Category Archives: Risk
Factor models of variance in finance
In “What the hell is a variance matrix?” I talked about the basics of variance matrices and highlighted challenges for estimating them in finance. Here we look more deeply at the most popular estimation technique. Models for variance matrices The types of variance estimates that are used in finance can be classified as: Sample estimate … Continue reading
Posted in R language, Risk
Tagged covariance matrix, factor model, risk model, variance matrix
10 Comments
In the blogosphere this week: sunshine and Vegas
Gambling Falkenblog has a post called: Why Do People Gamble? This includes the often-stated “problem” that the same people both: pay for insurance pay to gamble Maybe I’m being thick, but I don’t see any problem. I see both these activities as buying positive skewness: paying a little now for an uncertain but big positive … Continue reading
Normal market accidents
We think of accidents as abnormal events, but there is “normal accident” theory. We don’t think of accidents happening in markets, but they do. That’s why it’s called a market crash. For normal accidents to come into play, two conditions need to hold: the system is complex the system is tightly coupled Certainly the financial … Continue reading
Posted in R language, Risk
Tagged contagion, market crash, normal accident, too big to fail
1 Comment
Clever versus simple risk management
David Rowe has a short piece called Regulators Double Down. He argues that risk regulations should be simple at the expense of consistency, rather than complex at the expense of knowing the consequences. I wish to remain a cool remove away from discussions of regulation. However, I very much agree with David’s argument. I see … Continue reading
What the hell is a variance matrix?
When I first came to finance, I kept hearing about “risk models”. I wondered, “What the hell is a risk model?” Of course, I didn’t say this out loud — that would have given the game away. My wife has strict instructions that she is to be the only one to know that I’m an … Continue reading
Posted in R language, Risk, Statistics
Tagged covariance matrix, risk model, variance matrix
17 Comments
