Blog Week in Risk (August 19th)

[David Harper CFA FRM]

In the Forum This Week (selected only)

• [general] Shakti's formula summary is considered useful https://trtl.bz/2MAsOQc
• [general] Questions about work experience requirement https://trtl.bz/2MmplVR
• [general] Why my questions often cross-reference https://trtl.bz/2Bio5Ol
• [general] Discussion about age (am I too old to get the CFA/FRM?) and CFA versus FRM https://forum.bionicturtle.com/threads/pre-frm-options.9876/
• [general] Karim on calibrating the FRM vis-a-vis Master's https://trtl.bz/2MB4hKu
• [GARP] An example of an unclear value at risk (VaR) question https://trtl.bz/2Bi7ydp
• [Hull] An instructive, advanced Q&A on Hull's question about delta hedging a call option on a silver futures contract https://forum.bionicturtle.com/threads/hull-chapter-19-greeks-eoc-question-18-11.14046/
• [P1.T1] Trying to interpret Crouhy's example of the trade-off between accounting and economic earnings https://forum.bionicturtle.com/threads/economic-earning-accounting-earning.10625/
• [P1.T1] Is the standard error of regression (SER) also a measure of risk? https://trtl.bz/2Mlbyz0
• [P1.T1] The variance of a factor portfolio applies basic variance properties https://forum.bionicturtle.com/threads/p1-t1-63-arbitrage-pricing-model-apt-elton.5306/#post-61951
• [P1.T1] There is no difference between Miller's and Hull's hedge ratio (per the minimum variance portfolio) https://trtl.bz/2N3aCeP
• [P1.T2] Candidates do want to understand the difference between the normal and student's t distributions, and when to use each https://trtl.bz/2MuoEcd
• [P1.T2] Candidates should also know how to calculate sample variance https://trtl.bz/2MB8SwA
• [P1.T2*] What is the meaning of "If the inverses of all roots of Θ(L) are inside the unit circle, then the process is invertible" https://trtl.bz/2BhwxNR
• [P1.T2] A thought-provoking question that allows for a meditation on the three different, yet effectively identical, approaches to the statistical test (significance test, confidence interval and p value) https://trtl.bz/2MnVEE8
• [P1.T2] Common confusion about S&W's summary distribution table comparing test scores to student-teacher ratios https://trtl.bz/2BhPwYz
• [P1.T4] To really understand effective duration, you want to understand how it is the slope of the secant line that approximates the tangent line to the price/yield curve https://trtl.bz/2MueJna
• [P1.T4] Can we use T^2 to approximate the convexity of a bond? https://trtl.bz/2MuhHbi
• [P1.T4] A good question from GARP that tests realized yield and reinvestment versus duration risk https://forum.bionicturtle.com/threads/garp-practice-exam-2017-q14.14052/
• [P2.T5] What is the best bond mapping risk factor (if there is such a thing)? https://trtl.bz/2MAyzxi and more, in the context of a practice question https://trtl.bz/2BforWf
• [P2.T5] Do we map to Macaulay or modified duration? https://trtl.bz/2MvrYE4
• [P2.T5] A smart question about the relationship between the units of yield volatility and duration in fixed-income value at risk (VaR) https://trtl.bz/2MxNQ1y
• [P2.T5] A numerical example of balance sheet procyclicality https://trtl.bz/2Bi707l
• [P2.T5] How did Basel determine the backtest (floor) 3.0 multiplier? https://trtl.bz/2MufXyM
• [P2.T5] Jorion's EOC question on the likelihood-ratio test is tedious! https://forum.bionicturtle.com/threads/jorion-chapter-6-question-10.13424/
• [P2.T5] Modified duration has a convenient formula in the special case of a bond that is priced at par (i.e., coupon equals yield) https://forum.bionicturtle.com/threads/mod-duration-formula.14058/
• [P2.T6] The two practical differences between potential future exposure (PFE) and VaR, which are statistically identical concepts https://trtl.bz/2MliYlS
• [P2.T6] Thank you @rnavarro for feedback on Gregory's PFE for CCS XLS https://trtl.bz/2N3BJGL
• [P2.T7] A simple but excellent question about the interpretation of the EVT VaR (does it refer to the parent or child distribution?) https://trtl.bz/2Mn31LO

World

• Turkey Will Put Capital Rules to the Test https://trtl.bz/2Mn34Yc "First, bank failures are triggered by funding problems: typically, a run on the bank and an inability to cover deposit outflows. More capital can’t protect against this risk. Banks are also highly leveraged by design. Unless they’re willing to return to 19th-century standards of 50 percent equity, the effectiveness of capital requirements will depend on the magnitude of exposure and loss in question." If you are wondering about the 18.0% (of risk-weighted assets, RWA) requirement mentioned in the article, it refers to the FSB's TLAC standard, see http://www.fsb.org/2015/11/tlac-press-release/
• Turkey Was Ripe for a Currency Crisis. Will It Spread? https://trtl.bz/2PjCzQX ... [But this view seems credible:] Turkey’s Economic Red Flags Stand Out Among Emerging Markets https://trtl.bz/2PoyOKn " "Its economic woes include one of the largest trade deficits of any emerging-market country, unmatched external debts, a currency vulnerable to decline, exceptionally high inflation, unorthodox monetary policy and very little international goodwill."
• [GARP] India’s Big Bank Heist https://trtl.bz/2Bv0Zo0

Banks and Wall Street

• Wall Street Erases the Line Between Its Jocks and Nerds (There used to be a strict hierarchy: Traders made money and won glory while programmers wrote code and stayed out of sight. Those days are over) https://trtl.bz/2MWqcsN “Everyone who comes to sales and trading needs to know how to code.”
  
• Nobody Says ‘Zelle Me’: Banks Struggle to Catch Up to Venmo https://trtl.bz/2MUkB6e At Bank of America, Zelle's transaction volume just doubled YoY to over $9.0 billion (disclosure: I am long BAC). I use Venmo, but I'm interested to try Zelle.
• Banks and Retailers Are Tracking How You Type, Swipe and Tap https://trtl.bz/2MpjvTX "The data collection is invisible to those being watched. Using sensors in your phone or code on websites, companies can gather thousands of data points, known as behavioral biometrics, to help prove whether a digital user is actually the person she claims to be."
• U.S. Pursues One of the Biggest Mortgage-Fraud Probes Since the Financial Crisis (WSJ) https://trtl.bz/2MWfUc2
• Wells Fargo's Apologies Leave Customers Unmoved (ft.com) https://trtl.bz/2Pirpfo "There is a message in here for any big company trying to shrug off a hit to its reputation: however much you may think you are done with the past, the past is not done with you."

Quantitative

• Essential Math for Data Science  https://trtl.bz/2Bm8gGx
• Volatility 101: An Introduction to Market Volatility http://www.visualcapitalist.com/intro-market-volatility-101/
• Histograms and Density Plots in Python https://trtl.bz/2MpkYcV I love this article because it shows how you don't know histograms until you actually have to chart/code them!

Risk/FRM

• 2008 crash now an economic case study https://trtl.bz/2MVR3oL Here is the Post-Crash Economics Society http://www.post-crasheconomics.com/ which includes their report on the failings of modern economics education (pdf here https://trtl.bz/2Bj0xJt)
• Is Nike’s gender problem a few bad apples, or an old-boys-club culture? https://qz.com/work/1353550/nikes-metoo-problem-is-rooted-in-an-old-boys-club-culture/ "Nike’s former head of human resources has been largely blamed for the department’s repeated failure to act on complaints, but it appears there were many others who, either willingly or not, cooperated with the male-dominated status quo."
• An Inverted Yield Curve May Not Portend Doom (by Burton Malkiel) https://trtl.bz/2Bmhx1l "The global environment today is highly unusual. Both the European Central Bank and the Bank of Japan have monetary policies opposite those of the U.S. Fed. Long-term interest rates in Europe and Japan have hovered near zero, or even below. These yields have made U.S. Treasury bonds extremely attractive, especially since the dollar has been increasing in value."
• Tuition Insurance Catches On as Costs Rise, Students Struggle to Adjust (WSJ) https://trtl.bz/2MpmD1R
• Study highlights continued central clearing interdependencies (FSB) http://www.fsb.org/2018/08/study-highlights-continued-central-clearing-interdependencies/
• [GARP] The Obstacle-Strewn Path to Replacing LIBOR https://trtl.bz/2BsgWLu
• [GARP] Improving Risk Ratings in Preparation for CECL https://trtl.bz/2BxTM6m
• [GARP] A FICO Score for Cybersecurity https://trtl.bz/2N0Fg8I
• [GARP] A Behavioral Risk Metric https://trtl.bz/2BriQMv Some interesting companies mentioned: https://www.eflglobal.com/, https://www.distillanalytics.ca/ and http://www.perthleadership.org/
• [GARP] EU Stress Testing 2.0: Analyzing the Revised Guidelines https://trtl.bz/2PnSTQT

Cyber and Technology

• The Security App That Actually Makes Browsing Easier https://trtl.bz/2Plb5dJ I hope you use a password manager. Here at BT we use LastPass. But the new Dashlane 6 look good. If you are not using a PW, now is a good time to research the alternatives. Here is PC magazine's review https://trtl.bz/2Pi2BEg
• Blockchain: A Progress Report https://blogs.cfainstitute.org/investor/2018/08/02/blockchain-a-progress-report/
• Blockchain Is Starting to Show Real Promise Amid the Hype (Barron's) https://trtl.bz/2PlakS3 “Blockchain is not a technological solution to a technological problem, its' a technological solution to a political problem." ... and Fizzy flight insurance is interesting: https://fizzy.axa/en-gb/

Investing

• Measuring Process Diversification in Trend Following https://blog.thinknewfound.com/2018/07/measuring-process-diversification-in-trend-following/
• Old Age Isn’t What Ends a Bull Stock Market https://trtl.bz/2MoxCZp I agree with this 100%
• Buyback Derangement Syndrome (Clifford Asness) https://trtl.bz/2MrlqXS Correct but misses the behavioral fact that ESOs payout for price appreciation (but are hurt by dividends), such that executives prefer buybacks
  
• The Cognitive Biases Tricking Your Brain https://www.theatlantic.com/magazine/archive/2018/09/cognitive-bias/565775/ "If I had to single out a particular bias as the most pervasive and damaging, it would probably be confirmation bias."
• You See Less Than You Think https://trtl.bz/2MYoeYO

Other (Climate and Future)

• Why Ravaging Heatwaves Matter to World’s Dinner Table https://trtl.bz/2PgTR1j "To see the impact of record-breaking temperatures around the world, watch wheat. Found in everything from bread to noodles, biscuits to cereals, beer to cakes -- there is no more widely grown staple crop and more than 170 million metric tons trade every year."
• Yuval Noah Harari on what the year 2050 has in store for humankind https://www.wired.co.uk/article/yuval-noah-harari-extract-21-lessons-for-the-21st-century A thought-provoking extract from his upcoming book, I read Sapiens while on vacation and am still reeling from some of it!
• We All Have It Now https://ofdollarsanddata.com/we-all-have-it-now/ "Historically, having an informational edge was worth something. Being faster or having better access meant making more money. Not anymore."