Blog Week in Risk (ending May 14th)

[David Harper CFA FRM]

In the forum this week (selected only)

• Exam day tips https://forum.bionicturtle.com/threads/exam-day-tips.8143/
• [Upcoming course] Correlation Risk Modeling and Management by Gunter Meissner https://forum.bionicturtle.com/thre...ling-and-management-by-gunter-meissner.10460/
• [P1.T2] Why is the correlation between single-factor variables so simple? https://forum.bionicturtle.com/thre...te-normal-distribution-hull.10189/#post-50204
• [P1.T2] @berrymucho recommends the MVN package https://forum.bionicturtle.com/thre...n-geometric-brownian-motion.10432/#post-49866
• [P1.T2] More discussion on Bayes https://forum.bionicturtle.com/threads/p1-t2-501-more-bayes-theorem-miller.8324/
• [P1.T2] What are the weights in EWMA and GARCH? https://forum.bionicturtle.com/threads/p1-t2-704-forecasting-volatility-with-garch-hull.10165/
• [P1.T3] Eurodollar futures interest rate versus price quotation versus contract unit https://forum.bionicturtle.com/thre...l_ch6_topic-eurodollarfuturescontracts.10458/
• [P1.T3] Thank you @gargi.adhikari for spotting my accrued interest mistake: the number of ACTUAL days in a leap year (e.g., 2012, 2016, 2020) is 366 days https://forum.bionicturtle.com/thre...s_hull_ch6_topic-day_count_conventions.10452/
• [P1.T3] As @Miko shows “pictures say more then 1000 words” when it comes to swaps https://forum.bionicturtle.com/threads/l1-t3-176-currency-swap-valuation.4587/page-4#post-50030
• [P1.T3] Understanding Hull’s tedious convexity adjustment https://forum.bionicturtle.com/thre...-eurodollarfuturescontracts.10458/#post-50175
• [P2.T5] @Ashok_Kothavle shows how to estimating expected shortfall (ES) by averaging the VaR quantiles (with Excel) https://forum.bionicturtle.com/threads/calculating-expected-shortfall.10447/#post-50059
• [P2.T5] What does alpha (α) signify in Tuckman’s Model 3 and Model 4 term structure models https://forum.bionicturtle.com/threads/model-3-and-4.10406/
• [P2.T5] Overnight index swaps (OIS) versus LIBOR https://forum.bionicturtle.com/thre...dexed-swaps-ois-versus-libor.7547/#post-49989
• [P2.T5] @berrymucho shares technical documentation that helps explain how MC simulation is used to evaluate portfolio VaR https://forum.bionicturtle.com/thre...n-geometric-brownian-motion.10432/#post-49972
• [P2.T5] If the Macaulay duration’s unit of measurements is “years,” what is the modified duration’s unit of measurement? https://forum.bionicturtle.com/threads/question-12-macaulay-and-modified-duration.3002/#post-49982
• [P2.T5] Interpreting a quantile-quantile (QQ) plot https://forum.bionicturtle.com/threads/l2-t5-74-qq-plot.3668/#post-50180
• [P2.T6] @Matthew Graves shows how to infer PD from σ(PD) https://forum.bionicturtle.com/threads/deriving-pd.10467/
• [P2.T6] Does a credit default swap (CDS) protection seller have any counterparty risk? https://forum.bionicturtle.com/threads/p2-t6-407-credit-exposure.7704/#post-50184
• [P2.T6] Although we normally equate a long (short) credit default swap (CDS) as selling (buying) the risky bond plus investing (borrowing) cash, the correct replication also trades an interest rate swap (IRS) because owning a bond incurs funding risk, credit risk and market (interest rate) risk https://forum.bionicturtle.com/thre...urn-swaps-topic-review.6217/page-2#post-49950
• [P2.T6] @QuantMan2318 with good help on trade compression https://forum.bionicturtle.com/threads/trade-compression-gregory.9525/
• [P2.T6] Credit exposure generally includes close-out netting https://forum.bionicturtle.com/thre...ure-terminology-topic-review.6191/#post-49940
• [P2.T6] Methods for calculating cumulative default probability https://forum.bionicturtle.com/threads/hazard-rates-and-probability-of-survival.9595/#post-50019
• [P2.T6] Does default correlation impact credit value at risk (CVaR)? https://forum.bionicturtle.com/threads/credit-var.7174/#post-50020
• [P2.T6] Does subordinated debt behave like equity or senior debt? https://forum.bionicturtle.com/thre...inated-debt-stulz-applying-merton-model.7677/
• [P2.T6] Can there be more than one Z-spreads for a bond, and what is the difference between the Z-spread and the yield? https://forum.bionicturtle.com/thre...ead-01-dvcs-malz-section-7-1.6921/#post-49987
• [P2.T6] Perhaps the most fundamental counterparty formula is: Risky value = Riskfree value minus the credit value adjustment (CVA) https://forum.bionicturtle.com/threads/p2-t6-417-credit-value-adjustment-cva.7814/#post-50064
• [P2.T6] @Roddefeller with the sort of correction that requires understanding the BCVA formula, awesome! https://forum.bionicturtle.com/thre...credit-value-adjustment-cva.10146/#post-50055
• [P2.T6] Wrong-way risk in a put option https://forum.bionicturtle.com/threads/p2-t6-419-wrong-way-counterparty-risk.7900/page-2#post-50088
• [P2.T6] Kendall’s Tau examples https://forum.bionicturtle.com/threads/kendall-tau-example.9984/
• [P2.T7] What’s the key challenge when backtesting OpRisk VaR, if any? https://forum.bionicturtle.com/threads/p2-t7-304-model-risk-topic-review.6878/#post-50099
• [P2.T7] @Roddefeller with a good question about Type I versus Type II in De Laurentis https://forum.bionicturtle.com/threads/de-laurentis-validating-rating-models.10466/
• [GARP 2017 P2.06] When GARP asks for the unconditional default probability https://forum.bionicturtle.com/threads/garp-part-2-question-6-garp17-p2-6.10453/
• [GARP 2017 P2.74] Nuances render this question flawed https://forum.bionicturtle.com/threads/garp-2017-p2-74.10430/

Bank, banking and regulation

• [European Central Bank] The Eurosystem collateral framework explained http://trtl.bz/2rhv1SP
• Fintech and Shadow Banks http://johnhcochrane.blogspot.com/2017/05/fintech-and-shadow-banks.html “Our mortgage system is based on a rather crazy product, the fixed rate mortgage with a costly option to refinance. No other country does this. I know a lot of finance professors, and none of them can tell you the optimal refinancing rule” and a few gems like “The rise of fintech proves that there is no essential economic tie between loan origination and deposits or other short-term financing.”
• [GARP] Banks Need to Revisit CRO Compensation and Board Risk Committee Composition http://trtl.bz/2rh2Z9Z
• [GARP] Are You Ready for the Next Piece of the FRTB Puzzle? (Credit valuation adjustment, CVA, and its capital implications come into focus) http://trtl.bz/2rgS5Bp

International

• Brexit Imperils London’s Claim as Banker to the Planet https://www.nytimes.com/2017/05/11/business/dealbook/brexit-uk-london-banking.html … and How Brexit Could Alter London, the World’s Banker https://www.nytimes.com/interactive/2017/05/11/business/brexit-london-finance.html
• [CFA Institute] Brexit: What it Means for Investment Management http://trtl.bz/2r7GTcY
• Puerto Rico Must Not Waste Its Second Chance (Michael Bloomberg) http://trtl.bz/2qWg9bv And a legal view (”We explore in this paper whether Congress has the power to bar Puerto Rico from enacting a restructuring mechanism and not offer an alternative. We submit that the answer is no”) Puerto Rico and the Netherworld of Sovereign Debt Restructuring http://trtl.bz/2qW3FRx
• Puerto Rico's Title III Bankruptcy: Initial Views and Expectations (pimco.com) https://blog.pimco.com/en/2017/05/puerto-ricos-title-iii-bankruptcy-initial-views-and-expectations
• Puerto Rico Bankruptcy: Week One http://www.creditslips.org/creditslips/2017/05/puerto-rico-bankruptcy-week-one.html
• As Venezuela’s Default Risk Rises, Battle Heats Up for Control of Refiner Citgo (wsj) http://trtl.bz/2riU0VM
  
• [GARP] Understanding of Geopolitical Cycles Is as Critical as Economic, Says Eurasia Group’s Bremmer http://trtl.bz/2qHzKQQ

Natural Science, including Climate and Energy

• The Doomsday Glacier http://www.rollingstone.com/politics/features/the-doomsday-glacier-w481260 “Someday soon – possibly even by the time you read this – a chunk of the Larsen C ice shelf will break off and float into the ocean that surrounds Antarctica. The crack in the Larsen C, which is a close cousin to the Larsen B that broke up in 2002, has been developing for several years. But in the past few months, it has increased dramatically. As I write this, the crack is more than 100 miles long. Such a collapse of ice shelves is exactly what Mercer predicted would be the first sign that disaster is imminent. When it breaks, it will likely be front-page news and cited as evidence that Antarctica is rapidly falling apart.”

Technology, including FinTech and Cybersecurity

• What you need to know about the WannaCry Ransomware https://www.symantec.com/connect/blogs/what-you-need-know-about-wannacry-ransomware
• WannaCry ransomware used in widespread attacks all over the world (securelist.com) http://trtl.bz/2rgYRqw
• How to Accidentally Stop a Global Cyber Attacks https://www.malwaretech.com/2017/05/how-to-accidentally-stop-a-global-cyber-attacks.html … and: For $10.69, British Researcher Slows Global Cyberattack http://trtl.bz/2qHAWDQ
• Cyber Crime Fears Drive Up Demand for Anti-Hacker Insurance (bloomberg.com) http://trtl.bz/2qHrArw
• [NYSE Survey] The Price of Convenience: Communications, Cyber Risk, and Cybersecurity Practices of Corporate Boards http://trtl.bz/2pNaK5G “The survey of 381 corporate directors of publicly traded companies found 90% use unsecured personal email accounts to sometimes communicate with other board members and management, while 49% said they regularly download board meeting materials, reports and company documents onto personal computers and devices.”
• [Review] When Markets Quake: Online Banks and Their Past, Present and Future (by Marshall Lux and Martin Chorzempa) https://www.orchardplatform.com/blog/review-online-banks-and-their-past-present-and-future/

Data science (primarily R), including Alternative Data

• [new book] Processing and Analyzing Financial Data with R https://sites.google.com/view/pafdR/home
• Technical Foundations of Informatics https://info201-s17.github.io/book/index.html “The course guide is a self-contained book that teaches you how to work with data using R in modern and reproducable ways. It assumes no technical background, but jumps quickly into setting up the necessary infrastructure for reproducible data science: R, RStudio, Git, an editor, and a command shell.”
• U.S. Federal Government Spending is Now a Single, Unified Data Set http://www.visualcapitalist.com/u-s-federal-governments-spending-data-single-unified-data-set/ “The data puts records of accounts, budgets, grants, and contracts all in one place, and links this information together in way that has never been done before. Everyday citizens, journalists, and data scientists will be able to see how the government spends money with one consolidated view. Further, this harmonization of accounts will also help to boost transparency, making it easier to spot inefficiencies, waste, and fraud at the federal level.”
• [Tutorial] SQL Basics: Working with Databases https://www.dataquest.io/blog/sql-basics/

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

• CFA Exam to Add Big Data, Artificial Intelligence as Topics http://blog.wolfram.com/2017/05/03/new-mathematics-books-utilizing-wolfram-technology/ la
• https://www.bloomberg.com/news/arti...de-big-data-artificial-intelligence-as-topics This is telling about the future. The 2019 CFA exam will add artificial intelligence, robo-advisory and "methods for analyzing big data" but stops short of requiring that candidates learn how to code. I predict that eventually they will require a bit of realistic (ie., code) date literacy.
• Lockton’s Risk Manager Survey Shows Challenges and Trends for Risk Executives http://complexrisksymposium.com/survey-results/
• Sorry, Harvard and Yale, the Trading Whiz Kids Are at Baruch College (Students who have recently dominated trading competitions attend a public college in New York) http://trtl.bz/2rgU48S

Future including disruption

• Artificial Intelligence: The Promise and the Playbook http://a16z.com/2017/05/12/ai-playbook/ “Building on our popular primer on artificial intelligence, today we’ve launched a microsite to help newcomers — both non-technical and technical — begin exploring what’s possible with AI. The site is designed as a resource for anyone asking the two questions above [How do I get started with artificial intelligence? What can I do with AI in my own product or company?], complete with examples and sample code to help get started; no computer science degree required!”
• Three Revolutions in Urban Transportation (vehicle electrification, automation, and widespread shared mobility) https://www.itdp.org/3rs/ Report here http://trtl.bz/2qiBFd8
• Lemonade arrives in California (where I live) https://www.lemonade.com/blog/california-were-here/
• Disrupting Insurance — So Easy a Caveman Can Do It? (1/3) http://trtl.bz/2qHFUk1
• Slice is a cool insurance startup that just went live https://blog.slice.is/ “Slice provides coverage on-demand, and for only the periods of time you need it. The Slice policy automatically begins and ends with your business hours, whether it’s minutes, days or weeks. And, you only pay for the dates and times your policy is active.”
• Programmable blockchains in context: Ethereum’s future by Vinay Gupta (medium.com) http://trtl.bz/2rgH1UK “Blockchain explainers usually focus on some very clever low-level details like mining, but that stuff really doesn’t help people (other than implementers) understand what is going on. Rather, let’s look at how the blockchains fit into the more general story about how computers impact society.”

Other

• Major Gift Funds Expansion of Yale Program on Financial Stability http://trtl.bz/2qWcEC3
• How a Polymath Mastered Math—and So Can You (‘Mindshift’ author Barbara Oakley on the science and practice of learning—and finding love at the South Pole) https://www.wsj.com/articles/a-polymath-mastered-mathand-so-can-you-1494622700

Risk Foundations (FRM P1.T1)

• Intelligent Risk (May issue) by PRMIA http://trtl.bz/2rgiRsF
• Taxonomy of uncertainty (medium) http://trtl.bz/2qHmlrM Here is Andrew Lo’s Paper (WARNING: Physics Envy May Be Hazardous To Your Wealth!) http://trtl.bz/2rg77pZ

Quantitative Analysis (FRM P1.T2)

• Regression by Eye http://trtl.bz/2reCkuE
• Kullback-Leibler Divergence Explained https://www.countbayesie.com/blog/2017/5/9/kullback-leibler-divergence-explained “Very often in Probability and Statistics we'll replace observed data or a complex distributions with a simpler, approximating distribution. KL Divergence helps us to measure just how much information we lose when we choose an approximation.”
• Linear Thinking in a Nonlinear World https://hbr.org/2017/05/linear-thinking-in-a-nonlinear-world “Which upgrade is better? A. Replacing the 10 MPG vehicles with 20 MPG vehicles; B. Replacing the 20 MPG vehicles with 50 MPG vehicles.”
• How to go about interpreting regression cofficients https://itsalocke.com/interpreting-regression-cofficients/
• How can a survey of 1,000 people tell you what the whole U.S. thinks? (Pew Research) http://www.pewresearch.org/fact-tank/2017/05/12/methods-101-random-sampling/

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

• Exchange Wants to Shake Up End-of-Day Stock Trading Format http://trtl.bz/2qWaEto
• Who Wants to Buy a 100-Year Bond? It Depends on the Yield (wsj) http://trtl.bz/2rh0vZp
• At the N.Y. Fed: The Evolution of OTC Derivatives Markets http://libertystreeteconomics.newyo...the-evolution-of-otc-derivatives-markets.html

Valuation and Risk Models, including Country risk (FRM P1.T4)

• [ECB Working Paper Series] Do stress tests matter? (Evidence from the 2014 and 2016 stress tests) Here at http://trtl.bz/2qiFJtV
• The VIX Article No One Will Like http://themacrotourist.com//macro/the-vix-article-no-one-will-like

Credit risk (FRM P1.T6)

• How to Predict If a Borrower Will Pay You Back http://nymag.com/scienceofus/2017/05/what-the-words-you-use-in-a-loan-application-reveal.html “It turns out the language that potential borrowers use is a strong predictor of their probability of paying back. And it is an important indicator even if you control for other relevant information lenders were able to obtain about those potential borrowers, including credit ratings and income.”
• Collateral Reuse and Balance Sheet Space (IMF Working Papers) Here at http://trtl.bz/2qhQwoK
• Deloitte’s advanced credit risk platform http://trtl.bz/2rgbvpg

Investment risk, including Pensions (FRM P1.T8)

• The Most Interesting Thing About the Buffett/Seides Bet http://ritholtz.com/2017/05/interesting-thing-buffett-seides-bet/ He’s right, this is interesting. The collateral pulled (very much!) toward par in the first five years, so they transferred into to BH stock and it outperformed the rest.
• What’s My Investing Fee? A Frustrating Quest https://www.wsj.com/articles/whats-my-investing-fee-a-frustrating-quest-1494209820
• An Algorithm, an ETF and an Academic Study Walk Into a Bar (Most of the supposed market anomalies academics have identified don’t exist, or are too small to matter) https://www.wsj.com/articles/an-algorithm-an-etf-and-an-academic-study-walk-into-a-bar-1494528113

Current issues (FRM P2.T9)

• [Low interest rates] Safety, Liquidity, and the Natural Rate of Interest https://www.newyorkfed.org/research/staff_reports/sr812 “Why are interest rates so low in the Unites States? We find that they are low primarily because the premium for safety and liquidity has increased since the late 1990s, and to a lesser extent because economic growth has slowed.”
• Why Drawdowns Matter: A Visual Demonstration http://willowstreetproject.com/why-drawdowns-matter/