Risk Management
Risk management is more important than making predictions. For example, a 10% loss requires an 11% gain to break even, while a 20% loss requires a gain of more than 40%. Effective risk management involves understanding and reducing portfolio risks by applying innovative tools to better manage investment exposure.
We present various risk management indicators at both the node and edge levels, illustrating the complex interconnections and transmission of risk through portfolios and financial networks. This is achieved by integrating these indicators with dynamic methods such as network entropy, persistent homology, and spillover indices.
Ricci Curvature
Ricci curvature is a compelling indicator for assessing fragility at the edge level of asset networks, focusing on how tightly assets are connected rather than their individual characteristics. The higher the level, the higher the risk of risk transmission between the asset classes in the market.
The current level suggests low market enwironment with small risk of risk spillover.
Entropy
The entropy of a asset network serves as a measure of structure and measures transition rates between nodes while disregarding direct links. This is an indicator for the risk on the individual asset level. The higher the level, the higher the risk associated with the individual assets.
The current level suggest historically elevated risk of sindividual assets.
CAFNITE
Model probabilistically the causal average effects using treatment effects, dilation effects, and potential outcomes of risk and return to other asset classes. absolutely novel technique that models interactions and spillover effects from one asset to other. A negative impact of -5% on S&P500, US dollar, and the US Treasuries results in:
Combined Effects -4.2%
Direct Effects -17.7%
Indirect Effects -4.4%
Persistent Homology
Uses persistent diagrams to identify change in the dynamics of spreads between assets. Prone to noise due to application of different threshold levels it clearly identifies turbulence and asset abnormal behavior.
Criticality
Containing a compromise index, refers to a set of variables that identify the risk associated with the interacting assets in the network.
Crowdedness
The effect of decreasing payoff for of a investment strategy in the case of an increasing number of investors applying the same strategy.
The current level of 0.25 suggest low crowdedness of assets.
Risk Management Tools
If you are interested in learning more about the risk management tools, please send us a message.