Estimating risk of a portfolio of financial investments

• US 8,326,722 B2
• Filed: 08/08/2005
• Issued: 12/04/2012
• Est. Priority Date: 08/08/2005
• Status: Active Grant

• Current Assignee: WARP 11 Holdings LLC
• Original Assignee: WARP 11 Holdings LLC
• Inventors: Navin, Robert Lloyd
• Primary Examiner(s): KANERVO, VIRPI H
• Application Number:
  US11/198,301
• Publication Number:
  US 20070033123A1
• Time in Patent Office: 2,675 Days
• Field of Search: None
• US Class Current: 705/36.R
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis

Abstract

An estimate of the effect of a market condition or conditions on a portfolio of financial investments is determined. Financial risk for a portfolio of financial investments is estimated for particular observed parameter values that affect the value of the portfolio. The financial risk is estimated based on previously calculated measurements of risk of the portfolio for a previously selected range of values of the parameters.

Claims

1. A method, performed at least in part by a computer, for providing an estimate of risk of a portfolio of a plurality of financial investment holdings to fluctuations in a portfolio value, the method comprising:

receiving, by a computer processor, an indication of a first set of values of at least two parameters, the first set of values including a first value for each of the at least two parameters;

accessing, from a computer memory, an indication of a predetermined measurement of risk of a portfolio holdings to a second set of values of the at least two parameters, the second set of values including a second value for each of the at least two parameters;

accessing, from the computer memory, an indication of a predetermined measurement of risk of the portfolio holdings to a third set of values of the at least two parameters, the third set of values including a third value for each of the at least two parameters such that the third set of values is different from the second set of values; and

performing a stress testing estimating a measurement of risk of the portfolio holdings by performing operations that include;

performing by one or more computer processors a Taylor Series expansion identifying multiple estimated measurements of risk of the portfolio holdings to multiple values of one of the at least two parameters based on the accessed indication of the predetermined measurement of risk of the portfolio holdings to the second set of values, and the accessed indication of the predetermined measurement of risk of the portfolio holdings to the third set of values; and

performing by the one or more computer processors a polynomial interpolation estimating a measurement of risk of the portfolio holdings to the first set of values based on the multiple estimated measurements of risk, wherein the operations performed for the stress testing include the Taylor Series expansion performed on a set of previously calculated risk measurements that reflect the outputs of a finite difference grid model where each term in the Taylor Series expansion is a prescription for the polynomial interpolation.

2. The method of claim 1 further comprising:

identifying by the one or more computer processors the predetermined measurement of risk of the portfolio holdings to the second set of values;

making by the one or more computer processors an indication of the predetermined measurement of risk of the portfolio holdings to the second set of values accessible for later use;

identifying by the one or more computer processors the predetermined measurement of risk of the portfolio holdings to the third set of values; and

making by the one or more computer processors an indication of the predetermined measurement of risk of the portfolio holdings to the third set of values accessible for later use.

3. The method of claim 2 further comprising:

accessing, from the computer memory, an indication of multiple values of the at least two parameters;

identifying by the one or more computer processors, for each set of values of the at least two parameters including one of a subset of the multiple values for each of the at least two parameters, a predetermined measurement of risk of the portfolio holdings to the set of values; and

making by the one or more computer processors, for the each set of values, an indication of the predetermined measurement of risk of the portfolio holdings to the set of values accessible for later use.

4. The method of claim 2 further comprising:

identifying by the one or more computer processors, for each of a first subset of the portfolio holdings, a predetermined measurement of risk of the portfolio holdings to the second set of values;

making by the one or more computer processors, for each of the first subset of the portfolio holdings, an indication of the predetermined measurement of risk of the portfolio holdings to the second set of values accessible for later use;

identifying by the one or more computer processors, for each of a second subset of the portfolio holdings, a predetermined measurement of risk of the portfolio holdings to the third set of values; and

making by the one or more computer processors, for each of the second subset of the portfolio holdings, an indication of the predetermined measurement of risk of the portfolio holdings to the third set of values accessible for later use.

5. The method of claim 2 wherein:

identifying the predetermined measurement of risk of the portfolio holdings to the second set of values comprises identifying the predetermined measurement of risk of the portfolio holdings to the second set of values at a time when the portfolio holdings may not be traded; and

identifying the predetermined measurement of risk of the portfolio holdings to the third set of values comprises identifying the predetermined measurement of risk of the portfolio holdings to the third set of values at a time when the portfolio holdings may not be traded.

6. The method of claim 2 wherein:

identifying the predetermined measurement of risk of the portfolio holdings to the second set of values comprises identifying the predetermined measurement of risk of the portfolio holdings to the second set of values before the indication of the first set of values is received; and

identifying the predetermined measurement of risk of the portfolio holdings to the third set of values comprises identifying the predetermined measurement of risk of the portfolio holdings to the third set of values before the indication of the first set of values is received.

7. The method of claim 1 wherein:

receiving the indication of the first set of values comprises receiving the indication of the first set of values at a time when the portfolio holdings are permitted to be traded.

8. The method of claim 1 further comprising:

accessing, from the computer memory, an indication of a predetermined measurement of risk of a second portfolio holdings to the second set of values;

accessing, from the computer memory, an indication of a predetermined measurement of risk of the second portfolio holdings to the third set of values;

performing by the one or more computer processors the Taylor Series expansion identifying multiple estimated measurements of risk of the second portfolio holdings to multiple values of one of the at least two parameters based on the accessed indication of the predetermined measurement of risk of the second portfolio holdings to the second set of values and the accessed indication of the predetermined measurement of risk of the second portfolio holdings to the third set of values; and

performing by the one or more computer processors the polynomial interpolation estimating a measurement of risk of the second portfolio holdings to the first set of values based on the multiple estimated measurements of risk.

9. The method of claim 1 further comprising:

accessing, from the computer memory, for each of a first subset of the portfolio holdings, an indication of a predetermined measurement of risk of the portfolio holdings to the second set of values;

accessing, from the computer memory, for each of a second subset of the portfolio holdings, an indication of a predetermined measurement of risk of the portfolio holdings to the third set of values; and

estimating by the one or more computer processors a measurement of risk of the portfolio holdings to the first set of values based on the accessed indication of the predetermined measurement of risk of the first subset of the portfolio holdings to the second value and the accessed indication of the predetermined measurement of risk of the second subset of the portfolio holdings to the third value.

10. The method of claim 9 wherein estimating the measurement of risk of the portfolio holdings to the first set of values comprises:

estimating, for each of the portfolio holdings, a measurement of risk of the portfolio holdings to the first set of values based on the accessed indication of the predetermined measurement of risk of the portfolio holdings to the second set of values and the accessed indication of the predetermined measurement of risk of the portfolio holdings to the third set of values; and

aggregating the estimated measurements for the portfolio holdings into an estimate of the measurement of risk of the portfolio holdings to the first set of values.

11. The method of claim 9 wherein estimating the measurement of risk of the portfolio holdings to the first set of values comprises:

aggregating the predetermined measurement of risk of the portfolio holdings to the second set of values into a measurement of risk of the portfolio holdings to the second set of values;

aggregating the predetermined measurement of risk of the portfolio holdings to the third set of values into a measurement of risk of the portfolio holdings to the third set of values; and

estimating the measurement of risk of the portfolio holdings to the first set of values based on the measurement of risk of the portfolio holdings to the second set of values and the measurement of risk of the portfolio holdings to the third set of values.

12. The method of claim 9 further comprising:

identifying by the one or more computer processors an allocation of the portfolio holdings that reduces the estimated measurement of risk of the portfolio holdings to the first set of values.

13. The method of claim 12 further comprising:

modifying by the one or more computer processors the portfolio holdings to have the identified allocation.

14. The method of claim 9 wherein:

the measurement of risk of the portfolio holdings to a set of values comprises a measurement of an amount by which the set of values of the portfolio holdings changes as a result of a change in a parameter from an original set of values to the set of values.

15. The method of claim 1 wherein the measurement of risk of the portfolio holdings to a set of values of a parameter comprises a measurement of an amount by which the set of values of the portfolio holdings changes as a result of a change in the parameter from an original set of values to the set of values.

16. The method of claim 1 wherein:

one of the at least two parameters is a state variable and others of the at least two parameters are non-state variables.

17. The method of claim 16 wherein:

using the Taylor Series expansion comprises using the Taylor Series expansion in identifying multiple estimated measurements of risk of the portfolio holdings to multiple values of the state variable based on an accessed indication of a predetermined measurement of risk of the portfolio holdings to values of the non-state variables included in the second set of values, and an accessed indication of a predetermined measurement of risk of the portfolio holdings to values of the non-state variables included in the third set of values; and

using the polynomial interpolation comprises using the polynomial interpolation in estimating a measurement of risk of the portfolio holdings to the state variable.

18. The method of claim 17 further comprising:

identifying by the one or more computer processors a number of expansion terms to be used in the Taylor Series expansion.

19. The method of claim 1 wherein:

the portfolio holdings include at least one derivative holding.

20. The method of claim 1 wherein:

an identified parameter comprises at least one of an interest rate, a price, a maturity interest rate, a price of an exchange-traded stock, a price of a maturity bond, a price of a credit default swap, and a current foreign exchange rate.

21. A computer program product tangibly embodied in an machine-readable storage device, the computer program product including instructions that, when executed by a computer processor, provide an estimate of risk of a portfolio of a plurality of financial investment holdings to fluctuations in a portfolio value, the computer program product configured to:

receive an indication of a first set of values of at least two parameters, the first set of values including a first value for each of the at least two parameters;

access an indication of a predetermined measurement of risk of a portfolio holdings to a second set of values of the at least two parameters, the second set of values including a second value for each of the at least two parameters;

access an indication of a predetermined measurement of risk of the portfolio holdings to a third set of values of the at least two parameters, the third set of values including a third value for each of the at least two parameters such that the third set of values is different from the second set of values; and

performing a stress testing estimating a measurement of risk of the portfolio holdings by performing operations that include;

perform a Taylor Series expansion identifying multiple estimated measurements of risk of the portfolio holdings to multiple values of one of the at least two parameters based on the accessed indication of the predetermined measurement of risk of the portfolio holdings to the second set of values, and the accessed indication of the predetermined measurement of risk of the portfolio holdings to the third set of values; and

perform a polynomial interpolation estimating a measurement of risk of the portfolio holdings to the first set of values based on the multiple estimated measurements of risk, wherein the operations performed for the stress testing include the Taylor Series expansion performed on a set of previously calculated risk measurements that reflect the outputs of a finite difference grid model where each term in the Taylor Series expansion is a prescription for the polynomial interpolation.

22. The computer program product of claim 21 further configured to:

identify the predetermined measurement of risk of the portfolio holdings to the second set of values;

make an indication of the predetermined measurement of risk of the portfolio holdings to the second set of values accessible for later use;

identify the predetermined measurement of risk of the portfolio holdings to the third set of values; and

make an indication of the predetermined measurement of risk of the portfolio holdings to the third set of values accessible for later use.

23. The computer program product of claim 22 further configured to:

access an indication of multiple values of the at least two parameters;

identify, for each set of values of the at least two parameters including one of a subset of the multiple values for each of the at least two parameters, a predetermined measurement of risk of the portfolio holdings to the set of values; and

make, for the each set of values, an indication of the predetermined measurement of risk of the portfolio holdings to the set of values accessible for later use.

24. The computer program product of claim 22 further configured to:

identify, for each of a first subset of the portfolio holdings, a predetermined measurement of risk of the portfolio holdings to the second set of values;

make, for each of the first subset of the portfolio holdings, an indication of the predetermined measurement of risk of the portfolio holdings to the second set of values accessible for later use;

identify, for each of a second subset of the portfolio holdings, a predetermined measurement of risk of the portfolio holdings to the third set of values; and

make, for each of the second subset of the portfolio holdings, an indication of the predetermined measurement of risk of the portfolio holdings to the third set of values accessible for later use.

25. The computer program product of claim 22 wherein:

identifying the predetermined measurement of risk of the portfolio holdings to the second set of values comprises identifying the predetermined measurement of risk of the portfolio holdings to the second set of values at a time when the portfolio holdings may not be traded; and

identifying the predetermined measurement of risk of the portfolio holdings to the third set of values comprises identifying the predetermined measurement of risk of the portfolio holdings to the third set of values at a time when the portfolio holdings may not be traded.

26. The computer program product of claim 22 wherein:

identifying the predetermined measurement of risk of the portfolio holdings to the second set of values comprises identifying the predetermined measurement of risk of the portfolio holdings to the second set of values before the indication of the first set of values is received; and

identifying the predetermined measurement of risk of the portfolio holdings to the third set of values comprises identifying the predetermined measurement of risk of the portfolio holdings to the third set of values before the indication of the first set of values is received.

27. The computer program product of claim 21 wherein:

receiving the indication of the first set of values comprises receiving the indication of the first set of values at a time when the portfolio holdings are permitted to be traded.

28. The computer program product of claim 21 further configured to:

access an indication of a predetermined measurement of risk of a second portfolio holdings to the second set of values;

access an indication of a predetermined measurement of risk of the second portfolio holdings to the third set of values;

perform the Taylor Series expansion identifying multiple estimated measurements of risk of the second portfolio holdings to multiple values of one of the at least two parameters based on the accessed indication of the predetermined measurement of risk of the second portfolio holdings to the second set of values and the accessed indication of the predetermined measurement of risk of the second portfolio holdings to the third set of values; and

perform the polynomial interpolation estimating a measurement of risk of the second portfolio holdings to the first set of values based on the multiple estimated measurements of risk.

29. The computer program product of claim 21 further configured to:

access, for each of a first subset of the portfolio holdings, an indication of a predetermined measurement of risk of the portfolio holdings to the second set of values;

access, for each of a second subset of the portfolio holdings, an indication of a predetermined measurement of risk of the portfolio holdings to the third set of values; and

estimate a measurement of risk of the portfolio holdings to the first set of values based on the accessed indication of the predetermined measurement of risk of the first subset of the portfolio holdings to the second value and the accessed indication of the predetermined measurement of risk of the second subset of the portfolio holdings to the third value.

30. The computer program product of claim 29 wherein estimating the measurement of risk of the portfolio holdings to the first set of values comprises:

estimating, for each of the portfolio holdings, a measurement of risk of the portfolio holdings to the first set of values based on the accessed indication of the predetermined measurement of risk of the portfolio holdings to the second set of values and the accessed indication of the predetermined measurement of risk of the portfolio holdings to the third set of values; and

aggregating the estimated measurements for the portfolio holdings into an estimate of the measurement of risk of the portfolio holdings to the first set of values.

31. The computer program product of claim 29 wherein estimating the measurement of risk of the portfolio holdings to the first set of values comprises:

aggregating the predetermined measurement of risk of the portfolio holdings to the second set of values into a measurement of risk of the portfolio holdings to the second set of values;

aggregating the predetermined measurement of risk of the portfolio holdings to the third set of values into a measurement of risk of the portfolio holdings to the third set of values; and

estimating the measurement of risk of the portfolio holdings to the first set of values based on the measurement of risk of the portfolio holdings to the second set of values and the measurement of risk of the portfolio holdings to the third set of values.

32. The computer program product of claim 29 further configured to:

identify an allocation of the portfolio holdings that reduces the estimated measurement of risk of the portfolio holdings to the first set of values.

33. The computer program product of claim 32 further configured to:

modify the portfolio holdings to have the identified allocation.

34. The computer program product of claim 29 wherein:

the measurement of risk of the portfolio holdings to a set of values comprises a measurement of an amount by which the set of values of the portfolio holdings changes as a result of a change in a parameter from an original set of values to the set of values.

35. The computer program product of claim 21 wherein:

the measurement of risk of the portfolio holdings to a set of values of a parameter comprises a measurement of an amount by which the set of values of the portfolio holdings changes as a result of a change in the parameter from an original set of values to the set of values.

36. The computer program product of claim 21 wherein:

one of the at least two parameters is a state variable and others of the at least two parameters are non-state variables.

37. The computer program product of claim 36 wherein:

using the Taylor Series expansion comprises using the Taylor Series expansion in identifying multiple estimated measurements of risk of the portfolio holdings to multiple values of the state variable based on an accessed indication of a predetermined measurement of risk of the portfolio holdings to values of the non-state variables included in the second set of values, and an accessed indication of a predetermined measurement of risk of the portfolio holdings to values of the non-state variables included in the third set of values; and

using the polynomial interpolation comprises using the polynomial interpolation in estimating a measurement of risk of the portfolio holdings to the state variable.

38. The computer program product of claim 37 further configured to:

identify a number of expansion terms to be used in the Taylor Series expansion.

39. The computer program product of claim 21 wherein:

the portfolio holdings include at least one derivative holding.

40. The computer program product of claim 21 wherein:

an identified parameter comprises at least one of an interest rate, a price, a maturity interest rate, a price of an exchange-traded stock, a price of a maturity bond, a price of a credit default swap, and a current foreign exchange rate.