Questions tagged [risk]

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

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4
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1answer
164 views

Whats the big deal between volatility and the risk free rate?

I am trying to understand asset price volatility. Many of the news articles I read link how stock market volatility is linked to asset price volatility? To give an example, in Mike Mackenzie's (...
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1answer
577 views

Calculating Expected Shortfall of combined portfolios

So I am reading lecture notes here: https://courses.edx.org/c4x/DelftX/TW3421x/asset/Week3_var_3_slides.pdf The example is this: We have two independent portfolios of bonds. They both have a ...
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2answers
175 views

Cashflow Risk vs Discount Risk

Studying asset pricing, I often hear the terms cashflow risk and discount risk but I'm not sure what they mean? The Campbell/Shiller (1988) decomposition includes cashflows (future dividends) and ...
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3answers
246 views

Backtesting of Risk models

I am wondering if there is any difference between 2 terms call model backtesting and model validation from the perspective of <...
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0answers
22 views

lot size formula for cfd and forex based on risk percentage

I have a question regarding the calculation of the lot size for cfd and forex instruments when we have a risk amount as a percentage of the balance. So how to compute the lot size to trade knowing the ...
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1answer
47 views

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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2answers
75 views

Is there a way to formulate a Martingale series that will never explode?

Martingale's betting method can be seen here:https://www.investopedia.com/articles/forex/06/martingale.asp My question is if there is a way to put a non-exploding martingale, [There is one attempt to ...
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1answer
35 views

Textbook about methodologies for computing margins (TIMS and SPAN)

I'm reading and trying to understand TIMS and SPAN methodologies for margin calculations. In the internet I found these 2 great resources and that's what I'm using to get familiar with things: TIMS ...
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0answers
30 views

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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3answers
1k views

Which is riskier: a call option or the underlying?

From Joshi's Quant Interview Questions and Answers: What is riskier: a call option or the underlying? (Consider a one day time horizon and compute which has bigger Delta as a fraction of value). I ...
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1answer
171 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. ...
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1answer
1k views

Is it more common to hedge a mortgage bond portfolio with other bonds as opposed to Interest Rate Swaps? [closed]

Is it possible to get interest rate swaps on mortgages? If not, why not? Are there models that describe this? Any direction would be great.
2
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1answer
61 views

liquidity of a portfolio of options

In the asset management industry, many reports contain liquidity metrics such as the no. of days to liquidate 95% of a position, based on a certain participation rate. If that position is a stock or a ...
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0answers
25 views

Is there a clear mathematical statement of what problem Hierarchical Risk Parity is solving?

Prado's paper is really just an algorithm for solving some inverse problem. Has anyone seen a clear statement of that inverse problem? Or do you know how to write it simply? The first step is just a ...
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1answer
3k views

cvxpy portfolio optimization with risk budgeting

I'm trying to do some portfolio construction in cvxpy in Python: ...
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0answers
124 views

Optimizing a portfolio under known risk

I want to maximize the return of a $n$-asset portfolio under known risk: $$\max_{\{w \in \mathbb{R}^{n}|w_{1}+...+w_{n}=1\}} \; \mathbb{E}\left[\sum_{i=1}^{n}w_{i}R_{i}\right]$$ under the constraint $$...
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1answer
44 views

Risk-Weighted assets and Risk Weight

I am not really sure I understand the meaning of Risk weight defined as RW = RWA/EAD, where EAD = Exposure at Default RWA = Risk-Weighted assets From a bank's perspective: If I have two portfolios, ...
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0answers
46 views

Why is Calmar ratio considered not to satisfy monotonicity?

We have the following definitions $\text{Gain-loss ratio} = \frac{E[X^+]}{|E[X^-]|}=\frac{E[X^+]}{-E[X^-]}=\frac{E[X]}{-E[X^-]}+1$; where $X$ are the returns, $E[X^+]$ is the expected gain, i.e. $E[X|...
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0answers
6 views

Valuating risky annuities. (Default & Recovery)

As the topic says, I want to price a risky annuity. There are 2 things that I'm uncertain of. Whether the probability of default is correctly defined. Value of payments in the event of default. In ...
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0answers
15 views

scenario-specific covariance matrices for minimum regret portolio allocation

I am trying to follow the paper here https://www.wiwi.uni-siegen.de/banken/dokumente/2._szenariobasierte_aa_englisch.pdf and implement the minimum regret approach. In particular, the decision under ...
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2answers
84 views

Definition of drawdown

Say I am considering the entire time horizon, is max drawdown what I've drawn in blue, or what's in purple? Likewise, how about the current drawdown for the period in black (in practice, I am asked ...
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1answer
44 views

how to relate risk aversion and sharpe ratio in optimisation

I am trying to optimise the following: U(w)=w′μ−λ/2w′Σw which is the typical risk aversion problem. I would like to set lambda in order to have the max sharpe but I cannot find in literature what is ...
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1answer
613 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 ...
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2answers
45 views

Binomial model and delta hedging

I've got a question about theory which is probably a one line answer. I use to understand it but I'm stuck right now. In the Binomial model, we define the progression of the price as: $$ S_k = S_{k-...
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5answers
204 views

Why worry about fat tails, if you can use stoploss?

Sorry this might sound a silly question, but -humbly- I don't understand why models assume that returns range from [-∞,+∞] instead of [-stoplimit, +takeprofit]. A common objection to most models is "...
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0answers
34 views

Sign of DV01 for FRA and IR Swap and Their Relationship

I'm confused with the sign notion (positive or negative) of DV01 for FRA and IRS. Say if I short FRA and also long IRS (pay fixed receive Float) with same underlying, does that mean both dv01 of these ...
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0answers
17 views

Results of Fama french three factors model and Fama MacBeth cross sectional regression

I am doing research work on “Idiosyncratic volatility and stock return”. I have calculated Idiosyncratic volatility with the help of Fama french three factor model. IV is defined as the standard ...
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1answer
31 views

Properties of risk aversion

What are some common properties for risk aversion? I know the basic definition of the risk premium, absolute risk adversion, relative absolute risk adversion. Besides the basic definition, what are ...
4
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1answer
62 views

CRRA Ultility, simple question

for CRRA, does increasing gamma leads to increase in risk-aversion? Looking at the curve, I think increasing gamma leads to less in risk-aversion (since the risk preimum is less). But in terms of ...
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2answers
137 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
40 views

Results of Fama MacBeth regression

I have run Fama MacBeth cross section regression of of Excess Return of stocks on Idiosyncratic volatility, the log of market capitalization, book to equity ratio and Beta. I'm getting all significant ...
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0answers
30 views

Currency of CDS and adjustment of interest rated for country risk

I have question concered currency of the CDS spreads. In the analysis I am conducting, I perform adjustment of interest rates for country risk (CDS could be a reference to reflect a country risk). ...
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1answer
58 views

The ratio of upside deviation to downside deviation in portfolio weighting

I've been calling this ratio "acceleration" in my head, so I'll do the same in this post. The question is, is this relationship used anywhere and if so, how? My thought process is as follows. Risk ...
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1answer
79 views

Risk Neutral Pricing, a quick question [closed]

I am a newbie. The risk neutral pricing has the following formulation: $$P=\frac{\hat{E(d)}}{R}$$, But the discounted expected value has the formulation of: $$P=\frac{E(d)}{R}$$. The text book ...
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1answer
96 views

Computing covariance matrix with historical data

I have been reading Active Portfolio Management by Grinold and Khan. In the chapter about risk, they mention, "The third elementary model relies on historical variances and covariances. This ...
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0answers
25 views

relation between duration and credit risk

I am curious if there is a relation between duration and Credit risk measure for callable bonds. I recall seeing it somewhere but can't find the details. Credit risk measure would be sensitivity of 1 ...
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1answer
69 views

Determining Value at Risk of a Poisson distribution

If my discrete random variable had a poisson distribution with both moments say equal to 10, how can I find the Value at Risk for a 95 percent confidence interval? I have seen that I need to ...
3
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1answer
60 views

Economic interpretation of Time-varying beta (systematic risk) in portfolio analysis

What is the economic interpretation of Time-varying beta (systematic risk) in portfolio analysis and the main economic difference with costant beta. I'm not interested in how to estimate it but just ...
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0answers
65 views

CVaR portfolio optimization with risk aversion parameter

I'm trying to implement the Rockafellar's function described in this paper http://past.rinfinance.com/agenda/2009/yollin_slides.pdf with a risk aversion parameter for my thesis. The function to ...
2
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1answer
42 views

Incremental/marginal contribution to VaR in a simulation setting

Estimating marginal contributions to VaR in a simulation setting is apparently quite difficult (see e.g. this blog post) due to issues with sampling variability. My question is whether the following ...
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2answers
68 views

How is the risk premium of the index estimated?

In the construction of an index model, we often use the expected return of a security, including surprises, for analysis. To calculate this, we must estimate the risk premium of the index. Since we ...
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0answers
33 views

QuantConnect Strategy Metrics

I am new here and trying to write new strategies. I am a good computer engineering student working on robotics now, but I want to see the opportunities(money) in the financial fields. Currently, I am ...
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0answers
36 views

Advantage of copula over estimation based on historical data

It seems to me hard to intuitively understand the concept of copulas and their advantages. For example, why would it be better to estimate value at risk of portfolio by modelling its asset returns ...
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1answer
54 views

How to calculate R for strategies with dynamic exit points

Calculating risk-reward ratio R is easy when trading a straight forward strategy which has its entry and exit points clear: ...
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1answer
89 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 ...
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2answers
261 views

Ways most financial institutions measure risk

Does most financial institutions measure risks in terms of https://en.wikipedia.org/wiki/Coherent_risk_measure? Or are they using other/newer theoretical tools?
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1answer
40 views

Assymmetric Risk Call Option

I'm reading in Radu Tunaru's book "Model Risk in Financial Markets" and he argues that two parties in the financial contract do not have the same magnitude of exposure to model risk. The reason for ...
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1answer
1k views

Calculate Idiosyncratic Risk?

I have basic finance background but I am trying to calculate idiosyncratic risk as measure for firm risk in my CEO gender research. I have found the following on Alpha architect but I am unsure of ...
4
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1answer
81 views

What are non-variance (non Markowitz) based theories of capital allocation between non-correlated assets?

A large amount of literature in finance accepts the standard deviation in return as if it were an accurate measure of "risk." What are some other financial theories for how to allocate capital ...
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28 views

Is time diversification effective?

If the returns are log-normal, how do I find the probability of negative returns, since log can only take positive values as an argument. Also, for time = more than 1 year, how do I find the ...

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