Posts Tagged ‘Risk’

I thought they said money makes money?

Day in and day out companies around the globe ask themselves the same key question – “How can we make more money?”

Whether you are a fruit seller in Guatemala or an international online book seller, in order to continue trading, a revenue stream needs to be established, strengthened and protected. For the fruit seller this may involve local knowledge, an appreciation for agricultural cycles and a reliable supply chain where the online book seller may also profile their customers’ previous purchases, browsing history and geographical location in order to suggest additional sales appropriate to the customer and hence maximise the sale by analysing the information available.

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in: Banking & Finance by: James Watts | No Comments »

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Malware on a corporate network.

Almost every day new reports of companies becoming victims of malware in one form or another are reported. Most of us look at these stories and quietly hope the same fate doesn’t befall us. A recent example is Mitsubishi Heavy Industries where a reported 80 servers and computers were infected. Once 80 computers on a network are infected what confidence would I have that the problem was isolated to just those computers? When this is coupled with a report from Trend Micro (Trend Micro finds 100% of enterprises had undetected malware), it becomes worrying just how large the scale of the problem may be.

It will be interesting to see over the coming months whether malware designed to attack behind corporate firewalls becomes significant or whether it is just too hard a target for malware writers to worry about. (more…)

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in: Aerospace & Defence by: Brian Bassil | No Comments »

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The Risk Appetite Question

The FT reports that Bob Diamond, Barclays’ new chief executive, is “considering increasing the bank’s risk profile, in order to hit profitability targets over the next three years”.

According to the report, Barclays has judged that the current risk appetite is too low, which means it is missing out on profit-making opportunities.

As Andy Chappell mentioned in his blog article on risk models, it is extremely important to get the model itself right, but the question of how much risk appetite is appropriate is a very difficult one to answer. It will be interesting to see how other financial institutions and regulators respond, especially in the light of the adoption of Basel III.

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in: Banking & Finance by: Pat Galea | No Comments »

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Non-Gaussian Shocks and Risk in Financial Markets

By Andy Chappell

Selection of models representing financial markets is crucial to financial institutions, as failure to properly quantify risks can have serious implications; over-estimating risk can reduce returns, while under-estimating risk is potentially ruinous, as recent history has demonstrated.

In the Bank of England’s Working Paper 417 (How non-Gaussian shocks affect risk premia in non-linear DSGE models), Martin M. Andreasen looks at the impact of a number of non-Gaussian shocks and further demonstrates the importance of model selection. (more…)

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in: Banking & Finance by: Pat Galea | No Comments »

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Stock Market Volatility Modelling

By Andy Chappell

As events of the last few years have demonstrated, understanding risk in the financial markets is of paramount importance, but it remains extremely challenging. Among the well known properties of financial markets are:

  • Volatility persistence: Returns of a large magnitude on any given day are likely to be followed by further large movements, and these clusters of volatility can persist over long time frames;
  • Volatility jumps: Despite this clustering, volatility is also subject to extreme jumps, so a cluster of low volatility returns can be followed immediately by very high volatility returns, with no smooth transition between the two;
  • Self-affinity: The behaviour described above can be observed across different time-frames (yearly, monthly, daily, intra-day);
  • Negatively skewed distribution of returns: Large negative returns are observed more frequently than large positive returns;
  • Fat tails: Extreme events occur with greater frequency than would be expected if returns were normally distributed.

Any model of financial market risk should look to reproduce these features. In attempting to do so, I implemented the Markov Switching Multifractal (developed by Calvet and Fisher) using the programming language R. (more…)

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in: Banking & Finance by: Pat Galea | No Comments »

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Cutting With the Grain

There’s not much obvious similarity between software engineering, statistics and carpentry, but the one thing they have in common is that it’s much nicer to work with tools that cut with the grain rather than against it.

Crunching a lot of data to extract statistical information can be very hard without the right tools. You could, in principle, use any programming language to perform statistical analysis, but if you choose the wrong one it’ll feel like using a screwdriver to hammer in a nail; sure, it’ll work, and if it’s all you have to hand then you have to make do. But it’s much better (and more comfortable!) to use a hammer.

R has been described as “a programming language written by statisticians for statisticians.” It is an open-source product that can be used as an interactive command-line driven tool for manipulating data and viewing the results live, allowing fast production of useful results, or iteration of concepts when trying to develop a new model. R can also be used to create stored programs that can run regularly or continually on huge quantities of data. (more…)

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in: Banking & Finance by: Pat Galea | No Comments »

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