Modeling Sovereign Risk. Part 2: Quantification
“The Bloomberg sovereign risk model starts by dividing countries into two types,” said Rajan Singenellore, “reserve-currency countries and non-reserve currency countries. Everything else depends on that distinction.” Singenellore is Product Manager, Risk & Valuations at Bloomberg and was the second of two speakers to address a GARP webinar audience on September 12, 2013. A reserve-currency country is one whose currency is held in significant quantities by other governments as part of their foreign exchange reserves, such as the US and the Japan. There is a pressing need for quantification in the area of sovereign credit risk, he said, citing as […]
Modeling Sovereign Risk. Part 1: Emerging Markets
“Country-specific factors such as government debt and the sovereign credit rating change slowly but global aggregates such as the risk appetite change quickly, thus leading to confusion the part of observers,” said Michael Rosenberg, Foreign Exchange Consultant, Bloomberg and author of Currency Forecasting: A Guide to Fundamental and Technical Models of Exchange Rate Determination. He was the first of two speakers to address a GARP webinar audience on September 12, 2013. Much of Rosenberg’s talk focused on the sovereign credit risk of emerging markets (EM), because the accelerating flow of net private capital into EM from 1980-2014 has been unprecedented. […]
Celebrity Gossip for the Finance Nerds
I stumbled on a small piece of paradise when I came across Milevsky’s book, The 7 Most Important Equations for Your Retirement: The Fascinating People and Ideas Behind Planning Your Retirement Income. This book is stuffed with anecdotes about the mathematical geniuses who derived the equations that are central to retirement planning. “Getting an equation named after you isn’t easy. Unlike a building, hospital ward or even a business school, money can’t buy you this sort of fame,” Milevsky writes. “You must own a very sharp set of knives.” In my undergrad days in chemistry, I recall the moment it dawned on […]
Quant Chalkboard: A New Way to Aggregate
The Gumbel copula is the best way to aggregate losses in economic capital, says Yimin Yang, Director of Model Risk and Capital Management Practice at Protiviti, a global consulting firm. “This copula has asymmetrical behaviour and can model fat tails the best” of the numerous copulas he has tried recently. He was speaking at a GARP webinar on August 20, 2013. Yang began by explaining that a copula was a broad class of mathematical function that could be used to describe the joint distribution function between two or more other functions. Such a joint cumulative distribution function (CDF) must determine […]
Quant Chalkboard: Data, Models & Concepts
“People are more likely to believe something that comes as data,” said Joe Pimbley, Principal, Maxwell Consulting, “but you shouldn’t necessarily believe the data.” Pimbley, a lead investigator for the examiner appointed by the Lehman Brothers bankruptcy court, addressed financial risk management professionals at a GARP webinar on August 6, 2013. [Ed. Note Click here to read Joe Pimbley – “Why Lehman Brothers Failed When It Did” on Stories.Finance.] Pimbley said that model builders must always look at data with the eyes of a skeptic. With a PhD in physics he is conversant with models devised to predict the “real world” and […]
Hollywood Math
To showcase its mathematics software, a firm usually works through idealized examples from its client base. Sometimes, the firm will consider a real-life problem. The firm seldom turns to the silver screen for inspiration—yet that was the hook that drew in a webinar audience on June 19, 2013. Jonny Zivku, Product Manager at Maplesoft, provided an entertaining tour of Maple software (version 17), as applied to math problems encountered in the movies. Zivku quickly moved from a discussion of the basic math problem (13 X 7 = 28) encountered by Abbott and Costello in the 1941 classic In the Navy […]
Risk Models: From Governance to Validation: Part 3. Examples
“The calculation of the spread on the tranches is quite involved but essentially boils down to dependencies between names,” said Frederic Siboulet, Principal at iEpsilon and the third of three speakers at a GARP webinar on risk models held June 11, 2013. The tranches in structured credit products he referred to were apparently diversified, but in reality not so. Siboulet chose to illustrate the subtle and embedded risk of models with actual structured product examples. In particular, he said that “We must not overlook the importance of the parameters and their interpretation.” The first example involved stressed correlation within a […]
Risk Models From Governance to Validation: Part 2. A Model of Model Management
No longer should a firm just use financial models; it should have a “model of model management,” said Donna Howe, Chief Risk Officer at Sovereign Bank. She was the second of three speakers at a June 11, 2013 webinar on risk models organized by the Global Association of Risk Professionals (GARP). Such a “meta-model” would help a firm sort and track models. Howe said that risk models must be understood within the wider frame of compliance and other non-prudential risk. Model parsimony, or Occam’s razor, that was recommended by the first speaker, is good but in the real world “cannot […]
Risk Models From Governance to Validation: Part 1. Don’t Forget the Story
The best practices of risk models–and model building–boil down to one thing: “we can’t forget the story behind it,” said Peter Went, VP, Banking Risk Management Programs at GARP. He was the first of three speakers at a GARP webinar on risk models held June 11, 2013. “There must always be a qualitative story expressible in quantitative terms.” And, vice versa, since any model reduces the complexities of the real world into snippets of mathematical relationships, the opposite must hold true. Went, a trained econometrist, described three main types of models. Fundamental models are based on rules relating basic variables […]
Spotting Signs of Poor Corporate Governance. Part 2: ESG Management
Corporate governance is only one part of an overall phenomenon known as “ESG management,” or how a company handles environmental, social, and corporate governance (ESG) issues. “Research shows that companies that disclose more ESG information are more likely to enjoy a lower cost of capital,” said Max Zehrt, Senior Manager at Sustainalytics. He was addressing a noon-hour seminar of financial analysts and portfolio managers on the subject of corporate governance on May 8, 2013 at the offices of the CFA Society Toronto. His talk was the second part of a two-speaker panel moderated by Toby Heaps of Corporate Knights. Zehrt was […]