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This might be naive of me, but how did you have a billion euro risk on a portfolio of 2 billion euros? How do you assess that risk to now be instead 50 million

This might be naive of me, but how did you have a billion euro risk on a portfolio of 2 billion euros? How do you assess that risk to now be instead 50 million euros? With respect, this seems like numbers were plucked out of somewhere. I propose that, if these come from a statistical model, it's the model that paints your position in the most optimistic light. I don't judge you for that, but you should really read this article and look out for other fallacies of statistics.

mynegation 12y ago
There are other factors that affect the magnitude of risk that are independent of the model. One of them is leverage. Let's say, for simplicity's sake, there is a stock worth $100 and the assumption is that in a week it has 50% chance of becoming $90 and 50% chance of becoming $110. This assumption is your model and your risk is $10. Now let's say you are bullish on the stock and borrow $400 to buy 5 stocks. In the same model, after gain or loss is realized and $400 is returned to the creditor after one week you are either $50 poorer or $50 richer, your magnitude of risk grew 5-fold by leveraging.
- dschiptsov 12y ago
  How do you model events such as yesterday's EUR/CHF?
  - mynegation 12y ago
    Stochastic volatility and jump diffusion models
  - hessenwolf 12y ago
    I think the Swiss Bank intervention is the classic black swan story. The model really only works until somebody puts their foot in it. Risk management looks at the usual processes via stochastic modelling, but you need to also make scenario analysis, where you just make a deterministic event happen and then measure the effect on the value of your portfolio.
hessenwolf 12y ago
The risk wasn't 2 billion Euro, just the portfolio. The risk, according to solvency II, is 30-50% of the equities, approximately a 1% raise or drop in interest rates, 25% change in FX, etc. The risk is probably about 40% of the 2 billion.

mynegation 12y ago

There are other factors that affect the magnitude of risk that are independent of the model. One of them is leverage. Let's say, for simplicity's sake, there is a stock worth $100 and the assumption is that in a week it has 50% chance of becoming $90 and 50% chance of becoming $110. This assumption is your model and your risk is $10. Now let's say you are bullish on the stock and borrow $400 to buy 5 stocks. In the same model, after gain or loss is realized and $400 is returned to the creditor after one week you are either $50 poorer or $50 richer, your magnitude of risk grew 5-fold by leveraging.

dschiptsov 12y ago
How do you model events such as yesterday's EUR/CHF?
- mynegation 12y ago
  Stochastic volatility and jump diffusion models
- hessenwolf 12y ago
  I think the Swiss Bank intervention is the classic black swan story. The model really only works until somebody puts their foot in it. Risk management looks at the usual processes via stochastic modelling, but you need to also make scenario analysis, where you just make a deterministic event happen and then measure the effect on the value of your portfolio.

hessenwolf 12y ago

The risk wasn't 2 billion Euro, just the portfolio. The risk, according to solvency II, is 30-50% of the equities, approximately a 1% raise or drop in interest rates, 25% change in FX, etc. The risk is probably about 40% of the 2 billion.