Financial Risk Management

Financial Risk Management

  • Mostafa Eidiani added an answer:
    What is the best software for performing financial portfolio optimization?
    Which software programs are best at performing optimization of investment portfolios? What makes the programs preferable? Please provide pros and cons if applicable.
    Mostafa Eidiani · Khorasan Institute of Higher Education


    I think Matlab is good

  • Roland Iosif Moraru added an answer:
    What do you understand by Quantitative Risk Assessment?
    A dictionary definition says: "Quantitative Risk Assessment is Use of measurable, objective data to determine asset value, probability of loss, and associated risk(s)".
    Nevertheless in various fields (Environment, Finance, Occupational Health and Safety etc) and in different countries the meaning attributed to QRA differs sometimes significantly. Being highly interested in the field I invite you to brainstorming around this question. Many professionals, researchers and experts should be interested and involved. Thank you.
    Roland Iosif Moraru · University of Petrosani

    Dear Ehsan

    Many thanks for your opinions and comments. They could be of a good help in the debate initiated on this subject.

  • Nazeeh A. Ghatasheh added an answer:
    Risk measurement in banking - do you know any examples of classification for risk measurement?
    I am looking for the classification of risk measurement in banking (credit, liquidity, market, operational). I have some ideas, but maybe I am reinventing the wheel. For example, you can measure risk directly (eg. probabilities) or indirectly (LTV or maturity mismatch). Any suggestions?
    Nazeeh A. Ghatasheh · University of Jordan


    try to check these datasets and publications

    Crook, J. and Banasik, J. Forecasting and explaining aggregate consumer credit delinquency behaviour. 2012

    Hong Yu, Xiaolei Huang, Xiaorong Hu, and Hengwen Cai. A Comparative Study on Data Mining Algorithms for Individual Credit Risk Evaluation, 2010.

    Nazari, Mohsen and Alidadi, Mojtaba. Measuring Credit Risk of Bank Customers Using Artificial Neural Network, 2013

    Hope it would help.

  • Felix Lopez-Iturriaga added an answer:
    Which methodologies or models can be applied to measure the quality of accounting information through the disclosure of financial statements?
    The quality shown in the financial statements accounting information (the conceptual framework of IFRS and FASB, as well as by standard-setting) is treated based on the relevance and faithful representation of the same, keeping the economic substance of the transactions summarized. To declare that it meets the IFRS or national GAAP is not enough to measure quality. Several studies conducted have focused on measuring the amount of disclosure made ​​in accordance with the standards set and asked how we can measure the quality of mandatory disclosure and also generate inferences or proxies for voluntary disclosure, such as "Theories for Disclosure" (Verrecchia) and "Relevance of Accounting Information" (Barth et al).
    Felix Lopez-Iturriaga · Universidad de Valladolid

    From my point of view, this paper is one of the best and most comprehensive approaches to the quality or reported earnings

    Dechow, P., Ge, W. and Schrand, C. 2010. Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of Accounting and Economics, 50, 344-401.

  • Paulo Pereira Silva added an answer:
    How do you measure the relationship between audit fee and stock market risk (unsystematic risk)?

    How do you measure the relationship between audit fee and stock market risk (unsystematic risk)?

    Paulo Pereira Silva · Comissão do Mercado de Valores Mobiliários CMVM

    I aggree with Erik in that there is simultaneity between the variables.

    You should first scale audit fees as a percentage of the assets or enterprise value, because audit fees depend on the size of the firm. After that, you may evaluate whether there is significant time series variation of audit fees to justify a pooled data analysis.

    If you are trying to see if audit fees are explained by idiosyncratic volatility, you should bear in mind that idiosyncratic risk proxies are noisy in the sence that it captures specific information, information risk and microstructure noise if measured at high frequency data. So there are lots of controls to account for.

  • Montserrat Guillen added an answer:
    Can anyone help with the scaling the time horizon for VAR (Value At Risk)?
    I would like to compute the value at risk for a portfolio of several financial instruments (their returns are not normally distributed). My underlying for all of them is the oil price, with normally distributed returns with mean of 0.

    My problem is that I want to compute the VAR for several days from now (10,15, maybe even 30). The common idea says that if the return is normally distributed with mean of 0 you can scale up the VAR by multiplying it with SQRT(Time). Obviously I cannot do that for the entire portfolio VAR.

    Am I allowed to compute VAR for oil price, scale it up by SQRT(Time) and then introduce that (my 5th quantile of oil) into the portfolio valuation and compute the portfolio once?
    Montserrat Guillen · University of Barcelona

    I sometimes go back to the original data and take the time gap I want to consider for VaR calculation. This is handy if you have enough data.

  • Marcus Martin added an answer:
    What is the best risk measurement tools in banks regarding financial risks and how are they calculated?
    Risk measurement practices.
    Marcus Martin · Technische Hochschule Mittelhessen

    According to the current discussions on the so-called "Trading Book Review" by the Basel Committee on Banking Supervision, Value-at-Risk is to be replaced by expected shortfall (or tail conditional expectation) which is also used in internal models for measuring credit risk. Hence, I would suggest to also have a look on this coherent risk measure (cf., e.g., McNeil, A., Frey, R., and Embrechts, P. (2005). Quantitative Risk Management: Concepts, Techniques and Tools. Princeton University Press, Princeton).

  • Levente Szelitzky asked a question:
    What is the criticallity of the transaction BD87 SAP?

    I am pondering about the criticallity of the transaction BD87 as a singular transaction. In combination with WE19 you have the possibility to reprocess and resend successfull IDOCs, enabling fraud risk of false invoices. But what about using the BD87 alone. What security risks could arise?

  • Juan Sebastián Salcedo asked a question:
    How can we measure exchange arte risk?
    Im pretending to measure exchange rate risk in a portafolio of FX market
  • James S Ang added an answer:
    Why are Chinese investors afraid of IPO?
    There is a really strange phenomenon in Chinese stock markets. When the regulation institution decides to get some new companies listed (it is noteworthy that IPO has to get permission from Securities Regulatory Commission in China), the stock market drastic falls and the Chinese investors sell out their stocks crazily.
    Some argue that more stocks listed means that more money is needed by the market, but the supply is constant in the short term. So the stock price falls. But I don't think it explains well what we observe.
    James S Ang · Florida State University
    It is far more complex. Financial institutions do own a sizable allocation of Chinese IPO shares, as they are being instrumental in price setting in the auction process, which is the case in most of the recent period. It has always been difficult to get approval to do IPO where the hurdles such as history of profits are much higher than in some US listing venues, certainly higher than those Chinese stocks gained US listing through reverse merger. So, it is not lower quality firm or information. The problem lies mostly in the type of companies that got approved , many are state affiliated - they are not well run nor would go bankrupt - boring to most investors. They do IPO to raise outside funds. The other factor is timing, CSRC always keep an eye on the state of the stock market in approving IPO. Finally, finance theory based on asymmetric information and agency would interpret stock issue as signal of overvaluation, predicting a correction / price decline.
  • M.Thomas Paul added an answer:
    How to use SWAP (Derivative) as a instrument for hedging risk?
    How to use SWAP (Derivative) as a instrument for hedging risk in risk management?
    M.Thomas Paul · University of the South Pacific
    Once the SBI has already declared such big NPAs , the credit swaps can not be used. Credit swaps can be used at the time of creating assets
  • Bruno Mweemba added an answer:
    Does anyone have experience with research in infrastructure finance risks?
    I am undertaking a research on risk in Infrastructure project finance where I have ranked questions developed for my questionnaire. My interest is to see which risks are more severe within each of the nine categories that I have profiled (ie each category has 5 sub risks). What would be the best statistical outputs to analyse this data? Besides wanting to know which risks are more severe within each risk category, I would be interested in knowing the differences in the responses between the public and private sector. Your thoughts?
    Bruno Mweemba · Nelson Mandela Metropolitan University
    Hi Paul
    A million thanks for your well elaborated response. I reckon it would be more helpful if i could share with you the survey questionnaire so that you could advise on perhaps changing the tone of some questions. Kindly drop me a blank email to so that i could share with you my proposal and questionnaire.

    I noted that most surveys tend to use means testing, concordance analysis, Kendall and the rank correllation etc.

  • Dr. Nizar Matar added an answer:
    How objective are subjective assessments?
    Can we trust the rating agencies. What is your attitude towards the ratings of banks and insurance companies?
    Dr. Nizar Matar · An-Najah National University
    It is really very difficult to find a rating agency which is 100% reliable, 100% trustworthy, 100% transparent and 100% independent. What proves the success, of a bank or an insurance company or even a university, is the actual performance in the real world.
    No one can confirm that a rating agency is free from political intervention or bias.
    Figures alone can be manipulated and what is needed is (facts & figures).
    In my opinion, there is considerable doubt in how universities are rated. A certain university publicized once that, according to so & so rating agency, it is at the top in its country & one of the top 5 in its region. I was informed by some experienced friends, that the rating was built on the number of visitors to universities websites!!
  • Sébastien Gyger added an answer:
    Do portfolios selected through value drivers have good market performance and are located near the efficient frontier?
    For over 50 years, researchers have studied the influence of financial indicators, accounting practices or other variables (called here 'value drivers') on stock prices or stock returns. But if we select portfolios using some model based on value drivers, will these portfolios have good market performance and be located near the efficient frontier?
    Sébastien Gyger · Banque Lombard Odier & Cie SA
    If value drivers refer to value stocks, i.e. stocks with lower price-to-book than average, then yes these stocks tend to perform better than the average over time.
    Best regards
  • Eric Girard added an answer:
    If alpha should be zero (based on CAPM), would a FAMA-FRENCH 3 factor model explain your observations above more effectively?
    Alpha is a risk-adjusted measure of active return on an investment.

    The FF 3 factor model is emerging 2 classes of stock with CAPM to reflect a portfolio's theory.

    r - Rf = beta3 x ( Km - Rf ) + bs x SMB + bv x HML + alpha

    Alpha Coefficient can show that in an efficient market, the expected value of the alpha coefficient is zero. Therefore the alpha coefficient indicates how an investment has performed after accounting for the risk it involved:

    Alpha_i < 0 : the investment has earned too little for its risk (or, was too risky for the return)
    Alpha_i = 0 : the investment has earned a return adequate for the risk taken
    Alpha_i > 0 : the investment has a return in excess of the reward for the assumed risk
    Eric Girard · Siena College
    Absolutely. Take the case of a portfolio. The measurement of alpha with CAPM assumes that a portfolio is (1) passive and (2) similar in style and value as the "market." In this case, a significant negative or positive alpha can be a distortion. For example, if (1) your portfolio is more value-oriented than the "market" and (2) value stocks have overperformed growth stocks during the period of evaluation, your portfolio alpha is overestimated. Now, if you orthogonalize alpha for value and size biases, then your measurement of "excess return" is more refined. Momentum (Carhart) and market timing are also factors can be added. In fact, professional (commercial) factor models like MSCI BARRA use up to 8 or 10 risk factor groups comprised of 100s of risk macro components (liquidity, confidence, volatility, trading activity, etc.).
  • Michal Kravec added an answer:
    What is the interpretation that ROE is less than 1?
    I have conducted a research of financial ratios and one result is very interesting: return on equity was than -1, i.e. net income is in absolute value higher than total shareholder equity.
    Michal Kravec · University of Economics in Bratislava
    Some of them sold inefficient and unprofitable mills in order to decrease their debt and increase liquidity
  • Jeroen Mulders added an answer:
    What are the origins of the Three Lines of Defence theory in risk management / governance?
    See for example
    There are loads of consultancies presenting this, but I can't find an original reference to an academic paper or a policy document. Which one is the earliest? Thanks!
    Jeroen Mulders · Erasmus Universiteit Rotterdam
    Hi Sarantos, don't give up on this. You're on to something. I find it astonishing to see an entire financial industry implement a strategic model to support its’ s organisational defence approach without knowing the origins, let alone, underlying assumptions or success criteria. Have you made any progress on your ‘quest’?
  • What is state of the art in financial risk management?
    Financial risk management is a dynamic area where new regulation (at international and European levels) will necessitate new approaches.

    One theoretical debate is about top-down versus bottom-up models, where the advantages of top-down models (e.g. data availability and ease of estimation) are said to be outweighed by disadvantages such as lacking diagnosis of risk problems, backward looking perspective and lack of incorporating risk mitigation techniques. On the other hand, when deploying bottom-up models (both process approaches and actuarial methods) it is more difficult to aggregate data and provide clear estimates for capital requirements.

    Another debate both in the literature and in practice is about Value-at-Risk (VaR) models. Despite their limitations (e.g. regarding extreme values which in financial markets can be heavily tailed), they are still widely used in practice and have become a standard measure for risk management.
    Melquiades Pereira Lima Junior · Instituto Federal de Educação, Ciência e Tecnologia do Rio Grande do Norte
    I think you need to better define your question. It is very broad, you'll have a world of research areas as simulation, VaR, Bayesian models, standard deviation, CAPM, etc. .. each has its area of ​​these classics.
  • Paulo Pereira Silva added an answer:
    Can I use Sharp Ratio to convert Default Probability to standard deviation?
    I would like to apply the Sharp ratio to compare between a two portfolios. I don`t have the standard deviation but the default probabilities.

    Can I apply the default probability instead of standard deviation or I need to apply some type of transformation function on the default risk, that would approximate it to a standard deviation.

    Paulo Pereira Silva · Comissão do Mercado de Valores Mobiliários CMVM
    If you assume that the PD of the obligors follows a standard distribution, you may obtain estimates for the expected return and the risk of the portfolio.
    Lets consider that one portfolio (one year loans) follows a binomial dist; all loans have the same PD; that the loans are iid; and the recovery rate is 0.
    Expected return of the portfolio= (1-PD)*(Principal+Coupon)/Principal-1

    You also know that if the loans PDs' follow a binomial its standard error is N*PD*(1-PD)...
  • Carsten Bergenholtz added an answer:
    Does anyone know about the application of social network analysis in the analysis of contagion in stock markets?
    Is there any kinds of quantitative analysis?
    Carsten Bergenholtz · Aarhus University
    This paper seems fairly relevant for you:
    Luo, X., J. Zhang and W. Duan. 2013, "Social Media and Firm Equity Value." Information System Research 24(1): 146-163.
  • Dr. S.Durai Rajan added an answer:
    financial Crisis
    how to settle financial crisis in banking sector
    Dr. S.Durai Rajan · XLRI School of Business & Human Resources
    There are two parts in the above Qn - solving financial crisis in banks: T(his is a big debate) how to make banks stronger, by improving (tightening) regulations and increasing capital adequacy. Basic issue here is to make banks lend only to credit worthy borrowers and ensure these loans are recovered, and banks do not extend themselves into more risky areas like derivatives trade etc. Increasing capital (equity) which can stand loss, and improving Asset Liability Management and disclosure standards and liquidity of the banking system are the hallmarks of this new thinking and debate which has even resulted in Basel III.
    As for the second part, it is fairly simple - Liquidation rules are specifically mentioned in the Companies Act and after satisfying Creditors, if any residual assets are available these can be distributed to the shareholders. If you like, stakeholders, for a liquidating company it refers only to the extra members (other than creditors and shareholders) viz. its staff and employees. A good company might think of compensating them or retraining them so that they can find employment elsewhere. I don't think there is anything else a company under liquidation can do (as mostly winding up arises at the instance of creditors).
  • Dr. S.Durai Rajan added an answer:
    Are current market indices (SENSEX and NIFTY) overvalued?
    Now, Sensex has touched almost to its highest level (of 2008). Looking at domestic and international financial environment, there is nothing to cheer about. So what is driving the markets?
    Dr. S.Durai Rajan · XLRI School of Business & Human Resources
    Dear Kedar,
    Mkts look ahead always - for short term it is sentiments, current news, more negative bias oriented and quarterly/annual results; but for the long term, it is the fundamentals that play an important role - devoid of the short term blips and deep corrections, if you look for the trend, it is always based on the strength of the company's fundamentals. Now Indian mkts are ruled by hopes of a non congress govt. If these hopes materialise, watch my words, mkt would come down! If these hopes are belied also, mkt would come down. because hope is onething, but reality is different - you can understand it better with the Kejriwal example. It is the hope and fear that drive the sentiment, over the short term.
    Finally our indices have some more steam left before peaking (pre election) and before correcting (post-election). Let us see,
    Dr DR
  • Paul Louangrath added an answer:
    Does anyone know of a questionnaire for a risk management report in construction project management (not H & S or CDM)?
    I am carrying out research in risk management in regeneration works (planned maintenance) in housing associations or local authorities.
    Paul Louangrath · Bangkok University
    That sounds very interesting.
    When dealing with risk issue, the issue of probability is almost inescapable.
    From you description, I would construct the model for the organization goal, i.e. outcome = depends on x1, x2, ..xn; then adjust it for risk: (i) internal source and (ii) external source. Both (i) and (ii) would have to be determined by probability. As such, you would need past data for total event observation.
    The goal of the organization itself may also pose a risk if it is not practicable to achieve. Setting a goal too high and achieve little would only create unnecessary risk of failure. Here too you time frame is one of the decisive factor. Time constraint itself play a role in achieving organizational goal.
    Interesting project.
  • Dr. S.Durai Rajan added an answer:
    In how far higher capital requirements for banks can be justified in developing countries?
    The higher capital requirement under Basel III will force banks to raise substantial extra capital to meet the regulatory requirements. How does one go about weighing the costs and benefits associated with higher capital requirements in the context of developing countries?
    Dr. S.Durai Rajan · XLRI School of Business & Human Resources
    Higher CAR prescribed in B 111, is an international benchmark advocated by Basel. It applies uniformly to developed and developing countries; national regulators have certain freedom; A uniform Cost Benefit analysis is not made in the Basel document for either the developed or the developing countries. But if some countries are not Basel 111 compliant, then the banks therein may have to incur highter transaction costs like LC commission etc. while dealing with other (compliant) international banks. Benefit: B 111 compliant banks would in all likelyhood pass on the reduced transaction cost to borrowers, and ensure sound and solvent banking system. But this is a broad brush appreciation. In specifics for the developing country, is there any study made on CB analysis for introducing the Basel 11 and 111?
  • Ali Khalilifar asked a question:
    How do you use package GLLMgibbs in R?
    I need an example for this package

About Financial Risk Management

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