Value at Risk (VaR) is a tool for measuring a portfolio’s risk. Value at risk (VaR) is a measure of the risk of loss for investments. It estimates how much a set of investments might lose (with a given probability), given normal market conditions, in a set time period such as a day. … For…
Read More Value At Risk – Financial Risk Management in PythonJust like any financial derivatives that were initially designed for risk management purposes, interest rate swaps are an effective tool for managing and transferring interest rate risks as long as those risks are well understood. But as banks and financial institutions are constantly trying to invent new financial products to sell to their consumers, sometimes…
Read More Another Misuse of Financial DerivativesIn a previous post, we discussed the risks of Collateralized Loan Obligations, a type of complex credit derivatives. Since then, the trend in securitizing loans is still upward. Nowadays, not only performing loans but also non-performing loans are being securitized and sold to investors. A non-performing loan is a loan that is in default or…
Read More Are Collateralized Loan Obligations the New Debt Bombs? Part TwoIn the previous post, we presented a system for trading VXX, a volatility Exchange Traded Note. The trading system was built based on simple moving averages. In this post, we are going to examine the time series properties of VXX in more details. The figure below shows the VXX and its 200-day moving average for…
Read More Stationarity and Autocorrelation Functions of VXX-Time Series Analysis in PythonIn a previous post entitled Credit Risk Management Using Merton Model we provided a brief theoretical description of the Merton structural credit risk model. Note that, The Merton model is an analysis model – named after economist Robert C. Merton – used to assess the credit risk of a company’s debt. Analysts and investors utilize…
Read More Merton Credit Risk Model, a Case StudyR. Merton published a seminal paper [1] that laid the foundation for the development of structural credit risk models. In this post, we’re going to provide an example of how it can be used for managing credit risks. Within the Merton model, equity of a firm is considered a call option on its asset, and…
Read More Credit Risk Management Using Merton ModelLast year, in a post entitled Credit Derivatives-Is This Time Different we wrote about credit derivatives and their potential impact on the markets. Since then, they have started attracting more and more attention. For example, Bloomberg recently reported that collateralized loan obligations (CLO), a type of complex credit derivatives, are becoming a favorite financing vehicle…
Read More Are Collateralized Loan Obligations the New Debt Bombs?We have written many blog posts about the increase in volatility of volatility. See, for example Is Volatility of Volatility Increasing? What Caused the Increase in Volatility of Volatility? Similarly, last week Bloomberg reported, The sudden rise in volatility in February and March showed that even with strong growth fundamentals, financial markets remain vulnerable. Since…
Read More Black Swan and Volatility of VolatilityThe US equity market just reached new highs, and it broke many records. For example, Bloomberg reported that the US market had not been overbought like this in 21 years. The S&P 500 Index’s superlative start to 2018 is making a contrarian technical indicator look silly. The benchmark gauge is poised to end trading Thursday…
Read More Correlation BreakdownThe sell-off in the high yield bond Exchange Traded Funds space last month reminds us of an important risk factor: liquidity. But what exactly is liquidity risk? According to Aleksander Kocic, derivatives strategist at Deutsche Bank AG, Liquidity transforms the risk of default (the ability that the debtor may not be able to pay back…
Read More Liquidity Risk and Exchange Traded Funds