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WIFE Week in Risk (ending July 24th)

David Harper CFA FRM

David Harper CFA FRM
Staff member
Low Interest rates
  • The Search for the Elusive Natural Interest Rate (The concept guides central bankers like Janet Yellen, but the rate can’t be directly observed) http://www.bloomberg.com/news/articles/2016-07-22/the-search-for-the-elusive-natural-interest-rate “The Fed aims to set short-term interest rates in relation to the natural rate--the one that would produce full employment without excess inflation."
  • Death of the risk-free rate http://trtl.bz/death-riskfree-rate “Abandoning the assumption of a positive risk-free rate alters our conceptions of money, monetary policy, and investment risk. Managing volatility, the traditional measure of risk, may now prevent us from achieving our investment objectives … Are these default-free negative real rates of interest [really] risk free?”
  • Forecasting Interest Rates over the Long Run http://trtl.bz/nyfed-forecasting-rates “As we explained in our previous post, term premia compensate investors for bearing interest rate risk. Term premia also vary over time, reflecting the changing magnitude of investor compensation for those risks. As a result, the presence of term premia confounds the inferences that one might make about the market-implied expectation for the path of interest rates when looking at current rates. Term structure models allow analysts to decompose observed interest rates into the expected path of short-term interest rates over the life of the bond and the term premium.” This post includes a link to their previous article which has a more basic discussion about the Expectation Theory of interest rates, which has a pure version (i.e., forward rates are unbiased predictors of future spot rates) and a more realistic Biased Expectations Theory
  • May you live in "exciting" times! An Updated Picture of Country Risk by Aswath Damodaran http://trtl.bz/damodaran-country-2016-july-update “It is a good time to update my global country risk database and the paper that goes with it, and in this post, I would like to focus on updating numbers and providing risk pictures of the world, as it looks today.” Please note this refers to a current P1.T4 FRM reading assignment: Aswath Damodaran’s “Country Risk: Determinants, Measures and Implications - The 2015 Edition.” Here is the updated paper (Country Risk: Determinants, Measures and Implications--The 2016 Edition): http://trtl.bz/damodaran-country-risk-july-2016-update
  • How the world’s sovereign bonds stack up (The BlackRock Sovereign Risk Index helps us assess various government bonds. Richard discusses some of the notable changes in the recently updated ranking) https://www.blackrockblog.com/2016/07/22/worlds-sovereign-bonds-stack/
  • Economies in the triple-A club https://www.weforum.org/agenda/2016/07/what-is-triple-a-credit-rating “There are very few countries that belong to the AAA club. At the moment they are Australia, Canada, Denmark, Germany, Hong Kong, Liechtenstein, Luxembourg, Netherlands, Norway, Singapore, Sweden and Switzerland; and, until very recently, the UK. Hong Kong, which has Special Administrative Region status, has its own credit rating (AAA, from S&P). Some countries are close to the mark. The United States, for instance, was downgraded by S&P in 2011, but retains its Aaa/AAA from the other agencies.”
Climate and Water Risk
Governance and ERM
  • Using the Z-Score to Assess the Risk of Bankruptcy (Interview with Edward Altman, creator of Z-Score) http://www.aaii.com/journal/article/using-the-z-score-to-assess-the-risk-of-bankruptcy
  • Analyzing Banks’ Credit Risk: Expectations for New Accounting Guidance http://trtl.bz/cfa-mi-credit-new-guidance “In today’s reporting environment, analyzing the credit risk of bank assets is hampered by the delayed write-down of loans, the incomparability of how loan carrying values are measured, and inconsistencies in the classification of loans as non-performing. For this reason, stakeholders, including investors, have been keenly waiting for the revised accounting guidance under both US GAAP and International Financial Reporting Standards (IFRS).”
Operational risk and Case Studies
Regulations and Regulators
  • When Bank Capital Standards Aren't Actually That Standard http://www.bloomberg.com/news/artic...pital-standards-aren-t-actually-that-standard “While such rules set a minimum required capital level for banks, countries retain leeway in calculating the ratio by which that level is achieved — allowing for tinkering in the numerator (definition of capital) and the denominator (risk-weighted assets).”
  • The OFR Introduces Interactive U.S. Money Market Fund Monitor https://financialresearch.gov/money-market-funds/ “A lack of detailed data about fund holdings blocked regulators from seeing risks quickly in 2008. Since then, regulators have begun to require funds to report detailed data about their holdings more frequently. Funds are also required to hold more liquid assets.”
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