Model Risk 2. Look Beyond the Numbers
What does the near-disaster on London’s Millennium Bridge have to teach us about model risk? “The bridge, inaugurated with great fanfare by the Queen in 2000, filled with people and began to sway so strongly it had to be immediately shut down,” said Ravi Chari, Manager, Americas Risk Practice at the SAS Institute. “When the bridge was modelled during development, the developers did pose the question ‘what is the probability of 10,000 people walking in unison on the bridge?’ And the answer was ‘practically zero’—but that’s exactly what happened on Day One!” Chari was the second of two speakers on […]
Model Risk 1. After the Crisis
The potential sources of error in constructing a model “is the key point in determining how to handle model risk,” said Suresh Gopalakrishnan, Principal, Business Information Management, at Capgemini Financial Services. He was the first of two speakers on the topic of model risk management (MRM) in the post-financial crisis regulatory regime, and was speaking at a webinar organized by the Global Association of Risk Professionals on April 24, 2014. Model risk is very wide-ranging. “What about inadequacies in models?” he asked. “Do they cover black swan events? What about aggregate risk? Is model risk in fact part of operational […]
A Low Volatility Equity Strategy
Despite conventional wisdom, “the returns on more volatile equities have not exceeded the historical returns on less volatile equities,” said Grant Wang, Senior Vice-President and Head of Research at Highstreet Asset Management in London, Canada. He was the first of two speakers at the GARP Toronto Chapter meeting held at First Canadian Place at King & Bay, Toronto on the evening of January 30, 2014. Wang began with a brief survey of the increased volatility in equity markets over the past several years: the 2001 tech bubble, the 2008 housing crash, and the 2011 European debt crisis. “VIX has posed […]
Monetary Policy and Treasury Risk Premia: Part 2
After giving an overview (see Part 1), Paul Whelan, of the Imperial College London and formerly the European Central Bank, walked the audience through the mechanics of an award-winning paper on monetary policy at a webinar on January 16, 2014 sponsored by GARP. A shock, by its very nature, is non-routine. Therefore, “a good measure of monetary policy shocks should exclude systematic components,” Whelan said. Another challenge was to “distinguish between quantity of risk versus price of risk channels.” Use of the Taylor rule allowed the researchers to isolate the exogenous dynamics of monetary policy. The trio was able to […]
Monetary Policy and Treasury Risk Premia: Part 1
“Monetary policy makers want to control the long end of the yield curve,” said Paul Whelan at a webinar on January 16, 2014 sponsored by the Global Association of Risk Professionals. Whelan co-authored an article that won the 2013 GARP Award for best paper in financial risk management. “Monetary Policy and Treasury Risk Premia”, by Andrea Buraschi, Andrea Carnelli, and Paul Whelan, provides a quantitative analysis of the effect of monetary policy shocks on future bond returns. Buraschi is at the University of Chicago Booth School of Business and Imperial College London; Carnelli is at Imperial College London; and Paul […]
Eye on Credit Markets. Part 1: Little Beta, Lots of Alpha
“How will the credit markets perform if the Federal Reserve Board chooses to taper over the next year or so?” asked Sivan Mahadevan, Head of U.S. Credit Strategy and Global Credit Derivatives Strategy at Morgan Stanley. He posed this question to members of the Global Association of Risk Professionals on November 21, 2013. Here, “tapering” refers to a gradual lessening of asset purchases. As the first of two speakers in a webinar presentation, Mahadevan summarized the credit markets to date: “little beta, lots of alpha.” Investment grade assets have had a good rally this year. “The higher yields go, the […]
Essential Mathematics for Economics and Business
Jonny Zivku, Product Manager at Maplesoft, gave a tour of the web-based tutoring and assessment product Maple T.A. on November 12, 2013. To highlight its features, Zivku drew on content that was tailored specifically for Essential Mathematics for Economics and Business by Teresa Bradley. This is one of the leading introductory textbooks on mathematics for students of business and economics, and was recently re-issued in its fourth edition by John Wiley & Sons. Each chapter of the book is structured with an overview, explanation, and applications. Students who do the exercises can check their answers against solutions given at the end of […]
Leveraging Risk Analytics. Part 1
“The new risk management role has a dual responsibility: to the organization, and to achieve business goals. When they contradict each other, the business profitability must come first,” said Boaz Galinson, VP and Head of Credit Risk Modeling and Measurement at Bank Leumi. He was the first of two speakers at a GARP webinar on leveraging risk analytics to drive competitive advantage held September 17, 2013. Galinson referred to the Accenture 2011 Global Risk Management Survey of the 400 biggest corporations (including the 40 biggest banks). Of the respondents, 93 percent said that “sustainability of future profitability” was important or […]
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. […]