Propagating causal stress-tests or contagion on selected risk factors to all the risk drivers is a challenging task. We use Entropy Pooling by Meucci (2008) to address this issue. Our causal stress-tests comprise, but are not restricted to, stress-testing Bayesian networks. We detail the theory...

We extend the Fully Flexible Views generalization of the Black-Litterman approach to effectively handle extreme views on the tails of a distribution. First, we provide a recursive algorithm to process views on the conditional value at risk, which cannot be handled directly by the original...

In the paper we introduce an empirical approximation of the log-optimal investment strategy that guarantees an almost optimal growth rate of investments. The proposed strategy also considers the effects of portfolio rearrangement costs on growth optimality and advises a suboptimal portfolio for...

By default, most investors equate a passive investment such as a traditional market capitalisation based index with a welldiversified investment. However, “diversified” and “passive” should not a priori be considered as synonymous. We have attempted to show that “passive” should not...

The article focuses on the categorisation of indexing methods in equity space. Based on the theoretical concepts of the various index methods, we first conduct a qualitative categorisation. In a second step, we try to validate it with a formal statistical analysis. We conclude that many indexing...

We introduce a new framework to integrate liquidity risk, funding risk and market risk, which goes beyond the simple bid-ask spread overlay to a VaR number. In our approach, we overlay a whole distribution of liquidity uncertainty to each future market-risk scenario. Then we allow for the...

We clarify the rationale and differences between the two main categories of linear factor models, namely dominant-residual and systematic-idiosyncratic. We discuss the five different, yet interconnected areas of quantitative finance where linear factor models play an essential role: multivariate...

We develop in this paper a novel portfolio selection framework with a feature of dual robustness in both return distribution modeling and portfolio optimization. While predicting the return distributions of the future market always represents the most compelling challenge in investment, any...