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Fouque and Langsam, Cambridge University Press, 2013, Handbook on Systematic Risk, here.
The Handbook on Systemic Risk, written by experts in the field, provides researchers with an introduction to the multifaceted aspects of systemic risks facing the global financial markets. The Handbook explores the multidisciplinary approaches to analyzing this risk, the data requirements for further research, and the recommendations being made to avert financial crisis. The Handbook is designed to encourage new researchers to investigate a topic with immense societal implications as well as to provide, for those already actively involved within their own academic discipline, an introduction to the research being undertaken in other disciplines. Each chapter in the Handbook will provide researchers with a superior introduction to the field and with references to more advanced research articles. It is the hope of the editors that this Handbook will stimulate greater interdisciplinary academic research on the critically important topic of systemic risk in the global financial markets.
Duffie and Pan, An Overview of Value at Risk, 1997, here.
Joshua M Brown, The Reformed Broker, The End is Where We Start From, here.
Right at the closing bell of trading Friday, Hilsenrath dropped the first of what I presume will be many hints about the Fed’s new initiative to begin cooling things off. There’s a well-worn Churchill quote that springs to mind: “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
Chris Angelini, Tom’s Hardware, Core i7-4770K: Haswell’s Performance Previewed, here. OK, where do I get my Haswell server? I like the part where they say floating point is almost twice as fast (as ivy bridge) which might be important (unless you compile with gcc/AVX in which case, no change).
The integer test employs the AVX2 instruction set on Intel’s Haswell-based Core i7-4770K, while the Ivy and Sandy Bridge-based processors are limited to AVX support. As you see in the red bar, the task is finished much faster on Haswell. It’s close, but not quite 2x.
Floating-point performance also enjoys a significant speed-up from Intel’s first implementation of FMA3 (AMD’s Bulldozer design supports FMA4, while Piledriver supports both the three- and four-operand versions). The Ivy and Sandy Bridge-based processors utilize AVX-optimized code paths, falling quite a bit behind at the same clock rate.
Why do doubles seem to speed up so much more than floats on Haswell? The code path for FMA3 is actually latency-bound. If we were to turn off FMA3 support altogether in Sandra’s options and used AVX, the scaling proves similar.
Buchheit and Gulati, SSRN, Walking Back from Cyprus, here. via Salmon. A proposal to sell the uninsured depositors 5Y CDs and leave the insured depositors alone.
On Friday night, March 15, 2013, European leaders trespassed
on consecrated ground. They insisted that Cyprus impose losses –
euphemistically dubbed a “solidarity levy” — on insured depositors with
Cypriot banks as a condition to receiving EU/IMF bailout assistance.
Entering Friday’s meeting, the leaders had four options on the table, none of
(i) Give Cyprus a complete bailout (estimated to cost €18
(ii) Restructure the outstanding Cypriot bonds, €4.4 billion of
which are governed by Cypriot law and €3.8 billion by
(iii) Haircut excess deposits in the Cypriot banking system;
that is, deposits in excess of the €100,000 minimum
covered by the local deposit insurance scheme. These
represent about half of the total deposit base.
(iv) Haircut the insured deposits.
The European leaders chose options (iii) and (iv). Insured
depositors will suffer a 6.75% loss on their deposits; amounts in excess of
that level will be subject to a solidarity contribution of 9.9%. Holders of
Cypriot sovereign bonds will emerge unscathed. The next bond maturing on
June 3, 2013 in the amount of €1.4 billion — a large chunk of which is reputed
to have been bought by international hedge funds over the last six months at
prices ranging from 70-75 cents on the euro — will be paid out at 100 cents
on the euro in about ten weeks. Each depositor in a Cypriot bank, large and
small, will be making a solidarity contribution toward that payment to
Nina Mehta, Bloomberg, Google, IBM, Nasdaq, Finra Plan Bids to Build SEC Audit, here.
Google Inc. (GOOG), Infosys Ltd. (INFO), International Business Machines Corp. (IBM) and the Financial Industry Regulatory Authority plan to bid on a project to build a comprehensive market oversight system for U.S. securities.
Lisa Pollack, Alphaville, Oh look the CDS market isn’t working again, here.
The Dutch government took the shares of SNS Reaal and the sub debt of SNS Bank and declared that they own it all now, and it isn’t clear whether this act of “expropriation” counts as a credit event according to the rules that govern CDS contracts.
On the one hand, the basic credit event sniff test passes muster: a bad thing has happened to subordinated bond holders. They are highly unlikely to get any of their investment back, though some seem determined to try.
On the other hand, nothing has actually happened in the CDS definition sense. And, even if something is determined to have happened by the Isda DC on Tuesday or something does happen in the future (such as a failure to pay interest — next payment due in May), there aren’t any subordinated bonds around to have a credit auction with, as the Dutch government owns all of them. The senior debt is trading at par, so that’s no use either.
In the last couple of years, there have been other curveball CDS cases, Greece’s sovereign debt restructuring being the biggest among them. That only ended as well as it did by chance.
FT Alphaville has written before about how the underlying issue here is that all sorts of complicated, idiosyncratic things can happen with debt, so it’s not surprising that it’s challenging to have a standardised derivative referencing credit risk.
Matt Levine, DealBreaker, Turns Out Global Regulators Are Fine With Using Credit Ratings To Decide What Banks Can Do, here.
Isn’t that strange? The argument against using ratings in setting bank capital is some combination of (A) “the rating agencies are dumb and corrupt” and (B) “credit ratings don’t measure market risk”; the argument in favor is some combination of (C) “ratings measure the risk of default – i.e. permanent devaluation of bank assets – which is really what capital is designed to guard against” and (D) “well, do you have a better idea of how to measure that?” And so there is much fulminating against giving official power to ratings, and not so much done about actually stripping them of that power in capital regulation.
Subrahmanyam, Tang, and Wang, SSRN, Does the Tail Wag the Dog? The Effect of Credit Default Swaps on Credit Risk, here.
Credit default swaps (CDS) are derivative contracts that are widely used as tools for credit risk management. However, in recent years, concerns have been raised about whether CDS trading itself affects the credit risk of the reference entities. We use a unique, comprehensive sample covering CDS trading of 901 North American corporate issuers, between June 1997 and April 2009, to address this question. We find that the probability of both a credit rating downgrade and bankruptcy increase, with large economic magnitudes, after the inception of CDS trading. This finding is robust to controlling for the endogeneity of CDS trading. Beyond the CDS introduction effect, we show that firms with relatively larger amounts of CDS contracts outstanding, and those with relatively more “no restructuring” contracts than other types of CDS contracts covering restructuring, are more adversely affected by CDS trading. Moreover, the number of creditors increases after CDS trading begins, exacerbating creditor coordination failure for the resolution of financial distress.
Matt Levine, DealBreaker, Deutsche Bank Had A Profitable Interest Rate Trading Business In 2008, here.
Again, though, I come at it the opposite way: if your business is based on manipulating rates, why are you running a matched book? There’s an intuitive plausibility to the Journal‘s basic tale of (1) bank put on big bets, (2) risk managers fretted, (3) they were reassured by traders saying “well we’ll just manipulate Libor so this bet pays off for us.” But if that was really the thinking, why not do it all the time? Why go through the effort of laying off 98% of your interest rate risk, building a mostly balanced book of long and short swaps, instead of just leaning really hard into bets on Libor going up, say, and then working the phones hard to push it up?
Danielle D’Elia, Staten Island Advance, This ice cream truck does more than serve sweets on Staten Island, here. Perfect.
STATEN ISLAND, N.Y. — This summer when the sun is hot and you’re looking to stay cool, get out into the street and call for Time Warner Cable because they are bringing back a summer favorite; the ice cream truck.
This summer, Time Warner Cable is pairing with Connect a Million Minds program in efforts to donate money to local museums, including Staten Island Children’s Museum.
Connect a Million Minds was designed to inspire the next generation of youths to connect to the wonders of science, technology, engineering and math.
The Time Warner Cable ice cream truck will be going around the city asking for donations of a dollar while serving icy cold ice cream treats. All donations will proceed to local museums to provide programs for young people that connect to math and science.
Eric Zivot, coursera, U Washington, Introduction to Computational Finance and Financial Econometrics, here.
Learn mathematical and statistical tools and techniques used in quantitative and computational finance. Use the open source R statistical programming language to analyze financial data, estimate statistical models, and construct optimized portfolios. Analyze real world data and solve real world problems.
Introduction to Computational Finance and Financial Econometrics, Eric Zivot and R. Douglas Martin. Manuscript under preparationStatistics and Data Analysis for Financial Engineering by David Ruppert, Springer-Verlag.Beginner’s Guide to R by Alain Zuur, Elena Ieno and Erik Meesters, Springer-Verlag.R Cookbook by Paul Teetor, O’Reilly.Other books for further reference:Introductory Statistics with R, Second Edition (Statistics and Computing, Paperback), by Peter Dalgaard, Springer-Verlag, New York.Modern Portfolio Theory and Investment Analysis, by E.J. Elton et al., Wiley, New York.Financial Modeling, by Simon Benninga. MIT Press.Statistical Analysis of Financial data in S-PLUS, by Rene Carmona, Springer-Verlag, 2004.
Acuity Derivatives LLC, Why P&L Attribution? Or Judging Weathermen…, here. Interesting site. I don’t see many treatments of P&L attribution written down and presented like this. Let’s see how it reads.
Profit & Loss Attribution (PLA) in a bank provides a critical product control function of decomposing and analyzing actual booked Profit & Loss (P&L) and its variance, especially in the context of testing three hypotheses posed by the bank’s risk models:
I. Change in the mark-to-market value of its positions are materially determined by changes to a specified set of variables and parameters (i.e. risk factors) and the expected change is quantified by the sensitivities obtained to these risk factors from its models;
II. There is a specified % probability that the value of its positions will lose more than its VAR number over any given interval equal to the VAR holding period;
III. The cost of insuring its aggregate positions against the risk of counterpartyZ defaulting is not expected to exceed the cumulative sum of the CVA fees charged to its trading desks for originating exposure to counterparty Z.