Blog Week in Risk (ending October 15th)

[David Harper CFA FRM]

New practice questions

• P1.T2.708. Probability function fundamentals (Miller Ch. 2) http://trtl.bz/2zbhaAU
• P1.T2.709. Joint probability matrices (Miller Ch.2) http://trtl.bz/2yLGilw
• P2.T5.707. Historical simulation and lognormal value at risk (VaR) (Dowd) http://trtl.bz/2gkaOLE
• P2.T5.708. Expected shortfall (Dowd Chapter 3) http://trtl.bz/2glvT8n

New YouTube Videos (We started a new series!)

• What is financial risk? (FRM T1-1) What is financial risk? http://trtl.bz/frm-t1-1-what-is-financial-risk
• What is value at risk? (VaR, FRM T1-2) http://trtl.bz/frm-t1-2-what-is-var
  
• How to translate volatility over time; i.e., scale volatility per the square root rule (FRM T1-3) http://trtl.bz/frm-t1-3-scaling-volatility
  
• What is autocorrelation (and how does it impact scaled volatility)? FRM T1-4 http://trtl.bz/frm-t1-4-autocorrelation

In the forum this week (selected only) or Major News

• [P1.T2] When can we use the normal Z versus when must we use the student’s t https://forum.bionicturtle.com/threads/p1-t2-405-distributions-i.7958/#post-52668
• [P1.T2] Here is my simple illustration of removing the non-stationary constituents (e.g., trend and seasonality) in order to isolate on white noise which is covariance stationary https://forum.bionicturtle.com/thre...ds_representation-covariant-stationary.11215/
• [P1.T2] On the similarity between partial autocorrelation and multivariate regression slope coefficient https://forum.bionicturtle.com/threads/r15-p1-t2-diebold_ch7_partial_auto-correlation.10817/
• [P1.T3] Very happy to finally understand the logic of the second approach to T-bond futures conversion factor (CF) calculation https://forum.bionicturtle.com/threads/conversion-factor-in-learning-xls.11142/
• [P1.T3] Why does a callable bond have negative convexity yet still positive duration? https://forum.bionicturtle.com/threads/l1-t3-161-bond-duration-convexity-hull.4522/page-3#post-52733
• [P1.T3] Thank you @akcfa447 for identifying a flawed question about high-yield bonds (T3.198.2) https://forum.bionicturtle.com/threads/l1-t3-198-fabozzis-corporate-bonds.4735/
• [P1.T3] On the difference between ROA and net interest margin in the FX hedge examples https://forum.bionicturtle.com/thre...nge-fx-hedges-saunders.8809/page-2#post-53228
• [P1.T3] What specifically does it mean to over-hedge with the T-bond futures contract? https://forum.bionicturtle.com/thre...tion-based-hedges-hull.4570/page-2#post-53083
• [P1.T4] When is VaR coherent? Here is my summary of the relationship between general and spectral risk measure and ES/VaR as instances https://forum.bionicturtle.com/thre...topic-coherent-risk-measures.9720/#post-53243
• [P1.T4] Short positions are represented with negative quantities in the fundamental relationship: Position Greek = Quantity * Percentage Greek https://forum.bionicturtle.com/threads/portfolio-delta-calculation.10768/
• [P2.T5] Nice summary of fixed income duration mapping by @uness_o7 https://forum.bionicturtle.com/threads/l2-t5-63-fixed-income-mapping-jorion.3617/page-3#post-52671
• [P2.T6] The difference between the clearing function and the trade executive venue https://forum.bionicturtle.com/thre...cp-netting-logistics-gregory.9221/#post-53294
• [P2.T6] More on Malz’s use of the binomial to model credit portfolio risk https://forum.bionicturtle.com/threads/p2-t6-309-default-correlation-malz-sections-8-1-and-8-2.9952/
• [P2.T6] Is credit risk positively or negatively skewed? https://forum.bionicturtle.com/thre...risk-cvar-topic-review.6333/page-2#post-52726
• [P2.T8] Beta with respect to the benchmark is not Treynor’s beta https://forum.bionicturtle.com/threads/p2-t8-709-ang-on-factors-and-factor-theory.10736/
• [GARP 2012.P2.18] On the role of drift in value at risk (VaR) https://forum.bionicturtle.com/threads/2012-garp-pq-question-18.11257/
• [GARP 2017.P2.78] Inferring risk-neutral default probability (PD) when recovery is nonzero https://forum.bionicturtle.com/threads/2017-garp-pq-78-garp17-p2-78.10449/

Bank and banking

• Goldman Sachs to Lend to House-Flippers https://www.wsj.com/articles/goldman-sachs-to-buy-house-flipping-lender-1507826252
• Financial Stability Improves, But Rising Vulnerabilities Could Put Growth at Risk [The IMF's latest Global Financial Stability Report] https://blogs.imf.org/2017/10/11/fi...ing-vulnerabilities-could-put-growth-at-risk/

Natural Science, including Climate and Energy

• Why the 2017 fire season is shaping up to be one of California’s worst http://www.latimes.com/projects/la-me-california-fire-seasons/ “Over time, the edges of cities have encroached on wild spaces. The close proximity between private property and wildlands allows fires to spread more rapidly and damage or destroy more property in the process. That allows fires during this part of the year to spread more rapidly into urbanized areas, Jin said. Many of these at-risk areas are in wildland-urban interface areas, or WUIs — where housing and vegetation intermix or come within close proximity of each other.”
• Analysis: How well have climate models projected global warming? https://www.carbonbrief.org/analysis-how-well-have-climate-models-projected-global-warming

Technology, including FinTech and Cybersecurity

• Content Analysis of Cyber Insurance Policies (How do carriers write policies and price cyber risk?) by RAND Corporatoin https://www.rand.org/pubs/working_papers/WR1208.html “In this research, we collect and analyze over 100 cyber insurance policies filed with state insurance commissioners. By analyzing these policies, we provide the first-ever analysis of the underwriting process for cyber insurance and uncover how insurance companies understand and price cyber risks.”
• Global Regulators Play Bitcoin Whack-a-Mole as Demand Explodes http://trtl.bz/2ylsQE8 “Global efforts to regulate digital money have accelerated in the past month since China banned initial coin offerings and ordered all cryptocurrency exchanges to close … It’s a development that creators of bitcoin, the best-known digital currency, saw coming, and prepared for. Since it works on a peer-to-peer network, users can buy and sell coins and secure and perpetuate the system without any government or central bank involvement. Trying to control it is like trying to catch water, said Alex Tapscott.”
• Bitcoin’s Rise Happened in Shadows of Finance. Now Banks Want In https://www.bloomberg.com/news/arti...pened-in-shadows-of-finance-now-banks-want-in
• Criticizing Ethereum — weaknesses of the internet 3.0 https://hackernoon.com/the-top-critiques-on-ethereum-a-bubble-waiting-to-pop-6ccf9b577d11 and a good Ethereum explainer by the same author http://www.lawandblockchain.eu/what-is-ethereum/

Case Studies and Companies, including Strategic or Reputation risk

• Ten years after the crisis: Looking back, looking forward http://voxeu.org/article/ten-years-after-crisis-looking-back-looking-forward

Quantitative Analysis (FRM P1.T2)

• We have a pretty good idea of when humans will go extinct https://www.washingtonpost.com/news...tty-good-idea-of-when-humans-will-go-extinct/ Surprisingly statistical, with appropriately wide confidence interval (TLDR: between 5,100 and 7.8 million years from now.)

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

• How Domino’s Persuaded Wall Street to Lend to It For Less (Whole-business securitization enables companies to issue bonds more cheaply) https://www.wsj.com/articles/how-dominos-convinced-wall-street-to-lend-to-them-for-less-1507739797
• New Ratings Firm Measures Banks’ Financial-Crime Vulnerability (wsj.com) http://trtl.bz/2gIJsMd The firm is Sigma Ratings http://sigmaratings.com/products/ratings/
• The Impact of CECL’s Financial Reporting Requirements http://trtl.bz/2yjszl9
• Goldman Has a New Way for You to Bet on the Next Banking Crisis https://www.bloomberg.com/news/arti...ers-first-swaps-on-riskiest-type-of-bank-debt
• Resolution Regimes for Central Clearing Parties https://www.moneyandbanking.com/commentary/2017/10/8/resolution-regimes-for-central-clearing-parties This is very relevant to the FRM’s Gregory readings on CCPs.
• Mexico to Collect $150 Million From Catastrophe Bond https://www.wsj.com/articles/mexico-to-collect-150-million-from-catastrophe-bond-1507684294
• The Shallow Benefit of Deep Liquidity http://www.collaborativefund.com/blog/the-shallow-benefit-of-deep-liquidity/
• The Triple-B Supremacy in Bonds Draws IMF Attention (The investment-grade bond market is increasingly dominated by BBB-rated credit, and investors now run the risk of getting stung) https://blogs.wsj.com/moneybeat/2017/10/12/the-triple-b-supremacy-in-bonds-draws-imf-attention/ The 25 basis point spread is sort of amazing: "Ultralow interest rates and massive bond buying by central banks has pushed financing costs down for companies raising money in bond markets. The yield on Bank of America Merrill Lynch’s global corporate BBB index is just 2.89%, compared to a 20-year average of more like 5.1%. What’s more, the spread between the highest and lowest-rated investment grade credit has collapsed. In 2008, during the financial crisis, triple-B rated bonds yielded over 8%, over four percentage points more than AAA-rated debt. On Wednesday, that spread was just 0.25 percentage point."