From brown energy to green
How will climate change affect the financial sector and the broader economy? What policy responses will mitigate climate change risks? Recently, the US Federal Reserve Bank (FRB) sponsored the first conference dedicated to exploring the economic and financial risks associated with climate change. “Climate change will have sweeping effects on our economy and financial system,” says the report summarizing the main themes of the conference. The report, released on December 16, 2019, was co-authored by Galina B. Hale, Òscar Jordà, and Glenn D. Rudebusch. Hale is a research advisor and Jordà and Rudebusch are both senior policy advisors at the Federal […]
Machine learning sniffs out corruption
“Bribery and corruption are by-products of risk culture,” said Aparna Gupta, Associate Professor at Lally School of Management at Rensselaer Polytechnic Institute. “We can take a step back and devise methods to detect it using textual data and machine learning.” Gupta was the second of two speakers at the one-hour webinar “Corruption and Corporate Governance” sponsored by the Global Association of Risk Professionals (GARP) on October 30, 2019. Since culture is intangible, empirical work on the relation between risk culture and risk management is limited. Traditional approaches for assessing risk culture have many drawbacks such as bias and lack of comparability. Nonetheless, […]
More Leaves than Grapes?
Who says the market on old books is in a downward spiral? Luca Pacioli wrote the definitive treatise Summa de Arithmetica, Geometrisa, Proportioni et Proportionalita and published it in Venice in 1494. On June 12, 2019, Christie’s put up one copy for auction. (The starting price was one million USD; it eventually sold for 1.2 million USD.) Experts estimate 120 copies of this book still exist. An image of a typical page, reproduced here, shows its type font is somewhat less readable than the modern accounting textbook. Summa de Arithmetica was widely read and used at the time. It contains real-life examples, […]
Missing the Mark
“In the spring a young man’s fancy lightly turns to thoughts of buying a house,” Morty said, as he put the latest issue of the Financial Analysts Journal on my desk. We don’t often paraphrase Tennyson in the office, so this caught my attention. “You’re not thinking of moving again, are you?” I said. “No, but I always keep my eye on the market,” he said. “You should check out what these economists are saying.” So I did. First I read the FHFA working paper, by the team of Alexander Bogin, William Doerner, and William Larson. “Missing the Mark: Mortgage […]
Wanted: Business Expertise
Artificial intelligence can be expensive and tricky to implement. Is it worth the trouble? Two organizations recently decided to pose the question to those who were working in financial institutions. “Due to budget constraints, a company might not always be able to apply artificial intelligence. But, to those who can, the benefits have become clear,” said Mahdi Amri, Partner and National AI Services Leader, Canada at Omnia, which is the artificial intelligence practice at Deloitte. On January 24, 2019, Amri was the second of two panellists who discussed early results of a joint survey by SAS and the Global Association […]
Operationalizing A.I.
How pervasive is the use of artificial intelligence in the field of financial risk management? What are the key challenges in AI implementation over the next two to three years? These issues were examined in early 2019 via the webinar, Operationalizing AI and Risk in Banking, sponsored by the Global Association of Risk Professionals (GARP). “We found exceptionally high rates of AI usage among survey respondents,” said Katherine Taylor, Senior Data Scientist at the software company SAS. On January 24, 2019, Taylor was the first of two panellists who presented a “sneak peek” at a joint survey by SAS and […]
A Tale of Two Funds
There are helpful and unhelpful models for determining risk-based profit attribution, according to Michael B. Miller, founder and CEO, Northstar Risk. This is part 2 of his explanation about how to attribute financial performance, given at a webinar sponsored by the Global Association of Risk Professionals on June 20, 2018. Miller gave an example of two funds. Fund A contains both long and short assets, is market neutral and generates positive alpha. Fund B is a macro fund that is market dependent and whose manager is correct 54 percent of the time. The returns of Funds A and B look very […]
Risk-Based Profit Attribution
“Even the best portfolio managers have bad years due to macroeconomic factors beyond their control,” said Michael B. Miller, founder and CEO, Northstar Risk, to an audience of financial risk professionals. This is Part 1 of his talk about how to attribute performance for financial management at a webinar sponsored by the Global Association of Risk Professionals on June 20, 2018. “We tend to view measurement of risk and performance as separate tasks, but performance can only be fully understood by taking risk into account,” Miller said. Performance is always evaluated relative to something else, such as “the market”—which commonly taken […]
Origins of Canadian Banking
The financial crisis of 2007-2008 triggered a worldwide recession. The American and European banking systems experienced massive losses, takeovers, and taxpayer-funded bailouts. Lehman Brothers, Northern Rock, European debt crisis, … and the after-effects are still being felt. Canada’s banking system did have some shaky moments, as a recently published analysis of its asset-backed commercial paper (ABCP) predicament showed. On the whole, however, Canada’s banks withstood the financial crisis relatively well and the financial system maintained its liquidity, solvency, and profitability. The history of the divergence in the Canadian and American banking systems is recounted in a new book. From […]
Volatility Clustering
When looking at stock market time series, one notices immediately a certain “jitter” or “noise” in the daily returns. This is ordinary volatility. Every once in a while, volatility becomes higher and stays that way—for a while. “Volatility clustering occurs when the volatility of the returns becomes correlated from one day to another,” said Attilio Meucci, CEO and founder of Advanced Risk and Portfolio Management (ARPM). He was the sole presenter at the May 11, 2017, webinar on Modeling and Forecasting Volatility Clustering sponsored by the Global Association of Risk Professionals. Meucci began by showing an example of volatility clustering […]