In the forum this week (selected only)
- 5% VaR versus 95% VaR and why Dowd’s absolute VaR is the best formula https://forum.bionicturtle.com/threads/l2-t5-69-parametric-value-at-risk-var.3643/#post-49002
- The opposite of a diversification benefit is a “compounding penalty” https://forum.bionicturtle.com/thre...asurement-and-feedback-loops.7539/#post-49009
- Two-bond portfolio expected shortfall if we change the bond assumptions https://forum.bionicturtle.com/threads/l2-t5-70-expected-shortfall.3651/page-3#post-49004
- Discount factors have lesser known cousins called “future value factors” and both have the advantage of incorporating the compound frequency https://forum.bionicturtle.com/threads/par-yield-ytm-and-spot-rate.1355/#post-48994 and @Matthew Graves makes a great point about applying compound frequencies consistently: “if you assume annual compounding when you derive the [spot rate] curve you will obtain slightly different zero rates than if you'd assumed continuous compounding. This means that when you use the curve to price another instrument you must assume annual compounding again otherwise the resulting price will not be consistent with the curve.”
- Correlation in multi-asset options by @bpdulog https://forum.bionicturtle.com/thre...ic-review-meissner-chapter-1.8200/#post-49011
- On the challenge lots of us seem to have interpreting Bodie’s Market Timing Score: “If we call P1 the proportion of the correct forecasts of bull markets and P2 the proportion for bear markets, then P1 + P2 - 1 is the correct measure of timing ability.” https://forum.bionicturtle.com/thre...-and-performance-attribution.5595/#post-48917
- More on the difference between the confidence of the VaR model and its backtest https://forum.bionicturtle.com/threads/l2-t5-60-basel-ima-backtest.3610/page-2#post-48963
- Which counterparty is the borrower/lender in a forward rate agreement (FRA)? https://forum.bionicturtle.com/thre...f-forward-rate-agreement-fra.4510/#post-48970
- Component VaR is just scaled component volatility (aka, risk contribution in percentage terms) https://forum.bionicturtle.com/thre...e-at-risk-var-calculations-topic-review.7709/
- Basel capital ratios https://forum.bionicturtle.com/threads/which-basel-capital-ratio-ci-etc.10356/
- [GARP 2015 P2 # 15] Why BSM will tend to underprice an ITM call (OTM put), if it keeps the ATM volatility assumption https://forum.bionicturtle.com/threads/garp-2015-p2-15.10333/
- [GARP 2016 P2 # 19] Known mistake in the LVaR https://forum.bionicturtle.com/threads/garp-2016-p2-19.10335/
- [GARP 2016 P2 # 72] Known mistake in the alpha confidence interval https://forum.bionicturtle.com/threads/garp-2016-p2-72.10337/
- Explaining Malz' single factor model https://forum.bionicturtle.com/threads/week-in-risk-ending-march-26th.10357/#post-49049
- Project Scalpel: Behind Big Banks’ Plan to Save $2 Billion (Wall Street firms discuss joint venture to process transactions) https://www.wsj.com/articles/project-scalpel-behind-big-banks-plan-to-save-2-billion-1490607000
- Shadow Banking Is Getting Bigger Without Getting Better https://www.bloomberg.com/view/arti...king-is-getting-bigger-without-getting-better “The reason shadow banks have largely escaped public scorn, regulatory scrutiny and high capital requirements is that they often came in the guise of high-tech disruptors. Quicken Loans Inc., the third biggest mortgage lender in the U.S. in 2015, does business online and on the phone, and that somehow makes it less interesting to regulators than a bank that does the same through an old-style branch network. Lending Club and other peer-to-peer lending firms quickly became conduits for large investors, not peers, yet they avoided regulation as though they were innovative tech platforms.”
- Judge Fines Bank of America $45 Million for ‘Heartless’ Treatment of Mortgage Borrowers (Amount meant to be large enough that it won’t be laughed off in the boardroom, judge says in ruling) https://www.wsj.com/articles/judge-...ss-treatment-of-mortgage-borrowers-1490742230 “It is apparent that the engine of Bank of America’s problem in this case is one of corporate culture…not rogue employees betraying an upstanding employer,” he added … Interesting debate in the comments.
- Former Citizens Bankers Say They Faked Data for Customer-Meeting Program https://www.wsj.com/articles/citize...-data-for-customer-meeting-program-1490811468 “The former Citizens employees said they falsified information because of pressure to meet expectations related to the program and time constraints from other banking responsibilities … The appointment-setting program was part of a broader push to bring in more than $60 million in new revenue for 2016.”
- There’s a Party in the Stock Market, and Banks Aren’t Invited (Equity trading revenue at U.S. banks is declining despite higher volumes and big index price swings) https://www.wsj.com/articles/theres-a-party-in-the-stock-market-and-banks-arent-invited-1490866205
- Annual Banking Outlook Conference Highlights Opportunities, Challenges Facing the Banking Industry http://trtl.bz/2oRcB9I
- America's Central Bank: The History and Structure of the Federal Reserve (Speech) https://www.federalreserve.gov/newsevents/speech/powell20170328a.htm
- E.U. Blocks Merger of London Stock Exchange and Deutsche Börse https://www.nytimes.com/2017/03/29/business/dealbook/deutsche-borse-london-stock-exchange.html
- Economic growth in the US: A tale of two countries by Thomas Piketty et al http://voxeu.org/article/economic-growth-us-tale-two-countries Income inequality is obviously a political risk factor with growing importance. Also: Corporations in the Age of Inequality https://hbr.org/cover-story/2017/03/corporations-in-the-age-of-inequality
- America's Central Bank: The History and Structure of the Federal Reserve (brief speech by governor Jerome Powell) https://www.federalreserve.gov/newsevents/speech/powell20170328a.htm
- GARP: Supervisor-Guidance Reviews Continue in a Deregulatory Climate (Banking agencies document simplification steps as pace of policy overhaul remains uncertain) http://www.garp.org/#!/risk-intelli...uidance-reviews-continue-deregulatory-climate
- BIS had a productive publishing week! Global systemically important banks - revised assessment framework - consultative document https://www.bis.org/bcbs/publ/d402.htm; and Financial systems and the real economy https://www.bis.org/publ/bppdf/bispap91.htm; and Progress in adopting the Principles for effective risk data aggregation and risk reporting https://www.bis.org/bcbs/publ/d399.htm; and Pillar 3 disclosure requirements - consolidated and enhanced framework https://www.bis.org/bcbs/publ/d400.htm; and Regulatory treatment of accounting provisions - interim approach and transitional arrangements https://www.bis.org/bcbs/publ/d401.htm
- Read the Brexit letter Britain gave to the European Union http://apps.washingtonpost.com/g/do...tter-britain-gave-to-the-european-union/2392/
- J.P. Morgan Scours Europe for Best Post-Brexit Home https://www.wsj.com/articles/j-p-morgan-scours-europe-for-best-post-brexit-home-1490779804 “The bank is checking out as many as eight cities including Paris, Frankfurt, Luxembourg and Dublin.”
- Why China’s Financial Plumbing Is Getting Clogged (China has raised key interest rates twice since early February, hitting smaller banks particularly hard) https://www.wsj.com/articles/why-chinas-financial-plumbing-is-getting-clogged-1490786689
- Have a Donkey to Trade? China Has an Exchange for That (From livestock to flowers, exchanges are popping up everywhere in China. So is speculation) https://www.bloomberg.com/news/articles/2017-03-29/china-has-exchange-traded-donkeys
- China Has Its Worst-Ever Start to a Year For Defaults https://www.bloomberg.com/news/arti...-worst-ever-start-to-a-year-for-bond-defaults
- Demographics Will Weigh Heavily on China Over Next Decade http://beta.morningstar.com/articles/798989/demographics-will-weigh-heavily-on-china-over-next.html
- This Is Why Australia Hasn't Had a Recession in Over 25 Years https://www.bloomberg.com/news/arti...victory-on-growth-its-spoils-look-bittersweet
- Iceland weighs plan to peg krona to another currency https://www.ft.com/content/a7894efe-1466-11e7-80f4-13e067d5072c
- HFT as an insight into where fintech is going https://ftalphaville.ft.com/2017/03/28/2186482/hft-as-an-insight-into-where-fintech-is-going/
- Swipe by Swipe, Chinese Smartphone Users Flock to Risky Investments https://www.wsj.com/articles/swipe-...e-users-flock-to-risky-investments-1490714334 Five of the world’s 10 most valuable FinTech companies are Chinese “A million companies in China have turned to the internet to raise money, hawking loosely regulated, often risky investments. Swipe by swipe, the online money supply is helping to democratize investing and loosen capital markets. It also is propping up indebted Chinese companies and inflating bubbles in asset types from bonds to plastic pellets. And it is shifting more of the risks from China’s corporate debt load onto consumers.”
- The Arrival of Artificial Intelligence https://stratechery.com/2017/the-arrival-of-artificial-intelligence/
- Cyber risks and government pools. Too soon? http://www.artemis.bm/blog/2017/03/30/cyber-risks-and-government-pools-too-soon/
- Pruitt on the Paris Accord http://www.factcheck.org/2017/03/pruitt-paris-accord/
- Making Sense of Trump's Order on Climate Change https://www.bloomberg.com/view/articles/2017-03-29/making-sense-of-trump-s-order-on-climate-change “The $36 figure [i.e., $36 per metric ton of C02 reflects social cost of carbon; see https://en.wikipedia.org/wiki/Carbon_tax#Social_cost_of_carbon] reflects the global rather than purely domestic damage from carbon emissions. If the United States is imposing harm on China, India or France, that harm is fully incorporated in our regulatory decisions, leading to more aggressive regulation than would be justified with the purely domestic figure. The $36 figure also reflects harm done to future generations, while using an annual “discount rate” of 3 percent -- meaning that in monetary terms, damage in 2080 is going be valued a lot lower than damage in 2017. The theory behind the use of a discount rate is that money today is worth a lot more than money in 50 years, because you can invest today’s money and watch it grow. The higher the discount rate, the lower the value of benefits that you get in the future.”
- How Machines Make Sense of Big Data: an Introduction to Clustering Algorithms https://medium.freecodecamp.com/how...duction-to-clustering-algorithms-4bd97d4fbaba This is really good.
- How to Manage Our Algorithmic Overlords https://www.bloomberg.com/view/articles/2017-03-29/how-to-manage-our-algorithmic-overlords
- At BlackRock, Machines Are Rising Over Managers to Pick Stocks https://www.nytimes.com/2017/03/28/...k-actively-managed-funds-computer-models.html
- An Introduction to Stock Market Data Analysis with R (Part 1) https://ntguardian.wordpress.com/2017/03/27/introduction-stock-market-data-r-1/
- Would You Rather Have $1 Million or $5,000 Monthly in Retirement? The answer will tell you whether you suffer an ‘illusion of poverty’ or an ‘illusion of wealth’ https://www.wsj.com/articles/would-...ion-or-5-000-monthly-in-retirement-1490582208
- Now Negotiable: Credit-Card Annual Fees (More than 80% of people who ask for relief from their annual fees receive it, according to a new survey) https://www.wsj.com/articles/now-negotiable-credit-card-annual-fees-1490587260
- The Rising Retirement Perils of 401(k) Leakage (Companies are trying to discourage employees from borrowing from their retirement accounts) https://www.wsj.com/articles/the-rising-retirement-perils-of-401-k-leakage-1491171015
- Gambling is a feature of capitalism—not a bug https://www.prospectmagazine.co.uk/magazine/gambling-is-a-feature-of-capitalism-not-a-bug “It was four developments in the second half of the 17th century that combined to frame the way we think about risk, and the institutions we have for dealing with it, through to the present day …” and what follows is a very enjoyable read that mentions even “insurable interest.”
- FASB Proposal Looks to Trim ‘Hedge Accounting’ Requirements (Agency would give companies more time to complete documentation, expand treatment to wider range of circumstances) https://www.wsj.com/articles/fasb-proposal-looks-to-trim-hedge-accounting-requirements-1490619600 “Changes in the price of derivatives that don’t qualify as hedges must be recorded in the income statement each quarter, which can result in large earnings swings. The result is that ADM’s losses on derivatives not designated as hedges reduced earnings by $352 million, to $1.28 billion in 2016.”
- Simplifying Risk Management https://securityintelligence.com/simplifying-risk-management/
- A Brief History of Random Numbers https://medium.freecodecamp.com/a-brief-history-of-random-numbers-9498737f5b6c
- Learning AI If You Suck at Math — P6 — Math Notation Made Easy! https://hackernoon.com/learning-ai-if-you-suck-at-math-p6-math-notation-made-easy-1277d76a1fe5
- GARP: Overcoming the Data Dilemma: How to Use Rolling Analysis for Accurate Forecasting (The inadequacy of financial data is a recurring problem with respect to estimation of statistical quantities and risk measures of historical return series. Risk managers, however, can use so-called rolling window analysis to meet this challenge) http://www.garp.org/#!/risk-intelligence/all/all/a1Z40000003PRmwEAG
- A Dearth of I.P.O.s, but It’s Not the Fault of Red Tape https://www.nytimes.com/2017/03/28/business/dealbook/fewer-ipos-regulation-stock-market.html “A third possibility is that companies simply no longer need the public market. The private markets are more efficient, and financing is readily available from venture capitalists and banks.”
- Hedge-Fund Manager Wants to Rearrange GM's Stock https://www.bloomberg.com/view/arti...r-david-einhorn-wants-to-rearrange-gm-s-stock “The magic of finance -- the reason it's a big industry, and the reason that hedge-fund managers are often a lot richer than car-company executives -- is that it can, in its finest moments, create value out of nothing.” Here is Einhorn’s presentation https://www.scribd.com/document/343303520/Greenlight-GM-Presentation
- Insatiable Demand for Long Bonds Isn’t Short Term https://www.wsj.com/articles/invest...bonds-shows-little-sign-of-abating-1490879737 “These motives are often structural. Banks’ appetite for sovereign debt has increased because, to meet new postcrisis liquidity requirements, they need assets that are easy and quick to sell during times of distress. Government bonds also carry very little risk, so banks aren’t required to raise much extra capital to hold them. Bonds are also a crucial—and increasingly scarce—source of collateral for investors that borrow in short-term markets. Another major source of demand comes from insurers and pension funds, especially in Europe.”
- What does the SF Bay Bridge have to do with bond investing? https://www.blackrockblog.com/2017/03/30/bay-bridge-bond-investing/
- Policyholders in Limbo After Rare Failure of Insurer https://www.nytimes.com/2017/04/01/...s-in-limbo-after-rare-failure-of-insurer.html
- Flatter Yield Curve in 2017 Shows Growth Concern Lingers https://www.wsj.com/articles/flatter-yield-curve-in-2017-shows-growth-concern-lingers-1491048017
- Federal Reserve Readies Plan for Balance Sheet https://www.wsj.com/articles/federal-reserve-readies-plan-for-balance-sheet-1491000013
- Special Report: Commercial Insurance at the Crossroads http://ww2.cfo.com/risk-management/2017/04/special-report-commercial-insurance-crossroads/
- Allianz’ Global Claims Review: Liability in Focus http://www.agcs.allianz.com/about-us/news/global-claims-review-2017/
- More covered interest parity http://johnhcochrane.blogspot.in/2017/03/more-covered-interest-parity.html
- A Gentle Introduction to Value at Risk https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2942138 This is recommended because it contains illustrations based on years of their teaching to students
- Who’s Right: Warren Buffett or Larry Fink? (A debate over whether managers are underinvesting in the U.S. economy because they want to line the pockets of investors through share buyback) https://www.wsj.com/articles/whos-right-warren-buffett-or-larry-fink-1488472177 “Companies, sectors and countries that invest less relative to their payouts to shareholders have higher valuations, and those engaging in big buybacks have outperformed.”
- United States Residential Foreclosure Crisis: Ten Years Later by CoreLogic http://trtl.bz/0402-corelogic-crisis via Barry Ritholz who says: “Comprehensive data and analysis on completed U.S. foreclosures and foreclosure inventory: Fascinating report from Core Logic on the past decade, looking at from a national and state by state perspective. Definitely worth checking out the complete report (click on graphic below).”
- Understanding CMO CDO and CDS. Big Short Case Study – Part III https://financetrainingcourse.com/education/2017/03/understanding-cmo-cdo-cds-big-short/
- Understanding Synthetic CDO – The Goldman Mike Burry Big Short Trade https://financetrainingcourse.com/e...hetic-cdo-goldman-mike-burry-big-short-trade/
- GARP: Private Funds Fill a Void in Senior Credit Risk (Risks percolate in a small but growing market segment from which banks have retreated) http://www.garp.org/#!/risk-intelli...AW/private-funds-fill-void-senior-credit-risk
- Here’s 48 Hedge Fund Terms Every Investor Should Know http://www.visualcapitalist.com/48-hedge-fund-terms/
- All About Factors & Smart Beta https://blog.thinknewfound.com/2017/03/factors-smart-beta/ Presentation deck here http://trtl.bz/2orw5FG
- A Question About Risk That Founders Forget to Ask VCs https://thinkgrowth.org/a-question-about-risk-that-founders-forget-to-ask-vcs-a5a27186d989 “A seed or Series A investor should be able to articulate the risks they perceive with a particular investment and why that risk is one they’re willing to take.”
- Valeant Bet Was a ‘Huge Mistake,’ Hedge Fund Chief Ackman Says https://www.nytimes.com/2017/03/29/...uge-mistake-hedge-fund-chief-ackman-says.html and: What went wrong with Ackman and Valeant- the alternative edition https://ftalphaville.ft.com/2017/03...h-ackman-and-valeant-the-alternative-edition/ “Lesson 2: Position sizing is very, very important … Lesson 3: Public auctions are not usually very good places to find bargains.”
- The Gains No Longer Available To You http://thereformedbroker.com/2017/03/30/the-gains-no-longer-available-to-you/ “Michael Mauboussin’s most recent research paper, The Incredible Shrinking Universe of Stocks, is absolutely incredible. There are like 50 separate profound insights to be gleaned from it.”
- BlackRock Cuts Dozens of Jobs and Fees in Stock-Picking Unit https://www.bloomberg.com/news/arti...cut-jobs-fees-in-revamp-of-active-equity-unit and: At BlackRock, Machines Are Rising Over Managers to Pick Stocks https://www.nytimes.com/2017/03/28/...k-actively-managed-funds-computer-models.html and BlackRock Bets on Robots to Improve Its Stock Picking https://www.wsj.com/articles/blackrock-bets-on-robots-to-improve-its-stock-picking-1490736002
- The Future of Bitcoin Could Be Bitcoin Futures http://blogs.wsj.com/moneybeat/2017/03/28/the-future-of-bitcoin-could-be-bitcoin-futures/
- The Fed Is Bedeviled by Keynes's Paradox https://www.bloomberg.com/view/articles/2017-03-30/the-fed-is-bedeviled-by-keynes-s-paradox “Keynes is credited with popularizing the Paradox of Thrift, which is the economic theory that posits people tend to save more during recessions as rates fall to offset the income their savings is not generating. Of course it is the case that when you save more, you spend less. Since the U.S. economy is fueled by consumption, it also stands to reason that growth suffers as a result.”
- Low Real Interest Rates and Monetary Policy http://newmonetarism.blogspot.com/2017/03/low-real-interest-rates-and-monetary.html Natural versus Equilibrium versus Neutral real interest rates
