risk


risk - Can Economic Capital cover Regulatory Capital?

Economic Capital (EC) covers potential losses under normal conditions, whereas Regulatory Capital (RC) covers potential losses under stressed conditions. Thus, is not uncommon for the RC to be grater... Read More


risk - Credit VaR Formula

Here is the excel formula with steps: =NORMSDIST((NORMSINV(0.02)+NORMSINV(0.999)×SQRT(0.1))/SQRT(1−0.1)) =NORMSDIST((−2.054+3.09×SQRT(0.1))/SQRT(1−0.1)) =NORMSDIST(-1.135) =12.8% They keep changing t... Read More


Examples of Spectral Risk Measures

I believe that Prospect Theory (as defined by Kahneman, Amos, and Tversky) implicitly makes use spectral risk measures. Though I am not able to find any literature linking the two, I think there is c... Read More


Which lags or percentiles should be run in a batch when calculating Value-at-Risk?

Standard (read: regulators will accept it) could be a one day, 99% VaR calculated with two years of historical data. A minimum of one year of history is needed although this is not the norm. Typicall... Read More


equities - When should you build your own equity risk model?

Great question. We would expect 3rd party risk providers to have specialized expertise (robust regression techniques, factor research, data cleansing etc.). We might grant them these advantages but s... Read More


high frequency estimators - How to manage equity portfolio risk intraday?

The first issue you need to care about using intraday data to compute beta is the Epps effect (collapse of correlation when you zoom in). This effect comes from different parts, the first being that... Read More


derivatives - What is the purest way to get exposure to Jump risk premia, is there a jump swap

The closest contract to this is gap risk which does trade, either as OTC swap (client looking for a hedge) or embedded inside a structured note (bank looking to recycle risk). Basic starting point i... Read More


terminology - Backtesting of Risk models

Just adding the time/frequency dimension difference to what was said above: model backtesting is a model performance technique which takes place on an ongoing basis (in particular for VaR, breaches n... Read More


risk - Where to find good notations to teach investment portfolio maths?

Financial markets & Corporate Strategy - Grinblatt & Titman The book is very intuitive, but as a consequence less comprehensive than ex. Options, Futures, and other Derivatives by Hull (which is seen... Read More


capm - Why are investors risk-averse?

Below you find some observations... In CAPM, we assume people are risk-averse and people get compensated for the systematic risk they suffer. The assumption that most people are risk-averse makes se... Read More