Questions tagged [risk]

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

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0answers
30 views

Flattening a Credit Loss Curve

I have a credit loss curve for 36 months and I want to transform that curve into a 20 months curve without changing its final loss. My credit loss vector is a % of unpaid principal balance in a ...
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63 views

Preferred Stock pricing model

I am trying to build a model to price a preferred stock. I want to model the dividends as random payments. I can't find any papers online on the subject. Does anyone have a reference for me?
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3answers
278 views

How to estimate market based PD and LGD for small enterprises?

I am estimating CVA/DVA for derivatives... How to estimate PD and LGD (or RR) based on market data for the small enterprises, if there is no external rating for them and they don't have bonds or ...
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0answers
50 views

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 ...
4
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1answer
195 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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4answers
106 views

How to test the linearity assumption of a model?

Let's say I want to have a model that projects income over a stressed period. I have a marked-to-market component that shows the P&L of trading book positions during this stressed period. Along ...
2
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1answer
41 views

Literature on return sensitivy in respect to: growth, risk and profitability

I am currently writing my master's thesis, wherein I am looking for supporting literature. Specifically, I wanted to know if there had been any research relating to how the: growth, risk and ...
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94 views

Reference request for research on the maximum drawdown **ratio** (NOT value)

Let's suppose the asset price process follows a Geometric Brownian motion $S_t \sim GBM(\mu, \sigma),\,t\ge 0$, and define the two process: $$ \begin{align} \text{MSF}_t &:= \max_{\tau\in[0,t]} S_\...
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45 views

Transformation of random variables and second-order stochastic dominance

Suppose $X$ and $Y$ are two random variables where $X$ SOSD* $Y$. Let $g(\bullet)$ be a monotonic function and $X'=g(X)$ and $Y'=g(Y)$. Under what conditions of $g$ is $X'$ SOSD $Y'$? I know if $g$ ...
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1answer
114 views

Markowitz portfolio risk with PV01 instead of variance

As the PV01 ($= dpdy \times notional$) of a bond is a measure of its risk, as well as its price return variance, could we measure the risk of a bonds portfolio with the Markovitz portfolio variance ...
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3answers
100 views

How to determine the optimal start capital for a strategy?

Suppose my strategy generates a stream of daily profits distributed like 𝒩[μ=1€, σ=10€]. Intuitively, if I trade with 10€ start capital: I could very well be ruined on the first day, if the first ...
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151 views

How to reasonably aggregate returns across both different assets and different time-horizons?

This might be a somewhat open question, so any suggestion of improvement is welcome. Suppose at time $t=0$, we have $N$ different assets whose weights are $w_1,\cdots,w_n$ ($\sum w_i = 1$), and they ...
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1answer
916 views

Calculate unsystematic-risk of a firm in a regression with SD or R2?

i'm studying for a finance exam and i can't answer this question. It is asking me to calculate the unsystematic risk of firm A and i have the following information: Return firm A: 0,1% + 1,...
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2answers
163 views

Imputation of missing returns

I'm trying to calculate a historical VaR for a portfolio of futures, however there are certain days for which some assets are missing prices. Since the portfolio consists of many spread positions, the ...
2
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1answer
105 views

Why Can I not estimate a CVAR from Heston Model

I fit the parameters of Heston model, using option data for SPX. Now I have the process S and P 500 is expected to follow. I make 100,000 simulations of this process and then calculate the expected ...
2
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4answers
398 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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2answers
141 views

Procedures to follow when VaR model fails backtest

I was wondering what the correct procedure is to follow when a VaR model fails a backtest (either conditional coverage and/or independence tests)? Assuming I am restricted to using a historical VaR ...
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2answers
885 views

Equal Risk Contribution portfolio scipy optimization not working

I'm trying to create a tool for an equal risk contribution portfolio,essentially following this article (https://quantdare.com/risk-parity-in-python/) but it is failing at the last step (def ...
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0answers
46 views

Are the explanatory factors for a firm's expected returns and its expected earnings/valuation multiples the same?

For example, the 3 factor Fama French model explains much of the cross-sectional variation in equity returns. Would these same 3 factors also explain the cross sectional variation in earnings/EV to ...
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1answer
178 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 ...
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1answer
154 views

Klein and Chow Orthogonal Transformation - Lowdin Orthogonalization

I've doing research on the orthogonal transformation in Orthogonalized Equity Risk Premia and Systematic Risk Decomposition They borrow a mathematical technique called symmetric orthogonalization ...
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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 ...
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2answers
113 views

How do I calculate bad debt on revolving credit?

I have a revolving credit system. A customer purchases and then has 6 months to pay off the purchase. i.e. Purchase for 60 in Jan and then need to pay 10 a month in Feb, Mar, Apr, May, Jun, Jul. The ...
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0answers
67 views

Statistical methods to compare two financial series data

I have two financial series data, x and x', where x' was formed form ...
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1answer
354 views

Why is the expected value of bias statistic one?

I have been reading about factor models recently. One of the ways in which the developer of these models (Barra/ Axioma) measure the accuracy of their models is by calculating the bias statistic for ...
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1answer
1k views

Calculating Total Risk and Idiosyncratic Risk for individual stocks?

I am working on a research project but am having some trouble wrapping my head around how I need to go about replicating two of key dependent variables from (Serfling, 2014). Total Risk, defined as: ...
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1answer
174 views

Risk of Put-Call-Parity in practice

When $C+PV(K) \ne P + S_0$, it's an opportunity for risk-free arbitrage (excluding cost). In practice, what potential risk could make the arbitrage fail? I know that failure to build complete ...
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0answers
383 views

How to compute the portfolio risk when weights are negative?

In QMiF (p. 239) , the variance of a portfolio is defined as: V(R) = w'Vw = w'DCDw = x'Cx Does this formula hold if the weights are negative (i.e., short)? For example, if I have a 5x5 covariance ...
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1answer
208 views

What are the advantages of $EVaR$ over $CVaR$?

$CVaR$, which is short for Conditional Value-at-Risk, has long been accepted by both academe and practice as a good coherent risk measure. Entropic value-at-risk ($EVaR$) is a comparative new coherent ...
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1answer
2k views

Absorption ratio by Mark Kritzman

In Principal Components as a measure of systemic risk, the author Mark Kritzman defines absorption ratio (AR) as the fraction of the total variance of a set of asset returns explained or absorbed by a ...
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51 views

Measuring size risk in CAPM. How one could go about?

I am using valuation methods (e.g. CAPM) in order to measure some projects "baseline" return. I'm not using these measures for stocks returns, but to evaluate specific projects (e.g. dam constructions)...
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1answer
281 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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1answer
1k views

What is the industry standard way of calculating and annualizing performance metrics?

Say I am looking at a performance report for a hedge fund manager who trades mostly equities, and they provide me a list of monthly returns for the past 5 years. What is the industry standard way to ...
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2answers
657 views

Risk Parity / Equal Risk Contribution with Tail Risk Measures

Risk Parity or (synonymous) Equal Risk Contribution is an approach to portfolio construction which could work in theory with a broad class of risk measures. Yet, all references I have found so far ...
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0answers
72 views

z-score of an active return with a no-volatility benchmark

I don't know how to approach the problem I am having. Basically, the statement I am trying to make is: the fund's return is X standard distribution away from the mean. Normally, for a single fund, ...
2
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1answer
440 views

Calculating beta to market

Let's say we want to compute beta to S&P500 of a portfolio, using 3 years of weekly returns, as of today. We would take each stock in the portfolio and regress the weekly returns of that stock ...
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1answer
628 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
530 views

Why do par-yield shifts grow faster across the curve than spot-rate shifts when looking at key-rates?

Consider the following 10y key-rate shifts of bond par yields and its implied shift of bond spot rates: Assume we have the key-rates for 2y, 5y, 10y and 30y. The y-axis is in basis points, and the x-...
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0answers
53 views

Cramer-Lundberg: Adjustment coefficient does not exist

The question is about Ruin theory and the Cramer-Lundberg model. I am wondering if there is an example of distribution where the MGF is finite, but the adjustment coefficient does not exist. Can you ...
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1answer
125 views

Using Normal Distribution to forecast active return

I wanted advice on how to go about forecasting active return via a standard normal distribution, The asset is a security with annual volatility of 6%. The benchmark is a 5% annual return with 0% ...
2
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1answer
92 views

Sigma moves - annualize return or no?

This might be a very simple dumb question. But when you look at a security's annualized volatility over a 3 year period, assuming the security has an annualized vol of 5% and the drawdown over three ...
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1answer
208 views

Variance covariance matrix - number of periods required

Hi I am reviewing the example of Barra risk model in the following document page 23 there is the statement: "Estimating a covariance matrix for, say, 3,000 stocks requires data for at least 3,...
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1answer
125 views

Independence of initial wealth for Constant Absolute Risk Aversion

Suppose a consumer's preference over wealth gambles (lotteries) can be represented by a twice differentiable Von Neumann Morgenstern utility function. Show that the consumer's preference over gambles ...
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1answer
221 views

Value-at-Risk and dividend payments

How should dividends be considered when computing Value-at-Risk for a stock portfolio using Historic data. To simplify let's consider a very simple portfolio of one long position on a stock. My VaR ...
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1answer
645 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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1answer
57 views

Knightian Uncertainty Iff Bayesian Probabilistic View Point

If an investor operates under knightian uncertainty, does that investor then have a Bayesian viewpoint on probability implicitly, and vice versa? Has this been answered or do I have a poor ...
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1answer
120 views

Creating riskless portfolio in black scholes

$$\begin{align} d\pi &= \theta dV + dS \\[3pt] & = (\theta \partial V/\partial t + \theta \mu S \partial V/\partial S + \theta S^2 \sigma^2 \partial^2 V/2\partial S^2 +\mu S ) dt + (\theta \...
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1answer
3k views

Semivariance calculation (downside deviation)

what is the accurate formula for semivariance? I see two versions up to now: this version which considers as N (denominator) all the numbers over/under the mean-or any other number. This is the ...
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0answers
68 views

How can I find what Loss Given Default to use

I want to come up with the appropriate loss given default for a commodity derivative in my CVA calculation. would anyone know where I can find this information?
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2answers
2k views

What is time-varying risk premium? Forecasting stock returns

I am trying to understand the concept 'Time-varying aggregate risk premium'. Here is an extract from a Forecasting book, written by Rapach and Zhou, "However, rational asset pricing theory posits ...

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