05
Feb
Week in risk (2/5/2010)
by David Harper, CFA, FRM, CIPM
In the forum:
- Jensen’s alpha versus CAPM
- Typical practice question on arbitrage with spreadsheet calculations here
- My 7-min video on How to calculate simple historical volatility. This is the simple version of volatility the underlies much of a quant finance introduction
Stuff in the world (that may interest an FRM candidate):
- Excellent, highly recommended summary (my annotated here) of Basel’s (BIS) recent proposals in regard to capital (Tier 1/2/3) and liquidity standards
- Carmen Reihhart on (co-author of FRM assigned This time is Different) on U.S. Debt: “There is still a lot of serious deleveraging that lies ahead of us
- A wew website @ http://www.bankdirectorsdesktop.org/index.cfm with some interesting free tutorials
- Did Fair-Value Accounting Contribute to the Financial Crisis? “it is unlikely that fair-value accounting contributed to the severity of the financial crisisin a major way, either by increasing banks’ leverage in the boom or by substantiallyamplifying banks’ problems in the downturn” SSRN
- Sensitivity versus scenario analysis: “A sensitivity analysis, otherwise known as a what-if analysis, in financial modeling refers to the process of tweaking one key input or driver in a financial model, and seeing how sensitive the model is to the change in that variable. Scenarios, on the other hand, involve listing a whole series of inputs and changing the value of each input for each scenario”
- Don van Deventer’s 12-part series on Yield Curve
- “S&P is one of 10 firms considered by the Securities and Exchange Commission to be "Nationally Recognized Statistical Rating Organizations" (NRSROs)…we believe rating mandates should be removed.” Why rating requirements don't make sense (WSJ)
- On Iceland’s default threat. According to Reinhart, Iceland has the steepest peak-to-trough equity price decline: –90% in 2007. See This Time is Different, Eight Centuries of Financial Folly (Reinhart & Rogoff, 2009)
- Two knock-on effects of reducing the lending base to meet capital requirements: (1) fire-sale externality (“the effect of the fire-sale is to reduce the value of the assets being sold, which will reduce the value of other banks' assets, placing their capital position in jeopardy.”) and (2) credit crunch externality (“If the bank needs to shrink its capital requirements it may do so by reducing lending to parties far removed from the initial problems”)
- Associate PRM Webinar Series
- Stulz on credit default swaps (CDS) and the crisis
Comments
Maybe also of interest an interview with professor Reinhart on EconTalk:
Carmen Reinhart of the University of Maryland talks with EconTalk host Russ Roberts about the ideas in her book This Time is Different: Eight Centuries of Financial Folly (co-authored with Kenneth Rogoff). They discuss the role of capital inflows in financial crises, the challenges of learning the right lessons, and what is generally true about financial crises over time and place. Reinhart applies these observations to the current crisis, discusses the possibility of the U.S. defaulting on its sovereign debt, and discusses the possibility of financial reforms that might make a difference.
http://www.econtalk.org/archives/2009/11/reinhart_on_fin.html
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