Risk results can change for many reasons: trading activity that generates exposure to new factors, changes in exposures to existing factors, changes in risk factor volatilities, or changes in correlation among risk factors.
Understanding changes in risk estimates can be key, especially in times of crisis when volatilities spike and correlations point in the same direction, eliminating the diversification that was supposed to protect a portfolio.
In this paper, we:
- Explain why the parametric method makes understanding these changes relatively simple
- Describe the methodology that we use
- Detail the outputs and analysis that can be generated using an enterprise portfolio risk management system