Blog Week in Risk (February 10th)

[David Harper CFA FRM]

New Practice Questions

• P1.T4.904. Flattening and steepening of rate curves (Tuckman Ch.2) https://trtl.bz/2TkXpRU
• P2.T9.904. Artificial intelligence and machine learning (AI & ML) in financial services (FSB FIN, part 1 of 2) https://trtl.bz/2MIS9Vn
• P1.T4.905. Gross versus net bond returns, bond spread and bond yield (Tuckman Ch. 3) https://trtl.bz/2Bl7N58
• P2.T9.905. Machine learning in financial services: use cases and possible effects (FSB FIN, part 2 of 2) https://trtl.bz/2SaU4Z3

New YouTube

• Lognormal property of stock prices assumed by Black-Scholes (FRM T4-10): https://trtl.bz/2Gglwxk
• Black Scholes Merton option pricing model (FRM T4-11): https://trtl.bz/2UVm1ky

In the Forum

• [GARP FRM] Questions about work experience questions https://trtl.bz/2GnUrZd
• [P1.T1*] Can we elaborate on the difference between an economic and accounting hedge? https://trtl.bz/2SFmvh6
• [P1.T3] Further clarification on the tedious valuation (and the most confusing step) of a theoretical futures price for a Treasury bond futures contract https://trtl.bz/2Sx9kyy
• [P1.T3] Thank you @abhinavkhanna for a more correct version of the derivation of lump-sum income (given continuous form) https://trtl.bz/2Gnurx1
• [P1.T3*] Bond convexity dynamics https://trtl.bz/2DDo32O
• [P1.T3] Inferring the long-term zero rate from Eurodollar futures quotes https://trtl.bz/2Gqghej
• [P1.T3] Understanding the mathematical difference between forward rate agreement (FRA) valuation and cash flow simulation https://trtl.bz/2SvXRiM
• [P1.T3] How does the dividend affect an option's intrinsic value and/or time value? https://trtl.bz/2MXqSig
• [P1.T4] How can we calculate the worst case scenario (WCS) for a parametric/empirical distribution? https://trtl.bz/2GtBapl
• [P1.T4] Why doesn't Tuckman's P&L volatility of hedge position include the yield shocks and beta? https://trtl.bz/2GkVVmW
• [P1.T4*] Derivation of duration as first derivative https://trtl.bz/2MXaqyt
• [P2.T5*] Can we better understand the relationship between the implied volatility smile and option maturity? https://trtl.bz/2B6vZYy
• [P2.T5] What is the decision rule for rejection in the VaR backest? https://trtl.bz/2B5qmKy
• [P2.T5] Basel VaR test is really just a hypothesis test of the sample mean of a binomial distribution https://trtl.bz/2GonkEn
• [P2.T5] Another on the VaR backtest: why can't we easily calculate the probability of a Type II error? https://trtl.bz/2SFms4U
• [P2.T5] Thank you @gprisby for noticing: leptokurtosis is a heavy-tail, not necessarily a higher peak. This is not only mathematically proper but consistent with our focus, in risk, on extreme events https://trtl.bz/2Glw6mI
• [P2.T5] Thank you @pengfrm from explaining how portfolio Macaulay duration was calculated in T5.63 (which is the same way Jorion calculates the portfolio duration of 2.733 years in his Chapter 11 fixed income VaR mapping example) https://trtl.bz/2MWpMmO
• [P2.T5] VaR is not coherent under any approach (despite coherence under restrictive normality assumption) but expected shortfall (ES) is always coherent. An advantage of historical simulation (HS VaR) is that it makes no distributional assumption but it therefore cannot assume normality! https://trtl.bz/2SDz4ts
• [P2.T5] A good practice question by GARP on the interest rate term structure with a risk premium https://trtl.bz/2Bs2lgI
• [P2.T6] How is the value of a credit default swap (CDS) different than a credit valuation adjustment (CVA)? https://trtl.bz/2SqgaGk
• [P2.T6] Mapping De Laurentis definitions to standard FRM definitions https://trtl.bz/2SvZdKo
• [P2.T6] Spreadsheet solution that applies Altman's Z-score https://trtl.bz/2MVOeoC
• [P2.T6] What is the difference between an ABS, CDO, and CDO^2? https://trtl.bz/2GmgMWZ
• [P2.T6*] How can we understand the cumulative accuracy profile (CAP)? https://forum.bionicturtle.com/threads/credit-scoring.22144/

External

Banking and regulation

• BB&T to Buy SunTrust in Largest Bank Deal Since the Financial Crisis https://trtl.bz/2MYdXN0
• Federal Reserve Board releases scenarios for 2019 CCAR stress test exercises https://trtl.bz/2MXZfWo
• The Wells Fargo Cross-Selling Scandal https://corpgov.law.harvard.edu/2019/02/06/the-wells-fargo-cross-selling-scandal-2/
• [GARP] For Both Regulators and Banks, Tech Learning Curve Is Steep https://trtl.bz/2MXY0GI
• [FSB] FSB publishes Global Monitoring Report on Non-Bank Financial Intermediation 2018 https://trtl.bz/2MZ0tRg
• Cooling Housing Market Prompts Closer Scrutiny of Some Lenders (Ginnie Mae worries about risks from nonbank lenders, whose share of home loans has ballooned) https://trtl.bz/2MZQICr

FinTech and data science

• Learning Data Science: Modelling Basics http://blog.ephorie.de/learning-data-science-modelling-basics
• Machine Learning Introduction: A Comprehensive Guide https://trtl.bz/2SDgWjj Supervised Learning: Basics of Classification and Main Algorithms https://trtl.bz/2SEUHt3
• The Most Innovative Fintech Companies In 2019 (Forbes 2019 FinTech 50) https://trtl.bz/2N1855v
• Fintech in 2019: Five Trends to Watch (NYU Law) https://trtl.bz/2MZsAQh
• Defense of the cyberrealm: How organizations can thwart cyberattacks (McKinsey) https://trtl.bz/2UfNPzI
• How accurate are Zestimates? Zillow awards $1M to trio for improving them https://trtl.bz/2MY30eo Zillow's post https://www.zillow.com/promo/zillow-prize/

Investing and personal finance

• Over 60, and Crushed by Student Loan Debt https://trtl.bz/2MSF3oE "Total student loan debt rose 161% for people aged 60 and older from 2010 to 2017—the biggest increase for any age group"
• January 2019 Data Update 7: Debt, neither poison nor nectar! (Prof Aswath Damodaran) https://trtl.bz/2SzvCjf and Update 8: Dividends and Buybacks https://trtl.bz/2SKABxC
• Eternal Market Patience Offers Eternal Rewards (Crunching 200 years of data reveals some shocking results) https://trtl.bz/2N69LuV The paper is here https://trtl.bz/2MZfdQ3.
• A VIX Copycat Tries to Break Cboe’s Monopoly on Volatility Products https://trtl.bz/2N3fLVa SPIKES Index and volatility products https://www.miaxoptions.com/spikes/overview
• Some Puzzles About Asset Returns in the Long Run https://trtl.bz/2MXVXSY
• Diversification: High Dispersion Beats Low Correlation (CFA Institute) https://trtl.bz/2MXxhtX
• ESG, Credit Risk and Ratings: A Case Study (PIMCO) https://trtl.bz/2MZuEYx
• An investor's desire for negative skew https://trtl.bz/2N0fCl9

Quantitative

• Almost Everything You Need to Know About Time Series https://trtl.bz/2MZctlJ
• What is the bootstrap? (Significance) https://trtl.bz/2MZdOsL
• An Introduction to the Bootstrap Method https://trtl.bz/2MXBaix
• Forecasting Interest Rates: Short Rate Term Models https://trtl.bz/2MXZgcU and Forecasting Interest Rates — Mean Reverting Drift Term Structure Models https://trtl.bz/2N68Zhv
• Misinterpreting Tests, P-Values, Confidence Intervals & Power https://trtl.bz/2MXJIWs The paper: https://trtl.bz/2Bw4zLZ
• Probability Theory (Fundamentals of Machine Learning, Part 1) https://trtl.bz/2MZfN01

Other

• 2018 Was Fourth-Hottest Year in Modern Records, U.S. Government Scientists Say https://trtl.bz/2N3dwRK NYT on same https://trtl.bz/2N3ehKA
• P&C Insurance Trends To Watch In 2019 https://www.cbinsights.com/research/insurance-trends-2019/
• California Homeowners Face Higher Prices for a Scarce Commodity: Wildfire Insurance https://trtl.bz/2N0pWcM