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WIFE Week in Risk (ending April 23rd)

David Harper CFA FRM

David Harper CFA FRM
Staff member
In the forum this week (selected only)
Bank and banking
Political and regulatory risk, including Systemic Risk (including BIS)
International and Economic
Natural Science, including Climate and Energy
Exams, Financial Associations (GARP, FRM, CFA Institute) and Careers, including CRO Interviews
Books and Courses (including Journal/SSRN)
  • One of the Best Investment Books I’ve Read in a While ( … is Bull: A History of the Boom and Bust, 1982-2004 says Ben Carlson) http://awealthofcommonsense.com/2017/04/one-of-the-best-investment-books-ive-read-in-a-while/ Book is here http://amzn.to/2pNzps1
  • Teaching Statistics: A Bag of Tricks (second edition) by Andrew Gelman and Deborah Nolan http://andrewgelman.com/2017/04/20/teaching-statistics-bag-tricks-second-edition/ This should be good (the first edition is great but was written 15 years ago)!
  • Real-Time Risk by Aldridge & Krawciw (brief review by Brenda Jubin) http://readingthemarkets.blogspot.com/2017/03/aldridge-krawciw-real-time-risk.html “Realk-time risk by Irene Aldridge and Steve Krawciw is in large measure an advertisement for AbleMarkets, of which the authors are, respectively, president and CEO. That said, and it is a major caveat, the book provides insight into the often overlooked, or inaccessible, world of market microstructure.”
  • The Second Leg Down by Hari P. Krishnan (brief review by Brenda Jubin) http://readingthemarkets.blogspot.com/2017/04/krishnan-second-leg-down.html “Since options eventually expire, the question for a hedger is how far out in time to go … It is wise to avoid those options that many institutions tend to favor--the 2% OTM 3 month to maturity puts. They are not a Goldilocks solution but rather the worst of both worlds … [the book’s] real value comes from his sophisticated analysis of such critically important concepts as volatility and skew. This makes the book useful not only to hedgers but even to speculative options traders.” Book is here http://amzn.to/2ojrO7D
  • How to measure risk in the real world (In ‘The End of Theory’, Richard Bookstaber argues for an economics that is more than a numbers game) http://trtl.bz/2oWBTpS (ft.com) “Bookstaber, who ran risk management for Morgan Stanley, Salomon Brothers and the hedge fund Bridgewater before he decamped to Washington and later the University of California, believes those emotions and systemic interactions are still not properly accounted for in the neoclassical economic theory that underpins most risk models today.” Book is here http://amzn.to/2oCovU8
Personal finance
  • Steve Ballmer’s stealth startup (USAFacts is a new data-driven portrait of the American population, our government’s finances, and government’s impact on society) https://www.usafacts.org/
  • Pool-landia (For 70 years, Iceland has kept afloat the idea that mandatory swimming lessons save lives, but the policy doesn’t hold water) https://www.hakaimagazine.com/article-long/pool-landia
  • Our Puny Human Brains Are Terrible at Thinking About the Future http://trtl.bz/2oAA5iS (slate.com) by Jane McGonigal, the author of SuperBetter (http://amzn.to/2pReODi)
  • Creating Simple Rules for Complex Decisions (hbr.org) https://hbr.org/2017/04/creating-simple-rules-for-complex-decisions Not profound, they just use multivariate regression and rescale the coefficients per their ”select-regress-and-round” approach, but it is intuitive! “Recognizing the real-world constraints that managers and engineers face, we developed a simple three-step procedure for creating rubrics that improve yes-or-no decisions. These rubrics can help judges decide whom to detain, tax auditors whom to scrutinize, and hiring managers whom to interview. Our approach offers practitioners the performance of state-of-the-art machine learning while stripping away needless complexity.” Their academic paper is here http://trtl.bz/2pb7hkP
  • Amazon Strategy Teardown: Building New Business Pillars In AI, Next-Gen Logistics, And Enterprise Cloud Apps https://www.cbinsights.com/blog/amazon-strategy-teardown
  • A look back at housing’s best year in a decade http://lenkiefer.com/chartbooks/dec2016/index.html Amazing dataviz!
Enterprise risk management (ERM) including Governance
  • PwC’s 2017 Risk in review study http://www.pwc.com/us/en/risk-assurance/risk-in-review-study.html The Front Liners “take a more rigorous approach to risk management” including (i) Risk appetite or tolerance has been defined across a number of key risk categories [69%], (ii) They take their defined risk appetite into account when making business decisions [66%], (iii) Their company has a well-defined risk appetite statement and framework that is clearly communicated [65%], (iv) They have a formal process to aggregate risk across the company and review results against their defined risk appetite [61%], and (v) They effectively monitor their risk appetite by using key risk indicators [57%]. Survey report of > 1,500 corporate officers across 30 industries in 80 countries is here http://trtl.bz/2017-PwC-Risk-Review
  • Deloitte’s 2016 Board Practices Report (Topics include Board refreshment and composition; Risk and strategic oversight; Audit committee practices; Shareholder rights, engagement, and activism; Cybersecurity; and Top areas of board focus) http://trtl.bz/2ojOjcp
Financial reporting, including Accounting and Audit
  • Faulty Profit Disclosures Are Making M&A Deals Risky, AIG Says https://www.bloomberg.com/news/arti...risky-amid-faulty-profit-disclosures-aig-says “A fourth of all policies written on deals topping $1 billion led to a claim, AIG said … Errors in financial data, such as undisclosed liabilities, misstatement of inventories and overstatement of profits, were the most common cause of claims, AIG’s study showed. Legal compliance issues came in at No. 2, while tax-related breaches and intellectual-property questions were also listed.”
Case Studies and Companies, including Strategic or Reputation risk
  • [GARP] Breakdown and Repair: The Wells Fargo Reputational Crisis and Its Aftermath (How failures of culture and risk management contributed to the cross-selling scandal, and the long road to recovery that lies ahead) http://trtl.bz/2oBgvUj
  • Serious design, construction and maintenance defects doomed Oroville Dam, report says (78 page Root Cause Analysis) http://trtl.bz/2oxSyNH
  • Pearl Meyer Quick Poll: Retail Banking Incentive Plan Survey http://trtl.bz/2q5hixh “Our recent Pearl Meyer Quick Poll on retail incentive plans in the banking community was designed to examine how banks are responding to the Wells Fargo scandal and the fraud that occurred based on that organization’s program.”
  • Theranos Secretly Bought Outside Lab Gear and Ran Fake Tests, Court Filings Allege https://www.wsj.com/articles/theran...-gear-ran-fake-tests-court-filings-1492794470
Risk Foundations (FRM P1.T1)
  • 2017 The State of Risk Oversight: An Overview of Enterprise Risk Management Practices (8th Edition) by the ERM Initiative in the Poole College of Management at North Carolina State University in conjunction with the American Institute of Certified Public Accountants (AICPA) http://trtl.bz/2017-Poole-State-Risk
  • The Active Equity Renaissance: The Rise and Fall of modern portfolio theory (MPT) https://blogs.cfainstitute.org/inve...-equity-renaissance-the-rise-and-fall-of-mpt/ Super short history and then this “After decades, there is little evidence to support MPT. It is time to move on. There is an alternative way to view securities markets, their movements, and their participants: behavioral finance.” leads to some great comments
  • The Active Equity Renaissance: New Frontiers of Risk https://blogs.cfainstitute.org/inve...ive-equity-renaissance-new-frontiers-of-risk/ “One modern portfolio theory (MPT) pillar that is unquestionably broken is the use of volatility, specifically standard deviation, as a measure of risk. This initial error in MPT’s development is a major contributor to active investment management underperformance.”
Quantitative Analysis (FRM P1.T2)
Financial Markets and Products, including Interest Rates, Commodity Risk, and Foreign Exchange (FX)(FRM P1.T3)
Valuation and Risk Models, including Country risk (FRM P1.T4)
  • The fearless market ignores perils ahead http://trtl.bz/2oWvTgv (ft.com Big Read) “Vix is calculated using the prices of S&P 500 puts and calls that mature in roughly the next 30 days. It is structured so that if investors expect S&P 500 fluctuations to average 1 per cent a day for the next month, the Vix level is about 20 — roughly its long-run average — while 40 implies 2 per cent moves. This year it has averaged a depressed 11.7. No one can actually trade the “spot” or current level of Vix, as it merely reflects a bundle of underlying derivatives. But CBOE has nurtured a derivatives market based on the index itself. From 2004 investors could trade Vix futures — another popular derivative instrument — and from 2006 they could trade Vix options.” Here is the Vix White Paper (methodology) http://trtl.bz/2pUDiOH
  • In Defense of Fairness Opinions: An Empirical Review of Ten Years of Data https://corpgov.law.harvard.edu/201...ons-an-empirical-review-of-ten-years-of-data/
  • How Credit Ratings Affect Bond Valuations http://blog.aaii.com/how-credit-ratings-affect-bond-valuations/
Credit risk (FRM P1.T6)
Investment risk, including Pensions (FRM P1.T8)
Current issues (FRM P2.T9)
  • Want To Be a VC? Just Flip a Bitcoin http://trtl.bz/2oUGlp0 Creative disruption! Instead of investors paying cash in exchange for stock, investors pay bitcoin in exchange for a digital token that is sort of a currency and sort of equity but neither exactly. “The Initial Coin Offering is the Bitcoin world's latest attempt to re-create Wall Street in its own image. Rather than exchanging dollars for shares, which usually come with a claim on profits and voting rights, an ICO sees the exchange of Bitcoin (or a rival like Ether) for an issuer's newly minted digital currency.”
  • The Blockchain Could Change the Backbone of the Stock Market http://www.visualcapitalist.com/blockchain-backbone-stock-market/
  • The Federal Reserve Bank of Atlanta’s Recession to Recovery: A Decade in Perspective https://www.frbatlanta.org/economy-matters/annual-report/2016.aspx
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