Questions tagged [risk]
The possibility that a negative event (such as a loss) will happen.
593 questions
2
votes
1
answer
102
views
EURIBOR Fixing Risk
So this is really about EURIBOR as we are in a RFR framework in other major currencies. I'm interested in understanding the exact EURIBOR fixing risk a swap trader really faces if he manages a large ...
- 963
0
votes
0
answers
114
views
Bond Risk Premium (Term Premia) vs. Equity Risk Premium
I'm generally a bit confused about risk premia, especially when we talk about term premia. My understanding is term premia is the equivalent of the equity risk premium for bonds, which describes the ...
- 41
5
votes
1
answer
234
views
How are factors determined on a basis to fully describe/decompose risk/variance?
In The Prediction of Systematic and Specific Risk in Common Stocks by Rosenberg & McKibben (1973), the authors mention in section III. "A Stochastic Model of the Parameters":
but the (...
- 2,862
0
votes
0
answers
71
views
Are factor (return) relationships more stable than stock (return) relationships?
In Grinold & Kahn (2000) (Expected Returns and the APT, Chapter 7), the authors state that - "One of the non-APT reasons to focus on factors is the knowledge that the factor relationship is ...
- 2,862
0
votes
1
answer
82
views
Tracking Error Vanguard BND ETF
I am taking BND ETF total returns and Agg total returns, monthly over 10 years ending 12/31/2024, and calculating the annualized tracking error. What I get blows me away: 57bp of tracking error over ...
- 53
3
votes
2
answers
504
views
Advanced utility functions that distinguish risk from uncertainty
During my reading of Investments by Bodie, Kane & Marcus (a textbook in finance), in section 5 (Risk Tolerance and Asset Allocation) of chapter 6 (Capital Allocation to Risky Assets), I found this ...
- 2,862
1
vote
1
answer
193
views
Is GARCH (and or it's variations) actually used in risk-modelling for expected-shortfall?
I understand there are limitations and practicality issues with GARCH, but does any company actually use it in their risk-management system when calculating their expected-shortfalls? Even as a basis ...
- 119
1
vote
0
answers
67
views
Why would a pension fund use immunization?
According to wikipedia, https://en.wikipedia.org/wiki/Immunization_(finance), immunization (i.e. ensuring assets and liabilities are affected similarly by rate movements) is used by pension funds to '...
- 31
2
votes
1
answer
144
views
VBO - Vega Break Out
Good morning, everyone,
I would need to understand what is meant by vega break out of options on underlyings having themselves an expiration.
The trader showed me a matrix with one dimension ...
- 21
1
vote
2
answers
762
views
Flip a coin $5$ times in a row. If you get $5$ Heads, you get $\$28$. How much would you pay to play?
In preparation for quant interview season, I tried out interview questions and came across the following one:
Flip a coin $5$ times in a row. If you get $5$ Heads, you get $28$ dollars. How much ...
- 330
0
votes
1
answer
414
views
PCA risk modelling
Been doing loads of reading about PCA, FA and SVD but still fail to understand the fundamentals of how PCA links with factor analysis in the context of risk modelling. Here is where I'm stuck:
Given a ...
- 1
2
votes
1
answer
477
views
Improving Portfolio Optimization on a Mean-Variance Basis
Is there a point to conduct research to improve mean-variance optimization (MVO)? Because I understand that most of the poor performance in MVO is a result of the estimation error in expected returns.
...
- 2,862
2
votes
1
answer
405
views
When optimizing a portfolio for risk parity, can any portfolio weights turn negative?
As the title reads, when performing risk parity optimization (equal risk contribution amongst all assets to the portfolio volatility), is it possible for weights to turn negative?
I understand that in ...
- 2,862
2
votes
1
answer
226
views
Cubic Spline Interpolation partial derivative to the point
Still didn't figure out this, so looking for some help, kindly apppreciated.
By this blog https://blog.timodenk.com/cubic-spline-interpolation/index.html, the piecewise cubic spline interpolation is ...
- 21
1
vote
1
answer
218
views
Calculating marginal risk contribution of FX for foreign asset portfolio
I am a European investor investing in US equities. My US equities portfolio returns in EUR can be broken down into (1) equities returns in USD terms, and (2) USDEUR spot currency returns.
Using the ...
- 25
6
votes
2
answers
321
views
On measurements of ambiguity and their shortcomings
Ambiguity in quant finance is defined as the uncertainty in the probabilities of the return distribution, whereas risk is defined as the uncertainty in the returns of the asset.
There are various ...
- 2,862
0
votes
0
answers
74
views
Taking a set of normally distributed random variables as the sample space to fitting an exponential distribution
Disclaimer, this is my first question/interaction in this forum.
Let's assume I have random variables that are normally distributed. Then, say I take the observations that are greater than the mean, i....
- 1
0
votes
0
answers
140
views
If investors are risk-neutral, should the (equity) risk premium be zero?
I looked up ChatGPT and they stated that the (equity) risk premium should be zero for a risk-neutral world. The definition of a risk-neutral investor is that one is indifferent between additional or ...
- 2,862
2
votes
1
answer
327
views
From parameter risk (sensitivities) to market risk (sensitivities)
In models where the underlying is not modeled directly - such as in the HJM framework or short rate models - how does one then compute the Greeks, i.e. sensitivites wrt. market variables.
As an ...
- 588
1
vote
1
answer
263
views
Value At Risk Modelling for electricity market with negative prices
I'm a bit at loss after trying to find papers regarding tail risk for electricity markets. There doesn't appear to be a whole lot of literature (or perhaps I haven't managed to find it) regarding ...
- 11
2
votes
1
answer
1k
views
Can PCA be used to transform a ladder of interest rate risk?
The context
For traders/market makers on interest rate swaps desks, it is essential to have a model that transforms risk from its most complex representation (i.e. a ladder of every tenor) into a less ...
- 449
0
votes
0
answers
83
views
Estimating risk premium with cross sectional regression
I am trying to estimate a carbon risk premium according to the Fama & MacBeth methodology using a cross-sectional regression approach.
Therefore, I regress the excess return in period t+1 on the ...
- 9
4
votes
0
answers
104
views
FRTB - Federal Reserve vs Basel
The federal reserve has released its proposed Market Risk rules for Basel III.
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230727a.htm
Is anyone aware of any resource that compares ...
- 73
0
votes
0
answers
216
views
"fix" a sample covariance matrix which is not positive semidefinite by using daily returns instead of monthly
In the portfolio optimization problem at hand, one of the constraints is that the tracking error should not be greater than $\gamma$.
The constraint is therefore:
$(\textbf{x}-\textbf{w})^\mathrm{T}\...
- 1
0
votes
1
answer
75
views
Intuition behind risk-return realation (Mark Joshi's concepts 1.2) [closed]
In Mark Joshi's "The concepts and practice of mathematical finance" section 1.2, it is given an intuitive motivation behind "high risk high returns" claim. It goes as follows:
...
- 53