Blog Week in Risk (ending April 9th)

David Harper CFA FRM

David Harper CFA FRM

David Harper CFA FRM
Subscriber
In the forum last week (selected only)
Bank and banking
Political and regulatory risk, including Systemic Risk (including BIS)
International
  • New Currency Peg Is No Panacea for Iceland by Mohamed A. El-Erian https://www.bloomberg.com/view/articles/2017-04-04/new-currency-peg-is-no-panacea-for-iceland “Managing a small and open economy is becoming a lot harder in a world facing considerable trade and economic fluidity and, to use Federal Reserve Chairman Ben Bernanke’s insightful phrase, unusual uncertainty … Such exchange-rate volatility complicates the management of both business and government activities. It also threatens disruptive currency overshoots”
  • Europe, Middle East, India and Africa Fraud Survey 2017 by EY https://fraudsurveys.ey.com/
Technology, including FinTech and Cybersecurity
Data science (primarily R), including Alternative Data
  • Will Using Artificial Intelligence To Make Loans Trade One Kind Of Bias For Another? http://trtl.bz/2odG6EU “As part of the loan application process, some lenders have prospective borrowers download an app that uploads an extraordinary amount of information like daily location patterns, the punctuation of text messages or how many of their contacts have last names. In the credit industry, this is called alternative data, and it's mostly used to make decisions on short-term, high-interest loans. But that's likely to change soon. In 10 years, there will hardly be a credit decision made that does not have some flavor of machine learning behind it, says Dave Girouard, the CEO of Upstart, an online lender.” Here is one of the cool companies mentioned http://www.underwrite.ai/
Natural Science, including Climate and Energy
Exams, Financial Associations (GARP, FRM, CFA Institute) and Careers, including CRO Interviews
Personal finance
  • Comparing Mortgage Applications and Originations by Credit Score Distribution http://trtl.bz/2pc8y8a “Figure 3 shows how the credit score distributions have shifted from 2006 to 2016 for both applications and originations. The share of applications and originations with a less-than-pristine credit score has declined. The difference is more pronounced for applications than for originations. The share of credit scores below 700 for applications has declined and has been offset by a greater share of credit scores above 750. From a credit space perspective, the similarity of the two density distributions for 2016 suggests that lenders were largely meeting the demand of borrowers applying for a loan when compared to 2006.”
  • America’s Credit-Card Tab Hits $1 Trillion https://www.wsj.com/articles/the-nations-credit-card-tab-hits-1-trillion-1491593929
  • What’s Next for Robo-Advisers? https://blogs.cfainstitute.org/investor/2017/04/06/a-turing-test-for-robo-advisers/
  • Cash Is Dead. Long Live Cash (The push to end hard-currency payments in favor of digital ones keeps hitting speed bumps) https://www.wsj.com/articles/cash-is-dead-long-live-cash-1491735609 “The most likely reason for the cash paradox, analysts say: a thriving global underground economy of tax evasion, organized crime and terrorism financing. Digital payments may be faster and more efficient, but cash cloaks transactions in privacy.”
  • The Longform Guide to Debt (A collection of picks about cities, nations, athletes, and writers going broke) https://longform.org/posts/the-longform-guide-to-debt--3
  • The Throughput of Learning https://praxis.fortelabs.co/the-throughput-of-learning-4aed7e9f9b1d “"Modern learning is not a process for maximizing the throughput of insights, but for maximizing the throughput of learning process improvements. The best assumptions to invalidate in our quest for learning are assumptions about learning itself ... I think what is required to make this model of learning work is, instead, a different way of listening. Specifically, listening for assumptions."
Enterprise risk management (ERM) including Governance
Case Studies and Companies, including Strategic or Reputation risk
Quantitative Analysis (FRM P1.T2)
Financial Markets and Products, including Interest Rates, Commodity Risk, and Foreign Exchange (FX)(FRM P1.T3)
Valuation and Risk Models, including Country risk (FRM P1.T4)
  • Diversification, Adaptation, and Stock Market Valuation http://www.philosophicaleconomics.com/2017/04/diversification-adaptation-and-stock-market-valuation/ “We can arbitrarily separate asset risk into three different types: price risk, inflation risk, and fundamental risk” and an argument as to why the equity risk premium has fallen over time.
  • The Incredible Shrinking Universe of Stocks (the latest must-read by Michael J. Mauboussin) by http://trtl.bz/2o0Gc0t Fascinating breakdown of the rather dramatic drop in supply of US-listed equities over the last 20 years: "while the number of listings fell by roughly 50% in the U.S. from 1996 through 2016 [i.e., from >7,000 to about 3,700], it rose about 50% in 13 developed countries that have complete data ... Because the number of listings shrank in the U.S. and expanded in the rest of the world, the U.S. now has a listing gap of more than 5,800 companies. A model of how many companies should be listed, based on GDP, GDP growth, population growth, and measures of corporate governance, suggests that the U.S. should have more than 9,500 listings."
  • Morgan Stanley made an error analyzing Snapchat, and it shines a light on some big flaws in Wall Street research http://www.businessinsider.com/morg...at-research-to-lower-earnings-forecast-2017-4
Investment risk, including Pensions (FRM P1.T8)
  • With 125 Ph.D.s in 15 Countries, a Quant Alpha Factory Hunts for Investing Edge (Igor Tulchinsky’s WorldQuant is part of the forefront of a new quantitative renaissance in investing) https://www.wsj.com/articles/with-1...a-factory-hunts-for-investing-edge-1491471008 “The “Alpha Factory” breaks up the process of investing into a quantitative trading assembly line. The inputs are data acquired by a special group that scours the globe for interesting and new data sets, including everything from detailed market pricing data to shipping statistics to footfall in stores captured by apps on smartphones.”
  • Managed Futures & Dealing With Uncorrelated Assets http://awealthofcommonsense.com/2017/04/managed-futures-dealing-with-uncorrelated-assets/ “Managed futures is a strategy that, at its core, relies on trends or momentum. Momentum is the idea that assets that have performed relatively well (poorly) recently will continue to perform well (poorly) going forward, at least for a short period of time. The best explanation for trends is that people are slow to update their views when presented with new evidence, data or information.”
  • Why your startup idea isn’t big enough for some VCs https://medium.com/@mhdempsey/why-your-startup-idea-isnt-big-enough-for-some-vcs-2440b61f6d36 The one, simple equation that every VC knows: Fund Size / (% owned at exit) = Minimum Viable Exit
  • Corporate Pension Funds About to Become Huge Players in Bond Markets https://www.bloomberg.com/news/arti...nsions-locking-in-gains-and-buying-corporates “Companies on average have about 82% of the funding they expect to require for retirees’ pensions, compared with around 75% in the middle of last year, according to strategists at Morgan Stanley. Once pensions are around 80% funded, they tend to increase their bond holdings and cut their stock investments to lock in gains.”
  • The $90 Billion Investor Who’s Out to Fire Wall Street https://www.bloomberg.com/news/arti...illion-investor-who-s-out-to-fire-wall-street “Folwell, 58, became the state’s first Republican treasurer in 140 years partly on the strength of a simple investment strategy he proposed: Instead of paying money managers big fees, the state should use a slim menu of cheap, mostly indexed investments and manage them in-house when possible. The state paid $600 million in outside managers’ fees, incentives, and related costs last year, seven times more for every dollar under management than it paid in 2000.”
 
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