as riskfree rate and no longer gov bonds?

I recently had an interview where I was asked what to use as risk-free rate. In all my textbooks it was always the US treasury yield curve. But they said no its now the "swap curve". Why is the swap ...
2
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4answers
316 views

Which rate to use as a risk free rate in emerging markets?

By looking at Fama and Frenchs global Portfolios, they just use the USD-RF rate as the risk free rate, because they converted their Returns to US-Dollar. Im currently estimating Strategy Returns in ...
1
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1answer
145 views

Barra model: why standardize the fundamental risk factors?

The two main types of risk factors included in the famous Barra model are called the "fundamental factors", and "industry factors," and the thing that I do not understand is why are only the former ...
0
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2answers
127 views

understanding Value-at-Risk correclty

The are several types how to calculate the VaR. I am focussing on the method of calculation the VaR in percentage. $VaR=I*z*std*\sqrt{t}$ This gives the VaR in €. I have the z-value, the daily ...
3
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3answers
445 views

Risk prediction based on financial statements

I have a profit loss statement and balance sheet with the following fields: Example P&L Turnover420,363 - Cost of sales £118,730 £140,169 - Gross Profit £...
23
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3answers
10k views

What is a “coherent” risk measure?

What is a coherent risk measure, and why do we care? Can you give a simple example of a coherent risk measure as opposed to a non-coherent one, and the problems that a coherent measure addresses in ...
0
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0answers
23 views

Adjust the Capital Market Line For Margin Interest

Modern Portfolio Theory assumes unlimited borrowing and investing at the risk-free rate. Of course, this is not realistic; margin interest costs several multiples of the RFR, especially for portfolios ...
0
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1answer
85 views

Having only 2 Industry risk factors?

Is it possible to build a risk model that only has 2 industry risk factors? For example, if I wanted just Tobacco and Healthcare industries as risk factors can I do that? If I did that do I have to ...

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