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WIFE Week in risk (ending Dec 18th)

David Harper CFA FRM

David Harper CFA FRM
Staff member
Selected news
Banks and banking
Political and regulatory, including systemic risk (and BIS)
  • The fatal flaw in macropru: It ignores political risk http://voxeu.org/article/tmacroprus-fatal-flaw “For monetary policy, central banks have one measure (inflation), and two tools (interest rates and quantity of money) that have powerful but diffuse effects on the economy. In contrast, the macropru policymaker is faced with a complex, ill-defined policy domain in which there is not a clear consensus on either the problem or the objective … When we look at major stress events in the financial system, only a few have arisen purely from excessive risk-taking by, and misbehaviour of, economic agents. Perhaps the best example is the 1987 stock market crash that originated in an automatic trading rule and portfolio insurance. This crash had limited impact outside finance. Most other stress events, however, have been strongly influenced by politics.”
  • Control Risks’ annual RiskMap 2017 http://riskmap.controlrisks.com/
Case Studies, including Strategic or Reputational
Technology, including FinTech and Cybersecurity
  • Wall Street Jobs Won’t Be Spared from Automation https://hbr.org/2016/12/wall-street-jobs-wont-be-spared-from-automation “If there is any good news here, it’s that there will be a substantial number of jobs that involve working alongside machines. If you’re already familiar with key financial processes, you’ll have a much better chance of keeping your job if you learn to work alongside smart machines that perform key aspects of those processes …”
Climate and Energy
Exams, Financial Associations (GARP, FRM, CFA Institute) and Careers, including CRO Interviews
Books and Courses (including Journal/SSRN)
  • [Book review] Hedge Fund Investing by Kevin Mirabile (2nd Edition) The first edition is currently assigned in FRM R81.P1.T8. [Investment Risk] https://blogs.cfainstitute.org/investor/2016/12/15/book-review-hedge-fund-investing/ The first edition was previously assigned “The 2nd Edition offers new material related to portfolio financing, how funds are sold, liquid alternatives, and the challenges faced when trying to value hedge fund management companies. This edition includes updated power point slides, and a companion workbook with an updated set of end of chapter problems and a revised set of over 150 test bank questions.”
  • [New book] The Handbook of Mortgage-Backed Securities, 7th Edition http://amzn.to/2hWU9gf Hat tip to @brian.field "The sixth edition was published in 2006, one year prior to the subprime mortgage crisis. The events and legislation following the subprime mortgage crisis made it necessary to update the Handbook. The number of chapters has been reduced from 55 chapters to 35 chapters. Of the 35 chapters in the seventh editing, 17 are new, with the balance of the chapters substantially revised from the previous edition. Consequently, this book can be characterized as a new book ...."
  • [Book review] Gray and Vogel, Quantitative Momentum http://readingthemarkets.blogspot.com/2016/12/gray-and-vogel-quantitative-momentum.html (book at http://amzn.to/2gFyQOC)
  • Brenda Jubin’s Best books of 2016 http://readingthemarkets.blogspot.com/2016/12/best-books-of-2016.html
Data science (primarily R) including Alternative data
  • Scraping data: the next frontier in battle for investment returns (Use of consumer emails and receipts is growing but brings potential problems) https://www.ft.com/content/08a22da8-b587-11e6-ba85-95d1533d9a62 “If fund managers begin to lean more on alternative data to help make investment decisions, some believe it ultimately has the potential to dislodge quarterly corporate earnings reports and monthly economic data from the centre of investors’ radars. So far big data can only offer clues — some strong, some weak, some simply wrong — on what these market-moving releases will show. But in time, it is far from inconceivable that our digital fingerprints will provide an accurate, instantaneous gauge that will render traditional investment information obsolete.”
Quantitative Analysis (FRM P1.T2)
Financial Markets and Products, including interest rates. commodities and foreign exchange (FX) risk (FRM P1.T3)
  • China: Renminbi stalls on road to being a global currency https://www.ft.com/content/e480fd92-bc6a-11e6-8b45-b8b81dd5d080 “The share of China’s foreign trade settled in its own currency has shrunk from 26 per cent to 16 per cent over the past year while renminbi deposits in Hong Kong — the currency’s largest offshore centre — are down 30 per cent from a 2014 peak of Rmb1tn. Foreign ownership of Chinese domestic financial assets peaked at Rmb4.6tn in May 2015; it now stands at just Rmb3.3tn. In terms of turnover on global foreign exchange markets, the renminbi is only the world’s eighth most-traded currency — squeezed between the Swiss franc and Swedish krona — barely changed from ninth position in 2013. What appeared to be structural drivers supporting greater international use of the Chinese currency now appear more like opportunism and speculation. Against this backdrop [i.e, strong US dollar, capital outflows stemming from concerns over China’s slowing economy and spiraling debt], China’s recent moves to tighten approvals for foreign acquisitions by Chinese companies, as well as other transactions that require selling renminbi for foreign currency, cast further doubt on China’s commitment to currency internationalization.”
  • Rising Mortgage Rates Could Threaten Housing Demand in 2017 (Sustained increases could lead to ‘rate lock,’ leaving some homeowners reluctant to trade up or down) http://www.wsj.com/articles/rising-mortgage-rates-could-threaten-housing-demand-in-2017-1481457602 “A sustained period of rising rates could freeze homeowners with rock-bottom mortgages who otherwise might want to trade up for bigger or better properties. Such situations, which economists call ‘rate lock,’ could weigh on housing demand in 2017, economists said … The fact that so many homeowners enjoy such low rates could also prove an economic brake, creating a disincentive for homeowners to move to a new city in pursuit of a new job if it means their mortgage might be more expensive.”
  • Rising Rates Ripple Through Mortgage Market (Experts warn homeowners of sticker shock ahead, as interest rates on adjustable-rate mortgages and home equity lines of credit are expected to creep up) http://www.wsj.com/articles/rising-rates-ripple-through-mortgage-market-1481976007
Valuation and Risk Models, including Country risk (FRM P1.T4)
  • S&P Just Demolished One Big Distinction Between Emerging and Developed Markets https://www.bloomberg.com/news/arti...nction-between-emerging-and-developed-markets “We believe it may no longer be possible to separate advanced economies from emerging markets by describing their political systems as displaying superior levels of stability, effectiveness, and predictability of policy making and political institutions”
Market risk, including equity risk (FRM P1.T5)
  • Why active fund managers should cheer the rise of ETFs https://www.ft.com/content/df1d95ec-bac4-11e6-8b45-b8b81dd5d080 “The correlation of shares in ExxonMobil with the index has increased from 0.35 in 1995 to 0.73 in 2015. AT&T shares’ correlation has risen from 0.42 to 0.71 over the same period while the correlation of Proctor and Gamble shares has jumped from 0.36 to 0.73. This, the hedge fund argues, could indicate that the increased amount of money devoted to tracking the index is causing its constituents to move in line with one another, meaning those seeking to profit from buying good companies and selling bad ones are finding life increasingly difficult.”
  • Forex trading ain’t what it used to be https://ftalphaville.ft.com/2016/12/15/2181273/forex-trading-aint-what-it-used-to-be/ “The decline was primarily driven by spot currency trading, since derivatives and swaps volumes grew. In the report, Michael Moore, Andreas Schrimpf and Vladyslav Sushko found a couple of reasons for the 15-per-cent slowdown in spot currency trading (to $1.7tn from $2tn three years ago). One of them is basic macroeconomics — growth rates for global trade and capital flows are below their pre-crisis pace, so there’s less need for currency translation. Beyond that, the types of traders in the market have changed, as large institutional investors such as pension funds and life insurers become bigger players.”
Investment risk, including pensions (FRM P1.T7)
  • America’s Largest Pension Fund: A 7.5% Annual Return Is No Longer Realistic (A reduction in Calpers’s investment target would be first since 2012) http://www.wsj.com/articles/america...nual-return-is-no-longer-realistic-1481721719 This is an ongoing saga with so many problems; e.g., “Lowering the assumed rate of return by just a quarter of a percentage point would likely increase annual Calpers payments made by one town, Costa Mesa, Calif., by up to $8 million. That would likely mean budget cuts for Costa Mesa, which already spends more than 20% of its $120 million operating budget on pensions.”
  • Lessons of mortgage crisis go unheeded in small-business lending market (New breed of nonbank platforms have churned billions of dollars of loans) https://www.ft.com/content/920d286e-c323-11e6-9bca-2b93a6856354 “Largely out of sight of regulators, a new breed of nonbank platforms such as OnDeck, CAN Capital and Kabbage have churned billions of dollars of loans, many of them originated by industrial banks in Utah, where interest-rate caps do not apply.”
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