Blog Week in Risk (April 8th)

[David Harper CFA FRM]

New YouTube

• Linear regression: OLS coefficients minimize the SSR (FRM T2-15) https://trtl.bz/2GLlM4O
• Regression: standard error of regression (SER, FRM T2-16) https://trtl.bz/2ICXNoQ
• Interest rates: compound frequencies (FRM T3-8) https://trtl.bz/2v2EiUG
• Theoretical price of a bond using spot rates (FRM T3-9) https://trtl.bz/2qjiK0z

In the Forum (selected only)

• [P1.T1] Epic explanation by @emilioalzamora1 of Bodie's EOC Question 10.8 https://forum.bionicturtle.com/threads/bodie-study-notes-q-8.13806/
• [P1.T1] Stulz on the problem of limits that are too granular https://forum.bionicturtle.com/threads/p1-t1-601-risk-governance-at-a-bank-stulz.9215/#post-58927
• [P1.T1] Is tracking error the same as active return, and should it always be used in the information ratio? https://forum.bionicturtle.com/thre...io_residual-vs_active.10516/page-2#post-58827
• [P1.T2] The difference between events and outcomes in a binomial probability https://forum.bionicturtle.com/threads/miller-chapter-2-probabilities-question.13807/
• [P1.T2*] Can the conditional mean vary over time under Wold's theorem? https://forum.bionicturtle.com/threads/p1-t2-508-wolds-theorem-diebold.8409/#post-58975
• [P1.T2] Using the power rule to find the mean and variance of a continuous function https://forum.bionicturtle.com/threads/p1-t2-710-mean-and-standard-deviation-miller-ch-3.11270
• [P1.T2] Thank you @emilioalzamora1 for a truly incredible answer to the question "What do we mean when we ask if the AIC, SIC and MSE are consistent?" https://forum.bionicturtle.com/threads/p1-t2-505-model-selection-criteria-diebold.8381/#post-58676
• [P1.T2] The nuances of seasonality regression with (n-1) dummy variables https://forum.bionicturtle.com/thre...ime-series-analysis-diebold.10121/#post-58858
• [P1.T2*] Some Diebold questions https://forum.bionicturtle.com/threads/diebold-chapter-5-6.13794/
• [P1.T3] Delta hedging question example https://forum.bionicturtle.com/threads/delta-hedging.13805
• [P1.T3] Thank you @Marco.Musci for a thought provoking point about exactly which correlation/beta in assumed in Hull's hedge of equity portfolio https://forum.bionicturtle.com/thre...ith-stock-index-futures-hull.4449/#post-58963
• [P1.T3] Is there any difference between Hull's and Geman's basis risk? https://forum.bionicturtle.com/threads/l1-t3-190-gemans-basis-risk.4676/#post-58926
• [P1.T3] You can use the calculator to find the number of days between dates! https://forum.bionicturtle.com/threads/day-counting.4820/#post-58884
• [P1.T3] Thank you @[email protected] for the shortcut when using bond prices to extract forward rates https://forum.bionicturtle.com/thre...-using-spot-rates-hull.4481/page-3#post-58883
• [P1.T3] The key translation of continuous to discrete (and vice-versa) shown by @Xiconeto https://forum.bionicturtle.com/thre...ate-agreement-fra-hull.4510/page-2#post-58933
• [P1.T3] Good convexity observations by @Xiconeto https://trtl.bz/2q6um85
• [P1.T3] When maturity approaches, A long futures position loses on the roll return in a contango https://trtl.bz/2GSftzE
• [P1.T3] Thank you @FRM candidate for collecting three interesting EOC Hull questions that have in common the exploitation of a cash arbitrage trade https://forum.bionicturtle.com/threads/hull-04-01.13809/
• [P1.T3] Thank you @Marco.Musci for pointing out that intrinsic value of an option grant would change under cash dividend https://forum.bionicturtle.com/thre...ons-markets-hull-chapter-10.10679/#post-59043
• [P1.T3] Specifically pricing options under various assumptions https://forum.bionicturtle.com/thre...options-including-put-call-parity-hull.10705/
• [P1.T3] Hull EOC Question 5.20 (prove COC with income) https://forum.bionicturtle.com/threads/hull-ch-5-practice-question-5-20.13811/
• [P1.T3] Hull EOC Question 5.23 (difficult proof of optimal FX hedge ratio) https://forum.bionicturtle.com/threads/hull-ch-5-practice-question-5-23.13810/
• [P1.T3*] Hull EOC Question 5.27 https://forum.bionicturtle.com/threads/hull-ch-5-practice-question-5-27.13816/
• [P1.T3*] Hull EOC Question 5.29 https://forum.bionicturtle.com/threads/hull-ch-5-practice-question-5-29.13815/
• [P1.T4] Another example of the risk contribution (aka, unexpected loss contribution) calculation https://trtl.bz/2GnxeTY
• [P1.T4] Why does long option convexity (aka, gamma) imply profits if realized volatility is greater than implied volatility? https://forum.bionicturtle.com/threads/p1-t4-7-dynamic-delta-hedging-hull.4838/page-2#post-58821
• [P1.T4*] Two of Hull's questions on dynamic delta hedging https://forum.bionicturtle.com/threads/p1-t4-7-dynamic-delta-hedging-hull.13792/
• [P1.T4] On the exact mechanics of interpolation in the hybrid historical simulation value at risk (VaR) https://forum.bionicturtle.com/thre...ation-approaches-allen-ch-2.13700/#post-58961
• [P2.T5] VaR does not assume a normal distribution https://forum.bionicturtle.com/thre...ic-or-nonparametric-appoach.10716/#post-58882
• [P2.T5] Fabozzi has a slightly different convexity measure (with 2 in the denominator) but there are good reasons we don't use it https://forum.bionicturtle.com/threads/p2-t5-206-fixed-income-iii-mbs-topic-review.6044/#post-58901
• [P2.T5] Interesting term structure dynamics https://forum.bionicturtle.com/threads/tuckman-ch9-shape-of-term-structure.13801/
• [P2.T5] Tuckman's term structure models use (dw) which is a time-scaled random normal variable https://trtl.bz/2Ev0qH7
• [P2.T5] Thank you @Karim_B (again! again!) @bhoyare.nilesh for identifying mistakes https://forum.bionicturtle.com/thre...otes-p2-t5-market-risk.8758/page-4#post-58415
• [P2.T5] Counting the number of concordant/discordant pairs https://forum.bionicturtle.com/thre...-and-kendalls-meissner.8220/page-2#post-58847
• [P2.T5*] Interested in the HJM interest rate model https://forum.bionicturtle.com/thre...row-morton-hjm-model-in-interest-rates.13793/
• [P2.T6] On Gregory's slight switch in signs (+/-) embedded in BCVA between his 2nd and 3rd editions https://forum.bionicturtle.com/thre...dit-value-adjustment-gregory.7259/#post-58966
• [P2.T6] Wrong-way risk is an adverse correlation between exposure and the counterparty's credit quality (default probability) https://forum.bionicturtle.com/thre...nterparty-risk-gregory.7900/page-2#post-58993
• [P2.T7] Did the original Basel Accord acknowledge the benefits of collateral? https://forum.bionicturtle.com/thre...minimum-capital-requirements.4398/#post-58836
• [P2.T7] Basel III maintains the exclusion of securitizations from the incremental risk charge (IRC) https://forum.bionicturtle.com/threads/l2-t7-b18-basel’s-revisions-to-market-risk-framework-continued.4538/#post-58826
• [P2.T8] Tricky is the covariance of a position with the portfolio that contains it https://forum.bionicturtle.com/thre...al-and-incremental-var.8395/page-3#post-58938
• [P2.T8*] Why is rebalancing a short volatility strategy? https://forum.bionicturtle.com/threads/p2-t8-703-value-size-and-momentum-investing-andrew-ang.10194/
• [P2.T8] In the Fama-French three-factor model do the weights need to sum to one? https://forum.bionicturtle.com/threads/p2-t8-705-berkshire-hathaway-versus-its-benchmark-ang.10236/
• [P2.T8*] Rebalancing as a means to harvest the illiquidity premium https://trtl.bz/2H9gVLE
• [P2.T8*] What is the intuition behind the appropriateness of Treynor for sub-portfolios? https://forum.bionicturtle.com/threads/p2-t8-16-risk-adjusted-performance-measures-bodie.5549/
• [P2.T8] Thank you @emilioalzamora1 for the helpful discussion on Ang's low-risk anomaly https://forum.bionicturtle.com/threads/p2-t8-704-alpha-and-effective-benchmarks-andrew-ang.10204/
• [P2.T8*] Looking for help on the intuition of Jorion's optimal portfolio information ration under tracking error constraint https://forum.bionicturtle.com/thre...isk-var-in-investment-management-jorion.5520/
• [P2.T8] Bodie's style analysis constrains the sum of regression coefficients to one (1.0) https://forum.bionicturtle.com/thre...ance-attribution-bodie.5595/page-2#post-58999
• [P2.T8] Subtle difference(s) between standard error of alpha and standard error of regression https://forum.bionicturtle.com/thre...ficance-of-alpha-bodie.5578/page-2#post-58998
• [P2.T8] Interpretation of classification tree https://forum.bionicturtle.com/thre...-tricks-for-econometrics-by-hal-varian.13462/

Interesting External Links

Bank and banking

• [BIS] Revisions to the minimum capital requirements for market risk - consultative document https://www.bis.org/bcbs/publ/d436.htm
• [BIS] Frequently asked questions on market risk capital requirements https://www.bis.org/bcbs/publ/d437.htm
• [BIS] Frequently asked questions on the Basel III standardised approach for measuring counterparty credit risk exposures https://www.bis.org/bcbs/publ/d438.htm
• Jamie Dimon’s Annual Letter to Shareholders https://reports.jpmorganchase.com/investor-relations/2017/ar-ceo-letters.htm
• Wall Street’s Big Banks Are Waging an All-Out Technological Arms Race https://www.bloomberg.com/news/feat...anks-are-waging-an-all-out-technological-arms
• Spotify’s Splashy Debut Pressures Banks https://www.wsj.com/articles/spotify-shares-jump-in-market-debut-1522773951
• [video] How the Fed Works: After the Great Recession https://trtl.bz/2Jwi7d4
• [GARP] Irrational Exuberance in 2018: Aiming for Crisis Prevention https://trtl.bz/2qfMw7d “Central bankers around the world have recently and dramatically shifted their priorities. Indeed, they have postponed deadlines for the revised FRTB framework for market risk and the Basel Committee’s updated standards for operational risk and credit risk to 2022 and beyond.”

Technology and Data science, including FinTech and Cybersecurity

• [GARP] CDO 3.0: The Rapid Rise of the Chief Data Officer https://trtl.bz/2qfP7hD
• [GARP] How to Regulate Cryptocurrencies to Mitigate Risk https://trtl.bz/2qfVcui
• [Allianz] The Rise of Artificial Intelligence: Future Outlook and Emerging Risks http://www.agcs.allianz.com/insights/white-papers-and-case-studies/artificial-intelligence/
• Cyber attacks: the risks of pricing digital cover (ft.com, pdf) https://trtl.bz/2EwUZr9 Good overview of the challenges; e.g., lack of mature risk models, reality that much of cyber risk is cultural. "Insurers have two big fears about cyber. The first is the risk of a massive attack that affects a large number of their clients at once. In the industry’s jargon, this is called aggregation risk ... The other threat worrying insurers is known as silent — or non-affirmative — cyber risk. This is where they might be exposed to the costs of cyber attacks, not through specific cyber policies but through other insurance policies where cyber is not specifically excluded."
• Berkeley offers its fastest-growing course (data science) online, for free http://news.berkeley.edu/2018/03/29...-growing-course-data-science-online-for-free/

Exams, Financial Associations (GARP, FRM, CFA Institute) and Careers

• PRMIA and CFA Institute Partner to Offer CFA Charterholders Special Access to Risk Management Certification https://www.prmia.org/Public/News/PRMIA_and_CFA_Institute_Partner.aspx
• CAIA Stackable Credential Pilot Program https://caia.org/stackable-pilot (press release https://trtl.bz/2EvaJuH)

Books and Courses (including Journal/SSRN)

• An Introduction to Banking: Principles, Strategy and Risk Management (2nd Edition) by Moorad Choudhry https://amzn.to/2IDfS6o
• Predicting the Markets: A Professional Autobiography https://amzn.to/2JvO4Ci

Other

• Hard Questions: Q&A with Mark Zuckerberg on Protecting People’s Information https://newsroom.fb.com/news/2018/04/hard-questions-protecting-peoples-information/
• Why Zuckerberg’s 14-year Apology Tour Hasn’t Fixed Facebook https://www.wired.com/story/why-zuckerberg-15-year-apology-tour-hasnt-fixed-facebook/
• Your Data is Your Property https://medium.com/@bryan_johnson/your-data-is-your-property-a28a82ea212c
• [John Maudlin’s Guest Author] Is Risk-free Really Risk-free? http://www.mauldineconomics.com/outsidethebox/is-risk-free-really-risk-free
• How Southern California Became Home to Bond Kings https://www.bloomberg.com/news/features/2018-04-04/how-southern-california-became-home-to-bond-kings
• Lessons from My Math Degree That Have Nothing to Do with Math (The unexpected upsides to studying numbers) https://medium.com/s/story/6-life-l...hat-have-nothing-to-do-with-math-d38aba90edfe
• [project risk] Here’s Why All Your Projects Are Always Late — and What to Do About It http://freakonomics.com/podcast/project-management/
• How Did the Big Four Auditors Get $17 Billion in Revenue Growth? Not From Auditing https://trtl.bz/2EvSAgb

Financial Markets and Products, including Interest Rates, Commodity Risk, and Foreign Exchange (FX)(FRM P1.T3)

• Launching a Futures Contract is Hard https://www.rcmalternatives.com/2018/04/launching-a-futures-contract-is-hard/
• America's Libor Replacement Is Taking Its First Steps https://www.bloomberg.com/news/arti...-replacement-is-ready-for-its-debut-quicktake and the announcement by New York Fed: Statement Introducing the Treasury Repo Reference Rates https://www.newyorkfed.org/markets/opolicy/operating_policy_180403

Credit risk (FRM P2.T6)

• [SSRN] Credit Derivative Theory & Practice – A Credit Primer & Review of the Impact of ISDA Standardization on Credit Default Swap Pricing & Credit Model Calibration https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3138923

Operational risk (FRM P2.T7)

• Mexico's disaster bonds were meant to provide quick cash after hurricanes and earthquakes. But it often hasn’t worked out that way http://www.latimes.com/world/mexico-americas/la-na-mexico-catastrophe-bonds-20180405-htmlstory.html