Context

column

Key questions

Your CFO has a few questions for us:

  1. How do we characterize semiconductor variability and the impact of one market on another?

  2. What are the best combinations of semiconductor drivers?

  3. How much capital is needed to support a semiconductor earnings stream?

  4. How should the company plan to meet risk tolerances and thresholds for losses?

Data

For the semiconductor sector we select exchange traded funds (ETF) from the semiconductor sector:

  • USD for

  • PSI for

  • SMH for

These funds act as indices to effectively summarize the inputs, process, management, decisions, and outputs of various aspects of the semiconductor sector.

We load historical data on three ETFs, tranform prices into returns, and then further transform the returns into within-month correlations and standard deviations.

Work flow

Our process includes

  • Review the stylized facts of volatility and relationships among three repesentative markets.

  • Develop market risk measures for each driver of earnings.

  • Apply corporate risk tolerances and thresholds to determine optimal collateral positions for each driver of earnings.

  • Determine optimal combinations of the drivers for maximum excess portfolio return relative to portfolio risk as well as the minimization of risk

  • Given the optimal maximum excess return per risk portfolio, determine the probable range of collateral needed to satisfy corporate risk tolerance and thresholds.

Supporting Data

           USD        PSI       SMH
USD  1.0000000 -0.0984253 0.3304511
PSI -0.0984253  1.0000000 0.2402667
SMH  0.3304511  0.2402667 1.0000000

mean median std_dev IQR skewness kurtosis
USD.size 53.3224 40.0279 43.4224 63.6472 1.0841 3.9205
PSI.size 46.7599 37.3489 38.6064 56.5055 1.2780 5.2915
SMH.size 34.7733 27.6520 28.5064 36.6273 1.2326 4.4584
SOXL.size 33.3482 28.8902 24.7918 33.0334 1.0202 4.2949 
[1] -0.06110155