Bionic Turtle’s Week in Risk (ending February 12th)

New practice questions

• P1.T2.704. Forecasting volatility with GARCH (Hull) https://www.bionicturtle.com/forum/threads/p1-t2-704-forecasting-volatility-with-garch-hull.10166/
• P1.T2.705. Correlation (Hull) https://www.bionicturtle.com/forum/threads/p1-t2-705-correlation-hull.10173/

• P2.T8.701. Multifactor models (Andrew Ang) https://www.bionicturtle.com/forum/threads/p2-t8-701-multifactor-models-andrew-ang.10170/
• P2.T8.702. Macroeconomic risk factors including growth, inflation and volatility (Andrew Ang) https://www.bionicturtle.com/forum/threads/p2-t8-702-macroeconomic-risk-factors-including-growth-inflation-and-volatility-andrew-ang.10176/

In the forum this week (selected only)

• [T2 Time series] How can we interpret Diebold’s statement that “Lastly AR processes observed subject to measurement error also turn out to be ARMA processes.” https://www.bionicturtle.com/forum/threads/what-turns-a-process-to-be-arma.10174/#post-48078
• [T3 Markets] What is the Open Interest is the exchange has 1,000 open short and 1,200 open long positions? https://www.bionicturtle.com/forum/threads/l1-t3-150-definitions-futures-contracts.4411/#post-48038
• [CFA but also T4 Tuckman] How can we interpret this statement: “In general, for an upward-sloping yield curve, the immunization target rate of return will be less than the yield to maturity because of the lower reinvestment return. Conversely, a negative or downward-sloping yield curve will result in an immunization target rate of return greater than the yield to maturity because of the higher reinvestment return.” https://www.bionicturtle.com/bionic-turtles-week-risk-ending-february-5th/
• [T5 Term structure] The sqrt(Δt) in Tuckman’s interest rate models is the same square root rule that depends on i.i.d. variable (not normality) https://www.bionicturtle.com/forum/threads/l2-t5-45-multi-period-interest-rate-tree.3563/page-2#post-48034
• [T5 Implied volatility] Some intermediate discussion on implied volatility skew https://www.bionicturtle.com/forum/threads/p2-t5-410-implied-volatility-smile-and-the-implied-asset-distribution.7582/page-2#post-48018, and https://www.bionicturtle.com/forum/threads/l2-t5-08-greeks-and-volatility-smile.3387/page-2#post-47977 and, finally, a really good test of understanding is to ascertain whether Hull’s observation about the impact of a volatility on smile applies equally to a put option https://www.bionicturtle.com/forum/threads/p2-t5-411-implied-volatility-surface.7590/#post-47976

• [T6 Counterparty] A really simple example of how negative correlation confers the most netting benefit https://www.bionicturtle.com/forum/threads/p2-t6-324-impact-of-netting-on-exposure.7190/#post-48061
• [T6 Credit] We agree De Laurentis notation can be confusing (and it contains some errors) https://www.bionicturtle.com/forum/threads/p2-t6-705-logistic-regression-and-principal-component-analysis-pca-de-laurentis.10117/#post-48062
• [T6 Credit] Glad to see engagement with the linear discriminant analysis (LDA) example! https://www.bionicturtle.com/forum/threads/p2-t6-704-linear-discriminant-analysis-lda-according-to-de-laurentis.10112/
• [T7 Operational] How can a catastrophe bond hedge operational risk (FRM Handbook Example 25.13)? https://www.bionicturtle.com/forum/threads/cat-bonds-for-operational-risk-hedge.10163/
• [T7 Operational] What are the three most common distributions used to model operational risk frequency? https://www.bionicturtle.com/forum/threads/does-poisson-distr-require-n-large.10161/

Bank and banking

• Banks Are Finally Sprouting Anew in America (Eight groups have filed applications in recent months with FDIC to open new banks) https://www.wsj.com/articles/banks-are-finally-sprouting-anew-in-america-1486548000

• Biggest US banks have more than $120bn of ‘excess’ capital https://www.ft.com/content/dc7f7f66-ed83-11e6-930f-061b01e23655
• Bank of America testing completely automated branches http://www.charlotteobserver.com/news/business/banking/bank-watch-blog/article131267794.html

Political and regulatory risk, including Systemic Risk (including BIS)

• Basel IV: The Next Step for Capital Requirements by GARP http://www.garp.org/#!/risk-intelligence/credit/capital/a1Z40000003PDZYEA4
• A way to fight bank runs—and regulatory complexity http://review.chicagobooth.edu/public-policy/2017/article/way-fight-bank-runs—and-regulatory-complexity and interesting discussion by author et al on the Executive Order here at http://johnhcochrane.blogspot.in/2017/02/dodd-frank-reform.html
• Debating Whether Dodd-Frank Is Worth Saving https://www.bloomberg.com/view/articles/2017-02-07/tyler-cowen-and-noah-smith-debate-a-dodd-frank-rollback
• The Case for Including Capital Buffers in Stress Tests (Office of Financial Research) https://www.financialresearch.gov/from-the-management-team/2017/02/07/the-case-for-including-capital-buffers-in-stress-tests/

• Politics of products risk populist backlash (Consumer goods companies urged to take stand in increasingly politically sensitive market) https://www.ft.com/content/78a80154-ef0c-11e6-930f-061b01e23655

International

• Greece’s Never-Ending Fiscal Drama https://www.wsj.com/articles/greeces-never-ending-fiscal-drama-1486589512

Technology, including FinTech and Cybersecurity

• What is this Blockchain Thing? https://medium.com/@pullnews/what-is-this-blockchain-thing-a5d2abb99297#.sgr8wlpd3
• Scotiabank Deploys Deep Learning to Improve Credit Card Collections http://blogs.wsj.com/cio/2017/02/06/scotiabank-deploys-deep-learning-to-improve-credit-card-collections/ “The DeepLearning tool predicts possible delinquencies faster and suggests collection options based on the type of customer such as a forgetful payer. It analyzes individual customer behavior, looks for patterns and correlates it with other data pulled from the bank’s enterprise data lake. It then suggests the best time and method, such as email or text message, to reach credit card customers about payments.”
• Part 2: Understanding the Blockchain https://medium.com/@moskovich/part-2-understanding-the-blockchain-7c5af7e1e02e#.pt5b4s37i
• The Lykke Platform https://medium.com/@pullnews/the-lykke-platform-9bc2b7785da2#.j8z80anuk
• Blockchain: The Invisible Technology That’s Changing the World http://www.pcmag.com/article/351486/blockchain-the-invisible-technology-thats-changing-the-wor

Natural Science, including Climate and Energy

• A Crack in an Antarctic Ice Shelf Grew 17 Miles in the Last Two Months https://www.nytimes.com/interactive/2017/02/07/science/earth/antarctic-crack.html?_r=0

• EF3 Tornado Rips Through New Orleans East, Injuring 25 https://www.wunderground.com/blog/JeffMasters/ef3-tornado-rips-through-new-orleans-east-injuring-25
• We need to listen to the fish http://xlcatlin.com/fast-fast-forward/articles/xl-catlin-ad_listen-to-the-fish

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

• Final call for the research analyst? (Under pressure to cut costs and meet new rules, banks and brokerages are shedding jobs) https://www.ft.com/content/85ee225a-ec4e-11e6-930f-061b01e23655 “Yet even with more innovation, the economics of sellside research will remain challenging. Money managers have historically rewarded banks and brokerages with research they liked with trading business, which often came with fat commissions. Nowadays, electronic markets coupled with regulatory requirements for asset managers to always seek the best-possible execution have frayed this bundled approach.“

• Sellside research would be little missed (Surveys have found that analysts routinely overhype the companies they cover) https://www.ft.com/content/0609b1b4-ec51-11e6-ba01-119a44939bb6
• The Next Big Blue-Collar Job Is Coding https://www.wired.com/2017/02/programming-is-the-new-blue-collar-job
• Financial Market History: Reflections on the Past for Investors Today by CFA Institute Research Foundation http://www.cfapubs.org/toc/rf/2016/2016/3
• Financial advisor now among the toughest jobs to fill http://www.cnbc.com/2017/02/06/financial-advisor-now-among-the-toughest-jobs-to-fill.html

Books and Courses (including Journal/SSRN)

• Two reviews of Black Edge (Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street Black): An Insider-Trading Tale That Reads Like a Thriller https://www.nytimes.com/2017/02/07/books/review/black-edge-sheelah-kolhatkar.html and: How Steven Cohen survived and insider trading scandal https://www.ft.com/content/efda2ca2-ec69-11e6-930f-061b01e23655
• Announcing My New Book: Organizational Alpha by Ben Carlson http://awealthofcommonsense.com/2017/02/announcing-my-new-book-organizational-alpha/ I am looking forward to this, Ben Carlson is always smart. Excerpt here at http://ritholtz.com/2017/02/organizational-alpha/
• Announcing the release of my e-book: Introduction to Empirical Bayes by David Robinson http://varianceexplained.org/r/empirical-bayes-book/
• The Cure for Catastrophe: How We Can Stop Manufacturing Natural Disasters https://www.wunderground.com/blog/JeffMasters/the-cure-for-catastrophe-how-we-can-stop-manufacturing-natural-disast Review of: The Cure for Catastrophe: How We Can Stop Manufacturing Natural Disasters here at http://amzn.to/2kndO61

Data science (primarily R), including Alternative Data

• Code-Dependent: Pros and Cons of the Algorithm Age http://www.pewinternet.org/2017/02/08/code-dependent-pros-and-cons-of-the-algorithm-age/
• ModernDive: A free introduction to statistics and data science with R http://blog.revolutionanalytics.com/2017/02/moderndive.html

Financial reporting, including Accounting and Audit

• What LBO modeling suggests about the deductibility of interest expense https://ftalphaville.ft.com/2017/02/06/2183520/what-lbo-modeling-suggests-about-the-deductability-of-interest-expense/
• Alphabet (Google) opts to spell out its stock options https://www.ft.com/content/858d9b62-eeef-11e6-ba01-119a44939bb6

Risk Foundations (FRM P1.T1)

• McKinsey on Risk http://www.mckinsey.com/business-functions/risk/our-insights/mckinsey-on-risk

• The current state of risk management https://normanmarks.wordpress.com/2017/02/11/the-current-state-of-risk-management/

Quantitative Analysis (FRM P1.T2)

• The What does not kill my statistical significance makes it stronger fallacy http://andrewgelman.com/2017/02/06/not-kill-statistical-significance-makes-stronger-fallacy/ “In short, conditional on statistical significance at some specified level, the noisier the estimate, the higher the Type M and Type S errors. Type M (magnitude) error says that a statistically significant estimate will overestimate the magnitude of the underlying effect, and Type S error says that a statistically significant estimate can have a high probability of getting the sign wrong.”

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

• Is a strong dollar better than a weak dollar? http://marginalrevolution.com/marginalrevolution/2017/02/strong-dollar-better-weak-dollar.html
• The dollar: an orderly or disruptive appreciation? https://www.ft.com/content/081fca06-ed19-11e6-930f-061b01e23655

• The Perils of Shorting http://beta.morningstar.com/articles/792939/the-perils-of-shorting.html
• The World According to a Free-Range Short Seller With Nothing to Lose https://www.bloomberg.com/news/features/2017-02-09/the-world-according-to-free-range-short-seller-mark-cohodes

Valuation and Risk Models, including Country risk (FRM P1.T4)

• January 2017 Data Update 9: Dividends and Buybacks (Professor Aswath Damodaran’s http://aswathdamodaran.blogspot.com/2017/02/january-2017-data-update-9-dividends.html

Credit risk (FRM P1.T6)

• A Primer on Collateralized Loan Obligations (CLOs) by Morgan Stanley via FT’s long room http://trtl.bz/2ldowB1

• Everyone Is Suddenly Worried About This U.S. Mortgage-Bond Whale https://www.bloomberg.com/news/articles/2017-02-06/the-mortgage-bond-whale-that-everyone-is-suddenly-worried-about

Investment risk, including Pensions (FRM P1.T8)

• Factor Investing is more art, and less science (Factors included because of the new Andrew Ang assignments!) http://blog.alphaarchitect.com/2017/02/03/factor-models-are-more-art-and-less-science/#gs.xL3zKus
• A Smoother Path to Outperformance with Multi-Factor Smart Beta Investing https://www.researchaffiliates.com/en_us/publications/articles/594-a-smoother-path-to-outperformance-with-multifactor-smart-beta-investing.html

• Factor Investing and Asset Allocation: A Business Cycle Perspective http://www.cfapubs.org/toc/rf/2016/2016/4
• Short-Run Effects of Lower Productivity Growth: A Twist on the Secular Stagnation Hypothesis https://piie.com/publications/policy-briefs/short-run-effects-lower-productivity-growth-twist-secular-stagnation
• Demographic trends are a long-term challenge for markets (Effects of ageing are a boon for fixed income and dividend-paying equities) https://www.ft.com/content/bfeb773e-ea21-11e6-967b-c88452263daf “The global economy has now passed an important tipping point. For the first time in recorded history, children under the age of five no longer outnumber those aged 65 and above. We have arrived at peak child.”
• Silicon Valley Hedge Fund Takes On Wall Street With AI Trader https://www.bloomberg.com/news/articles/2017-02-06/silicon-valley-hedge-fund-takes-on-wall-street-with-ai-trader
• Watch What Indexing Does for Public Pensions https://www.bloomberg.com/view/articles/2017-02-10/watch-what-indexing-does-for-public-pensions

Current issues (FRM P2.T9)

• Decade After Crisis, No Resolution for Fannie and Freddie https://www.nytimes.com/2017/02/07/business/dealbook/decade-after-crisis-no-resolution-for-fannie-and-freddie.html
• The losers from credit crunches http://voxeu.org/article/losers-credit-crunches