Blog Week in Risk (May 6th)

[David Harper CFA FRM]

New YouTube

• The F ratio is a test of overall significance in a multivariate regression (FRM T2-20) https://trtl.bz/2IoQMvH
  
• Par yields are swap rates (FRM T3-13) https://trtl.bz/2FSR608

In the forum this week (selected only)

• [GARP] Another thread for practice paper errors https://trtl.bz/2IoLqk5
• [P1.T1] Is operational risk even a financial risk? https://trtl.bz/2I2zLUC
• [P1.T1] Which of Sharpe, Teynor and Jensen's alpha can be an ex ante (versus ex post) measure? https://trtl.bz/2wkOdWl
• [P1.T2] Good job @lRRAngle finding a Bayes shortcut https://forum.bionicturtle.com/threads/p1-t2-403-probabilities.7947/#post-59636
• [P1.T2] Is there an unconditional (long run) correlation in the GARCH covariance update? https://trtl.bz/2wmeDHh
• [P1.T3] Why does the short seller pay the dividend, doesn't the company pay the dividend? https://trtl.bz/2vVmBXI
• [P1.T3] We do have a spreadsheet workbook for Hull's trading strategies (spreads and combinations) https://trtl.bz/2HJvb19
• [P1.T3] Long or short hedge? https://forum.bionicturtle.com/threads/questions-about-hedge.13857/
• [P1.T3] Hull's theory of normal backwardation employs a discount rate--which is not exactly the growth rate--informed by the capital asset pricing model (CAPM) https://trtl.bz/2HKA36s
• [P1.T3*] Pension plan contribution https://trtl.bz/2HYUHf0
• [P1.T3] Novation versus netting https://trtl.bz/2wiN1TF
• [P1.T3] Foreign exchange (FX) quote convention (base versus quote currency) https://trtl.bz/2I2LH8A
• [P1.T4] Computing the new bond price under the roll down scenario https://trtl.bz/2wp1QUI
• [P2.T5] Investopedia is sort of incorrect to plot implied volatility against stock price https://trtl.bz/2w0kPoq
• [P2.T5] Which term structure models do not allow the rate to go negative (no peeking!) https://trtl.bz/2HKvU26
• [P2.T5] What is the implication of serial independence on the VaR backtest? https://trtl.bz/2wkC4B3
• [P2.T5] Implication of implied volatility smile on Black-Scholes-Merton (BSM) over- and underpricing https://trtl.bz/2IiI41Q
• [P2.T5] The VaR backtest cutoff range is not symmetrical (even as the approximation is) https://trtl.bz/2wp7OVC
• [P2.T5] Thank you @emilioalzamora1 for an answer to "How to scale absolute VaR?" https://trtl.bz/2I0Q6Je
• [P2.T6] Thank you again @emilioalzamora1 for answering "What is CDS versus TRS versus CLN?" https://trtl.bz/2I7Lm81
• [P2.T6*] Why does the junior tranche risk decrease with higher default correlation https://forum.bionicturtle.com/threads/basket-tranches-value-and-risk.5901/
• [P2.T6] How does a yield increase impact the weighted average life (WAL)? https://forum.bionicturtle.com/threads/p2-t6-715-credit-derivatives-and-securitization.10638/
• [P2.T6] Tranches and prepayment risk https://trtl.bz/2wkEAXN
• [P2.T6] De Laurentis formulas are still incorrect in the source text (sigh) https://trtl.bz/2HXdSKo (thank you @Karim_B for more of your incredibly helpful time, again this week!)
• [P2.T6] Most of our simple credit models unrealistically assume independence (iid) so we can use the binomial https://trtl.bz/2wnGhUq
• [P2.T7] Is OpVaR UL or UL + EL? https://trtl.bz/2w9gZth
• [P2.T7] Assessing quality of risk measures, thank you @Rink https://forum.bionicturtle.com/threads/topic-assessing-the-quality-of-risk-measures.13846/
• [P2.T7] Your calculator can calculate binomial (pmf) probabilities; e.g., Pr(X = 10 | n = 250, p = 0.01) is given by 250 [2nd][nCr] 10 [×] (.01 ^ 10) [×] (.99 ^ 240) [×] 10000 = 1.9629 https://trtl.bz/2I9HZNP .https://trtl.bz/2I9HZNP
• [P2.T7] Liquidity horizons in the Fundamental Review of the Trading Book (FRTB) https://trtl.bz/2InBZkC
• [P2.T8] Ang's beta is not the CAPM beta https://trtl.bz/2HMn5os
• [P2.T9] Do we use Malz or Cont's liquidity cost adjustment? https://trtl.bz/2IcxQAc

Regulatory and banking

• The Biggest Banks Are Gobbling Up Deposits. Here’s Who’s Not (JPMorgan Chase, BofA, Wells Fargo see gains; Fifth Third, Comerica and Regions Financial lose ground) https://www.wsj.com/articles/the-biggest-banks-are-gobbling-up-deposits-heres-whos-not-1524999612
• Federal Reserve issues FOMC statement https://www.federalreserve.gov/newsevents/pressreleases/monetary20180502a.htm
• Recommendations [part of the Financial Stability Board’s, FSB, measures to reduce misconduct risk] for consistent national reporting of data on the use of compensation tools to address misconduct risk https://trtl.bz/2wkYZvJ
• How Morgan Stanley Got Its Mojo Back https://www.wsj.com/articles/how-morgan-stanley-got-its-mojo-back-1525359327

Technology, including FinTech and Cybersecurity

• Cybersecurity Risk Management Oversight https://corpgov.law.harvard.edu/2018/04/30/cybersecurity-risk-management-oversight/
• Why the Rest of the World Can’t Free Ride on Europe’s GDPR Rules https://hbr.org/2018/04/why-the-rest-of-world-cant-free-ride-on-europes-gdpr-rules

Exams, Financial Associations (GARP, FRM, CFA Institute) and Careers, including CRO Interviews

• [GARP] AI Risks, Solutions, and the Future of the Risk Profession (Risk managers will not necessarily have to be data scientists but will have to upskill) https://trtl.bz/2HVIz2C
• [GARP] SEC Advances Search for a Chief Risk Officer (Chairman Clayton says there will be additional hiring and emphasizes cybersecurity) https://trtl.bz/2HZ0wNq “Upskilling is the best way for risk leaders to ensure that their own jobs continue to add value as AI advances. No one expects, at least in the near term, practical AI to eliminate the kind of judgment calls that only an experienced professional can make. But as AI automates analytical grunt work, risk leaders will need to know how to guide the models and interpret their results.”
• Large New York Money Manager AllianceBernstein Is Moving to Nashville https://trtl.bz/2HVDFm4
• What I’ve Learned Working In Finance For Six Years (Hint: It Applies To Everyone) https://trtl.bz/2Ip463b
• Legendary Investment Banker Richard Jenrette Left These 24 Rules for Success https://trtl.bz/2HY222D
• Architect of Greatest Trade Ever Hit by Losses, Redemptions Postcrisis [John Paulson] https://trtl.bz/2HUuzG1

Other

• The Man Who Cracked the Lottery (https://trtl.bz/2HVulys) and The Gambler Who Cracked the Horse-Racing Code (https://trtl.bz/2HVDjfe)
• Inside the World’s Most Elite (and Secret) Traders’ Club [ISDA Master Agreement] https://trtl.bz/2IjskeR
• Distinction Bias: Why You Make Terrible Life Choices https://trtl.bz/2HVQzAG
• America’s Mortgage Market Is Still Broken https://www.bloomberg.com/view/articles/2018-04-30/america-s-mortgage-market-is-still-broken
• [CFA Institute] Book Review: Financial Behavior https://blogs.cfainstitute.org/investor/2018/05/04/book-review-financial-behavior/
• The Rule of 72 https://betterexplained.com/articles/the-rule-of-72/

Risk Foundations (FRM P1.T1)

• Is Loss Aversion a Myth? https://behaviouralinvestment.com/2018/05/01/is-loss-aversion-a-myth/
• A Different Way To Think About Drawdown (Geometric Calmar Ratio) https://trtl.bz/2I0hon5
• [SOA] 11th Annual Survey Of Emerging Risks https://www.soa.org/research-reports/2018/11th-emerging-risk-survey/
• Strong culture supports risk management, auditor reminds agencies https://www.themandarin.com.au/9183...rts-risk-management-auditor-reminds-agencies/

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

• Volatility Strikes Back https://blogs.imf.org/2018/05/03/volatility-strikes-back/
• Does the VIX Need Fixing? Sure Looks That Way https://trtl.bz/2IrFpTo
• The Real Risk Is Believing That Volatility Is Risk https://www.wsj.com/articles/the-real-risk-is-believing-that-volatility-is-risk-1525106959

Operational risk, including Legal risk (FRM P2.T7)

• Using Catastrophe Models to Promote Resilience http://www.rms.com/blog/2018/05/04/using-catastrophe-models-to-promote-resilience/
• Geocoding: The Underappreciated Science of Catastrophe Modeling http://www.rms.com/blog/2018/05/03/geocoding-the-underappreciated-science-of-catastrophe-modeling/
• Modeling Fundamentals: Understanding Uncertainty https://trtl.bz/2IltbvG

Current issues (FRM P2.T9)

• [BIS] Despite ongoing progress, some central counterparties still lag on risk management and recovery planning https://www.bis.org/press/p180503.htm