Risk Model Methodologies

Risk Model Methodologies Nick Wade Northfield Information Services, Inc. October/November 2005

Motivation ,[object Object],[object Object]

More Motivation – A Recent Quote ,[object Object],GARP Risk Review Issue 16 Jan/Feb 2004

Overview ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

The Linear Model ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Implications so Far ,[object Object],[object Object],[object Object],[object Object],Any of these will result in Model Error

Evidence ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],We need to adjust model to accommodate broken assumptions

Estimating a Risk Model The Variance of a portfolio is given by the double sum over the factors contributing systematic or common factor risk, plus a weighted sum of the stock-specific or residual risks.

Practical Approaches ,[object Object],[object Object],[object Object],[object Object]

Exogenous Model ,[object Object],[object Object],[object Object],[object Object],[object Object]

Endogenous Model ,[object Object],[object Object],[object Object],[object Object],[object Object]

Statistical Model ,[object Object],[object Object],[object Object],[object Object]

Assumptions with Endogenous ,[object Object],[object Object],[object Object],[object Object]

Assumptions with Exogenous ,[object Object],[object Object],[object Object],[object Object]

Assumptions with Statistical ,[object Object],[object Object],[object Object],[object Object]

Estimation Issues: Exogenous ,[object Object],[object Object],[object Object],[object Object],[object Object]

Estimation Issues: Endogenous ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Estimation Issues with Statistical ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Errors in Variables ,[object Object],[object Object],[object Object],[object Object]

Other Approaches ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Hybrid Model ,[object Object],[object Object],[object Object],[object Object],[object Object]

Simultaneous Estimation ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Effect of Model Errors ,[object Object],[object Object],[object Object],[object Object],[object Object]

Other Model Issues ,[object Object],[object Object],[object Object],[object Object]

Adjustments for Error ,[object Object],[object Object],[object Object],[object Object],[object Object]

Non-Stationarity Adjustments (1) ,[object Object],[object Object],Adjust Model for the influence of non-stationary factor returns

Non-Stationarity Adjustments (2) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Adjust Model for the influence of non-stationary security returns

Heteroskedasticity ,[object Object],[object Object],[object Object],[object Object],[object Object]

Pause for Thought ,[object Object],[object Object],[object Object],[object Object]

Historical Attribution or Forecasting ,[object Object]

Objectives should drive Model ,[object Object],[object Object],[object Object],[object Object]

Forecast Horizon ,[object Object],[object Object]

What happens if it doesn’t? ,[object Object],[object Object],[object Object],[object Object]

Is it Alpha or Beta? ,[object Object],[object Object],[object Object]

Alpha or Beta? (2) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Alpha, Beta, and Portfolio Construction ,[object Object],[object Object]

Forecasting: Conditioning Alpha ,[object Object],[object Object],[object Object]

Portfolio Construction ,[object Object],[object Object],[object Object],[object Object]

Country, Industry, Sector, Region… ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Country, Industry, Sector, Region…(2) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

How many factors…? ,[object Object],[object Object],[object Object],[object Object]

Conclusions ,[object Object],[object Object],[object Object]

References ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

References II ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

References III ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Risk Model Methodologies

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