It's All About Me

Time for some self-promotion.

I have written a fair bit about announcements, market expectations, and using scenarios for risk management (as well as ranking mutual funds). Here are some currently active links to my work.

• Credit Downgrade/Fat Tails/Mixture of Normals - It is February 17, 2000, and Moody’s Investors Services has placed on review, for possible downgrade, the Aa1-rated yen-dominated domestic securities of the Japanese government. Moody’s called the review because Japan’s Ministry of Finance forecast its national debt to exceed 129% of its GDP at the end of fiscal year 2000. Moody’s last downgraded Japan’s debt because the ratio had reached 100%. Japan’s current debt-to-GDP ratio is the highest among all industrialized nations. Apart from extraordinary events such as wars, this level of debt is unusual. A story about how risk managers at a fictitious US bank with a large position in Japanese government bonds deal with the implications of the downgrade for their portfolio.

• Interest Rate Forecasts as Scenarios - A risk manager at a fictitious US bank is asked by a board member who had seen a survey of forecasts for interest rates at the end of the year asked, “What might the banks’ losses be if these forecasts represented the mainstream opinion, but everyone was wrong?” This story investigates ways in which forecasts can be used to create scenarios for risk analysis.

• Economic Announcements and Risk Measures - This story investigates whether knowledge of an impending policy announcement by the Federal Reserve Board (Fed) is useful in estimating market volatility, and therefore risk. Risk measures based on a variance-covariance matrix derived from recent historical data assume that history is stable and will repeat itself. Information about an impending change in the target federal funds rate can be incorporated into a risk management framework through scenarios. Scenario-based risk measures capture the announcement effect, the higher volatility observed following a change in the federal funds rate.

• Earnings Announcements, Volatility Spikes and Risk Measures - It’s October 12, 2000 and there is a strong possibility that Microsoft’s release of its quarterly earnings on October 18, 2000 might miss Wall Street’s earnings expectations of $0.413. A broker whose largest portfolio consists of Microsoft stock, wants to ensure that its equity trading desk is accurately measuring risk. Its risk managers are aware that markets seem to show irregularities during a two-day period each quarter. If this phenomenon coincides with a downturn in Microsoft’s earnings, volatility might spike. Future volatility estimates based on this transient spike will be biased. This story examines the question: Is there a way to account for these shocks so they do not corrupt forecasts of risk measures for months to come?

• Scenario Banks and The Implications of Bank Takeovers on their Stock Price - On January 26, 2001, The Royal Bank of Canada (RBC) announces a takeover of Centura Banks Inc. in the United States. How can history be used to create scenarios to model RBC’s share price following the announcement of the takeover that will help an investor understand the implications of this news?

• How Bad is Bad News; How Good is Good News? - The stock market is driven by news. Good news lifts the market. Bad news dampens growth. Good news does not lift the market as much as bad news depresses it. Also, bad news during a bear market has a bigger negative impact than bad news during a bull market. To illustrate these two asymmetries in stock market, GARCH volatility models are estimated. Because volatility is unobserved, models for volatility are particularly difficult to validate. Our models are re-cast in terms of how they react to news. By applying news scenarios, the adequacy of the models can be assessed.

• Mutual Fund Ranking System – Developed for www.globefund.com, Globefund 5-Star Ratings service, a simple rating for most mutual funds in Canada. Globefund 5-Star Ratings help investors understand how well each fund has been doing relative to similar funds. Funds are ranked from one to five stars, with the top ranked funds getting five stars and the lowest ranked funds getting one star. While past performance does not guarantee future performance, our historical testing of this rating system has shown that on average, top-rated funds have tended to outperform their peers over a six-month to two-year horizon. Press release link.

• Stress test proves blue chips tops for returns, safety – (The Globe and Mail Print Edition 20/01/01 Page N2, Rob Carrick) To gain some insight into how the a couple of stock-picking strategies hold up in market declines, I looked at what would happen to both the TSE 300 and a couple of portfolios if the average price-earnings ratio for TSE stocks were to fall by three different amounts. I did some further testing on the two portfolios by measuring its performance on days when the Nasdaq Stock Market plunges.

Don't forget thatI will be giving a presentation on the impact of news on financial markets to the Toronto Association for Business and Economics (TABE).

• Location: Bank of Montreal - BMO Boardroom, 21st Floor, 1 First Canadian Place, King St. West and Bay Street, Toronto (map)
• Date: Thursday April 5, 2007
• Time: 12 noon to 2 p.m.
• Cost: TABE and CABE members in good standing around $25-30, others $45-50. A light lunch will be available.
• Registration: Closer to the date you will be able to book on-line at: www.cabe.ca/chapters/TABE. Or you can call 905-845-3102 or E-Mail tabe@cabe.ca.
• TABE Members (only) may pay cash or cheque at the door, non-members and credit card payments (VISA, Diners/EnRoute, MasterCard, or American Express) are to be prepaid via the web site. No-shows will be invoiced. Charges include GST. (TABE GST number: R124389990).