Our members in the forum were very busy this past week discussing some great FRM concepts! We are also continuing our Daily Practice Questions each week, and David has chosen some really great risk articles for you!
FRM Forum Q&A (selected)
We are almost done with a fresh set of T1 (Foundations) global topic review. Last week we added six new questions on CAPM and RAPM (highly testable concepts) https://www.bionicturtle.com/forum/threads/p1-t1-609-capital-asset-pricing-model-capm-topic-review.9786/ and https://www.bionicturtle.com/forum/threads/p1-t1-610-risk-adjusted-performance-measures-topic-review.9798/
We started the set for 2016 Current Issues https://www.bionicturtle.com/forum/threads/p2-t9-600-forging-best-practices-in-risk-management-glasserman.9790/ and https://www.bionicturtle.com/forum/threads/p2-t9-601-case-studies-on-disruption-during-the-crisis-yorulmazer.9802/
Isn’t CCP loss mutualization both a benefit and a drawback? https://www.bionicturtle.com/forum/threads/p1-t3-600-central-clearing-gregory.9257/#post-44508 I am a huge fan of Gregory’s books, but one weakness is their editorial disorganization: certain concepts are dispersed, sometimes redundantly, throughout the book
We aren’t really sure exactly what Tuckman means when he writes “Investors tend to find zeros less attractive in lower-interest-rate markets because compounding is not as meaningful as when rates are higher.” https://www.bionicturtle.com/forum/threads/l1-t3-197-corporate-bond-security.4730/#post-44531
Independence versus correlation and covariance https://www.bionicturtle.com/forum/threads/correlation-vs-covariance.9766/ This is one of the most fundamental concepts in Topic 2 (quantitative methods). Be sure to understand what “dependence” means, and why “correlation” is linear.
A lot of conversation about coherence and spectral risk measures (ES is but VaR is not) https://www.bionicturtle.com/forum/threads/l2-t5-72-estimating-coherent-risk-measures.3657/ and https://www.bionicturtle.com/forum/threads/l2-t5-70-expected-shortfall.3651/page-3#post-44689 and https://www.bionicturtle.com/forum/threads/p1-t4-29-limitations-of-value-at-risk-var-coherent-risk-measures.5690/page-2
Great explanation of copulas by member, ami44: https://www.bionicturtle.com/forum/threads/l2-t5-83-copulas.3839/#post-44611
Suggestions for those interested in learning more about financial modeling https://www.bionicturtle.com/forum/threads/financial-modeling.9613/page-2
Meissner’s text has an error with respect to concordant and discordant pairs https://www.bionicturtle.com/forum/threads/errors-found-in-study-notes-p2-t5-market-risk.8758/#post-44681
Are jumbo rates necessarily higher than conventional rates? https://www.bionicturtle.com/forum/threads/p1-t3-500-residential-mortgage-products-tuckman.8474/page-2#post-44636
Properties of variance that an FRM candidate must know https://www.bionicturtle.com/forum/threads/variance-property-question.9787/
Going deeper into Malz’ credit value at risk (CVaR) as a function of portfolio granularity https://www.bionicturtle.com/forum/threads/p2-t6-309-default-correlation-malz-sections-8-1-and-8-2.6955/page-2#post-44705
Examples of exogenous and endogenous liquidity https://www.bionicturtle.com/forum/threads/exogenous-liquidity-vs-endogenous-liquidity.9310/#post-44703
An FRM candidate must know how to calculate an (linear) interpolation https://www.bionicturtle.com/forum/threads/p1-t2-314-millers-one-and-two-tailed-hypotheses.7118/
Mapping a currency forward explained by member, brian.field, and why exactly is it called a “delta-normal” value at risk? https://www.bionicturtle.com/forum/threads/delta-normal-method-to-calculate-var-for-linear-derivatives.9804/
Low interest rates
The Federal Reserve’s Monetary Policy Toolkit: Past, Present, and Future by Janet Yellen http://www.federalreserve.gov/newsevents/speech/yellen20160826a.htm Here is the symposium https://www.kansascityfed.org/publications/research/escp/symposiums/escp-2016
Fed Chairwoman Janet Yellen Sees Stronger Case for Interest-Rate Increase http://www.wsj.com/articles/fed-chairwoman-janet-yellen-sees-stronger-case-for-interest-rate-increase-1472220004
Central Bankers’ Main Challenge: Staying Relevant http://www.wsj.com/articles/central-bankers-main-challenge-staying-relevant-1472056567
Banks
America’s Biggest Banks Have a New Name for Their Venmo-Killer: Zelle http://www.wsj.com/articles/americas-biggest-banks-have-a-new-name-for-their-venmo-killer-zelle-1472047872
Thought Volcker Rule Went Too Far? There’s More Coming for Banks http://www.bloomberg.com/news/articles/2016-08-26/thought-volcker-rule-went-too-far-there-s-more-coming-for-banks “The Federal Reserve and other agencies are poised to issue a long-overdue report required by the law that lays out recommendations beyond the Volcker Rule to prevent financial firms from triggering an economic crisis … The document will include plans for restricting banks’ investments in copper and hard-to-value assets, said one of the people.”
Implementation of Basel standards – A report to G20 Leaders on implementation of the Basel III regulatory reforms http://www.bis.org/bcbs/publ/d377.htm From the summary: “The Basel III capital and liquidity standards have generally been transposed into domestic regulations within the time frame set by the Basel Committee. Further progress has been made towards implementing the Basel III framework since last year’s report. Its key components, including the risk-based capital standards and the Liquidity Coverage Ratio (LCR), are now enforced by all member jurisdictions. Also, all member jurisdictions that are home jurisdictions to global systemically important banks (G-SIBs) have the G-SIB framework in force. Further, member jurisdictions continue their efforts to adopt other Basel III standards, including the leverage ratio and the Net Stable Funding Ratio (NSFR). Non-Basel Committee jurisdictions also report substantial progress in adopting the framework’s core elements.”
Opaque Assets at Europe Investment Banks Fuel Capital Doubts http://www.bloomberg.com/news/articles/2016-08-21/european-investment-banks-opaque-assets-fuel-capital-concerns “Banks split assets into three categories: Level 1 for those with transparent prices, like stocks; Level 2 for assets where some external data is available, including over-the-counter derivatives such as interest-rate swaps; and Level 3 for the most illiquid. Banks value these using their own models based on historical data and risk assumptions.“
Risk
Deloitte’s C-Level, Client-Facing Risk Executive (CRO) http://www.garp.org/#!/risk-intelligence/detail/a1Z40000003K0agEAC/deloitte-c-level-client-facing-risk-executive “Has the stature of risk management changed since the global economic crisis? It’s very different today than it was in 2007. It is much more prevalent today for a CRO to have a direct reporting line to the CEO. And you see the rise of risk officers and board committees across industry sectors. I believe the financial crisis drove these changes. Senior leaders realized that risk wasn’t positioned in the right way, with a seat at the executive table to help make strategic decisions.”
Benchmarking Operational Risk Models (Federal Reserve Banks) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2829267
Risk Parity isn’t the Problem, it’s the Solution http://gestaltu.com/2016/08/risk-parity-isnt-problem-solution.html/ “Risk parity is characterized by three primary features. First of all, Risk Parity implementations almost always invest in a diverse basket of asset classes which react in different ways to various economic environments … Second, Risk Parity is about balancing risk. To balance risk, high risk assets like equities must necessarily receive a smaller allocation in portfolios than lower risk assets like bonds … The third distinguishing feature of Risk Parity strategies is that they are usually managed to a target volatility, so that to the greatest degree possible investors receive the experience they signed up for, even during the most hostile market conditions.”
Riskalyze.com case study for United Planners Financial Services https://www.riskalyze.com/casestudies/up Here is some information on their questionnaire which apparently produces a single risk number http://kb.riskalyze.com/category/24-risk-questionnaire
Pensions
In Scramble for Yield, Pension Funds Will Try Almost Anything http://www.wsj.com/articles/pensions-play-with-puts-for-protection-1471777202
Puerto Rico’s Pensions: $2 Billion in Assets, $45 Billion in Liabilities http://www.wsj.com/articles/puerto-ricos-pensions-2-billion-in-assets-45-billion-in-liabilities-1472156434
Pensions and bonds: the problem explained (Bond mathematics and the scale of pension deficits) https://ig.ft.com/sites/pensions-interestrates-explainer/ “For more than three decades, bond yields — which follow interest rates — around the world have decreased. The ten-year US Treasury yield — which was as high as 16 per cent in 1981 — is now just about 1.5 per cent.”
Natural Disasters (including Weather and Climate Change)
Biggest US pension fund calls for G20 action on climate change (Calpers joins more than 120 investors urging ratification of Paris climate change agreement) https://www.ft.com/content/16fa4efa-694f-11e6-a0b1-d87a9fea034f
Planning for Extreme Floods http://www.riskmanagementmonitor.com/planning-for-extreme-floods/ Here is FM Global’s (interesting!) report on The Impact of Climate Change on Extreme Precipitation and Flooding http://trtl.bz/fm-global-impact-precipitation
The New Normal is No Normal http://aquaticinformatics.com/blog/hydrology/new-weather-normal/
The science of earthquake prediction – explained https://www.weforum.org/agenda/2016/08/the-science-of-earthquake-prediction-explained
Regulations
Business-Drone Rules to Take Effect http://www.wsj.com/articles/business-drone-rules-to-take-effect-1472413016
Regulators Approve Hemp Derivatives Exchange (CFTC allows Seed SEF to register a trading platform for industrial hemp derivatives) http://www.wsj.com/articles/regulators-approve-hemp-derivatives-exchange-1472056617
Forecasting
Minds and machines: The art of forecasting in the age of artificial intelligence http://dupress.com/articles/art-of-forecasting-human-in-the-loop-machine-learning/
Forecasting Fixed-Income Default Rates https://blogs.cfainstitute.org/investor/2016/08/25/forecasting-fixed-income-default-rates/
Other
Visualizing Residuals https://drsimonj.svbtle.com/visualising-residuals
The Sinister Side of Cash http://www.wsj.com/articles/the-sinister-side-of-cash-1472137692 “There is little debate among law-enforcement agencies that paper currency, especially large notes such as the U.S. $100 bill, facilitates crime: racketeering, extortion, money laundering, drug and human trafficking, the corruption of public officials, not to mention terrorism … Cash is also deeply implicated in tax evasion, which costs the federal government some $500 billion a year in revenue.”
PricewaterhouseCoopers Settles $5.5 Billion Crisis Era Lawsuit (Bankruptcy trustee sued accounting firm over failure to catch fraud at Taylor Bean)http://www.wsj.com/articles/pricewaterhousecoopers-settles-5-5-billion-crisis-era-lawsuit-1472226383 “At issue in the case, one of the few allegations of wrongdoing during the financial crisis that has reached a courtroom, was a fundamental question in accounting: How much responsibility do auditors have for catching fraud? … The collapse of Colonial, which had $25 billion in assets and $20 billion in deposits, was the biggest bank failure of 2009. The FDIC estimates Colonial’s collapse will cost its insurance fund $5 billion, making it one of the nation’s most expensive bank failures.”
Real Estate Strikes Out on Its Own in the Stock Indexes www.nytimes.com/2016/08/27/your-money/real-estate-strikes-out-on-its-own-in-the-stock-indexes.htmlReal Estate is moving out of the Financial sector and will be added as its own new sector (the 11th) in the Global Industry Classification (GICS) structure. Here is the revised GICS classification map (Excel spreadsheet) http://trtl.bz/GICS-map
Suits join the hoodies with blockchain push (Cost savings and low returns drive lenders into working with system underpinning bitcoin)https://www.ft.com/content/be30b74c-6a01-11e6-ae5b-a7cc5dd5a28c “The latest example of big banks organizing themselves to exploit the potential of blockchain technology came this week with the announcement that four big lenders have teamed up to develop a utility settlement coin — a new form of digital cash. The four banks — UBS, Santander, Deutsche Bank and BNY Mellon — stress that they are not creating a new cryptocurrency. Instead, the system they are developing uses blockchain technology to create different coins that are each directly convertible into existing currencies deposited at central banks. In essence, it is a way of putting dollars, euros and pounds on the blockchain.” Fintech 2.0 Report here http://trtl.bz/fintech20-santander
How leading institutions are changing the rules on portfolio construction http://trtl.bz/mckinsey-rules-portfolio-construction “By far the most important change, however, is coming to the 80/20 alpha/beta management approach. Institutions plan to change those proportions by focusing on building portfolio-construction capabilities, given that these drive the vast majority of long-term returns. The most striking finding from our research is that almost 80 percent of institutions plan to reinforce their central portfolio-construction team, with most expecting to add three to five people. In interviews, leaders also said they expect a more dynamic decision-making process structured around top-down economic scenarios, which they hope will provoke more debate and move them away from a rote approval of strategic asset allocation by the executive committee and board.”
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