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WIFE Week in Risk (ending August 14th)

David Harper CFA FRM

David Harper CFA FRM
Staff member
In our FRM Forum (forum activity continues to grow, this is a small subset of some shares from the last week)
Low interest rates (This remains the major story with daily coverage. David selected the following because he believed that either have helpful insights and/or a linkage to an FRM concept; e.g., pull-to-par, negative convexity at low yield, maturity transformation at bank. Emphasis ours)
  • Bond Markets are Growing Ever More Bizarre http://www.wsj.com/articles/bond-markets-growing-ever-more-bizarre-1470834433 "A traditional zero-coupon bond is sold at a deep discount to face value ... The new mutation still pays no interest. But buyers get no uplift over time either because, with yields in negative territory, these securities are being priced at more than face value. The pull to par has become a drag: a buy-and-hold investor is guaranteed to lose money, even before taking inflation into account. The only way to make money is to find another buyer willing to pay a higher price—but that implies a bigger loss down the road."
  • Bond Funds Turn to Emerging Markets http://www.wsj.com/articles/bond-funds-turn-to-emerging-markets-1471198010 “Many global bond managers are also turning to emerging markets because a number of their institutional clients, including some pension funds and insurance companies, have restrictions on how much of their money can be invested in debt with negative yields. These investors need cash to meet ongoing liabilities and want income-producing investments.”
  • Falling Rates Create Bond-Call Frenzy (recall callable bonds have negative convexity at low yields) http://www.wsj.com/articles/falling-rates-create-bond-call-frenzy-1470671759 “Calls are growing more popular throughout the bond market. Mr. Pace said 59% of GSE debt sold in the last quarter of 2015 already has been called. Global corporate issuers have called more than $300 billion, including roughly $90 billion in U.S. corporate bonds, according to Performance Trust.”
  • Are Negative Rates Backfiring? (398 comments!) http://www.wsj.com/articles/are-negative-rates-backfiring-heres-some-early-evidence-1470677642 "Some economists now believe negative rates can have an unintended psychological effect by communicating fear over the growth outlook and the central bank’s ability to manage it."
  • Textbook Failure: Why Rate Cuts Have Stopped Working on Currencies http://www.wsj.com/articles/textboo...have-stopped-working-on-currencies-1470918053 "In theory, loosening monetary policy should lower a currency’s value, but this year the opposite has been happening"
  • Interest rates are a spent economic force https://www.ft.com/content/b9c48db8-6075-11e6-ae3f-77baadeb1c93The core profitmaking business of banks is maturity transformation, whereby banks fund themselves with short-term deposits and make longer-term loans. Bank profitability is typically determined by the difference between the interest rates they pay on deposits and receive on loans. If lending rates fall further than deposit rates, this model is challenged. Negative interest rates are even more pernicious, with banks reluctant to deduct interest charges for fear customers will respond by withdrawing cash.”
  • Preferred Stock: This Crazy Market Warps Another Asset http://blogs.wsj.com/moneybeat/2016/08/12/preferred-stock-this-crazy-market-warps-another-asset/ “To see why overheating could be a risk, it helps to understand more about how preferred stocks work. If a company goes into bankruptcy, preferred shareholders have a higher claim on any remaining assets than the common shareholders do … But preferred investors also have a lower claim on a company’s assets than bondholders do, and there’s no guarantee that a company won’t skip a dividend. Preferred investors, unlike holders of common stock, don’t participate on the upside if a company grows more profitable. So preferred stocks tend to offer returns similar to those of bonds, at a level of risk that can approximate that of stocks.
  • Everything You Need to Know About Negative Rates http://www.wsj.com/articles/everything-you-need-to-know-about-negative-rates-1456700481
Louisiana Flooding (and Climate Change)
  • Experimental Capitalism: Accommodating Trial and Error in Risk Management http://trtl.bz/garp-experimental-capitalism Third in an excellent series on disruption
  • China’s Next-Generation CDS: Improving Market Growth and Safety via Standardization http://trtl.bz/2bwzBJw “The first generation of credit derivative instruments included a product alteration that was once hailed as an innovation, but China’s second-generation CDS marks a welcome return to an international CDS standard feature … CRM’s one-to-one linkage with the underlying obligation clearly hampers product standardization, as well as credit curve construction. Moreover, the fragmentation poses major problems for market participants and regulators. Dealers need efficient hedging mechanisms for intermediating transactions. The one-to-many feature in international standard CDS is compatible with the standardization, connectedness and economy of scale that facilitate efficient hedging within a CDS family."
  • Stress Test Analysis: The Trouble with Attempting to Predict the Future (Precisely) http://trtl.bz/2bgUIh6 “Taken together, what do these two concurrent events [Fed’s CCAR results and Brexit] say about the ability of US banks to predict the future and prepare for it? First and foremost, they indicate the need for additional scenario analysis beyond the Fed’s small set of “deterministic” scenarios (i.e., baseline, adverse and severely adverse). Market disruptions can be driven by a host of real or imagined threats. If they were not nearly impossible to predict, they would not be “shocks.”
Markets and Wall Street
  • Frequently asked questions on the revised Pillar 3 disclosure requirements https://www.bis.org/bcbs/publ/d376.htm (highly technical, beyond anything you will see on the FRM exam)
  • Low long-term interest rates as a global phenomenon https://www.bis.org/publ/work574.htm "This paper compares how interest rates in advanced economies and in emerging economies are conditioned by two global benchmarks – the Federal funds rate at the short end and the world real interest rate at the long end."
Fintech and innovation
Quantitative and Models
International and Country risk
Case Studies
Books and papers
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David Harper CFA FRM

David Harper CFA FRM
Staff member
Thank you @Deepak Chitnis and @Dr. Jayanthi Sankaran for supporting the Week in Risk, I really appreciate it! FYI, each workday I take a "reading break" which mostly consist of reading through my feeds on www.feedly.com (i.e., my collection of RSS feeds is my primary information source, I am constantly tuning, adding and pruning information sources). Then I spend a good portion Sunday reviewing/organizing the links, and referring to a list of websites that I check once a week but not daily (e.g., www.bis.org). So mostly it takes up several hours on Sunday afternoon/evening, but because I am passionate about the topic, it's something I look forward to, it doesn't feel like work at all. Since I've been doing it, my perspective on risk has broadened. Thanks again!
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Very interesting!! Thanks for the insight, you are really doing a great job.
To add, I really liked the epic tutorial on the " Comprehensive Guide to Financial Statement Analysis / Ratio Analysis" he did a descent job there (I am a subscriber).

@David Harper CFA FRM what made you developed much interest in Risk in general more than any other field (could it be because you teach it)?

Thanks again for this wonderful insight.