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Dec 7

Predicting Heavy and Extreme Losses in Real-Time for Portfolio Holders

Posted by abiao at 00:57 | Code » Other | Comments(12) | Reads(8436)
Pawel wrote a great article on predicting heavy and extreme losses in real-time for portfolio holders, the goal is to calculate the probability of a very rare event (e.g. a heavy and/or extreme loss) in the trading market (e.g. of a stock plummeting 5% or much more) in a specified time-horizon (e.g. on the next day, in one week, in one month, etc.). The probability. Not the certainty of that event.

In this Part 1, first, we look at the tail of an asset return distribution and compress our knowledge on Value-at-Risk (VaR) to extract the essence required to understand why VaR-stuff is not the best card in our deck. Next, we move to a classical Bayes’ theorem which helps us to derive a conditional probability of a rare event given… yep, another event that (hypothetically) will take place. Eventually, in Part 2, we will hit the bull between its eyes with an advanced concept taken from the Bayesian approach to statistics and map, in real-time, for any return-series its loss probabilities. Again, the probabilities, not certainties.

Read this excellent post and accompanying Pathon codes at http://www.quantatrisk.com/2015/06/14/predicting-heavy-extreme-losses-portfolio-1/

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