# Tag Archives: risk model

## Variance matrix differences

Torturing portfolios to give different volatilities between a factor model and Ledoit-Wolf shrinkage. Previously There have been posts on: “What the hell is a variance matrix?” factor models Ledoit-Wolf shrinkage Question Two of the several ways to produce an estimate of the variance matrix of asset returns is a statistical factor model and Ledoit-Wolf shrinkage.  … Continue reading

## Appropriate risk modeling

A response to Danielsson and Macrae. Previously In “The appropriate use of risk models” I presented a synopsis of the Danielsson and Macrae document by the same name, and urged you to read it (it’s not very long). Simplicity I highlighted the sentence: This suggests that models used to constrain risk should be substantially simpler … Continue reading

## The appropriate use of risk models

Jon Danielsson and Robert Macrae on how to think about risk models. Uncertainties in risk models The authors point to several reasons why risk models are uncertain: The model estimation period is too short There are structural breaks during the estimation period Data snooping and model optimisation occur Portfolios are optimised, maximising errors It is … Continue reading

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## 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 | | 10 Comments

## 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 | | 17 Comments