10 February 2018
As the financial press had it, the financial markets had quite a dramatic week.
Put it in context, how dramatic was it?more
Medieval mapmakers noted the risk of an unknown kind by “here be dragons”. Attempts at measuring extreme risk should come with a similar warning. Just like the sailors of yesteryear, financial institutions will go into unknown territories and, just like the map makers of the earlier era, modern risk modellers have little to say.more
Two widely used indicators of financial risk, the VIX index and the ECB’s CISS, are at a historical low. The (financial) world must be really safe. However, that doesn’t square with all the newspaper headlines screaming political uncertainty. What gives?more
The new postcrisis financial regulations, for example Basel III, have the unfortunate side effect of favouring the largest banks relative to the smaller. This can result in concentration, oligopolies, and even larger SIFI banks. This problem is made worse because of how Europe likes to regulate.more
Regulations change behaviour and outcomes. It is seductively attractive to say that someone misbehaves, therefore we need the rule to prevent the misbehaviour. However, human beings, being human, don’t just comply, their behaviour changes. That is why regulating the financial system is infinitely more complex than engineering.more
I did a seminar at the University of Iceland. The first half of the presentation was about risk and regulations and the second part is about economic policy in Iceland. The slides can be downloaded from here.
The announcement is here.
The slides are in English but the Icelandic title is:
Stenst uppskriftin í raunverulegum bakstri? Getur þjóðhagsvarúð og peningastefna skilað því sem lofað er - eða aðeins lækka hagvöxt að nauðsynjalausu?more
Keynote speech at the bank of Lithuania on “Should macroprudential policy target real estate prices?”more
I got to present my paper Learning from History: Volatility and Financial Crises at the London quant group (LQG). The slides can be downloaded here.more
The Icelandic government announced today it it lifting its capital controls. Private investors, pension funds and the government need to prioritise investing abroad to lower the chance of another crash.
The Icelandic authorities in November 2008 imposed capital controls because they were in a panic over how to react to the crisis. The IMF was an enthusiastic supporter, its representative at the time arguing that it was one half of a belts and suspenders policy, the other being interest rates of 21%.more
I have been struggling to make sense of the Brexit debate. Perfectly reasonable, well informed and highly intelligent people reach diametrically opposite conclusions, all impeccably argued. In order to make sense of the debate, I did what any quant might do and made a graph of the competing Brexit visions.more
One of the puzzling things about post-crisis financial policymaking is the dual understanding that we missed the excessive build-up of risk before 2007 in spite of having all the numbers right in front of us and at the same time founding the new world order on numbers and measurements. Have the policymakers fallen for the McNamara fallacy?
Why do the regulatory authorities seemingly fall into the category of model believers, if not quite to the view that there must be one true model? Well, it is sort of inevitable the way the regulatory process works.more
There a lot of evidence that models are less than perfectly reliable. Why then do we rely so much on models in decision-making, and especially financial regulations? Because there are three types of people: Believers in true model, skeptics who accept model risk and nihilistic rejectionists.more
Much of the analysis of the recent market turmoil is amusing. Take the Wall Street Journal, Why the Fed Is the Root of Much Market Turmoil: Fed is a key reason markets have plunged and risk of recession rising . Here is a quote:more
Last January I looked at how the Swiss FX shock affected the most popular risk measures. Events of the past week give us another interesting test. My daily risk forecast shows the various risk measures for a number of assets, but focus on the SP-500, and the following picture taken from the site today:more
I have been in a conference for the past few days, and have seen a few presentations on macropru type regulations.more
Our LSE blog It is important that we understand and do something about systemic risk. The problem is that we desire two incompatible things simultaneously: we wish the financial system to be safe; but we also want to finance risky economic activity.more
I got to be on the radio show Sprengisandur, if you understand Icelandic. After discussing Greece, got asked about Iceland. The Icelandic authorities could have made some of the same mistakes as the Greek government did in its crisis, but overall, the three governments since then, have done a decent job. All, in their own way, paving the way for prosperity.more
May 14, 2015
Bloomberg today had an interesting piece, called Market Moves That Are Supposed to Happen Every Half-Decade Keep Happening. Here is their self-described “terribly simplistic list”
Just looked again at the what I did on the Swiss FX shock, looking at how the various risk measures performed in the days after the event, and also looking at the risk of the inverse FX.
The original analysis just looked at the risk of the Franc appreciating, but why not look at the risk of the euro appreciating.more