Advanced Topics Flashcards

A copula function is used in risk modeling primarily to:

Answer: Model the dependence structure between variables separately from their marginals

Copulas link marginal distributions into a joint distribution, allowing dependence to be modeled independently of the margins.

The Gaussian copula was widely criticized after the 2008 crisis mainly because it:

Answer: Underestimated tail dependence among defaults

The Gaussian copula has zero tail dependence, so it understated the probability of joint extreme defaults in structured products.

In extreme value theory (EVT), the peaks-over-threshold (POT) method models exceedances using which distribution?

Answer: Generalized Pareto distribution

The POT approach fits the generalized Pareto distribution to losses exceeding a high threshold.

Marginal VaR for a position in a portfolio measures:

Answer: The change in portfolio VaR from a small change in that position

Marginal VaR is the partial derivative of portfolio VaR with respect to the size of a given position.

The credit valuation adjustment (CVA) represents:

Answer: The expected loss due to counterparty default

CVA is the difference between the risk-free derivative value and its value accounting for counterparty default risk.

A bank using the standardized approach for market risk under the Fundamental Review of the Trading Book (FRTB) replaces VaR with which measure?

Answer: Expected shortfall at 97.5%

FRTB adopts expected shortfall at a 97.5% confidence level as the primary market-risk measure, replacing VaR.

Specific risk in a bond portfolio, as opposed to general market risk, arises from:

Answer: Issuer-specific credit and event factors

Specific risk reflects issuer-related factors such as credit deterioration or downgrades, distinct from broad market moves.