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Andreas Steiner's Documents
Surplus Risk And Return: Equivalence of Asset- and Liability-Centric Views
Surplus risk and return are not accounting measures but economic magnitudes. As the initial surplus can be zero, surplus return cannot be measured with the standard accounting logic in return measurement. Once surplus return is properly measured, standard risk measurement approaches can be used to quantify surplus risk. Whether surplus return is measured “asset-centric” or “liability-centric” is a reporting issue; we show that investment decisions are not affected how surplus is reported.
Category:Business & EconomicsReads:11Uploaded:05 / 08 / 2012ShareAdd to collectionSharpe Ratios Are Homogeneous of Degree Zero
We propose a new decomposition for contribution and attribution analysis based on the observations that Sharpe Ratios are homogeneous of degree zero in constituent weights.
Category:Business & EconomicsReads:51Uploaded:04 / 13 / 2012ShareAdd to collectionDid Diversification Really Fail? Evidence for Stock Portfolios
We present empirical evidence for 47 liquid stocks from the SPI universe that the diversification potential remained intact during the Financial Crisis. This contradicts the believe that diversification has failed and has major implication for the risk management approach used in actively managed portfolios.
Category:Business & EconomicsReads:67Uploaded:04 / 05 / 2012ShareAdd to collectionAnnualized Volatility
In this research note, we compare S&P 500 volatility figures calculated with the popular “square-root-n rule” to volatility figures derived from time-aggregated daily returns and try to reconcile the differences with popular time-series models featuring serial correlation in returns or volatilities. We show that the deviations from the square-root-n rule cannot be explained with serial correlation in returns, rather with a GARCH model. We conclude that volatility figures annualized with the square-root-n rule should not be interpreted as accurate estimates for true annual volatility. The square-root-n rule is also not suitable to standardize volatility figures for reporting purposes.
Category:Business & EconomicsReads:130Uploaded:02 / 18 / 2012ShareAdd to collectionRisk Parity for the Masses
Disappointed with the performance of market weighted benchmark portfolios and results of active portfolio management, many investors in recent years developed an interest in alternative index definitions and portfolios not driven by promised Alpha skills, but transparent rules considering risk. Risk Parity respectively the Equal Risk Contribution portfolio has been marketed as such an alternative. In this research note, we will give a short introduction to risk parity and compare risk parity portfolios with portfolios based on different construction principles .We will present some of our findings from in-sample and out-of-sample experiments with equity and balanced portfolios. We conclude with three practical recommendations.
Category:FinanceReads:206Uploaded:11 / 07 / 2011ShareAdd to collectionGeometric And Arithmetic Volatility
In this research note, we show that there exist geometric and arithmetic versions of volatility. We discuss how they relate and how they should be used. The relevance of the topic arises from the fact that the current industry practice is to calculate arithmetic volatility from discrete returns, which can distort reported volatility figures under certain conditions.
Category:Business & EconomicsReads:244Uploaded:10 / 24 / 2011ShareAdd to collectionEquity Tail Risk Before and After the Financial Crisis
We try to reconcile the popular opinion that the Financial Crisis has fundamentally altered equity risk characteristics with empirical data. Our analysis based on Extreme Value Theory suggests that equity tail risks have remained remarkably stable. This means that the loss dynamics of S&P 500 experienced since October 2007 could have been anticipated by equity investors as well as equity investment managers performing quantitative risk analysis.
Category:FinanceReads:145Uploaded:09 / 28 / 2011ShareAdd to collectionTail Risk Attribution
Tail risk refers to the shape of the left tail of the distribution of investment returns. Return distributions are traditionally described in terms of their first for moments: mean return, volatility, skewness and kurtosis. Attribution is a descriptive approach used in portfolio analysis to explain a certain magnitude as the sum of contributions from portfolio constituents as well as contributions from constituent attributes. In this research note, we propose a tail risk attribution methodology which allows to explain portfolio modified value-at-risk in terms of contributions from assets as well as mean, volatility, skewness and kurtosis. The approach is free of any residuals.
Category:FinanceReads:302Uploaded:08 / 10 / 2011ShareAdd to collectionManipulating Valid Correlation Matrices
We explain why the manipulation of a valid correlation matrix is challenging. We also propose three methods to perform the following task… 1) Increase all correlations such that they converge to one in the limit. This method can be used to model unexpected high correlation values (for example, in a system crisis as experienced just recently) 2) Decrease correlations such that they shrink to zero or a minimum correlation. This procedure is needed to analyze hedged portfolios or, more generally formulated, absolute return strategies. 3) Change individual correlation values. Many times, analysts have a need to change an individual correlation to a certain value or in a certain direction. As we will see, this method is also a starting point to generate random correlations.
Category:Business & EconomicsReads:334Uploaded:07 / 03 / 2011ShareAdd to collectionAttribution Analysis of Bull/Bear Alphas and Betas with Applications to Downside Risk Management
In this research note, we will discuss a specific asymmetrical model and build an attribution framework which allows relating the effects of asymmetry on Alpha and Beta relative to a benchmark model, the single-index model with its symmetric Alpha and Beta. We explain the difference between two models, while in traditional attribution analysis one usually attributes the difference in realized returns between a portfolio and its benchmark. We will illustrate how asymmetrical models can be used in ex post portfolio analysis to detect “false” alphas caused by “hidden” asymmetrical betas. We will also illustrate how asymmetrical betas can be used in ex ante portfolio construction for the purpose of active downside risk management.
Category:Business & EconomicsReads:353Uploaded:06 / 13 / 2011ShareAdd to collection
