VIX Cognity Use Case - Bisam
Transcript of VIX Cognity Use Case - Bisam
Cognity Case Study
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The challenges to overcome
Sample Portfolio Risk data as of September 8, 2008
Normal Lens
Fat-tailed Lens
Cognity Case Study
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Considering a What If for Hedging & Upside
VIX Index
September 8th 2008 is 22.64
• VIX had not been above 35 in 5 years
• Goal was to reduce downside risk
• Considered shorting an out of the money call
• Earned a premium and enhanced performance
Cognity Case Study
Portfolio With What-If Trade
• Short Call VIX option added to the portfolio beginning of September 2008
• Strike Price= 40
• Expiration = December 17, 2008
• Type: European
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Cognity Case Study
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The challenges to overcome
Normal Lens
Fat-tailed Lens
Portfolio Risk with Short Call
“Is the short call really a risk diversifier?”
Cognity Case Study
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Short Call What-If – ETL Diversifiers
Normal Fat-Tailed
“No, it is a risk contributor”
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Short Call What-If – ETL Contributors
Normal Fat-Tailed
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One Month Later
VIX Index
Closed October 8, 2008 at 57.53
Closed September 8, 2008 at 22.64
• Long Call VIX option added to the portfolio beginning of September 2008
• Strike Price= 40
• Expiration = December 17, 2008
• Type: European
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Portfolio with Long Call
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Portfolio with What-If Long Call
ETL @ 9% Var @ 99% ETR @ 99% Standard Dev
Long 5.89 5.37 53.57 6.67
Hold 10.86 5.41 9.38 3.07
Short 54.47 14.91 7.81 6.30
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Long Call What-If – ETR Contributors
Normal Fat-Tailed
“Portfolio analytics based on normal distributions do not provide the insight needed for sound what-if decisions.”
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Lack of Tail Insight Hurts Performance
Distribution Type Normal
Market Risk Horizon 1 Month
Data Frequency Daily
Evaluation Date 8-Sep-08
Historical Time Window 400 days
Dependancy Structure EWMA - Decay = 0.94
GARCH No
Mean Revision Process Yes
What If September 8, 2008 Change % Change
Original Portfolio $223mm
October 8, 2008
Traditional Analytics - Normal Short Call $145mm -$78mm -35%
“Cognity Fat-tailed view offers precise view into tail dynamics.”
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Tail Insights Avoid Large Loss
Distribution Type Normal
Market Risk Horizon 1 Month
Data Frequency Daily
Evaluation Date 8-Sep-08
Historical Time Window 400 days
Dependancy Structure Fat-tailed Copula
GARCH Yes
Mean Revision Process Yes
What If September 8, 2008 Change % Change
Original Portfolio $223mm
October 8, 2008
Traditional Analytics - Normal Short Call $145mm -$78mm -35%
Hold $198mm -$25mm -11%
“Cognity fat-tailed view uncovers new opportunities and upside potential.”
Cognity Case Study
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Precise Tail Insight Improves Performance
What If September 8, 2008 Change % Change
Original Portfolio $223mm
October 8, 2008
Traditional Analytics - Normal Short Call $145mm -$78mm -35%
Hold $198mm -$25mm -11%
Cognity - Fat-tailed Long* $250mm +$27mm +10%
Performance 40%+
* Includes est. 3% cost deduction of initial call price
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