Stress testing and scenario analysis are essential tools in portfolio management, helping portfolio and risk managers assess potential vulnerabilities under extreme market conditions. By simulating adverse scenarios such as financial crises, interest rate shocks, or geopolitical events, these techniques provide insights into how a portfolio might behave under stress and …

A Large Language Model (LLM) is an advanced AI system trained on vast amounts of text data to understand, generate, and analyze human language. In finance, LLMs are used for tasks like analyzing earnings reports, generating market sentiment analysis, automating financial research, and enhancing algorithmic trading strategies. They can process …

Earnings announcements impact a company’s stock volatility. Reference examined the earnings reports of Dow Jones Industrial Average components over 10 years to better understand the relationship between different volatility regimes and the time it takes for earnings information to be fully absorbed by the market. The study focuses on …

The Hurst exponent is a statistical measure used to assess the long-term memory and persistence of a time series. It quantifies the tendency of a system to revert to the mean, follow a random walk, or exhibit a trending behavior. A Hurst exponent (H) value between 0 and 0.5 indicates …

The volatility risk premium (VRP) is the difference between the implied volatility of options and the realized volatility of the underlying asset, representing the compensation investors earn for taking on volatility risk. Recent research suggests that the VRP is specifically a reward for bearing overnight risk. Reference goes further …

Sometimes, investors come across trading opportunities that offer outsized returns, but they may not fully understand the risks they are taking on. These risks can include operational risks, counterparty credit risks, or hidden optionality within a financial note. Reference examines the role of liquidity risks in the returns of …

Net Gamma Exposure (NGE) and its effect on stock prices has been an active research topic recently. Reference applied this concept to the Chinese stock market, studying the NGE effect on intraday stock direction and the relationship between futures and options. Specifically, the paper presents evidence supporting the idea …

Delta hedging is a risk management strategy used to neutralize the impact of price movements in the underlying asset of an option. It involves adjusting the position in the underlying asset to offset the sensitivity of the option’s value, measured by its “delta.”  Delta represents the rate of change in …

Credit risk refers to the potential for financial loss if a borrower fails to meet their debt obligations, such as repaying a loan or bond. Credit risk assessment involves evaluating the likelihood of default, often using financial metrics, historical performance, and credit ratings. Effective management of credit risk includes diversifying …

Volatility forecasting is important in portfolio and risk management because it helps portfolio and risk managers assess the potential risk and return of their investments. Accurate volatility forecasts help in setting appropriate risk limits, calculating Value-at-Risk (VaR), and managing portfolios. Most research has focused on forecasting the point estimate or …