Next Boston QWAFAFEW Meeting: Feb 16, 2021, 7:00PM ET
Risk under Uncertainty and Price Movement
A QWAFAFEW discussion led by,
Anish Shah, CFA
Portfolio managers are well acquainted with risk decomposition, a canonical tool for identifying and estimating sources of risks in a portfolio. As risk always exists in the future, a proper understanding of risk requires we consider our level of statistical confidence in the assessment and decomposition. The literature has long recognized the importance of addressing statistical estimation error (Ledoit and Wolf, 2004) in historical covariance matrices. However, an important element of the problem has been ignored: the extent to which we expect future price movements to change portfolio asset weights during the finite future time interval during which the risk assessment is presumed to hold true. Ignoring changes in expected risk arising from security price movements is similar to the situation of option hedging where textbook formulae for parameters such as “delta” unrealistically assume that hedging relationships are rebalanced continuously. This presentation will provide an original analytical approach to factor risk decomposition that is inclusive of both estimation error and the expected slippage in hedging relationships amongst portfolios assets that arises from asset price movements. Much like a medical X-ray, this enhanced form of risk decomposition reporting provides a much richer and more stable understanding of portfolio risk.
Trained as an applied mathematician (MS Operations Research UC Berkeley, MS and ABD in PhD Applied Math Brown), Anish Shah has been a quant for years – including stops at ITG, Northfield, and the (shuttered) ship-tracking hedge fund CargoMetrics – nearly all the time contemplating uncertainty and the effects of estimation error.
Time: 7:00 PM sharpe
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