14 ms·
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
by 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 agoHow do you model events such as yesterday's EUR/CHF?
- mynegation 12y agoStochastic volatility and jump diffusion models
- hessenwolf 12y agoI 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.