FACTOR RISK MODEL BASED SYSTEM, METHOD, AND COMPUTER PROGRAM PRODUCT FOR GENERATING RISK FORECASTS
First Claim
1. A method for generating risk forecasts in financial securities, comprising the steps of:
- selecting a set of securities;
selecting at least two risk factors associated with investment risk in the securities;
determining, for each selected risk factor, the risk factor'"'"'s return;
constructing a risk factor covariance matrix corresponding to the selected risk factors;
constructing an idiosyncratic variance matrix corresponding to the securities in the selected set of securities;
determining, for each selected risk factor, a risk factor loading coefficient for each security in the set by, at the least, performing a time series regression to obtain the sensitivity of each security'"'"'s return to variations in the risk factor'"'"'s return;
projecting the risk factor covariance matrix into a future forecast, thereby producing a future forecast of the risk factor covariance matrix, wherein the step of projecting the risk factor covariance matrix into a future forecast comprises utilizing information in implied volatility; and
projecting the idiosyncratic variance matrix into a future forecast, thereby producing a future forecast of the idiosyncratic variance matrix, whereinthe determined risk factor loading coefficients, the future forecast of the risk factor covariance matrix, and the future forecast of the idiosyncratic variance matrix can be used together to determine a forecast of the variance-covariance matrix for all securities in the selected set of securities.
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Accused Products
Abstract
A computerized method for generating risk forecasts is provided. A set of securities is selected. A set of risk factors is selected. The risk factor returns a determined. A risk factor covariance matrix and an idiosyncratic variance matrix are constructed. For each risk factor, a factor loading coefficient is determined for each selected security. The risk factor covariance matrix is projected into a future forecast. The idiosyncratic variance matrix is projected into a future forecast. The factor loading coefficients, the future forecast of the risk factor covariance matrix, and the future forecast of the idiosyncratic variance matrix can be used to determine a forecast of the variance-covariance matrix for the selected securities.
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Citations
33 Claims
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1. A method for generating risk forecasts in financial securities, comprising the steps of:
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selecting a set of securities; selecting at least two risk factors associated with investment risk in the securities; determining, for each selected risk factor, the risk factor'"'"'s return; constructing a risk factor covariance matrix corresponding to the selected risk factors; constructing an idiosyncratic variance matrix corresponding to the securities in the selected set of securities; determining, for each selected risk factor, a risk factor loading coefficient for each security in the set by, at the least, performing a time series regression to obtain the sensitivity of each security'"'"'s return to variations in the risk factor'"'"'s return; projecting the risk factor covariance matrix into a future forecast, thereby producing a future forecast of the risk factor covariance matrix, wherein the step of projecting the risk factor covariance matrix into a future forecast comprises utilizing information in implied volatility; and projecting the idiosyncratic variance matrix into a future forecast, thereby producing a future forecast of the idiosyncratic variance matrix, wherein the determined risk factor loading coefficients, the future forecast of the risk factor covariance matrix, and the future forecast of the idiosyncratic variance matrix can be used together to determine a forecast of the variance-covariance matrix for all securities in the selected set of securities. - View Dependent Claims (2, 3, 4, 5, 6, 7, 8, 9, 10, 31)
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11. A system, comprising:
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determining means for determining risk factor return for each risk factor in a set of selected risk factors; first estimating means for estimating a risk factor covariance matrix of the selected risk factors; second estimating means for estimating an idiosyncratic variance matrix corresponding to a set of selected securities; third estimating means for estimating, for each risk factor in the set of selected risk factors, a risk factor loading coefficient for each security in a set of selected securities; first projecting means for projecting the risk factor covariance matrix into a future forecast, thereby producing a future forecast of the risk factor covariance matrix, wherein the first projecting means utilizes information in implied volatility in projecting the risk factor covariance matrix into a future forecast; and second projecting means for projecting the idiosyncratic variance matrix into a future forecast, thereby producing a future forecast of the idiosyncratic variance matrix, wherein the estimated risk factor loading coefficients, the future forecast of the risk factor covariance matrix, and the future forecast of the idiosyncratic variance matrix can be used together to determine a forecast of the variance-covariance matrix for all securities in the selected set of securities. - View Dependent Claims (12, 13, 14, 15, 16, 17, 18, 19, 20, 32)
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21. A computer program product including a machine readable medium having stored therein instructions, the instructions comprising:
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instructions for determining a risk factor'"'"'s return, wherein the risk factor is from a set of two or more selected risk factors; instruction for constructing a risk factor covariance matrix corresponding to the selected risk factors; instruction for constructing an idiosyncratic variance matrix corresponding to securities in a selected set of securities; instructions for determining, for each risk factor in the set of risk factors, a risk factor loading coefficient for each security in the set of securities; instructions for projecting the risk factor covariance matrix into a future forecast, thereby producing a future forecast of the risk factor covariance matrix, wherein the instructions for projecting the risk factor covariance matrix into a future forecast comprise instructions for utilizing information in implied volatility in projecting the risk factor covariance matrix into a future forecast; and instructions for projecting the idiosyncratic variance matrix into a future forecast, thereby producing a future forecast of the idiosyncratic variance matrix, wherein the determined risk factor loading coefficients, the future forecast of the risk factor covariance matrix, and the future forecast of the idiosyncratic variance matrix can be used together to determine a forecast of the variance-covariance matrix for all securities in the selected set of securities. - View Dependent Claims (22, 23, 24, 25, 26, 27, 28, 29, 30, 33)
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Specification