08 Nov 10 StatPro voted ‘Best Risk Initiative’ in 2010 Buyside Technology Awards
London – November 8, 2010 – StatPro Group, a global provider of portfolio analysis and asset valuation services for investment professionals, was today voted the Best Buy-side Risk Initiative over the last 12 months in the 2010 Buyside Technology Awards.
The award was given for StatPro Risk Management, a risk application that is integrated with a detailed data service covering 74 equity markets, 65 fixed income markets and now also features a new liquidity risk model.
StatPro’s Risk Management model is based on historical simulation, corrected to take into account jump-to-default and event risk. It covers 260+ pricing functions and uses QuantLib, the open source library of financial pricing methods (www.quantlib.org), as the building block of its pricing formulas.
In September, StatPro launched a new version of the solution, StatPro Risk Management 5.70, delivering the new model to measure market liquidity risk to its clients.
Commenting on the awards (which are voted on annually by a panel of industry experts for excellence in financial IT solutions and services), Dario Cintioli, Head of Risk at StatPro said: “We are delighted that StatPro has been awarded this title, in recognition of the hard work we put in over the past year. Our liquidity risk approach is truly innovative and will enhance our risk offerings.”
For an overview of StatPro’s risk management solutions, please see http://www.statpro.com/portfolio_analytics/middle_office_analytics/risk_management.aspx
For further information please contact:
Jeanine Leuckel, StatPro
Tel: 020 8410 8655
Email: jeanine.leuckel@statpro.com
Fabienne Pasquion, Ascension Consulting
Tel: 020 7100 6111 / 07984 119846
Email: fabienne@ascensionconsulting.co.uk
Notes to Editors
Dario Cintioli is available for interview upon request.
About StatPro
StatPro is a leading provider of portfolio analysis and asset valuation services for the global asset management industry. The company sells a SaaS-based analytics and data platform on a rental basis to investment management companies allowing them to analyse portfolio performance, attribution, risk and GIPS® compliance. StatPro also provides market data and valuation feeds including a Complex Asset Pricing service.
For more information visit http://www.statpro.com
20 Oct 10 First ever QuantLib Forum to take place in November
StatPro Group, a global provider of portfolio analysis and asset valuation services for investment professionals, today announces that it will host a free-to-attend forum for quantitative analysts in London on 3 November 2010, in cooperation with open source organisation QuantLib.
The forum, which celebrates QuantLib’s ten-year anniversary, will present speeches by the QuantLib founders and offer networking opportunities for attendees.
QuantLib is the most widely used open source pricing library in the world. Its popularity stems from its quality content and a grassroots active participation by leading quants, many of whom work for some of the largest investment banks in the world. Whilst originally quants were mainly involved in risk management and derivatives pricing, the meaning of the term has expanded over time and now includes almost all individuals involved in financial mathematics.
QuantLib was founded in 2000 by Dario Cintioli (now global head of Risk at StatPro), Ferdinando Ametrano, Luigi Ballabio, Adolfo Benin and Marco Marchioro at Riskmap, now StatPro Italia. Experienced in writing option pricing codes, the five colleagues thought it would make a lot of sense to create an open source and standardised basic toolkit for quants, which could be used, maintained and updated by peer quants. Ten years on and without having been advertised commercially, QuantLib was downloaded more than 50,000 times over the last three years.
The forum is open to the public and free of charge. For more information and registration please visit: http://www.statpro.com/quantlib_forum.aspx
For further information please contact:
Jeanine Leuckel, StatPro
Tel: 020 8410 8655
Email: jeanine.leuckel@statpro.com
Fabienne Pasquion, Ascension Consulting
Tel: 020 7100 6111 / 07984 119846
Email: fabienne@ascensionconsulting.co.uk
Notes to Editors
Dario Cintioli is available for interview upon request.
About StatPro
StatPro is a leading provider of portfolio analysis and asset valuation services for the global asset management industry. The company sells a SaaS-based analytics and data platform on a rental basis to investment management companies allowing them to analyse portfolio performance, attribution, risk and GIPS® compliance. StatPro also provides market data and valuation feeds including a Complex Asset Pricing service.
For more information visit http://www.statpro.com
Tags: Asset Valuation, derivatives pricing, Portfolio Analysis
11 Oct 10 Nedbank selects StatPro for portfolio analytics suite
London/Cape Town, 11 October 2010 – StatPro Group plc, a leading provider of portfolio analysis and asset valuation services for the global asset management industry, today announces that the South African custodian division of Nedbank has committed to the new StatPro Seven analytics platform.
Nedbank, the fourth largest bank in South Africa, has signed for StatPro Seven Performance, Attribution, Fixed Income, Compliance and Analytics Reporting modules plus Index Data services.
“This deal stemmed from Nedbank’s strategy of providing in depth analytical data to its clients, backed up by a scalable solution capable of managing the anticipated growth. StatPro already has an excellent reputation in the region and a thorough understanding of the local market requirements,” said Robin Kemper, CEO, StatPro South Africa. “This agreement takes us one step closer towards our aim of creating a single analytics data standard in South Africa.”
Deployment of the system will begin in October 2010.
Louise Currie, General Manager at Nedbank: “This implementation will provide us with full performance, attribution and compliance functionality that we can manage and pass on to our clients in a scalable manner, whilst ensuring that industry standards are not only met but exceeded. In keeping with the requirements of the local market, we are keen to implement StatPro Portfolio Compliance – recognised as the market leader in South Africa.”
For further information please contact:
Jeanine Leuckel, StatPro
Tel: 020 8410 8655
Email: jeanine.leuckel@statpro.com
Fabienne Pasquion, Ascension Consulting
Tel: 020 7100 6111 / 07984 119846
Email: fabienne@ascensionconsulting.co.uk
Notes to Editors
Robin Kemper is available for interview upon request.
About StatPro
StatPro is a leading provider of portfolio analytics and asset valuation solutions for the global asset management industry. The Company sells a SaaS-based Analytics and Data platform on a rental basis to investment management companies allowing them to analyse portfolio performance, attribution, risk and GIPS® compliance. StatPro also provides an asset pricing service including a service to price complex assets and valuation feeds.
For more information on StatPro, please visit our website at http://www.statpro.com
16 Sep 10 StatPro Evaluated Pricing Service Selected by BofA Merrill Lynch Global Research
StatPro, Inc., a global provider of portfolio analysis software and asset valuations, today announced that it will become the primary independent provider of evaluated pricing for BofA Merrill Lynch Global Research Bond Indices for Canada, Mexico and Brazil.
StatPro’s fixed income methodologies incorporate bond terms and conditions, proprietary pricing models and real-time quotes from contributing dealers. StatPro uses fair market value assessments in accordance with accounting guidelines such as FAS 157 to provide valuations consistent with industry standards.
“We are very pleased with BofA Merrill Lynch Global Research’s decision to use StatPro as the primary price provider for Canada, Mexico and Brazil. Our independent valuations will provide the on-demand delivery and transparency needed to meet investor requirements,” said Mark Bramley, CEO of StatPro North America. “We believe that BofA Merrill Lynch Global Research will benefit not only from our superior fixed income valuation service but also from our commitment to providing excellent customer care.”
About StatPro
StatPro Inc. is a leading global provider of asset management software for the worldwide investment community. Founded in 1994, StatPro offers portfolio analysis software combined with pre-packaged evaluation service using the Software as a Service (SaaS) platform. StatPro’s Unlimited Pricing service incorporates reference data, corporate actions and industry classification codes, asset pricing, bond pricing and an index data service. The company’s integrated analytics solutions provide performance measurement, attribution analysis, risk management software, governance, compliance and reporting – all in a single interface. More than 250 major asset managers worldwide utilize StatPro solutions. StatPro Inc. is headquartered in Boston and is a division of StatPro Group PLC (AIM: SOG).
Tags: Asset pricing, Asset Valuation, bond pricing, performance measurement, Portfolio Analysis, Portfolio analytics, Risk Management Software
24 Aug 10 The New Regulatory Focus on Liquidity Risk: Problems and Solutions
The credit crisis has been accompanied by a contextual reduction of liquidity in all asset classes. For certain asset classes like ABSs liquidity has entirely disappeared, but even for popular instruments like convertible bonds and corporate bonds the destruction of market depth has been severe.
The loss of liquidity was not contemplated at all in the risk management models used across the industry, with the consequent increase of model back-testing failures. To give an idea of the impact of the liquidity component in these failures, we have observed in convertible bond portfolios three times the failures experienced by equivalent equity portfolios. The differential was entirely explained by the loss of liquidity in the convertible bond market, a market dominated by hedge funds that had to de-leverage their portfolios suddenly and all at once.
The combination of these events and the discovery that many monetary funds were investing relevant portions of their assets into illiquid instruments, such as ABSs, has increased the focus of regulators on Liquidity Risk.
Where the asset management industry is concerned, the most evident outcome of this new focus is reflected into the recent CESR recommendation for UCITS IV regulation (CESR/09-963, 28 October 2009). In this paper the CESR recommends the introduction of an ad hoc liquidity risk management process. Liquidity risk must be “…appropriately assessed, managed and monitored overtime” for all the UCITS.
The recommended prescription is reinforced by the following article, where the regulator requires that management companies perform stress tests and scenario analyses to measure the impact of potential liquidity crises, similarly to what is done under current legislation for stress tests on market risks.
The introduction of Liquidity Risk is the biggest surprise of UCITS IV according to many practitioners, even if this recommendation has been preceded by similar initiatives by the FSA in the banking regulation and by the Italian Consob for illiquid instruments marketed to individuals, under the MIFID hat.
The surprise comes along with worries and unresolved questions on the implementation of these new rules and liquidity risk procedures. Market Liquidity Risk is still a gray area in the risk management research. In the remainder of the article we try to define market liquidity risk, explain where the implementation problems come from and propose a possible solution.
Market Liquidity Risk is the risk of losing a certain amount of money when we liquidate the positions held in a portfolio/fund. Assume for a moment that we can observe bid and asks for all the instruments that we hold in our portfolio, and that the size of these proposals is consistent with the quantities that we hold. Assume also that we are revaluing our portfolio using mid prices.
In this case the market liquidity risk is simply the cost of liquidating our portfolio at the observed bids (and asks for short positions), as measured by the distance between mid price and bid (or ask).
It may be easy to compute this loss for an equity portfolio, where bid/asks and volumes are available, both in normal and stressed times. It becomes much tougher to follow this approach when the assets held in the portfolio are bonds, illiquid bonds, OTC derivatives and the plethora of opaque financial instruments that can be found in abundance in many mutual funds.
We call this the Liquidity Risk Paradox: the information for calibrating liquidity risk models is available only for liquid instruments. In other words, we will never find the data that we need on illiquid instruments, where most of the Liquidity Risk actually lies.
For a long time it seemed that the problem did not have a solution and this explains in part why the risk management industry has never implemented a universal solution for measuring and managing market liquidity risk across all financial instruments, from equities to OTC derivatives, to illiquid bonds.
However, current technology and availability of data allows imagining new solutions. We have recently finalized one year of research and development for developing a new approach to liquidity risk.
The approach replicates the way market makers create the bid and ask of an illiquid product: they introduce in the pricing function of an instrument the bid and ask of the OTC derivatives that will be used to hedge the position, obtaining the equivalent bid/ask of the instrument.
The approach can be used for any financial instrument that links a pricing function to traded OTC derivatives, enlarging dramatically the set of instruments for which Liquidity Risk is computable, including opaque assets for which no price and volume information is available.
About Statpro:
Dario Cintioli wrote this article on 03-12-2009, he is the Global Head of Risk Management and Complex Pricing at StatPro, a leading provider of portfolio analytics, data solutions, asset pricing services and risk management software for the global asset management industry.
Tags: Asset pricing, Asset Valuation, Bond Prices, Portfolio Analysis, Risk management, Risk Management Software
06 Aug 10 StatPro Unveils Revolution Portfolio Analytics Service for Public Beta
New front-office web-based offering combines ease-of-use, integrated data & analytics and flexible pricing; Saves time and money by simplifying portfolio analysis and reporting
London/Boston – August, 2010 – StatPro Group, a global provider of portfolio analysis and asset valuation software for investment professionals, today announced that StatPro Revolution is available for public beta. Revolution provides secure, online, access to market data, portfolio analysis and reporting from a single web platform. The public beta release gives access to a collection of powerful and visual analysis features including performance, attribution, allocation and risk. Front office financial executives as well as research, reporting and client service professionals will benefit from the ease-of-use, ease-of-implementation, consistency of analysis and cost efficiency that Revolution enables. To sign up for a free user account visit www.statpro.com/revolution.
StatPro Revolution allows users to import performance data from the middle office and provides a wealth of analysis and reporting functionality to any other area of the business – all using the same underlying data. StatPro Revolution can also be used as a stand-alone analysis, reporting and research platform, by taking advantage of the built-in pricing and benchmarking service. Over 500,000 securities and 11,000 benchmarks are available allowing instant portfolio analysis by importing simple holdings data.
Justin Wheatley, StatPro CEO commented, “StatPro Revolution provides technology that will allow managers of all sizes to add incredible value to their front office portfolio analysis process. We believe StatPro is the right solution at the right time for our market. We have seen huge interest in our initial trials and are already working with a major global custodian bank to deploy this service to their clients.”
Revolution is a turn-key, software as a service (SaaS) solution that is delivered with integrated data and analytics. This single-point approach can provide more consistency in analysis when compared to multi-system scenarios involving different vendors. Also, because portfolio information only needs to be entered one time, Revolution is faster and easier to implement than multi-vendor solutions.
Revolution is priced from $100 per portfolio per month, providing outstanding monetary value for small, medium and large asset managers alike. The full launch of StatPro Revolution is scheduled for January 2011.
Notes to editors:
Justin Wheatley is available for interviews upon request
Media Contact:
Karleen Fallon / Jeanine Leuckel
marketing@statpro.com
About StatPro
StatPro Group is a leading global provider of portfolio analytics and asset pricing services for the worldwide investment community. Founded in 1994, StatPro offers portfolio analytics software combined with pre-packaged evaluation services using the Software as a Service (SaaS) platform. The company’s integrated solutions provide performance measurement, attribution analysis, risk management, governance, compliance and reporting – all in a single interface. More than 250 major asset managers worldwide utilize StatPro solutions.
Tags: Asset pricing, Asset Valuation, Portfolio Analysis, Portfolio analytics, StatPro Revolution
02 Jun 10 Summary of Liquidity Risk
The traditional problem of Liquidity Risk is that the data needed for calibrating these models is only available for liquid instruments, trading on a regular basis and for which books of bid/ask and volumes are available. For this reason the current approaches to measuring Liquidity Risk fail providing any indication for the most opaque and illiquid instruments, or where the measurement of Liquidity Risk is mostly needed.
The new approach introduced here is based on liquidity scenarios, which is universal, because it covers potentially any financial asset, from equities, to bonds, to OTC derivatives under a homogeneous and consistent approach. Each scenario simulates a defined set of liquidity conditions applied transversally to all assets. Three liquidity scenarios are available: Normal Market Conditions, Stressed Conditions, Highly Stressed Conditions.
In every scenario a number of parameters can be controlled, influencing the five components of liquidity risk identified in this paper:
- Fair Value Bid / Fair Value Ask;
- Pricer Haircuts;
- Outstanding Notional;
- Equity Market Capitalisation;
- Percentage of Stock Ownership.
Fair Value Bid / Fair Value Ask. When an instrument is illiquid how does a market-maker create a price for it? This question has inspired and driven our research on liquidity risk. Professional market-makers rely on pricing functions to derive the fair value of a financial instrument that is not actively traded on a market.
When they need to quote a bid or ask for that instrument, they insert in their pricing functions the bid/ask of the underlying derivative market data.
Let’s make an example for a convertible bond. The pricing function for such instrument will require as inputs:
- Interest rate swaps to derive the Libor discount factor curve;
- Credit Default Swaps (CDS) to measure the credit risk of the bond guarantor;
- Underlying stock price;
- The implied volatility of the embedded call option.
In building the bid for the bond, the market maker will choose between the bid and ask of the above data inputs (or risk factors), depending on what action he needs to take to hedge that risk. For example in buying the bond he will acquire a short position on the credit spread of the bond, facing the risk of an issuer default. If he wants to hedge that risk he will buy protection on the relevant CDS, hitting the spread Ask in the market. Therefore, when inserting the CDS value to quote the convertible bond bid, he will insert the CDS spread Ask.
Similarly, he will insert the implied volatility bid in the function, as a long position in the bond coincides with a long position on the option volatility. To hedge that exposure the market-maker will hit the bid of that risk factor.
Our liquidity scenario replicates this process for every bond, derivative, option, certificate and in general for any instrument that holds a pricing function. The liquidity risk calculator understands what is the exposure of an instrument to each of the risk factors and uses the bid or the ask of the risk factor accordingly.
Pricing Function Haircut. Liquidity is normally an inverse function of complexity: the higher the complexity of the underlying financial instrument, the lower the liquidity. This component allows the user to penalise certain asset classes, identified by a Pricer tag. I.e. ABSs are identified by a dedicated tag and the liquidity scenarios increase their liquidity risk by a specific haircut.
Outstanding Nominal Haircut. For bonds and certificates the amount issued (outstanding nominal) can influence the underlying liquidity. The bigger the issued notional, the greater the associated liquidity will be. The liquidity scenarios offer the possibility of configuring a grid of liquidity haircuts by outstanding nominal bucket, divided by currency.
Market Capitalisation Haircut. Liquidity in equities is a function of market capitalisation, and typically the greater the market capitalisation, the greater the liquidity. In the scenarios, users can define a grid of liquidity haircuts by market cap buckets.
Equity Ownership Fraction Haircut. Another source of liquidity risk in equities is the amount of the company that the portfolio owns. E.g. a portfolio that owns 10% of a company faces higher liquidity risk than one that owns 0.01% of the same stock. The liquidity scenario contains a grid of liquidity haircuts associated to different levels of market capitalisation ownership.
About Statpro:
Asset Managers worldwide rely on Statpro to provide leading Portfolio Analysis and Credit Risk Management software. Statpro’s range of solutions helps the Asset Management industry to analyse portfolio performance, attribution, risk and GIPS® compliance, whilst providing market data and valuation feeds including complex Asset Pricing services. Read more on Liquidity Risk and how these are measured in Statpro’s Asset valuation tools.
Tags: Asset Valuation, Credit Risk Management, Liquidity Risk, Portfolio Analysis
18 May 10 Adepa selects StatPro in Luxembourg first
London, 17 May 2010 – StatPro Group plc, a leading provider of portfolio analysis and asset evaluation services for the global asset management industry, today announces that Adepa Asset Management in Luxembourg has signed a contract for components of Seven, StatPro’s new SaaS system aimed at performance and risk specialists in large asset managers.
Adepa is the leading Spanish provider in Luxembourg of asset management, fund administration and corporate services for investment funds addressed to institutional clients, professional investors and high net worth individuals around the world.
StatPro provides Adepa with portfolio compliance, risk and data management services, within a hosted environment. StatPro Seven combines zero IT footprint with full data management and automatic upgrades.
“This agreement is our first deal for StatPro Seven in Luxembourg and we are really excited about that,” said Justin Wheatley, StatPro Group’s CEO. “In a tough regulatory climate such as this, it is crucial for asset management companies to choose a scalable and reliable solution to help support growth in their business. A hosted solution such as StatPro Seven means that implementation is fast and cheap, and maintenance for the client is minimal.”
Carlos Alberto Morales, Managing Director at Adepa Asset Management and Alex Bardaji, Head of Risk & Compliance at Adepa Asset Management:
“StatPro was able to offer an impressive and cost-effective outsourced response to our problem, enabling us to concentrate on what we do best – managing portfolios and controlling risks. We are now benefiting from StatPro’s compliance, risk and data management components, which among other things will help us to meet the requirements of Ucits IV.”
For further information please contact:
Jeanine Leuckel
StatPro
Tel: 020 8410 8655
Email: jeanine.leuckel@statpro.com
Fabienne Pasquion
Ascension Consulting
Tel: 020 7100 6111 / 07984 119846
Email: fabienne@ascensionconsulting.co.uk
About StatPro:
StatPro is a leading provider of portfolio analysis and asset valuation services for the global asset management industry. The company sells a SaaS-based analytics and data platform on a rental basis to investment management companies allowing them to analyse portfolio performance, attribution, risk and GIPS® compliance. StatPro also provides market data and valuation feeds including a Complex Asset Pricing service. For more information on StatPro, please visit our website at www.statpro.com
About Adepa:
Founded in 1980, Adepa provides asset management, fund services, private equity and corporate services to a broad range of European entities. It is part of the Sebroker group (a member of the Madrid, Barcelona, Paris, Brussels, Lisbon, Amsterdam, Frankfurt and Milan stock exchanges).
Tags: asset management software, Asset Valuation, Portfolio Analysis, Risk Management Software
05 May 10 StatPro North America Expands Sales Leadership Team
Company adds proven sales leaders to meet rising customer demand for SaaS-based financial analytics solution
BOSTON – May 5, 2010 – StatPro Inc., a global provider of portfolio analysis and asset valuation software for investment professionals, today announced the expansion of its North American sales team with the addition of Holli McCaffery and David Meister. Both McCaffery and Meister bring years of finance and technology experience to StatPro from leading companies such as Morningstar, Thomson Reuters and Globalcom.
Holli McCaffery joins StatPro as a business development manager focused on expanding the company’s customer base and generating sales of StatPro’s portfolio analysis solutions. Prior to joining StatPro, McCaffery served as vice president of sales for Binary Investment Research, and worked as an account executive and senior relationship manager for Thomson Reuters. She holds a B.A. in Economics from the University of New Hampshire.
David Meister also joins StatPro as a business development manager with a focus on new customer development. Prior to joining StatPro, Meister served as business development associate, account executive and account manager for Morningstar, where he worked with customers in banking, mutual funds and pension funds in both the U.S. and Canada. He also served as an account executive with Globalcom in Chicago. Meister holds a B.A. in History from the University of Illinois.
The StatPro platform is a Software-as-a-Service (SaaS)-based solution that integrates portfolio analysis with market, classification and index data. It enables easy access to performance measurement, attribution analysis, risk management, governance, compliance reporting and more – all from a single interface.
“Holli and David both have successful track records as sales professionals in the financial industry,” said Simon Stillwell, Director of Sales for StatPro North America. “Their finance experience, technical knowledge and industry contacts make them an ideal fit for executing our vision to deliver SaaS-based solutions to customers throughout the U.S.”
For more information, visit www.statpro.com or contact us at boston@statpro.com or (001) (617) 692-1150.
About StatPro:
StatPro Inc. is a leading global provider of asset management software for the worldwide investment community. Founded in 1994, StatPro offers asset valuation and portfolio analytics software combined with pre-packaged evaluation services using the Software as a Service (SaaS) platform. The company’s integrated solutions provide performance measurement, attribution analysis, risk management software, governance, compliance and reporting – all in a single interface. More than 250 major asset managers worldwide utilize StatPro solutions. StatPro Inc. is headquartered in Boston and is a division of StatPro Group PLC (AIM: SOG).
For further information please contact:
Drew Miale
Davies Murphy Group, Inc.
(001) 781-418-2438
statpro@daviesmurphy.com
www.daviesmurphy.com
Tags: Asset Valuation, Portfolio Analysis, Risk Management Software
29 Apr 10 Hybrid VaR
There is a consolidated opinion in the financial risk management arena that giving more weight to most recent observation is a good thing, improving the forecasting power of risk measures such as VaR.
The front office professionals have a consolidated view that the risk measures must reflect the current “dimension” of risk. For this reason they are measured with a short historical period of observation and/or exponentially weighted (or GARCH) measures. The Risk Managers like to weigh the most recent events as there is a consolidated opinion that this process improves the back-testing statistics.
However, giving more weight to the most recent history increases the pro-cyclicality of the risk measure. Pro-cyclicality means that the risk measure moves in the opposite direction of the market, it increases when markets fall, it decreases when market thrive. This behavior generates a perverse consequence: money managers and traders are encouraged to take on bigger positions when risk goes down, buying more risk when the price is high and the market quotations are topping. On the other side, market falls increase risk, making it more likely that VaR limits are triggered and then causing stop losses and a “selling” of risk positions when the quotations are low.
In other words the pro-cyclicality of risk measures determines what George Cooper calls in his book “The Origin of Financial Crises” a positive feed-back process. The existence of pro-cyclical measures creates in the financial market a mechanism where the reduction of price generates an increase of the offer side of the market rather than of the demand side. Cooper explains that the financial markets differ from other goods markets, where a reduction of price always results into an increase of demand, generating a self-stabilizing effect. Differently from markets of goods, in the financial markets a reduction of price does not necessarily generate an increase in demand. Symmetrically, increase in price is often a catalyst for new demand. This innate nature of financial markets contains the seeds of instability and the intrinsic presence of periodic boom and bust cycles.
It is out of the scope of the article to discuss if the theories of Cooper are right or wrong, but what is certain is that a pro-cyclical risk measure increases the instability of financial markets, adding to the offer during market falls and powering demand during boom cycles. This is a perverse effect and what exponential weighting does is to amplify the positive feed-back process, contributing to the instability of the markets. The paradox is that VaR and risk management was originally introduced to mitigate systemic risks and strengthen market stability.
Our article presents a new risk measure, called Hybrid VaR, with two objectives in mind:
- Improve the statistical reliability of VaR measures, achieving good back-testing results in moments of stress.
- Introduce an anti-cyclical component, designed to invert pro-cyclicality in good market times.
Hybrid VaR blends traditional VaR measures with the worst P&L from a selection of historical stress test scenarios. The VaR measure remains anchored to a rolling window of time, always reflecting the market conditions in the most recent n observations used by the measure. In contrast, the stress tests scenarios always look at fixed time windows of stressed financial conditions.
The two measures, VaR and worst historical stress test, are assigned with weights calibrated in an anti-cyclical way: the more the markets thrive, the more the memory of the worst periods of stress increases, introducing a disincentive to take on more risk when market quotations are topping.
We have back-tested the Hybrid VaR measure during the turbulent 5 years comprised between 1st of January 2004 and 31st of December 2008. Both the daily and bi-weekly back-testing exercises yield the best results among a selection of different methodologies and the bi-weekly tests return a number of violations almost identical to the ones expected.
We conclude the article recommending the use of Hybrid VaR: it introduces a relevant anti-cyclical component in the risk measure and seems to work well and better than many other measures in back-testing terms.
About StatPro
StatPro is a leading provider of portfolio analysis and asset valuation services for the global asset management industry. The Company sells a SaaS-based Analytics and Data platform on a rental basis to investment management companies allowing them to analyse portfolio performance, attribution, risk and GIPS® compliance. StatPro also provides market data and valuation feeds including a Complex Asset Pricing service.
Tags: Asset Valuation, Financial Risk Management, Portfolio Analysis, StatPro
