A Survey of the Application of Various Risk Metrics to Financial Trading
Computational Finance INFT73-361
Postgraduate Research Assignment:
A Survey of the Application of Various Risk Metrics to Financial Trading
Brodie Paape - 13290315
Due Date: 30 November 2013
A Survey of the Application of Various Risk Metrics to Financial Trading
Abstract
This paper surveys recent literature in the domain of various risk metrics applied to investment and financial trading. It analyses the literature according to the style of risk measure, the investment discipline used, the successes demonstrated, and the applicability of the literature to real world trading through examples. This papers contribution is to expose key areas where recent research has been undertaken within the past five years, and attempts to demonstrate the advances within various risk metric approaches.
1.0 Introduction
This paper surveys the literature on various risk metrics carried out over the past five years [2008-present]. The literature reviewed covers multiple risk metrics including; stop-loss orders, maximum adverse selection (MAE), Monte Carlo Analysis and Sharpe Ratios. The research methods and results are then discussed and analysed to show how the findings has added to the financial literature of that particular risk metric.
2.0 Trade Risk
Stock market traders are largely concerned with downside risk, which individually nominates how much money is at risk on a per trade basis. Thus, traders place orders to sell/buy stocks to cover open long/short positions when losses reach pre-determined levels, branded as stop-loss orders [1].
2.1 Stop-loss orders
Prior research by Chande [2] developed the TOPS COLA approach, an acronym for take our profits slowly, cut off losses at once. Chande suggests trend-following systems will be viable using the TOPS COLA approach even when the quantity of losing trades outnumbers the quantity of winning trades.
More recently,
Postgraduate Research Assignment:
A Survey of the Application of Various Risk Metrics to Financial Trading
Brodie Paape - 13290315
Due Date: 30 November 2013
A Survey of the Application of Various Risk Metrics to Financial Trading
Abstract
This paper surveys recent literature in the domain of various risk metrics applied to investment and financial trading. It analyses the literature according to the style of risk measure, the investment discipline used, the successes demonstrated, and the applicability of the literature to real world trading through examples. This papers contribution is to expose key areas where recent research has been undertaken within the past five years, and attempts to demonstrate the advances within various risk metric approaches.
1.0 Introduction
This paper surveys the literature on various risk metrics carried out over the past five years [2008-present]. The literature reviewed covers multiple risk metrics including; stop-loss orders, maximum adverse selection (MAE), Monte Carlo Analysis and Sharpe Ratios. The research methods and results are then discussed and analysed to show how the findings has added to the financial literature of that particular risk metric.
2.0 Trade Risk
Stock market traders are largely concerned with downside risk, which individually nominates how much money is at risk on a per trade basis. Thus, traders place orders to sell/buy stocks to cover open long/short positions when losses reach pre-determined levels, branded as stop-loss orders [1].
2.1 Stop-loss orders
Prior research by Chande [2] developed the TOPS COLA approach, an acronym for take our profits slowly, cut off losses at once. Chande suggests trend-following systems will be viable using the TOPS COLA approach even when the quantity of losing trades outnumbers the quantity of winning trades.
More recently,