Real-Time Risk

CHAPTER 2This Ain't Your Grandma's Data

• —What do bots and intraverts have in common?
• —They like to keep their cool.

Real‐time risk is the possibility of lost value in an investment that occurs very fast, in real time or near‐real time. It is often known as intraday drawdown, or instantaneous or short‐term downward volatility; it is closely related to intraday margining. While real‐time risk has in principle existed since the beginning of financial time, there was little way to scientifically measure and estimate it. This chapter focuses on the trends that allowed for the development of real‐time risk as a discipline.

DATA

A New York Times article covering the latest Triple Crown horse race winner, American Pharoah, in early 2016 noted that the horse was identified as having amazing potential when the animal was only one year old. The prediction of success was made by a team of data scientists who estimated the horse's performance by noting the size of the winner's heart, among other characteristics compared with past race winners. On the future potential of the horse, the data scientists advised the owner “to sell the house, but keep the horse.” Their prediction paid off—American Pharoah won and made the owner a small fortune. The real victory, however, can be assigned to data science—the researchers' ability to identify the winner ahead of time based on quantitative metrics.

At its core, the data science behind the horse's win is similar to the methods deployed by modern ...