Using a parametric approach to understand changes in risk 

Take the guesswork out of risk estimations

Picture this: Your risk system is showing that risk went up from 9.68% to 10.83%, but it doesn’t explain what’s actually behind the risk increase. Was it due to new positions held? Rising factor volatilities? Correlation shifts that reduced diversification benefits? Without those clear answers, taking action becomes much harder.

This white paper presents a parametric approach that decomposes risk changes into three distinct effects: exposure changes, volatility changes, and correlation changes. Using Taylor expansion techniques, the framework provides transparent, additive explanations for risk variations at the factor level. The approach works across equity, fixed income, credit, and multi-asset portfolios with low convexity – essentially most traditional asset management strategies. Results are cumulative over time, enabling portfolio managers to track whether trading decisions consistently increased or decreased risk relative to market-driven changes.

Read this paper to learn how to:

• Separate trading impacts from market conditions
• Get precise factor-level breakdowns of exposure, volatility, and correlation effects
• Track hedging strategy effectiveness
• Understand correlation breakdowns during market stress