18 votes

Quantifying climate change risk

Here are some resources that I found useful when learning about this subject, in which I'm very interested. (Some may be more general ESG than just just climate.) Citigroup. Environmental and Social ...
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15 votes
Accepted

Is volatility for the next day forecastable? To any extent?

Upon close reading, this appears to be 3 (interesting) questions, not one. I'm not sure if the mods have the tools needed to split it up, so I'm just going to write down the three questions as I see ...
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6 votes
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Why would there be a positive risk-free rate?

Risk-free rate is that you get for letting someone else use your money in a riskless manner. Suppose we live in a world where there is no risk whatsoever. In particular, if you lend someone \$100 ...
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  • 471
5 votes

questions on VAR manipulation

First, I am quite sure that this is a typo and it should be $$ 0 < VaR_1 < VaR_0 $$ then $$ -VaR_0 < -VaR_1 $$ and the plot is correct. Second, the put strategy does not change only the ...
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  • 13.3k
5 votes
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Actually benefiting from logistic regression to estimate probability of default

Firstly, the use of the logit models to estimate the PDs is particularly appreciated in some credit industries, as, for instance, the credit retail one. The logit model predicts pretty well the PD on ...
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  • 2,446
5 votes
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Can portfolio Value-at-Risk be calculated analytically for multivariate t-distributed returns?

Let the $n-$dimensional vector of returns $\mathbf{r}$ have a multivariate t distribution with $\nu$ degrees of freedom. The marginal distribution of any component $r_i$ has a univariate t ...
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  • 3,365
4 votes
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What structural model does Reuters use for default probability?

Reuters uses a proprietary model defined StarMine structural/SmartRatios Credit Risk model that has been developed by themselves and provided with the Reuters data service. It does not exist a formal ...
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  • 2,446
4 votes

Hierarchical Risk Parity with allocation constraints?

EDITED You are right. We have to look town to the "leaves" in each iteration. I would do it the following way: If $L_i^{(j)}$ is the set of indices in the $j$ branch ($j \in \{1,2\}$), then we ...
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  • 2,894
4 votes
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Quantitative risk management for energy markets

The book "Managing Energy Risk An Integrated View on Power and Other Energy Markets" by Burger et al. (2014) may be very helpful as it not only introduces the relevant notions, but does so directly ...
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  • 197
4 votes
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Why does Hierarchical Risk Parity ignore the clusters generated?

This turns out to be a general drawback of the HRP algorithm, as pointed out by Pfitzinger, J., & Katzke, N. (2019) (my highlights): As shown in Figure 2.3, the naive bisection rule can violate ...
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  • 227
3 votes

Why would there be a positive risk-free rate?

The risk free rate is important and the reason for the inclusion and consideration of the risk free rate is that investors do not get compensated for not taking on risk. Now, we can argue whether the ...
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  • 14.1k
3 votes

Quantitative Real Estate Investment Finance

Quant finance is about finding prices of illiquid assets in terms of more liquid assets. So if you have the the data for liquid small house prices you should be able to come up with a reasonable ...
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3 votes
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How do energy companies measure the magnitude of the risks of buying energy at a variable price and selling it at a fixed price?

@Noob2’s comment above is “spot” on. Across the natural resource and energy value chains there are significant price risks that: A. Market prices will fall below price takers’ unit costs; and, B. ...
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3 votes

PD and LGD for ECL calculations needs to be time dependent?

I assume that you calculate ECL in the context of IFRS9 -correct? market practice often follows the following appraoch: estimate a TTC PD/LGD (TTC = through the cycle). This corresponds to your ...
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  • 13.3k
3 votes
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Open source projects to gain demonstrable experience in implementing modeling in C++

I would give GitHub a try. Searching for option pricing or machine learning or anything like that yield a ton of repositories with implementations that you can look through and learn from. Here are ...
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  • 3,770
3 votes
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Model Validation Aggregation Documentation (Binomial, Hosmer-Lemeshow, Tolerance) - Credit Risk et cetera

Take a look at these: Bauke Maarse. Master Thesis: Backtesting Framework for PD, EAD and LGD (2012) https://essay.utwente.nl/61905/1/master_B._Maarse.pdf Fábio Yasuhiro Tsukahara, Herbert Kimura, ...
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3 votes
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Filtered Historical Simulation VaR for swaps

Let us suppose for concreteness that the 10y swap rate is 0.5% today and was 7% a year and and 6.5% a "year minus a day" ago... reprice the swaps for each historical scenario and calculate ...
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3 votes

Filtered Historical Simulation VaR for swaps

Adding to Dimitris' answer (this is a too long for a comment) Proceed as follows: Identify risk factors $r^{(i)}$, $i=1\ldots n$. Say the absolute returns of the pillars 1Y,2Y,...30Y of the ...
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  • 5,853
2 votes

How to calculate unsystematic risk?

Unsystematic risk of a single stock can be calculated as follows: $$\sigma_\lambda-\rho_{\lambda,m}\sigma_\lambda=\sigma_\lambda(1-\rho_{\lambda,m})$$ where $\sigma_\lambda$ is the volatility of ...
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  • 27k
2 votes

How to calculate unsystematic risk?

I have studied unsystematic risk [USR] for more than two decades. In fact, I wrote a book (which is here) whose central focus is how to deal with USR in the valuation of non-public companies. It is a ...
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2 votes

Gamma vs. Volatility Risk

This is a not a theoritcal/academic answer relating the two by an equation. But from a practicioners stand point. The relationship between vol and gamma depends on the strategy your putting on. For ...
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  • 2,018
2 votes

Why would there be a positive risk-free rate?

In my opinion, risk free rate is not necessarily positive and not so important to pricing theory. It happened to be positive in most cases, but imagine a planet using Uranium-235 instead of gold as ...
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  • 2,107
2 votes

Why would there be a positive risk-free rate?

My non-rigorous answer: The future is uncertain. Even if there is no financial risk to investing in the "risk free" asset there is personal risk. For example, I could get hit by a car and die. ...
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  • 1,329
2 votes
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Estimate correlation of time series whose histories differ in length

The technique is sometimes referred to as full information maximum likelihood. It is more general than the technique you describe, but it is similar. Basically you start with the data with the longest ...
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  • 5,311
2 votes

What does it mean if $\beta$ is insignificant in the CAPM model?

Look at the process of estimating your $\beta$ (since if you ask about significance, you have an estimation viewpoint): you try to fit a linear model between your returns $r$ and a factor returns $F$ ...
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  • 10.6k
2 votes
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Minimum PD under Basel II retail asset?

From the Basel II accord: For corporate and bank exposures, the PD is the greater of the one-year PD associated with the internal borrower grade to which that exposure is assigned, or 0.03%. So it ...
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  • 1,335
2 votes

Quantitative Real Estate Investment Finance

In fact there is at least one application, namely in the pricing of reversions. The simplest case of a reversion is where there is no ground rent, and where exclusive possession (including the right ...
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2 votes
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How can I compare two mutual funds' performance with a sparse set of data?

I think the only valid answer is you can't. The techniques you describe would work of the signal was much stronger than the noise but it seems that with your fund returns this is not the case. You ...
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  • 7,692
2 votes

Portfolio risk analysis in Options & Mixed portfolios

I'm not sure were your problem exactly lies, but of course you can apply standard risk techniques: identify your risk factors (like stock prices and Implied Vol., yieldcurves, credit spreads, ...) ...
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  • 828
2 votes
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Calculating HIstorical VaR with short time series

The best approach is awfully subjective but by characterizing your data set with EVT (e.g. Generalized Pareto Distribution) you could extrapolate into the tail which will give you more risk levels ...
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  • 139

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