Financial Risk Management
The objective of financial risk management is to create economic value in a firm or to maintain a certain risk profile of an investment portfolio by using financial instruments to manage risk exposures, particularly credit risk and market risk. Other types include Foreign exchange, Shape, Volatility, Sector, Liquidity, Inflation risks, etc. As a specialization of risk management, financial risk management focuses on when and how to hedge using financial instruments to manage costly exposures to risk. Below, a few examples show how news analysis can be applied in the financial risk management space with the purpose to either arrive at better risk estimates in terms of Value at Risk (VaR) or to manage the risk of a portfolio to meet ones portfolio mandate.
Example 1
Scenario: The bank operates a VaR model to manage the overall market risk of its portfolio.
Action: Estimate the portfolio covariance matrix taking into account the development of the news sentiment score for volume. Implement the relevant hedges to bring the VaR of the bank in line with the desired levels.
Example 2
Scenario: A portfolio manager operates his portfolio towards a certain desired risk profile.
Action: Estimate the portfolio covariance matrix taking into account the development of the news sentiment score for volume. Scale the portfolio exposure according to the targeted risk profile.
Read more about this topic: News Analytics, Applications & Strategies
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