Technical paper/Asset allocation
Factors on demand
Attilio Meucci introduces a multi-asset-class return decomposition framework that extends beyond the standard systematic-plus-idiosyncratic approach. This framework, which rests on the conditional link between flexible bottom-up estimation factor models…
Maximum drawdown
The maximum loss from a market peak to a market nadir, commonly called the maximum drawdown (MDD), measures how sustained one’s losses can be. Malik Magdon-Ismail and Amir Atiya present analytical results relating the MDD to the mean return and the…
Bidding principles
Robert Almgren and Neil Chriss show how principal bid programme trades can be priced and evaluated as part of a trading business. By annualising the price impacts and variances of such trades, they construct an information ratio measure that can be used…
Minimising extremes
Portfolio diversification often breaks down in stressed market environments, but the co-movement of asset prices in a tail risk regime may be modelled using a coefficient of tail dependence. Here, Yannick Malevergne and Didier Sornette show how such…
Portfolio allocation to corporate bonds with correlated defaults
This article deals with the problem of optimal allocation of capital to corporate bonds in fixed income portfolios when there is the possibility ofcorrelated defaults. Under fairly general assumptions for the distribution of thetotal net assets of a set…
Credit risk in asset securitisations: an analytical model
How much capital should banks reserve against investments in portfolio securitisations? Asserting that recent proposals on this subject by Basel are inconsistent, Michael Pykhtin and Ashish Dev propose a new analytical model suitable for tranches of…
The pitfalls of VAR estimates
Value-at-risk