In the forum this week (a selected subset only, it’s been busy as the exam approaches)
- How can one FRM candidate fail with 2nd/2nd/3rd/3rd but another can pass with 3rd/3rd/2nd/2nd? https://forum.bionicturtle.com/threads/quartiles-and-weights-exam-results.9883/
- Is leptokurtosis necessarily higher peak? https://forum.bionicturtle.com/thre...utional-moments-topic-review.7232/#post-45553 Short answer: No, not necessarily. Better to follow the math with “heavier tail.”
- Why does Jorion use return on surplus in surplus at risk? https://forum.bionicturtle.com/threads/p2-t8-12-surplus-at-risk-sar.5488/#post-45622
- Confidence interval of VaR backtest https://forum.bionicturtle.com/threads/hypothesis-testing-q12-garp16-p2-12.9916/ This question from GARP’s sample paper efficiently illustrates the difference between the one-tailed VaR confidence level and the two-tailed backtest of the VaR.
- VaR Backtesting (Jorion vs. Hull) - testable concept https://forum.bionicturtle.com/threads/var-backtesting-jorion-vs-hull-testable-concept.9920/ Hull and Jorion are in agreement, it’s perhaps the semantics of backtest that can be confusing. Although Jorion does use the normal to estimate the binomial variable.
- Pritsker (2001) - P/L distribution of VaR and ES https://forum.bionicturtle.com/threads/pritsker-2001-p-l-distribution-of-var-and-es.9915/ Kevin Dowd, who remains an essential author in the FRM, expresses Profit and Loss in either of two formats: P(+)/L(-) where losses are negative on the left side of the distribution, and mathematically this is natural of course; or L(+)/P(-) where losses are positive on the right side of the distribution, and this is a mental switch.
- Is the riskfree rate an input into the Merton Model? https://forum.bionicturtle.com/thre...v-credit-monitor-model.4371/page-2#post-45590 Short answer: Yes, in the first step to solve simultaneously for asset value and volatility; but, No, definitely not in second step to estimate of a real-world probability of default.
- Total return swap, does Crouhy make a mistake? https://forum.bionicturtle.com/threads/total-return-swap-crouhy-figure-12-7-mistake.9923/ In a total return swap (TRS, aka TROR swap), who is the buyer and who is the seller?
- MtM and Exposure for Netting https://forum.bionicturtle.com/threads/mtm-and-exposure-for-netting.9922/ Looks like a mistake in Gregory that we inherited (It is not in his errata. We will update if/when he confirms)
- Using Mathematica to solve analytically for the optimal Sharpe ratio https://forum.bionicturtle.com/threads/market-portfolio-and-derivative-of-weight.9919/
- Imperfections with coefficient of variation https://forum.bionicturtle.com/threads/coefficient-of-variation-with-negative-values.9921/
- Eleventh progress report on adoption of the Basel regulatory framework http://www.bis.org/bcbs/publ/d388.htm “The Committee's latest report as of end-September 2016 shows that: all 27 member jurisdictions have final risk-based capital rules, LCR regulations and capital conservation buffers in force; 26 member jurisdictions have issued final rules for the countercyclical capital buffers; 25 have issued final or draft rules for their domestic SIBs framework; and 18 have issued final or draft rules for margin requirements for non-centrally cleared derivatives.”
- U.S. Regulators Outline Cyber Standards, Stress Board Governance (Rulemaking notice underscores possibility that threats can spread both within organizations and across the financial sector) http://trtl.bz/2eXzTui Here is the proposed standards http://trtl.bz/1023-anpr-cyber
- Goal posts are moving: Financial reporting readies for change https://www.bloomberg.com/enterprise/blog/goal-posts-moving-financial-reporting-readies-change/ Here is FASB’s Proposed Accounting Standards Update on Derivatives and Hedging (Topic 815) http://trtl.bz/FASB-proposed-topic-815-derivatives and the associated In Focus http://trtl.bz/FASB-in-focus-hedge
- Financial Engineers Take On New Rule With More Engineering (A major postcrisis rule taking effect in December will force Blackstone Group LP and other creators of complex securities to eat some of their own cooking) http://www.wsj.com/articles/financial-engineers-take-on-new-rule-with-more-engineering-1476696600
- Where the Next Crisis Will Come From http://www.bloomberg.com/news/articles/2016-10-20/where-the-next-crisis-will-come-from “Two regulations that take effect in 2018 will begin to pinch in 2017 as banks prepare to comply with them. One, from the Basel Committee on Banking Supervision, strictly limits the amount of leverage that banks can use to make money. Another requires them to recognize expected loan losses more quickly. Although the rules should make banks safer, they could also further reduce their profits. If banks keep trying to thread the needle—scraping by without turning to shareholders for more capital—they could become even more vulnerable. Whatever the stresses on conventional banks, they probably pose less of a risk than the shadow banking system, says Vincent Reinhart, chief economist at Standish, a unit of BNY Mellon. The “design failure” of the 2010 Dodd-Frank Act to reform Wall Street is that by raising the cost of operating a conventional bank, it pushed some money toward less regulated shadow banks, Reinhart says. The shadow banking system includes hedge funds, money-market mutual funds, and Wall Street securities lenders and borrowers.”
- Pedagogy and Scholarship in a Post-Crisis World, Speech by Federal Reserve Governor Daniel K. Tarullo http://www.federalreserve.gov/newsevents/speech/tarullo20161021a.htm from http://www.wsj.com/articles/tarullo...s-in-regulatory-system-post-crisis-1477059780
- Debating an Imprecise Gauge of Bank Performance http://www.nytimes.com/2016/10/21/b...g-an-imprecise-gauge-of-bank-performance.html “The cost of equity is hard to calculate with precision, however. Two common methods — the dividend capitalization and capital asset pricing models — both have flaws. Several European banks, for example, have frozen shareholder payouts. The three inputs for the capital asset pricing model – government bond yields, wider stock market returns and relative volatility — are not static and are thus open to interpretation. Even so, much has changed that supports reconsidering the cost of equity. Interest rates have been ultralow for years. Regulators also have imposed higher capital cushions in case of crisis. And most large financial institutions have slashed risky assets.”
- Jumbo Mortgages: Big Banks Still Love Them (Borrowers seen among the lowest-risk customers with higher credit scores on average) http://www.wsj.com/articles/jumbo-mortgages-big-banks-still-love-them-1477070789
- Seventh annual global EY/IIF bank risk management survey (Seven years on from financial crisis, banks now looking for blueprints for risk accountability, treatment of non-financial risks and sustainable business models) http://www.ey.com/gl/en/newsroom/news-releases/news-ey-seven-years-on-from-financial-crisis-banks-now-looking-for-blueprints-for-risk-accountability-treatment-of-non-financial-risks-and-sustainable-business-models Here is survey http://trtl.bz/ey-iif-7th-bank-survey
- The Fatal Mistake That Doomed Samsung’s Galaxy Note http://www.wsj.com/articles/the-fatal-mistake-that-doomed-samsungs-galaxy-note-1477248978 The company’s decision to recall the Note 7 was praised as “swift action” but it was based on a faulty diagnosis of the problem. Surprisingly, “Samsung still doesn’t have a conclusive answer for what’s causing some Note 7s to catch fire.”
- A Call to Overhaul the Traditional Risk Taxonomy (The current risk classification system is completely outdated. It fails to address important strategic questions and does not take into account the disruptive power of innovative technologies like Blockchain. That’s why it’s time to consider a new, integration-friendly, cash flow-centric approach) http://trtl.bz/garp--folpmers-risk-taxonomy
- The problem with p-values https://aeon.co/essays/it-s-time-for-science-to-abandon-the-term-statistically-significant “The problem is that the p-value gives the right answer to the wrong question. What we really want to know is not the probability of the observations given a hypothesis about the existence of a real effect, but rather the probability that there is a real effect – that the hypothesis is true – given the observations. And that is a problem of induction.”
- Quantifying uncertainties in global growth forecasts http://blogs.worldbank.org/opendata/quantifying-uncertainties-global-growth-forecasts “First, a number of measurable risk indicators that are typical sources of forecast errors for global growth forecasts are selected. Three were chosen: equity price futures, oil price futures and bond term spreads (the difference between short and long term interest rates). For instance, greater volatility in oil price futures could be associated with rising uncertainty around global growth forecasts, while a downward trend in equity price futures could signal rising downside risks to growth. Second, the probability distributions of forecasts for these three indicators are then mapped to the distribution of global growth forecasts.”
- Why Are Interest Rates So Low? Causes and Implications by Stanley Fischer Vice Chair of the Board of Governors of the Federal Reserve System http://www.federalreserve.gov/newsevents/speech/fischer20161017a.htm "To frame this discussion, it is useful to think about the real interest rate as the price that equilibrates the economy's supply of saving with the economy's demand for investment. To explain why interest rates are low, we look for factors that are boosting saving, depressing investment, or both.”
- Broken Indicators Mean It's Growing Harder to Spot Troubles in the Market http://www.bloomberg.com/news/artic...aveyard-of-broken-indicators-in-reform-s-wake #LIBOR
- The Dying Business of Picking Stocks (Passive investing has become investors’ default, driving billions into funds that track indexes. It’s transforming Wall Street, corporate boardrooms and the life of the neighborhood broker) http://www.wsj.com/articles/the-dying-business-of-picking-stocks-1476714749 From WSJ’s The Passivists (a series exploring the rise of passive investing) http://graphics.wsj.com/passivists/
- Ending food price speculation – Part 1 http://bilbo.economicoutlook.net/blog/?p=34609 #hedge “Futures markets have developed to provide insurance for the farmers to smooth prices. So, take the case of a farmer who is to deliver a crop to a market at some future date and is unsure what the ‘spot’ price will be at that date. All that he/she knows is that if the price is below some amount per unit (that reflects their costs, which are more or less known), they will record losses. The futures markets provides the farmer with a contract to supply a commodity at a given price at some future date. So if the break-even price is $5 per bushel and the future price is $5.50 per bushel then the farmer can be sure of a profit of $0.50 per bushel no matter what happens to the price over the course of the contract. So the futures contract allows the farmer to hedge against the risk that prices will fall by the time the crop is harvested.”
- Rewriting the textbook: covered interest parity http://www.moneyandbanking.com/commentary/2016/10/17/rewriting-the-textbook-covered-interest-parity
- Why bond yields are so low https://www.ft.com/content/2b3c6398-7f3f-11e6-8e50-8ec15fb462f4 “As always in investment, there are separate short-term and long-term factors. At least three broad reasons have been advanced for the decline in yields. All have some truth to them, but over different timescales.” The three reasons are macroeconomic factors (e.g., lower inflation expectations which overlap with sluggish growth), central bank policy (quantitative easing at the long end of the curve), and demographics (I find the demographic argument compelling because it is highly predictable. Here is the referenced paper, Understanding the New Normal: The Role of Demographics, at http://trtl.bz/2enPfIN)
- It’s the demography, stupid! https://www.ft.com/content/b1a6b24a-df3d-3a55-b37f-817d0b77e3a8 “In recent work, three aspects of the population statistics have emerged as important in explaining the decline in r* in the developed economies. These are: the growth rate in the labor supply; the dependency ratio within the population; and the life expectancy of the population”
- How One Goldman Sachs Trader Made More Than $100 Million (The gains from big trades on junk bonds are a throwback to an earlier era on Wall Street) http://www.wsj.com/articles/how-one-goldman-sachs-trader-made-more-than-100-million-1476869402
- ISO 37001 is here. Will It Work? http://www.fcpablog.com/blog/2016/10/17/iso-37001-is-here-will-it-work.html “Because it provides a globally accepted approach to anti-corruption compliance, ISO 37001 will likely be heralded as a significant step in the continued globalization of anti-corruption compliance, especially in countries where corruption could be considered part of the culture. Companies can now employ a tool that raises both the bar for compliance activities and the awareness of the risk of corruption.” Here is ISO’s brief powerpoint about their standard http://trtl.bz/2eflFFz
- Moody’s Expects U.S. to Sue Over Its Pre-Crisis Bond Ratings (Justice Department case would allege violations related to rosy ratings of securities that later soured) http://www.wsj.com/articles/moodys-says-justice-department-is-preparing-a-complaint-1477056302 “Any settlement with Moody’s is likely to be large, but the case has proven more difficult than the one against S&P, people familiar with the matter have said. Moody’s kept its ratings information more tightly guarded than S&P, with a policy of quickly wiping emails, making for a thinner paper trail, these people said.”
- Are Drones A Legitimate Source of Alpha? https://blog.quandl.com/drone-data-for-investing
- The Fintech Effect: What Will Bring the Most Change? https://blogs.cfainstitute.org/inve...ntech-effect-what-will-bring-the-most-change/
- What We Know About Friday’s Massive East Coast Internet Outage https://www.wired.com/2016/10/internet-outage-ddos-dns-dyn/
- When the Entire Internet Seems to Break at Once https://www.theatlantic.com/technol...ntire-internet-seems-to-break-at-once/504956/
- The CFA Exam Is Going Green (a stronger dose of ESG) http://www.bloomberg.com/news/articles/2016-10-20/the-cfa-exam-is-going-green “CFA Institute, whose eponymous exams are a requirement for many professional analysts and money managers, is planning to update its 2017 curriculum to include more focus on corporate ethics, risk management and environmental, social, and governance issues after feedback from its investment management practitioners … The new curriculum will also include descriptions of common ESG investment strategies, such as inclusion methods that pick companies making a positive impact, exclusion strategies that remove "sin stocks" or fossil fuels from investment, and active engagement approaches where investors work to influence corporate managers.”
- Changing course: a harder sell for MBAs (Would-be students question the value of what was once the must-have business qualification) https://www.ft.com/content/36942668-8ca0-11e6-8cb7-e7ada1d123b1 “Applications for full-time, two-year MBA courses fell in 53 per cent of US business schools this year, while only 40 per cent reported growth, according to figures from GMAC. The number of applications has flatlined since 2012, having dropped significantly after the 2008 global financial crisis.”
- Why Isn’t the U.S. Better at Predicting Extreme Weather? http://www.nytimes.com/2016/10/23/magazine/why-isnt-the-us-better-at-predicting-extreme-weather.html
- Analysts dismiss ‘carbon bubble’ warning (IHS Markit says climate change threat to oil and gas assets is overblown) https://www.ft.com/content/9954e072-9587-11e6-a80e-bcd69f323a8b This in response to Mark Carney’s debatable concept of transition risk: “[transition risks are] the financial risks which could result from the process of adjustment towards a lower-carbon economy. Changes in policy, technology and physical risks could prompt a reassessment of the value of a large range of assets as costs and opportunities become apparent.”
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