This lecture deals with recent developments in an area I call Far-From-Equilibrium economics and applies the work to both the recent financial crisis and optimal portfolio theory.
This document summarizes a research paper that develops a dynamic general equilibrium model to analyze systemic risk in the banking sector. The key aspects of the model are that it includes banks that engage in maturity transformation by issuing non-state contingent debt, and the banks are exposed to risks in capital markets that can affect their solvency. The model shows that individual banks in a competitive system will take on excessive systemic risk due to pecuniary externalities, leading to a higher crisis probability than the socially optimal level. The document then discusses using prompt corrective action (PCA) policies to reduce crisis risk by strengthening bank capital requirements.
This document summarizes a research paper that develops a dynamic stochastic general equilibrium (DSGE) model to explain how monetary policy affects risk in financial markets and the macroeconomy. The key feature of the model is that asset and goods markets are segmented because it is costly for households to transfer funds between the markets. The model generates endogenous movements in risk as the fraction of households that rebalance their portfolios varies over time in response to real and monetary shocks. Simulation results indicate the model can account for evidence that monetary policy easing reduces equity premiums and helps explain the response of stock prices to monetary shocks.
The New Risk Management Framework after the 2008 Financial CrisisBarry Schachter
1) The document discusses lessons learned from the 2008 financial crisis and proposes a new framework for risk management that views markets as complex networks with interconnected risk-takers.
2) Key challenges discussed include the difficulty of attributing causes to complex problems, measuring rare events, and addressing issues like illiquidity, crowded trades, and hidden correlations from a network perspective.
3) A new approach to risk management is suggested that shifts the focus from improving old paradigms to rethinking risk management entirely through the lens of dynamic networked markets.
Liquidity Risk Management Best Practices ReviewL Berger
This document discusses methods for calculating liquidity risk. It begins with an introduction to liquidity risk and its two components: funding liquidity risk and market liquidity risk. The document then reviews the literature on liquidity risk and identifies key drivers of market liquidity risk, including volatility, bid-ask spread, and market depth. The document goes on to describe the liquidity risk model chosen for analysis, how parameters will be defined, and how Gambit software will be used to solve the model. It outlines the methodology, including data collection, building a process, and data analysis using case studies and comparing new and Gambit models. The conclusion discusses results and limitations.
Cryptocurrency Liquidity Increased Notably in 2018Boris Richard
Despite the 2018 slump in cryptocurrency prices, liquidity increased significantly last year across all major types of digital tokens compared to 2017.
This document discusses risk management practices for hedge funds. It notes that risk management approaches differ across hedge funds based on their strategies. Common risk management tools discussed include Value at Risk (VaR), stress testing, concentration limits, drawdown management, and liquidity risk monitoring. The document cautions that no single risk management approach is best and that risk measures have limitations but can still provide useful insights if used appropriately.
Juan Carlos Hatchondo's discussion of "Self-Fulfilling Debt Restructuring"ADEMU_Project
This document discusses a model of self-fulfilling debt restructuring where larger haircuts during debt settlements are associated with higher post-settlement bond spreads. The model incorporates coordination failures among lenders that can lead to either a "good" equilibrium with lending or a "bad" equilibrium with default. Larger haircuts occur after settlements in times of the bad equilibrium, leading bondholders to view higher haircuts as a negative signal about future repayment, which then feeds back to higher post-settlement spreads. The model aims to understand the link between haircuts, spreads, and measures of global risk premiums.
This document summarizes a research paper that develops a dynamic general equilibrium model to analyze systemic risk in the banking sector. The key aspects of the model are that it includes banks that engage in maturity transformation by issuing non-state contingent debt, and the banks are exposed to risks in capital markets that can affect their solvency. The model shows that individual banks in a competitive system will take on excessive systemic risk due to pecuniary externalities, leading to a higher crisis probability than the socially optimal level. The document then discusses using prompt corrective action (PCA) policies to reduce crisis risk by strengthening bank capital requirements.
This document summarizes a research paper that develops a dynamic stochastic general equilibrium (DSGE) model to explain how monetary policy affects risk in financial markets and the macroeconomy. The key feature of the model is that asset and goods markets are segmented because it is costly for households to transfer funds between the markets. The model generates endogenous movements in risk as the fraction of households that rebalance their portfolios varies over time in response to real and monetary shocks. Simulation results indicate the model can account for evidence that monetary policy easing reduces equity premiums and helps explain the response of stock prices to monetary shocks.
The New Risk Management Framework after the 2008 Financial CrisisBarry Schachter
1) The document discusses lessons learned from the 2008 financial crisis and proposes a new framework for risk management that views markets as complex networks with interconnected risk-takers.
2) Key challenges discussed include the difficulty of attributing causes to complex problems, measuring rare events, and addressing issues like illiquidity, crowded trades, and hidden correlations from a network perspective.
3) A new approach to risk management is suggested that shifts the focus from improving old paradigms to rethinking risk management entirely through the lens of dynamic networked markets.
Liquidity Risk Management Best Practices ReviewL Berger
This document discusses methods for calculating liquidity risk. It begins with an introduction to liquidity risk and its two components: funding liquidity risk and market liquidity risk. The document then reviews the literature on liquidity risk and identifies key drivers of market liquidity risk, including volatility, bid-ask spread, and market depth. The document goes on to describe the liquidity risk model chosen for analysis, how parameters will be defined, and how Gambit software will be used to solve the model. It outlines the methodology, including data collection, building a process, and data analysis using case studies and comparing new and Gambit models. The conclusion discusses results and limitations.
Cryptocurrency Liquidity Increased Notably in 2018Boris Richard
Despite the 2018 slump in cryptocurrency prices, liquidity increased significantly last year across all major types of digital tokens compared to 2017.
This document discusses risk management practices for hedge funds. It notes that risk management approaches differ across hedge funds based on their strategies. Common risk management tools discussed include Value at Risk (VaR), stress testing, concentration limits, drawdown management, and liquidity risk monitoring. The document cautions that no single risk management approach is best and that risk measures have limitations but can still provide useful insights if used appropriately.
Juan Carlos Hatchondo's discussion of "Self-Fulfilling Debt Restructuring"ADEMU_Project
This document discusses a model of self-fulfilling debt restructuring where larger haircuts during debt settlements are associated with higher post-settlement bond spreads. The model incorporates coordination failures among lenders that can lead to either a "good" equilibrium with lending or a "bad" equilibrium with default. Larger haircuts occur after settlements in times of the bad equilibrium, leading bondholders to view higher haircuts as a negative signal about future repayment, which then feeds back to higher post-settlement spreads. The model aims to understand the link between haircuts, spreads, and measures of global risk premiums.
Juan Francisco Medina Muñoz busca un empleo mejor remunerado. Tiene experiencia de más de 20 años en cargos administrativos y de supervisión en varias empresas públicas y privadas en México D.F., incluyendo la Secretaría de Educación Pública donde actualmente trabaja como Jefe de Oficina. Cuenta con educación secundaria y técnica, y ha tomado varios cursos de inglés, ISO 9000, Excel y otros temas. Ha recibido varios reconocimientos por su desempeño como servidor público.
20140919 Dr. John Rutledge Investing with the Financial Weather MapJohn Rutledge
The document discusses an investment framework called "Weather Map Investing" that aims to identify major economic forces ("storm systems") that will persist long enough to exploit for significant investment gains. It identifies 5 major storm systems: (1) Reflation from unprecedented central bank stimulus, (2) Regulatory fallout from new financial and healthcare regulations, (3) The ongoing EU debt crisis, (4) Japan's monetary and economic policies under "Abenomics", and (5) Geopolitical realignment in the wake of the financial crisis and wars. The document argues these storm systems will drive profound changes in asset prices and represent opportunities to deploy capital at attractive returns. However, it also notes risks include global political conflicts,
Sectoral Allocation & Pricing of Ground WaterTushar Dholakia
The document proposes a sectoral allocation and pricing policy for groundwater resources in predominantly agricultural watersheds and rural areas undergoing industrialization. It suggests allocating basic water rights to farmers for food security and poverty alleviation. Additional allocations would be given to industry, environment, and farmers for economic activities. Pricing of water would involve covering operational and maintenance costs initially, with full cost recovery later. It argues for targeted subsidies and preventing speculative investments in water resources. Assessment tools are needed to quantify availability and demands to manage groundwater resources sustainably.
This document provides an introduction to macroeconomic equilibrium and the concept of the Keynesian multiplier. It discusses how (1) an economy starts in equilibrium, (2) a disturbance such as an increase in government spending can occur, and (3) the economy transitions to a new equilibrium level of output and income through the multiplier process. Specifically, it explains that each additional round of spending leads to progressively smaller increases in overall output until a new equilibrium is reached, and the size of the multiplier depends on the marginal propensity to consume.
This document discusses market equilibrium and government intervention in prices. It defines market equilibrium as the situation where there is no tendency for price or quantity to change, which occurs where the market demand curve intersects the market supply curve. The document discusses three methods for determining market equilibrium: numerical analysis, graphical analysis, and mathematical analysis. It then explains how government policies like price ceilings and price floors can control prices and impact market outcomes by creating shortages or surpluses. Price ceilings set a legal maximum price, while price floors set a legal minimum, and the effects of each are illustrated with examples and diagrams.
The document outlines Gautam Awasthi's personal views on key account management. It discusses the 4 deal clinchers of price, performance, brand and relationship. It then presents a 3-step approach to key account management involving understanding the client, developing a strategy, and mobilizing the firm. An organization map is shown involving markets, marketing, sales and products. Finally, it discusses the winning combination between marketer and sales roles in driving preference, awareness, and market share.
The document summarizes key concepts related to demand and supply, including:
1) Demand is represented by a demand schedule or curve that shows the quantity consumers are willing to purchase at different prices, while supply is represented by a supply schedule or curve showing the quantity producers are willing to sell.
2) The law of demand and law of supply state that, other things remaining the same, quantity demanded increases with lower prices and quantity supplied increases with higher prices.
3) Market equilibrium occurs where quantity demanded equals quantity supplied, establishing a market clearing price.
The document discusses the global financial crisis and challenges for risk managers. It covers several topics including:
1) The financial crisis was due to networks becoming unstable once they cross thresholds of complexity/size.
2) Mainstream economic models and risk management practices failed to comprehend and model systemic risks in the financial system.
3) Financial markets alternate between normal and exceptional modes, and risk management needs to account for rare "dragon king" events stemming from endogenous market dynamics.
4) Moving forward, there is a need for integrated financial risk governance, new modeling tools that understand interrelated systemic risks, and policies to make financial and real economies more resilient.
Emotions Affect Markets in Predictable Ways: Behavioral Finance and Sentiment...Cristian Bissattini
Financial markets are not purely rational. Emotions play a large part in stock pricing. H2O Sentiment Analysis captures these emotions, the “animal spirits” coined by Keynes, through social media post messages.
We employ a novel way to capture and quantify sentiment based on authors' credibility, namely tracking the accuracy of past recommendations. Our results provide evidence that there is strong and useful information on investor sentiment and likely stock market movements.
Our research (done in collaboration with the Università della Svizzera italiana) has demonstrated that we can use this information in order to make predictions about stock price changes and to implement trading strategies based on sentiment analysis that perform, on average, better than traditional investment strategies like Buy and Hold or Moving Averages.
A discussion of risk lessons learned from the financial crisis. I argue that the public debate on risk management failures is mis-focused, and I propose an alternative paradigm for identifying the challenges to effective risk management and for directing future efforts to increase the effectiveness of risk management.
Week 6 - Final Assignment Integrative Literatu.docxjessiehampson
Week 6 - Final
Assignment
Integrative Literature
Review
A special report on financial risk l February 13th 2010
The gods strike back
RISk.indd 1 2/2/10 13:08:02
The Economist February 13th 2010 A special report on �nancial risk 1
Financial risk got ahead of the world’s ability to manage it.
Matthew Valencia asks if it can be tamed again
ed by larger balance sheets and greater le-
verage (borrowing), risk was being capped
by a technological shift.
There was something self-serving
about this. The more that risk could be cali-
brated, the greater the opportunity to turn
debt into securities that could be sold or
held in trading books, with lower capital
charges than regular loans. Regulators ac-
cepted this, arguing that the �great moder-
ation� had subdued macroeconomic dan-
gers and that securitisation had chopped
up individual �rms’ risks into manageable
lumps. This faith in the new, technology-
driven order was re�ected in the Basel 2
bank-capital rules, which relied heavily on
the banks’ internal models.
There were bumps along the way, such
as the near-collapse of Long-Term Capital
Management (LTCM), a hedge fund, and
the dotcom bust, but each time markets re-
covered relatively quickly. Banks grew
cocky. But that sense of security was de-
stroyed by the meltdown of 2007-09,
which as much as anything was a crisis of
modern metrics-based risk management.
The idea that markets can be left to police
themselves turned out to be the world’s
most expensive mistake, requiring $15 tril-
lion in capital injections and other forms
of support. �It has cost a lot to learn how lit-
tle we really knew,� says a senior central
banker. Another lesson was that managing
risk is as much about judgment as about
numbers. Trying ever harder to capture
The gods strike back
�THE revolutionary idea that de�nesthe boundary between modern
times and the past is the mastery of risk:
the notion that the future is more than a
whim of the gods and that men and wom-
en are not passive before nature.� So wrote
Peter Bernstein in his seminal history of
risk, �Against the Gods�, published in 1996.
And so it seemed, to all but a few Cassan-
dras, for much of the decade that followed.
Finance enjoyed a golden period, with low
interest rates, low volatility and high re-
turns. Risk seemed to have been reduced
to a permanently lower level.
This purported new paradigm hinged,
in large part, on three closely linked devel-
opments: the huge growth of derivatives;
the decomposition and distribution of
credit risk through securitisation; and the
formidable combination of mathematics
and computing power in risk management
that had its roots in academic work of the
mid-20th century. It blossomed in the
1990s at �rms such as Bankers Trust and
JPMorgan, which developed �value-at-
risk� (VAR), a way for banks to calculate
how much they could expect to lose when
things got really rough.
Suddenly it seemed possible for any �-
nancial risk to be ...
Abstract
The idea of an Efficient Market first came from the French mathematician Louis Bachelier in 1900: « The theory of speculation ».
Bachelier argued that there is no useful information in past stock prices that can help predicting future prices and proposed a theory for financial options’ valuation based on Fourier’s law and Brownian’s motions (time series).
Bachelier’s work get popular in the 60s during the computer’s era.
In 1965, Eugene Fama published a dissertation arguing for the random walk hypothesis (Stock market’s prices evolve randomly: prices cannot be predicted using past data).
In 1970, Fama published a review of the theory and empirical evidences
The EMH (Efficient Market Hypothesis): Financial markets are efficient at processing information. Consequently, the prices of securities is a correct representation of all information available at any time.
Weak:
Not possible to earn superior profits (risk adjusted) based on the knowledge of past prices and returns.
Semi-strong:
Not possible to earn superior profits using all information publicly available.
Strong:
Not possible to earn superior profit using all publicly and inside information.
The CAPM describes the relationship between market risks and expected return for a security i (also called cost of equity), E(Re_i):
Re_i = Rf – Bi(Rm – Rf)
With:
Rf = Risk free rate (typically government bond rate)
Rm = Expected return for the whole market
Bi = The volatility risk of the security i compared to the whole market
(Rm – Rf) is consequently the market risk premium
According to the EMH, for a well-diversified portfolio, expected returns can only reflect those of the market as a whole. Consequently, in the CAPM formula, It would involves that for a diversified-enough portfolio: β = 1 so Re = Rm
Investors want to value companies before making investment decisions.
A typical way to do so is to use the Discounted Cash Flow (DCF) method:
See also: Prospect theory, disposition effect, heuristic, framing, mental accounting, Home bias, representativeness, conservatism, availability, greater fool theory, self attribution theory, anchoring, ambiguity aversion, winner's curse, managerial miscalibration and misconception, Equity premium puzzle, market anomalies, excess volatility, Bubbles, herding, limited liabilities, Fama French three 3 factors model.
Current Issues in Risk Management
Presenter: Stewart Hodges
Cass Business School
Fourth Annual Conference of the Cass-Capco Institute Paper Series on Risk
April 14, 2011
Long term investment strategies: Dollar cost averaging vs Lump sum investmentsibercovich
This document summarizes topics in financial mathematics including stochastic calculus, probability distributions, risk measures like value at risk, efficient market hypothesis, and numerical methods. It discusses using tools from fields like signal processing, information theory, and partial differential equations to analyze financial data and markets. Issues with dependencies in financial data and the complexity of modeling real-world markets are also addressed.
The document discusses log-periodic analysis of critical crashes in the Portuguese stock market. It begins with an outline of the presentation topics, which include motivation for the research, introduction to the theory of self-similar oscillations, literature review on rationality and herding behavior, the log-periodic formula, past international crashes in 1998, 2007 and 2015, methodology used, results and discussion. The presentation aims to analyze critical crashes in the Portuguese stock market using the log-periodic power law theory of financial singularities to identify early warning signs and better understand crash dynamics.
This research explores the trajectory of urbanization under capitalism and the evolutionary development of the financial system as a joint historical process. While design schools continue to propagate the famous Bauhaus adage "form follows function'', the particular historical reality of the American metropolis is that "form follows finance''. Focusing on the spatial consequences of the U.S. financial system since the 1830s, I argue that a general theory of urban rise and decline must establish explicit linkages between money, credit and banking and urban spatial structure. In particular, my research develops the case that money and finance are non-neutral with regard to space, principally because the institutional arrangements of finance matter for how the built environment evolves. In a globalizing economy, architecture and urban design thus have an increasing role in facilitating the circulation and accumulation of capital.
The recent financial crisis was a powerful reminder that the inherent instability of the monetary-financial system is likely entail serious consequences for the real economy.In responding to the crisis, both national and international policy makers have identified several gaps in the perimeter of financial regulation as the main culprit for failing to prevent the financial meltdown and its reverberations throughout the global economy. In many ways, the financial crisis has highlighted the importance of Hyman Minsky's work on financial instability and, perhaps in a more subtle way, the larger writings of Post-Keynesians on the non-neutrality of money. Common to all of this work is the special attention that it pays to the role of the financial sector as a source of fluctuations in the real sector, including the spatial structure of regional economies.
Paying particular attention to the analytic trinity of ideas, institutions and events, this research explores how the concept of "financial resilience" ought to be situated within the broader context of "money and the city" and the rapidly expanding research on urban resilience.
This document discusses options for managing systemic banking crises. It argues that the ongoing financial crisis results from a structural failure of prioritizing efficiency over diversity and resilience in the monetary and financial systems. Conventional solutions like nationalizing toxic assets or banks only address symptoms and not the underlying causes. The document proposes complementing conventional currencies with alternative currencies that are designed to increase money availability for exchange and link unused resources with unmet needs. These complementary currencies could help stabilize the economy and ensure future crises are avoided.
The document summarizes the global financial crisis, its causes, responses, and future implications. It also discusses Israel's relative insulation and need for public sector reform. The key points are:
1) The crisis began in subprime mortgages but became a liquidity crisis due to over-complex financial assets and defective regulation.
2) Responses focused on injecting capital into banks while improving long-term regulation. Emerging markets will have more influence going forward.
3) Israel was less affected due to avoiding complex assets and prudent bank regulation, but needs reform of weak public infrastructure planning and regulation of oligopolies.
The document discusses the current state of global financial markets and investments. It argues that decades of central bank intervention and money printing have created massive bubbles across asset classes. Modern portfolio theory and investment strategies no longer apply in these distorted markets. Investors have experienced huge gains, but future outcomes are uncertain as bubbles could burst, meaning past returns may not continue. Financial advisors must look beyond standard models and assumptions to help clients appropriately navigate this challenging environment.
Juan Francisco Medina Muñoz busca un empleo mejor remunerado. Tiene experiencia de más de 20 años en cargos administrativos y de supervisión en varias empresas públicas y privadas en México D.F., incluyendo la Secretaría de Educación Pública donde actualmente trabaja como Jefe de Oficina. Cuenta con educación secundaria y técnica, y ha tomado varios cursos de inglés, ISO 9000, Excel y otros temas. Ha recibido varios reconocimientos por su desempeño como servidor público.
20140919 Dr. John Rutledge Investing with the Financial Weather MapJohn Rutledge
The document discusses an investment framework called "Weather Map Investing" that aims to identify major economic forces ("storm systems") that will persist long enough to exploit for significant investment gains. It identifies 5 major storm systems: (1) Reflation from unprecedented central bank stimulus, (2) Regulatory fallout from new financial and healthcare regulations, (3) The ongoing EU debt crisis, (4) Japan's monetary and economic policies under "Abenomics", and (5) Geopolitical realignment in the wake of the financial crisis and wars. The document argues these storm systems will drive profound changes in asset prices and represent opportunities to deploy capital at attractive returns. However, it also notes risks include global political conflicts,
Sectoral Allocation & Pricing of Ground WaterTushar Dholakia
The document proposes a sectoral allocation and pricing policy for groundwater resources in predominantly agricultural watersheds and rural areas undergoing industrialization. It suggests allocating basic water rights to farmers for food security and poverty alleviation. Additional allocations would be given to industry, environment, and farmers for economic activities. Pricing of water would involve covering operational and maintenance costs initially, with full cost recovery later. It argues for targeted subsidies and preventing speculative investments in water resources. Assessment tools are needed to quantify availability and demands to manage groundwater resources sustainably.
This document provides an introduction to macroeconomic equilibrium and the concept of the Keynesian multiplier. It discusses how (1) an economy starts in equilibrium, (2) a disturbance such as an increase in government spending can occur, and (3) the economy transitions to a new equilibrium level of output and income through the multiplier process. Specifically, it explains that each additional round of spending leads to progressively smaller increases in overall output until a new equilibrium is reached, and the size of the multiplier depends on the marginal propensity to consume.
This document discusses market equilibrium and government intervention in prices. It defines market equilibrium as the situation where there is no tendency for price or quantity to change, which occurs where the market demand curve intersects the market supply curve. The document discusses three methods for determining market equilibrium: numerical analysis, graphical analysis, and mathematical analysis. It then explains how government policies like price ceilings and price floors can control prices and impact market outcomes by creating shortages or surpluses. Price ceilings set a legal maximum price, while price floors set a legal minimum, and the effects of each are illustrated with examples and diagrams.
The document outlines Gautam Awasthi's personal views on key account management. It discusses the 4 deal clinchers of price, performance, brand and relationship. It then presents a 3-step approach to key account management involving understanding the client, developing a strategy, and mobilizing the firm. An organization map is shown involving markets, marketing, sales and products. Finally, it discusses the winning combination between marketer and sales roles in driving preference, awareness, and market share.
The document summarizes key concepts related to demand and supply, including:
1) Demand is represented by a demand schedule or curve that shows the quantity consumers are willing to purchase at different prices, while supply is represented by a supply schedule or curve showing the quantity producers are willing to sell.
2) The law of demand and law of supply state that, other things remaining the same, quantity demanded increases with lower prices and quantity supplied increases with higher prices.
3) Market equilibrium occurs where quantity demanded equals quantity supplied, establishing a market clearing price.
The document discusses the global financial crisis and challenges for risk managers. It covers several topics including:
1) The financial crisis was due to networks becoming unstable once they cross thresholds of complexity/size.
2) Mainstream economic models and risk management practices failed to comprehend and model systemic risks in the financial system.
3) Financial markets alternate between normal and exceptional modes, and risk management needs to account for rare "dragon king" events stemming from endogenous market dynamics.
4) Moving forward, there is a need for integrated financial risk governance, new modeling tools that understand interrelated systemic risks, and policies to make financial and real economies more resilient.
Emotions Affect Markets in Predictable Ways: Behavioral Finance and Sentiment...Cristian Bissattini
Financial markets are not purely rational. Emotions play a large part in stock pricing. H2O Sentiment Analysis captures these emotions, the “animal spirits” coined by Keynes, through social media post messages.
We employ a novel way to capture and quantify sentiment based on authors' credibility, namely tracking the accuracy of past recommendations. Our results provide evidence that there is strong and useful information on investor sentiment and likely stock market movements.
Our research (done in collaboration with the Università della Svizzera italiana) has demonstrated that we can use this information in order to make predictions about stock price changes and to implement trading strategies based on sentiment analysis that perform, on average, better than traditional investment strategies like Buy and Hold or Moving Averages.
A discussion of risk lessons learned from the financial crisis. I argue that the public debate on risk management failures is mis-focused, and I propose an alternative paradigm for identifying the challenges to effective risk management and for directing future efforts to increase the effectiveness of risk management.
Week 6 - Final Assignment Integrative Literatu.docxjessiehampson
Week 6 - Final
Assignment
Integrative Literature
Review
A special report on financial risk l February 13th 2010
The gods strike back
RISk.indd 1 2/2/10 13:08:02
The Economist February 13th 2010 A special report on �nancial risk 1
Financial risk got ahead of the world’s ability to manage it.
Matthew Valencia asks if it can be tamed again
ed by larger balance sheets and greater le-
verage (borrowing), risk was being capped
by a technological shift.
There was something self-serving
about this. The more that risk could be cali-
brated, the greater the opportunity to turn
debt into securities that could be sold or
held in trading books, with lower capital
charges than regular loans. Regulators ac-
cepted this, arguing that the �great moder-
ation� had subdued macroeconomic dan-
gers and that securitisation had chopped
up individual �rms’ risks into manageable
lumps. This faith in the new, technology-
driven order was re�ected in the Basel 2
bank-capital rules, which relied heavily on
the banks’ internal models.
There were bumps along the way, such
as the near-collapse of Long-Term Capital
Management (LTCM), a hedge fund, and
the dotcom bust, but each time markets re-
covered relatively quickly. Banks grew
cocky. But that sense of security was de-
stroyed by the meltdown of 2007-09,
which as much as anything was a crisis of
modern metrics-based risk management.
The idea that markets can be left to police
themselves turned out to be the world’s
most expensive mistake, requiring $15 tril-
lion in capital injections and other forms
of support. �It has cost a lot to learn how lit-
tle we really knew,� says a senior central
banker. Another lesson was that managing
risk is as much about judgment as about
numbers. Trying ever harder to capture
The gods strike back
�THE revolutionary idea that de�nesthe boundary between modern
times and the past is the mastery of risk:
the notion that the future is more than a
whim of the gods and that men and wom-
en are not passive before nature.� So wrote
Peter Bernstein in his seminal history of
risk, �Against the Gods�, published in 1996.
And so it seemed, to all but a few Cassan-
dras, for much of the decade that followed.
Finance enjoyed a golden period, with low
interest rates, low volatility and high re-
turns. Risk seemed to have been reduced
to a permanently lower level.
This purported new paradigm hinged,
in large part, on three closely linked devel-
opments: the huge growth of derivatives;
the decomposition and distribution of
credit risk through securitisation; and the
formidable combination of mathematics
and computing power in risk management
that had its roots in academic work of the
mid-20th century. It blossomed in the
1990s at �rms such as Bankers Trust and
JPMorgan, which developed �value-at-
risk� (VAR), a way for banks to calculate
how much they could expect to lose when
things got really rough.
Suddenly it seemed possible for any �-
nancial risk to be ...
Abstract
The idea of an Efficient Market first came from the French mathematician Louis Bachelier in 1900: « The theory of speculation ».
Bachelier argued that there is no useful information in past stock prices that can help predicting future prices and proposed a theory for financial options’ valuation based on Fourier’s law and Brownian’s motions (time series).
Bachelier’s work get popular in the 60s during the computer’s era.
In 1965, Eugene Fama published a dissertation arguing for the random walk hypothesis (Stock market’s prices evolve randomly: prices cannot be predicted using past data).
In 1970, Fama published a review of the theory and empirical evidences
The EMH (Efficient Market Hypothesis): Financial markets are efficient at processing information. Consequently, the prices of securities is a correct representation of all information available at any time.
Weak:
Not possible to earn superior profits (risk adjusted) based on the knowledge of past prices and returns.
Semi-strong:
Not possible to earn superior profits using all information publicly available.
Strong:
Not possible to earn superior profit using all publicly and inside information.
The CAPM describes the relationship between market risks and expected return for a security i (also called cost of equity), E(Re_i):
Re_i = Rf – Bi(Rm – Rf)
With:
Rf = Risk free rate (typically government bond rate)
Rm = Expected return for the whole market
Bi = The volatility risk of the security i compared to the whole market
(Rm – Rf) is consequently the market risk premium
According to the EMH, for a well-diversified portfolio, expected returns can only reflect those of the market as a whole. Consequently, in the CAPM formula, It would involves that for a diversified-enough portfolio: β = 1 so Re = Rm
Investors want to value companies before making investment decisions.
A typical way to do so is to use the Discounted Cash Flow (DCF) method:
See also: Prospect theory, disposition effect, heuristic, framing, mental accounting, Home bias, representativeness, conservatism, availability, greater fool theory, self attribution theory, anchoring, ambiguity aversion, winner's curse, managerial miscalibration and misconception, Equity premium puzzle, market anomalies, excess volatility, Bubbles, herding, limited liabilities, Fama French three 3 factors model.
Current Issues in Risk Management
Presenter: Stewart Hodges
Cass Business School
Fourth Annual Conference of the Cass-Capco Institute Paper Series on Risk
April 14, 2011
Long term investment strategies: Dollar cost averaging vs Lump sum investmentsibercovich
This document summarizes topics in financial mathematics including stochastic calculus, probability distributions, risk measures like value at risk, efficient market hypothesis, and numerical methods. It discusses using tools from fields like signal processing, information theory, and partial differential equations to analyze financial data and markets. Issues with dependencies in financial data and the complexity of modeling real-world markets are also addressed.
The document discusses log-periodic analysis of critical crashes in the Portuguese stock market. It begins with an outline of the presentation topics, which include motivation for the research, introduction to the theory of self-similar oscillations, literature review on rationality and herding behavior, the log-periodic formula, past international crashes in 1998, 2007 and 2015, methodology used, results and discussion. The presentation aims to analyze critical crashes in the Portuguese stock market using the log-periodic power law theory of financial singularities to identify early warning signs and better understand crash dynamics.
This research explores the trajectory of urbanization under capitalism and the evolutionary development of the financial system as a joint historical process. While design schools continue to propagate the famous Bauhaus adage "form follows function'', the particular historical reality of the American metropolis is that "form follows finance''. Focusing on the spatial consequences of the U.S. financial system since the 1830s, I argue that a general theory of urban rise and decline must establish explicit linkages between money, credit and banking and urban spatial structure. In particular, my research develops the case that money and finance are non-neutral with regard to space, principally because the institutional arrangements of finance matter for how the built environment evolves. In a globalizing economy, architecture and urban design thus have an increasing role in facilitating the circulation and accumulation of capital.
The recent financial crisis was a powerful reminder that the inherent instability of the monetary-financial system is likely entail serious consequences for the real economy.In responding to the crisis, both national and international policy makers have identified several gaps in the perimeter of financial regulation as the main culprit for failing to prevent the financial meltdown and its reverberations throughout the global economy. In many ways, the financial crisis has highlighted the importance of Hyman Minsky's work on financial instability and, perhaps in a more subtle way, the larger writings of Post-Keynesians on the non-neutrality of money. Common to all of this work is the special attention that it pays to the role of the financial sector as a source of fluctuations in the real sector, including the spatial structure of regional economies.
Paying particular attention to the analytic trinity of ideas, institutions and events, this research explores how the concept of "financial resilience" ought to be situated within the broader context of "money and the city" and the rapidly expanding research on urban resilience.
This document discusses options for managing systemic banking crises. It argues that the ongoing financial crisis results from a structural failure of prioritizing efficiency over diversity and resilience in the monetary and financial systems. Conventional solutions like nationalizing toxic assets or banks only address symptoms and not the underlying causes. The document proposes complementing conventional currencies with alternative currencies that are designed to increase money availability for exchange and link unused resources with unmet needs. These complementary currencies could help stabilize the economy and ensure future crises are avoided.
The document summarizes the global financial crisis, its causes, responses, and future implications. It also discusses Israel's relative insulation and need for public sector reform. The key points are:
1) The crisis began in subprime mortgages but became a liquidity crisis due to over-complex financial assets and defective regulation.
2) Responses focused on injecting capital into banks while improving long-term regulation. Emerging markets will have more influence going forward.
3) Israel was less affected due to avoiding complex assets and prudent bank regulation, but needs reform of weak public infrastructure planning and regulation of oligopolies.
The document discusses the current state of global financial markets and investments. It argues that decades of central bank intervention and money printing have created massive bubbles across asset classes. Modern portfolio theory and investment strategies no longer apply in these distorted markets. Investors have experienced huge gains, but future outcomes are uncertain as bubbles could burst, meaning past returns may not continue. Financial advisors must look beyond standard models and assumptions to help clients appropriately navigate this challenging environment.
The document provides an overview of modern portfolio theory and passive investing strategies. It discusses key concepts like diversification, indexing, minimizing costs and turnover. The main recommendations are to invest in a few low-cost index funds covering major asset classes, rebalance annually, and maintain a buy-and-hold approach to achieve market-level returns. While EMH is largely valid, the evidence on value and small cap outperformance suggests tilting portfolios somewhat toward those factors.
The Facts and Fictions of the Securities IndustrySam Vaknin
This document contains an introduction to a book on the securities industry. It discusses several concepts related to valuing stocks and companies, including market capitalization, management compensation, cash flows, risk, liquidity, and various valuation models. It notes that the value of stocks is based on expected future cash flows from the company, securities markets, and current market participants. Stock prices reflect risks related to the specific company as well as broader market risks. Valuation requires estimating future dividends, earnings, or free cash flows and discounting them to arrive at a present value. The document also briefly discusses the process of due diligence required when attracting foreign investment.
The document discusses risk and uncertainty in economic life. It defines risk as the economic effect of uncertainty, often quantified as the variability in potential payoffs. It describes how probability and statistics are used to analyze risk and uncertainty. It discusses different types of risks like idiosyncratic and systemic risks. Finally, it explains how risk can be managed through hedging, which reduces risk by combining offsetting investments, and diversification, which reduces risk by spreading investments across many uncorrelated sources of risk.
The core objectives of a bank’s treasury are clear; to conduct the asset liability management
process and in particular, to invest in creditworthy assets, to maintain sufficient liquidity and to maximise returns. The challenge is that these
three objectives are not always mutually compatible; as a result the Treasurer and their
team has a delicate balancing act, how to measure and manage these complex factors
and to keep proper control of all the processes.
This document provides an overview of the global financial crisis, including its causes in the subprime mortgage lending boom and bust in the United States, the effects on credit markets and the real economy, and policy responses both domestically and internationally. It discusses the difficulties in policymaking given tradeoffs between liquidity and moral hazard, regulation and competitiveness, and domestic and international priorities. While reform goals are broadly agreed upon, specific policies and institutions face disagreement due to these complex tradeoffs and competing political interests among nations.
Similar to John Rutledge, Claremont Graduate University February 14, 2012 (20)
How to Invest in Cryptocurrency for Beginners: A Complete GuideDaniel
Cryptocurrency is digital money that operates independently of a central authority, utilizing cryptography for security. Unlike traditional currencies issued by governments (fiat currencies), cryptocurrencies are decentralized and typically operate on a technology called blockchain. Each cryptocurrency transaction is recorded on a public ledger, ensuring transparency and security.
Cryptocurrencies can be used for various purposes, including online purchases, investment opportunities, and as a means of transferring value globally without the need for intermediaries like banks.
New Visa Rules for Tourists and Students in Thailand | Amit Kakkar Easy VisaAmit Kakkar
Discover essential details about Thailand's recent visa policy changes, tailored for tourists and students. Amit Kakkar Easy Visa provides a comprehensive overview of new requirements, application processes, and tips to ensure a smooth transition for all travelers.
KYC Compliance: A Cornerstone of Global Crypto Regulatory FrameworksAny kyc Account
This presentation explores the pivotal role of KYC compliance in shaping and enforcing global regulations within the dynamic landscape of cryptocurrencies. Dive into the intricate connection between KYC practices and the evolving legal frameworks governing the crypto industry.
Madhya Pradesh, the "Heart of India," boasts a rich tapestry of culture and heritage, from ancient dynasties to modern developments. Explore its land records, historical landmarks, and vibrant traditions. From agricultural expanses to urban growth, Madhya Pradesh offers a unique blend of the ancient and modern.
Economic Risk Factor Update: June 2024 [SlideShare]Commonwealth
May’s reports showed signs of continued economic growth, said Sam Millette, director, fixed income, in his latest Economic Risk Factor Update.
For more market updates, subscribe to The Independent Market Observer at https://blog.commonwealth.com/independent-market-observer.
In a tight labour market, job-seekers gain bargaining power and leverage it into greater job quality—at least, that’s the conventional wisdom.
Michael, LMIC Economist, presented findings that reveal a weakened relationship between labour market tightness and job quality indicators following the pandemic. Labour market tightness coincided with growth in real wages for only a portion of workers: those in low-wage jobs requiring little education. Several factors—including labour market composition, worker and employer behaviour, and labour market practices—have contributed to the absence of worker benefits. These will be investigated further in future work.
Independent Study - College of Wooster Research (2023-2024) FDI, Culture, Glo...AntoniaOwensDetwiler
"Does Foreign Direct Investment Negatively Affect Preservation of Culture in the Global South? Case Studies in Thailand and Cambodia."
Do elements of globalization, such as Foreign Direct Investment (FDI), negatively affect the ability of countries in the Global South to preserve their culture? This research aims to answer this question by employing a cross-sectional comparative case study analysis utilizing methods of difference. Thailand and Cambodia are compared as they are in the same region and have a similar culture. The metric of difference between Thailand and Cambodia is their ability to preserve their culture. This ability is operationalized by their respective attitudes towards FDI; Thailand imposes stringent regulations and limitations on FDI while Cambodia does not hesitate to accept most FDI and imposes fewer limitations. The evidence from this study suggests that FDI from globally influential countries with high gross domestic products (GDPs) (e.g. China, U.S.) challenges the ability of countries with lower GDPs (e.g. Cambodia) to protect their culture. Furthermore, the ability, or lack thereof, of the receiving countries to protect their culture is amplified by the existence and implementation of restrictive FDI policies imposed by their governments.
My study abroad in Bali, Indonesia, inspired this research topic as I noticed how globalization is changing the culture of its people. I learned their language and way of life which helped me understand the beauty and importance of cultural preservation. I believe we could all benefit from learning new perspectives as they could help us ideate solutions to contemporary issues and empathize with others.
The Impact of Generative AI and 4th Industrial RevolutionPaolo Maresca
This infographic explores the transformative power of Generative AI, a key driver of the 4th Industrial Revolution. Discover how Generative AI is revolutionizing industries, accelerating innovation, and shaping the future of work.
Confirmation of Payee (CoP) is a vital security measure adopted by financial institutions and payment service providers. Its core purpose is to confirm that the recipient’s name matches the information provided by the sender during a banking transaction, ensuring that funds are transferred to the correct payment account.
Confirmation of Payee was built to tackle the increasing numbers of APP Fraud and in the landscape of UK banking, the spectre of APP fraud looms large. In 2022, over £1.2 billion was stolen by fraudsters through authorised and unauthorised fraud, equivalent to more than £2,300 every minute. This statistic emphasises the urgent need for robust security measures like CoP. While over £1.2 billion was stolen through fraud in 2022, there was an eight per cent reduction compared to 2021 which highlights the positive outcomes obtained from the implementation of Confirmation of Payee. The number of fraud cases across the UK also decreased by four per cent to nearly three million cases during the same period; latest statistics from UK Finance.
In essence, Confirmation of Payee plays a pivotal role in digital banking, guaranteeing the flawless execution of banking transactions. It stands as a guardian against fraud and misallocation, demonstrating the commitment of financial institutions to safeguard their clients’ assets. The next time you engage in a banking transaction, remember the invaluable role of CoP in ensuring the security of your financial interests.
For more details, you can visit https://technoxander.com.
The Rise and Fall of Ponzi Schemes in America.pptxDiana Rose
Ponzi schemes, a notorious form of financial fraud, have plagued America’s investment landscape for decades. Named after Charles Ponzi, who orchestrated one of the most infamous schemes in the early 20th century, these fraudulent operations promise high returns with little or no risk, only to collapse and leave investors with significant losses. This article explores the nature of Ponzi schemes, notable cases in American history, their impact on victims, and measures to prevent falling prey to such scams.
Understanding Ponzi Schemes
A Ponzi scheme is an investment scam where returns are paid to earlier investors using the capital from newer investors, rather than from legitimate profit earned. The scheme relies on a constant influx of new investments to continue paying the promised returns. Eventually, when the flow of new money slows down or stops, the scheme collapses, leaving the majority of investors with substantial financial losses.
Historical Context: Charles Ponzi and His Legacy
Charles Ponzi is the namesake of this deceptive practice. In the 1920s, Ponzi promised investors in Boston a 50% return within 45 days or 100% return in 90 days through arbitrage of international reply coupons. Initially, he paid returns as promised, not from profits, but from the investments of new participants. When his scheme unraveled, it resulted in losses exceeding $20 million (equivalent to about $270 million today).
Notable American Ponzi Schemes
1. Bernie Madoff: Perhaps the most notorious Ponzi scheme in recent history, Bernie Madoff’s fraud involved $65 billion. Madoff, a well-respected figure in the financial industry, promised steady, high returns through a secretive investment strategy. His scheme lasted for decades before collapsing in 2008, devastating thousands of investors, including individuals, charities, and institutional clients.
2. Allen Stanford: Through his company, Stanford Financial Group, Allen Stanford orchestrated a $7 billion Ponzi scheme, luring investors with fraudulent certificates of deposit issued by his offshore bank. Stanford promised high returns and lavish lifestyle benefits to his investors, which ultimately led to a 110-year prison sentence for the financier in 2012.
3. Tom Petters: In a scheme that lasted more than a decade, Tom Petters ran a $3.65 billion Ponzi scheme, using his company, Petters Group Worldwide. He claimed to buy and sell consumer electronics, but in reality, he used new investments to pay off old debts and fund his extravagant lifestyle. Petters was convicted in 2009 and sentenced to 50 years in prison.
4. Eric Dalius and Saivian: Eric Dalius, a prominent figure behind Saivian, a cashback program promising high returns, is under scrutiny for allegedly orchestrating a Ponzi scheme. Saivian enticed investors with promises of up to 20% cash back on everyday purchases. However, investigations suggest that the returns were paid using new investments rather than legitimate profits. The collapse of Saivian l
Fabular Frames and the Four Ratio ProblemMajid Iqbal
Digital, interactive art showing the struggle of a society in providing for its present population while also saving planetary resources for future generations. Spread across several frames, the art is actually the rendering of real and speculative data. The stereographic projections change shape in response to prompts and provocations. Visitors interact with the model through speculative statements about how to increase savings across communities, regions, ecosystems and environments. Their fabulations combined with random noise, i.e. factors beyond control, have a dramatic effect on the societal transition. Things get better. Things get worse. The aim is to give visitors a new grasp and feel of the ongoing struggles in democracies around the world.
Stunning art in the small multiples format brings out the spatiotemporal nature of societal transitions, against backdrop issues such as energy, housing, waste, farmland and forest. In each frame we see hopeful and frightful interplays between spending and saving. Problems emerge when one of the two parts of the existential anaglyph rapidly shrinks like Arctic ice, as factors cross thresholds. Ecological wealth and intergenerational equity areFour at stake. Not enough spending could mean economic stress, social unrest and political conflict. Not enough saving and there will be climate breakdown and ‘bankruptcy’. So where does speculative design start and the gambling and betting end? Behind each fabular frame is a four ratio problem. Each ratio reflects the level of sacrifice and self-restraint a society is willing to accept, against promises of prosperity and freedom. Some values seem to stabilise a frame while others cause collapse. Get the ratios right and we can have it all. Get them wrong and things get more desperate.
John Rutledge, Claremont Graduate University February 14, 2012
1. Dr. John Rutledge Claremont Graduate University February 14, 2012 Far From Equilibrium Economics: Network Failure, Credit Crisis, and Optimal Portfolios
17. Dr. John Rutledge Claremont Graduate University February 14, 2012 Far From Equilibrium Economics: Network Failure, Credit Crisis, and Optimal Portfolios
Editor's Notes
Fisher, Josiah Gibbs. (dissertation supervisor, Fisher financed Gibbs Collected Works Samuelson (1998, p. 1376). “Perhaps most relevant of all for the geneses if Foundations , Edwin Bidwell Wilson was at Harvard. Wilson was the great (Josiah) Willard Gibbs’s last (and, essentially only) protégé at Yale . He was a mathematician, a mathematical physicist, a mathematical statistician, a mathematical economist, a polymath who had done first-class work in many fields of the natural and social sciences. I was perhaps his only disciple … I was vaccinated early to understand that economics and physics could share the same formal mathematical theorems.” Gibbs products, coined term statistical mechanics (explain laws of thermo using stat properties of ensembles of particles, with Boltzmann, Maxwell), invented vector calculus, Gibbs free energy. 1 st US PHD in engineering from Yale in 1863 Einstein…”greatest mind in American history” (letters to Poincare, Hilbert, Boltzmann, Mach, le Chatalier, van der Waals, Planck