Risk Management


Innovative risk measurement. Accurate results and decision making.
StatPro's risk management solution is a ‘company-wide' portfolio risk assessment tool for
  • integrated market and credit risk
  • counterparty risk
  • liquidity risk
You don’t need to feed historic data or terms and conditions of standard products into the system. It comes with a comprehensive, data service covering a vast range of assets.
We’ve designed an innovative approach to measuring market liquidity risk that does not rely on observed bid, ask and volumes. The approach breaks down liquidity risk into five components:
  • Fair Value Bid and Fair Value Ask 
In this component the process that a market-maker uses for creating bids and asks for fixed income products and derivative instruments is replicated. Information is collected on bid and asks for the underlying derivative instruments used by the market-makers to hedge their risks and compute a fair value bid and a fair value ask by inserting the respective bid and ask of the underlying derivatives into our bond pricing functions. This process takes into account the exposure of each instrument to each risk factor. Therefore when creating a bid for a convertible bond, the function will use the bid of the underlying implied volatility. Instead, for the bid of a reverse convertible, the pricing functions will receive as input the ask of the implied volatility.[t1] 
  •  Pricing Function Type 
Certain instruments have more liquidity risk than others simply because of their nature. For example ABSs will be less liquid than other bonds by definition.
  • Outstanding Nominal 
The size of an issue is most relevant for the liquidity of a fixed income instrument. Two identical bonds issued by the same issuer can have more or less liquidity, depending on the size of the issue. A $50m issue will be less liquid than a $1bn issue by definition.
  • Market Cap (Equity Component) 
In stocks the liquidity is intimately linked to the dimensions of a company and to its market capitalization.
  • Percentage of Ownership (Equity Component) 
Given the idiosyncratic nature of individual stocks, the percentage of the market capitalization of a stock owned by a certain portfolio will be an essential driver of liquidity risk. Owning 0.0001% of a stock will not generate additional liquidity risk, but owning 10% of the market cap will create a remarkable additional liquidity risk to the owner.
We believe the benefits are:
  • Universal - The StatPro approach is extended to any instrument, from simple equities to liquid and illiquid fixed income instruments, from certificates to complex OTC derivatives, touching all the 250+ pricing functions supported by our risk management operation[t2] .
  • Consistency - The approach is consistent among all asset classes, capturing all the relevant drivers of liquidity risk. For example, longer maturity will always determine higher liquidity risk. A worse credit merit will always determine more liquidity risk. The currency denomination will also be a driver of that risk and a THB bond will always present higher liquidity risk than an equivalent USD bond.
  • Empower the Risk Manager – It’s a tool for spotting the main elements of liquidity risk with ease, enabling you to understand in detail the nature of liquidity risk in a portfolio without knowing the details of that portfolio.
  • Scenario based - The product supports several scenarios of liquidity risk, giving the possibility of measuring this risk under Normal Market Conditions, Stressed Conditions and Highly Stressed Conditions.
We have other risk tools too:
QuantLib is the most successful open source project for quantitative finance in the world. Created by StatPro, it provides financial pricing libraries and tools for building bond pricing functions. Our risk management solution and complex assets pricing, have been built around QuantLib.
“In the past clients have contacted us because they wanted to use QuantLib but their IT policy did not permit the use of open source software in production platforms. They needed a "certified" version, free of mal-ware and guaranteed by a professional operator. But they also wanted our support and integration expertise...” says an IT person from StatPro
“Following this market need, StatPro now offers an adapted version of QuantLib, modified in order to meet client requirements.
QuantLib2 offers more than 250 pricing functions. These have been created using QuantLib and give you access to a complete universe of pricing functions for risk assessment covering every asset class from equity, interest rate-linked products to mortgage-backed securities.
For more information download our white papers: http://www.statpro.com/resources/whitepapers.aspx


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Risk management, Liquidity Risk, Risk assessment tool, hybrid Var

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