models

Three Takeaways

Does it ever seem awkward to run Visual Basic subroutines within Microsoft Excel? If you have a plain unvarnished subroutine, you must click through to the Developer tab, and then point and click to find the macro of interest. “There are more convenient ways to access the macros you build,” said Andrew Nikolishyn of Vesta Solutions. He was the instructor of a day-long seminar on “Visual Basic for Financial Professionals,” held on location at the CFA Society of Toronto on May 1, 2015. In Part 1 of this posting, I described how participants could access the Developer tab to create […]

Hum a Few Bars and I’ll Fake It

How far can you go at reducing the tedium in your spreadsheet usage? On May 1, 2015, nearly twenty people attended a day-long seminar “Visual Basic for Financial Professionals,” held on location at the CFA Society of Toronto. The seminar was conducted by Andrew Nikolishyn, CFA, of Vesta Solutions. I often use Microsoft Excel as a scratch pad and a tally sheet, but lately I’ve had to do connected tasks on a regular basis, involving recent financial data. I prepare a graph from the data, and I also run a simple present value calculation, to compare with the previous month’s […]

Better Living Through Topology

“It gets downright annoying when I’m just trying to check my e-mail but I get prompted to answer three security questions,” said Alexis Johnson, voicing a concern shared by many in the audience when fraud detection is so overblown it obstructs ordinary use of software. Johnson, Director of Technical Sales at the big data analytics firm Ayasdi, was the second of two presenters at a webinar on the topic “The Fraud Arms Race” sponsored by the Global Association of Risk Professionals on April 21, 2015. When it comes to detecting fraud in big data, “data complexity, not volume, is the […]

Tailoring Risk Model to Investment Strategy

Due to the growing complexity of measuring financial risk, “risk has become a patchwork” of different models, said Phil Jacob, Senior Director at Axioma Risk Research. He was the sole presenter in a webinar about tailoring the right risk model to your investment strategy held on March 4, 2015, and sponsored by the Global Association of Risk Professionals (GARP). Jacob identified four inherent challenges. “There are operational issues stemming from existing rigid approaches,” leading to “difficulty in aggregating risk.” There is a lack of consistency in modeling portfolios, which can run the gamut from very simple proxies all the way […]

Stress Testing Mortgages. Part 2

The team of Scott L. Smith, Jesse Weiher, and Debra Fuller at the Federal Housing Finance Agency (FHFA) use specialized financial models to estimate potential losses. They carried out empirical tests of countercyclical shocks using four different models of mortgage credit risk. This posting continues a February 4, 2015, presentation by Scott L. Smith to an audience of financial risk managers at Global Association of Risk Professionals (GARP). Two models were devised at FHFA, and two are commercially available credit models: one, called Black Knight (formerly LPS-AA), and the other called ADCO Loan Dynamics. The estimated losses were converted to a capital […]

Stress Testing Mortgages. Part 1

“One needs to be careful and not over-reliant on any one model,” said Scott L. Smith, Associate Director for Capital Policy at the Federal Housing Finance Agency (FHFA). He was referring to the financial models used by major financial institutions to estimate potential losses. On February 4, 2015, he was presenting a GARP-sponsored webinar on countercyclical stress tests to set capital requirements. Smith explained how credit risk is measured for mortgages, and described a way to embed stress testing that uses countercyclical concepts. He and colleague Jesse Weiher, Senior Economist at FHFA, performed dynamic stress testing that was adjusted to […]

When Data Is Sparse. Part 2

It’s difficult to model sovereign credit risk for emerging markets using structural models such as the Merton model because “calibration is always an issue,” said Rob Stamicar, Senior Director of Research in Multi-Asset Class Risk Management at Axioma, continuing a theme during the second half of his webinar on December 2, 2014. During the first half, he showed how the probability of default can be used as a common link among the asset classes of interest (bonds, swaps, and equities). In the second half, he focused more on sovereign credit risk. Calculation of sovereign risk could be done directly, “but […]

When Data Is Sparse. Part 1

When modelling risk in emerging markets, are you hampered by sparse data? “Relationships between different asset classes can help measure the sovereign risk in emerging markets,” said Rob Stamicar, Senior Director of Research in Multi-Asset Class Risk Management at Axioma. He was sole presenter at a webinar on December 2, 2014, sponsored by the Global Association of Risk Professionals. When modelling global multi-asset class portfolios, “aggregation can be challenging,” said Stamicar, because the FX rates must also be taken into consideration—the subject for another day. His talk focussed on three asset classes: equity, fixed income, and credit portfolios. Infrequent data, […]

Stressed Interest Rates: ‘Simple’ Not Good Enough

“It’s difficult to apply historical down-shocks to the current low interest rate environment,” said Will Doerner, “and models have problems in the low interest rate environments of today.” Doerner is Senior Economist at the Federal Housing Finance Agency (“Agency”), and was the first presenter at a GARP webinar on how to generate historically-based interest rate shocks, which was held October 28, 2014. An accurate estimation of market risk helps financial institutions determine the amount of capital needed to withstand adverse market events. Interest rate changes represent a key factor for institutions with large fixed income portfolios. As such, when stress […]

Correlation Risk

“Before we argue about correlation, we must first agree on which interpretation we are talking about,” said Gunter Meissner, President of Derivatives Software, Founder and CEO of Cassandra Capital Management, and Adjunct Professor of Mathematical Finance at NYU-Courant. He was sole presenter at a webinar on October 21, 2014, sponsored by GARP. Meissner cited three different interpretations commonly used for correlation risk. “In trading practice, it can mean similar movement in time. Or it can be narrowly defined,” he said, “to only refer to the linear Pearson definition.” Third, it can be used in the broader sense of any type […]