Abstract

http://ssrn.com/abstract=2150877
 


 



Managing Risks in a Risk-On/Risk-Off Environment


Marcos Lopez de Prado


Guggenheim Partners, LLC; Lawrence Berkeley National Laboratory; RCC at Harvard University

September 23, 2012


Abstract:     
Every structure has natural frequencies. Minor shocks in these frequencies can bring down any structure, e.g. a bridge. An Investment Universe also has natural frequencies, characterized by its eigenvectors. A concentration of risks in the direction of any such eigenvector exposes a portfolio to the possibility of greater than expected losses (indeed, maximum risk for that portfolio size), even if that portfolio is below the risk limits. This is particularly dangerous in a risk-on/risk-off regime. Managing Risk is not only about limiting its amount, but also controlling how this amount is concentrated around the natural frequencies of the investment universe.

Number of Pages in PDF File: 50

Keywords: Risk Concentration, Eigenvectors, Eigen-risk decomposition, Risk-on/Risk-off

JEL Classification: C01, C02, C61, D53, G11

working papers series


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Date posted: September 23, 2012 ; Last revised: April 22, 2013

Suggested Citation

Lopez de Prado, Marcos, Managing Risks in a Risk-On/Risk-Off Environment (September 23, 2012). Available at SSRN: http://ssrn.com/abstract=2150877 or http://dx.doi.org/10.2139/ssrn.2150877

Contact Information

Marcos Lopez de Prado (Contact Author)
Guggenheim Partners, LLC ( email )
330 Madison Avenue
New York, NY 10017
United States
HOME PAGE: http://www.QuantResearch.info
Lawrence Berkeley National Laboratory ( email )
One Cyclotron Road
Berkeley, CA 94720
United States
HOME PAGE: http://www.lbl.gov
RCC at Harvard University ( email )
26 Trowbridge Street
Cambridge, MA 02138
United States
HOME PAGE: http://www.rcc.harvard.edu
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