Week in risk (April 11th)

[David Harper CFA FRM]

FRM Exam (week of 4/11)

• Who determines the firm's risk appetite, the Board or the CRO? https://forum.bionicturtle.com/thre...tting-risk-governance-crouhy-galai-mark.8225/
• The statistical significance of alpha (is a simple derivation) https://forum.bionicturtle.com/threads/p2-t8-18-statistical-significance-of-alpha.5578/#post-41451
• Continuing our discussion of the cashflow waterfall in Malz’ three-tiered securitization https://forum.bionicturtle.com/thre...ritization-structure-cashflows-malz-9-2.7013/
• How do we calculate the value of risky debt under the Merton model https://forum.bionicturtle.com/threads/risky-debt-risk-free-debt.9468/
• How funding liquidity risk is manifest by collateral calls https://forum.bionicturtle.com/threads/funding-liquidity-risk-in-collaterals-gregory.9472/
• Is survivorship bias a type of selection bias, what's the difference? https://forum.bionicturtle.com/threads/selection-bias-vs-survivorship-bias.9470/
• Because of rounding and the minimum transfer amount (MTA), @Mkaim makes a good point that collateral is lumpy https://forum.bionicturtle.com/thre...g-and-collateral-on-exposure.7779/#post-41519
• What is the relationship between expected shortfall (ES), spectral measures, and the general risk measure \({{M}_{\Phi }}=\int_{0}^{1}{\Phi (p){{q}_{p}}dp}\), see https://forum.bionicturtle.com/threads/l2-t5-72-estimating-coherent-risk-measures.3657/#post-41584

Notable error corrections

• As @mh2452 writes, options cannot have negative intrinsic value https://forum.bionicturtle.com/threads/l2-t5-18-shout-options.3422/#post-41349
• Great catch by @NNath in regard to errors by Malz https://forum.bionicturtle.com/threads/p2-t6-305-credit-value-at-risk-cvar.6816/page-2#post-41455
• Weakness in my Basel III capital question spotted by @Kenji at https://forum.bionicturtle.com/thre...i-regulatory-capital-changes.7944/#post-41425

GARP Practice question

• 2016 Part 1 No. 93 @bpdulog raises a good point. I think this question is too loose. How do you define risk aversion? https://forum.bionicturtle.com/threads/2016-part-i-practice-exam-question-93.9460/
• 2016 Part 1 No. 32: An excellent critique by @bpdulog concerning the difference between Macaulay and modified duration https://forum.bionicturtle.com/threads/2016-practice-exam-question-32.9461/
• 2016 Part 1 No. 29 In my opinion, this is a well-designed question and typical of an FRM’s volatility question https://forum.bionicturtle.com/thre...tting-risk-governance-crouhy-galai-mark.8225/ I’m really keen on this sub-question: “A variance estimate from the [EWMA | GARCH] model is always between the prior day’s estimated variance and the prior day’s squared return.” Is that true for both, either or neither?

Thank you @brian.field for your quality contributions!

• Is derivative counterparty failure to pay (e.g., interest rate swap, credit default swap) considered a default? https://forum.bionicturtle.com/threads/failure-to-deliver-cds-physical-settlement.9467/
• Rehypothecation Risk https://forum.bionicturtle.com/threads/rehypothecation-risk.9473/
• Maturity and exposure: how can Gregory say that the exposure of a forward contract is not influenced by the contract's maturity? https://forum.bionicturtle.com/threads/maturity-and-exposure.9474/
  
• Downgrade versus default risk https://forum.bionicturtle.com/threads/downgrade-risk-versus-default-risk.9477

Risk (general risk-related news that I find relevant, or just interesting ... )

BIS (Basel)

• Tenth progress report on adoption of Basel III standards published by the Basel Committee http://www.bis.org/press/p160411.htm
• The case for more capital http://ftalphaville.ft.com/2016/04/11/2158660/the-case-for-more-capital/
• Revision of the Quantification of Market Risk in the Basel III Regulatory Framework
  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2755950

Banks and regulation

• Regulators Reject ‘Living Wills’ of Five Big U.S. Banks Fed, FDIC rebuke bankruptcy plans of J.P. Morgan, Wells Fargo, Bank of America, Bank of New York, State Street. WSJ @ http://trtl.bz/bank-wills-wsj , Bloomberg @ http://trtl.bz/bank-wills-bb , Financial Times @ http://trtl.bz/bank-wills-ft
  
• For a Generalist, ‘Too Big to Fail’ May Be Too Tricky to Judge http://www.nytimes.com/2016/04/12/b...o-big-to-fail-may-be-too-tricky-to-judge.html
• Regulators Warn 5 Top Banks They Are Still Too Big to Fail http://www.nytimes.com/2016/04/14/business/dealbook/living-wills-of-5-banks-fail-to-pass-muster.html
  
• Supervising Large, Complex Financial Institutions: Defining Objectives and Measuring Effectiveness http://libertystreeteconomics.newyo...and-measuring-effectiveness.html#.VwxXh3pWvDE
• The Economics of Bank Supervision: So Much to Do, So Little Time http://libertystreeteconomics.newyo...o-much-to-do-so-little-time.html#.VxUT13pWvDE
• A Peek behind the Curtain of Bank Supervision http://libertystreeteconomics.newyo...k-behind-the-curtain-of-bank-supervision.html
  
• Systemic Importance Data Shed Light on Global Banking Risks https://financialresearch.gov/brief...ance-data-shed-light-on-global-banking-risks/
• Concentration risk: Banks Face New Headache on Oil Loans http://www.wsj.com/articles/banks-face-massive-new-headache-on-oil-loans-1460453401

Negative interest rates

• Negative Rates: How One Swiss Bank Learned to Live in a Subzero World http://www.wsj.com/articles/negativ...learned-to-live-in-a-subzero-world-1460547973
  
• Negative Rates Around the World: How One Danish Couple Gets Paid Interest on Their Mortgage http://www.wsj.com/articles/the-upside-down-world-of-negative-interest-rates-1460643111

Stocks

• What is the S&P 500, and Why Does It Matter to Traders at Banks? http://www.mergersandinquisitions.com/what-is-the-sp-500/
• The Most Complicated Stocks http://awealthofcommonsense.com/2016/04/the-most-complicated-stocks/

Climate

• The Data Says Climate Change Could Cost Investors Trillions https://hbr.org/2016/04/the-data-says-climate-change-could-cost-investors-trillions
  
• Yale Advances in Shaping Portfolio to Address Climate Change http://www.nytimes.com/2016/04/13/b...ping-portfolio-to-address-climate-change.html

Fintech

• Great article on an important trend: The Changing Generations of Financial Data https://www.quandl.com/blog/alternative-data
• Ranking the Top Fintech Companies http://www.nytimes.com/interactive/2016/04/07/business/dealbook/The-Fintech-Power-Grab.html

Numbers and pictures

• Yale Clears Air on Venture Returns (and Cautions on the Limits of IRR) http://on.wsj.com/1SabJEF I think this is really instructive! Their dollar-weighted return (aka, IRR) was 92.7% but their time-weighed return was "only" 32.3%. This is P2.T8 Bodie
• Duration Risk: The Bomb Ticking Inside Today’s Bond Market http://www.wsj.com/articles/duration-risk-the-bomb-ticking-inside-todays-bond-market-1460626201 "
  The duration of a bond is a measure of when an investor gets his or her money back. Longer-term bonds have higher duration—as do bonds with lower coupon payments, because low coupons mean more waiting. Today, with global interest rates extraordinarily low, and borrowers issuing ultralong debt, duration is shooting up."
• Constructing Volatility Surfaces in EXCEL http://financetrainingcourse.com/st...Surfaces-in-EXCEL/p/36848744/category=9950405
• Visualizing the risk management of the future https://www.linkedin.com/pulse/visualizing-risk-management-future-philippos-papadopoulos Their open forum is here at https://www.openrisk.eu/openrisk/forums/

Other

• Trading Costs & The New Market Averages http://awealthofcommonsense.com/2016/04/trading-costs-the-new-market-averages/ “It’s quite possible that returns from here will be lower than they have been when compared with the historical numbers. But it’s also true that investors in the past probably required a much higher gross return because there is no way they were actually receiving those historical returns on a net basis, after taking into account all costs.”
• Liquidity v. Solvency: Caesars edition http://ftalphaville.ft.com/2016/04/11/2158973/liquidity-v-solvency-caesars-edition/
• Why Wait Three Days to Get Your Cash After You Trade? http://www.wsj.com/articles/why-wait-three-days-to-get-your-cash-after-you-trade-1460765402
  
• The 2016 Excellence in Risk Management project from Marsh and RIMS, the Risk Management Society, looked at an array of issues around identifying, assessing and managing emerging risks http://www.brinknews.com/emerging-risks-anticipating-threats-and-opportunities-around-the-corner/ The report is here http://trtl.bz/marsh-emerging-risks
• Handouts from RIMS'16 https://www.rims.org/rims16/attendee/Pages/Session-Handouts.aspx
  
• At D.E. Shaw, a Star Falls Over Concerns About Risk http://www.wsj.com/articles/at-d-e-shaw-a-star-falls-over-concerns-about-risk-1460500315
• A veteran of securities law killed his weekend reading all 1,000 pages of the DOL rule -- and has a takeaway to share http://www.riabiz.com/a/5043735528210432/a-veteran-of-securities-law-killed-his-weekend-reading-all-1000-pages-of-the-dol-rule----and-has-a-takeaway-to-share
• Three Risks Poised to Disrupt a Fast-Changing World by 2021 http://www.brinknews.com/3-risks-poised-to-disrupt-a-fast-changing-world-by-2021/ 1. China, 2. Energy & the Middle East, 3. Technology & The State
• I love this decision-making distinction by Jeff Bezos in his latest letter to Amazon's shareholders https://www.sec.gov/Archives/edgar/data/1018724/000119312516530910/d168744dex991.htm "One common pitfall for large organizations – one that hurts speed and inventiveness – is one-size-fits-all decision making. Some decisions are consequential and irreversible or nearly irreversible – one-way doors – and these decisions must be made methodically, carefully, slowly, with great deliberation and consultation. If you walk through and don’t like what you see on the other side, you can’t get back to where you were before. We can call these Type 1 decisions. But most decisions aren’t like that – they are changeable, reversible – they’re two-way doors. If you’ve made a suboptimal Type 2 decision, you don’t have to live with the consequences for that long. You can reopen the door and go back through. Type 2 decisions can and should be made quickly by high judgment individuals or small groups. As organizations get larger, there seems to be a tendency to use the heavy-weight Type 1 decision-making process on most decisions, including many Type 2 decisions."