Blog Week in Risk (ending September 9th)

[David Harper CFA FRM]

New Practice Questions

• P1.T4.815. Black Scholes value of a warrant and implied volatility https://trtl.bz/2M7VBqM
• P2.T7.808. Exogenous and endogenous approaches to liquidity value at risk (LVaR) https://trtl.bz/2NWbpi5
• P2.T7.809. Failure mechanics of dealer banks (Darrell Duffie) https://trtl.bz/2M7VGuA

New YouTube

• Theoretical Price of Treasury Bond Futures Contract (FRM T3-27) https://trtl.bz/2Nxge4s

In the forum

• [David Harper] My personal equity portfolio update (the "Tech Turtle Portfolio", in case you are interested in my investment approach https://forum.bionicturtle.com/threads/my-personal-equities-porfolio.14097/
• [GARP experience] It can take up to six weeks to get work experience approved https://forum.bionicturtle.com/threads/questions-about-work-experience.7207/post-62200
• [GARP exam] Will the FRM exam provide any formulas? https://trtl.bz/2NsrEq9
• [GARP P1] Alternative regression solution reinforces understanding https://trtl.bz/2MeOOLS
• [GARP P1] Problems with a "law of one price question" https://forum.bionicturtle.com/threads/2016-pq-ques-11.13908/
• [GARP P2] The long-running errors w.r.t discordant/concordant pairs may still be in the original reading https://trtl.bz/2MehvJb
• [P1.T1] Although ρ(i, M) = ρ(M, i), β(i, M) <> = β(M, i) https://trtl.bz/2MW885Z
• [P1.T1*] Bodie's EOC PQ 10.9 https://forum.bionicturtle.com/threads/bodie_ch10_eoc_question9.14107/
• [P1.T1] It is really a risk management failure to ignore unknown risks? https://trtl.bz/2NozwJd
• [P1.T1] Excellent technical point(s) by @agattik on the units of variance https://forum.bionicturtle.com/threads/bodie-eoc-question-8.14106/
• [P1.T2] Thank you again @agattik by noticing that covariance stationary implies cov[y(t), y(t-π)] = γ(π) rather than γ(t, π)which seems minor but exhibits an undertsanding of its definition! https://trtl.bz/2MbmjPq
• [P1.T2] Does a leptokurtotic distribution necessarily have a higher peak? https://trtl.bz/2NoLhQ6
• [P1.T2] If we aren't specifically told, should we assume log (geometric) or simple (arithmetic) asset returns? https://trtl.bz/2Nwin0w
• [P1.T2] A very useful formula is: Cov(x,y) = E[xy] - E[x]E[y] https://trtl.bz/2Nx0jmZ
• [P1.T2] An FRM candidate must know variance properties https://trtl.bz/2NZY1th
• [P1.T2] It is easy to commit a logical fallacy when interpreting the p-value, but we do tend to employ the semantic over-simplifications (aka, convenience) of saying that we "accept the null" https://trtl.bz/2O7tCJS
• [P1.T2] Interpreting the VaR backtest test statistic https://trtl.bz/2MeN19N
• [P1.T3] Instructive: Hull's different approaches (i.e., in his 9th versus 10th version) to bootstrapping the spot rate https://forum.bionicturtle.com/threads/question-on-swaps-hull-chapter-7.14087/
• [P1.T4] In the fundamental duration relationship, ΔP/P = -D*Δy, what exactly are the units of yield volatility? https://forum.bionicturtle.com/threads/yield-volatility.14092/
• [P1.T4] Expected loss is NOT a direct input into unexpected loss contribution (ULC) https://trtl.bz/2NW6YnA
• [P1.T4*] Is it realistically true that it is the Board's responsibility to "ensure alignment between firm's risk appetite and stress testing activities"? https://forum.bionicturtle.com/threads/p1-t4-800-stress-testing-governance-siddique.13433/
• [P1.T4] Isn't VaR sometimes, or even often, sub-additive? https://trtl.bz/2MeOmgE
• [P2.T5] Deep dive, including visualization, of the mass-centered approach to age-weighted (aka, hybrid) historical simulation approach to VaR https://forum.bionicturtle.com/thre...ed-historical-simulation-hs-approaches.12247/
• [P2.T5] Is there a quick way to determine concordant versus discordant pairs? https://trtl.bz/2NpdFkY
• [P2.T5] Why do we backtest with cleaned (aka, hypothetical) returns? https://forum.bionicturtle.com/threads/hypothetical-returns.18921/
• [P2.T5] The heavy-tailed shape of a price distribution implied by a volatility smile https://trtl.bz/2Me8JLi
• [P2.T5] Holding period scales similarly in normal versus lognormal VaR https://trtl.bz/2NolVl9
• [P2.T5] Tuckman replicates a call option payoff with two bonds https://trtl.bz/2MWNcvO
• [P2.T5] Good question: In Tuckman's regression hedge, why are both nominal and real terms negative? https://trtl.bz/2MY098k
• [P2.T5] Assume interest rate input assumptions are given in per annum terms https://trtl.bz/2MUEMFg
• [P2.T5] Understanding discounting in the binomial interest rate tree https://trtl.bz/2MUEMFg
• [P2.T5] Why do we (need to) interpolate neighboring key rates? https://forum.bionicturtle.com/threads/using-linear-interpolation-to-neighboring-key-rates.18904/
• [P2.T5] The difference between and interest rate simulation and an interest rate tree https://trtl.bz/2Ma2TdE
• [P2.T6] What is the relationship between value at risk (VaR), unexpected loss (UL) and economic capital (EC)? https://trtl.bz/2M8Oj6k
• [P2.T6] The difference between CVA and CDS-bond basis https://trtl.bz/2P86wmf
• [P2.T6*] Is CVA calculated for the each trade, or the counterparty? https://trtl.bz/2NsvXSu
• [P2.T6] Thank you @JulioFRM for identifying an error in our paraphrase of Stulz on debt as an option https://trtl.bz/2NowLaP
• [P2.T6] Sometimes a probability matrix is the easiest approach to an expected loss problem https://forum.bionicturtle.com/threads/part-2-practice-question-on-expected-loss.18682/
• [P2.T8] The difference between the standard deviation of alpha, σ(α), and the standard error of the regression (SER) https://trtl.bz/2Npen1C
• [P2.T8] Ang's statement that "the risk implied by the value factor is that it will under-perform growth during bad times" is counter-intuitive because he is not using a CAPM model https://trtl.bz/2NssaV7
• [P2.T8] In Ang's Factor Theory, how is the stochastic discount factor (m) is related to the "bad times index"? https://trtl.bz/2NpqED7

External

10 year Anniversary of Crisis

• WSJ: The Financial Crisis Made Us Afraid of Risk—For a While https://trtl.bz/2wZcmjd; How Banks Lost the Battle for Power on Wall Street https://trtl.bz/2wZMEem, and The Financial Crisis Changed Home Buying Forever https://trtl.bz/2x0Gbjm
• A decade after the global financial crisis: What has (and hasn’t) changed? (McKinsey) https://trtl.bz/2wYcLlX
• BlackRock’s Decade: How the Crash Forged a $6.3 Trillion Giant https://trtl.bz/2O4sGpi
• The Dirty Banks Down Under https://trtl.bz/2okzdRJ
• The book I'm reading: Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze https://amzn.to/2NrC8Gt

Debt

• The Student Debt Problem Is Worse Than We Imagined https://trtl.bz/2wh0RmK "The new data makes clear that the federal government overlooks early warning signs by focusing solely on default rates over the first three years of repayment."
• U.S. Companies Begin to Chip Away at Mountain of Debt https://trtl.bz/2wiYsbk

Risk

• A glimpse into the dark underbelly of cryptocurrency markets https://trtl.bz/2MhCUBj
• [GARP] Success with AI Will Require Radical Rethinking, World Economic Forum Says (Extensive study with Deloitte identifies emerging risks and regulatory issues in an increasingly data-dependent financial services industry) https://trtl.bz/2Mizqya Here is the report: The New Physics of Financial Services https://trtl.bz/2wW7v2r
• [GARP] Risk Platform Transformation for Digital Banking https://trtl.bz/2O0pkDN
• Cybersecurity: The Barbarians Are at the Gate https://blogs.cfainstitute.org/investor/2018/09/05/cybersecurity-the-barbarians-are-at-the-gate/

Quantitative

• 'What’s Going On in This Graph?’ Is Now Weekly. STEM Teachers Explain Why It’s a Powerful Activity https://trtl.bz/2PcMWFp
• Why data culture matters (McKinsey) https://trtl.bz/2wZS7Sq
• Decision makers need more math https://towardsdatascience.com/decision-makers-need-more-math-ed4d4fe3dc09

Investing

• Why Doesn’t The Stock Market Care About the News? http://awealthofcommonsense.com/2018/08/why-doesnt-the-stock-market-care-about-the-news/
• How Yield Differs From Income https://www.morningstar.com/articles/882003/how-yield-differs-from-income.html
• The 9 Biases of Value Investors https://www.safalniveshak.com/outside-the-box-biases-value-investors/

Other

• Why Google Fiber Is High-Speed Internet’s Most Successful Failure https://hbr.org/2018/09/why-google-fiber-is-high-speed-internets-most-successful-failure
• Deloitte Internal Audit 3.0 has major flaws (Norman Marks) https://trtl.bz/2MgUuVI
• How the U.S. Has Weaponized the Dollar (The currency’s “exorbitant privilege” gives the nation extraordinary leverage) by Satyajit Das https://trtl.bz/2O4i5uw
• Many Major Airports Are Near Sea Level. A Disaster in Japan Shows What Can Go Wrong https://www.nytimes.com/2018/09/07/climate/airport-global-warming-kansai.html "A quarter of the world’s 100 busiest airports are less than 10 meters, or 32 feet, above sea level …"
• The Metaskills You Need to Thrive in the 21st Century https://trtl.bz/2NZxcFv (I agree!)