Welcome to the third issue of Volume 14 of The Journal of Operational Risk.

A few months ago, I had the opportunity to host OpRisk North America 2019 in New York. It was a pleasure to be reunited with longtime friends and be introduced to some of the new faces that are renewing the industry. I was glad to see how motivated everyone was regarding the challenges that operational risk brings to the financial industry. Despite Basel III’s efforts to simplify operational risk measurement, we are still seeing lots of innovative ideas in the areas of measurement and assessment of operational risk (if not for regulatory capital, then at least for economic capital purposes), and also to help in the better management of this important risk type. During the conference, I could also see an increased focus on cyber and IT risks, as these risks are becoming more prevalent with the increased use of technology in banking. It is no surprise that we see at least one paper on these...

All three of our papers are motivated by energy market risks and provide quite different, but practically relevant, analyses. These themes have been, and will continue to be, central to the publishing objectives of The Journal of Energy Markets.

Derek W. Bunn London Business School

Buyers in take-or-pay gas contracts can mitigate supply chain risks with storage. Local storage provides value when net convenience yield in gas prices is negative. Stochastic programming is powerful in contingent pricing of such bundled options.

Welcome to this issue of The Journal of Credit Risk. In this issue we have three research papers. 

Our first paper, “Asset correlation estimation for inhomogeneous exposure pools” by Christoph Wunderer, investigates the systematic error that is made if the exposure pool underlying a default time series is assumed to be homogeneous when in reality it is not.

Christian Fenger, in “An efficient portfolio loss model”, our second paper, develops a parsimonious model for evaluating portfolio credit derivatives dependent on aggregate loss.

And our final paper “On probability of default and its relation to observed default frequency and a common factor”, by Brent Oeyen and Oliver Salazar Celis, considers a definition of through-the-cycle as independent from an economic state that can result in a time-varying TTC probability of default.  

Welcome to issue two in the eighth volume of The Journal of Investment Strategies.

In this issue, we present three papers covering a wide range of topics. The first paper, “Factor investing: get your exposures right!“, by François Soupé, Xiao Lu and Raul Leote de Carvalho, ponders the question of optimal portfolio construction for equity factor investing and discusses the question of multifactor portfolio construction to show that the simplistic approaches often used by practitioners tend to be suboptimal.

In the second paper, “Dynamic volatility management: from conditional volatility to realized volatility” by Rongju Zhang, Nicolas Langrené, Yu Tian and Zili Zhu, presents a multiperiod portfolio management strategy that can be used to directly manage the realized volatility over a long time horizon.

Finally, George Tsalikis and Simeon Papadopoulos in their paper “Can shorting leveraged exchange-traded fund pairs be a profitable trade?”...

In June, the £3.5 billion Woodford Equity Income Fund was suspended to avoid fire sales that would have been necessary to cover sudden, snowballing redemptions. The UK fund was loaded with barely traded, unlisted stocks that tied it up in knots when it had to come up with the cash.

Blame, responsibility and mutual accusation are being meted out. “These funds are built on a lie, which is you can have daily liquidity for assets that fundamentally aren’t liquid,” Bank of England governor Mark

Risk Journals provide financial professionals with financial models to manage daily activities as well as providing academics with the latest research. Our journals will equip you with the technical details needed to improve performance by helping you quantify risk accurately and manage financial risk better. A subscription to Risk Journals means you will always be kept up-to-date on the rapidly evolving discipline of financial risk management.

Risk Journals provide academically rigorous, practitioner focussed research on topics such as credit risk, operational risk, investment strategies, commodities, infrastructures, derivatives, regulation.

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• The Journal of Risk • The Journal of Computational Finance • The Journal of Credit Risk • The Journal of Operational Risk • The Journal of Risk Model Validation • The Journal of Energy Markets • The Journal of...

Truncation probability estimates can be used to identify tail behavior of loss severities. The quantile score accurately selects severity distributions based on forecast accuracy for a quantile or quantile region. The log-sinh-arcsinh distribution is another flexible loss severity candidate family. Collection of loss frequencies below threshold vastly improves estimation.

The recent turmoil in Italian politics comes at a precarious time for the country’s banking sector.

An audacious effort by Matteo Salvini, leader of the far-right League, to bring down the government and force snap elections in the autumn – when annual budget negotiations were due to begin – appears to have failed. Salvini, who leads in the polls, has called for tax cuts and spending increases at a time when the country needs to find €23 billion ($25.2 billion) in savings to meet deficit goals agreed with the European Union. The prospect of early elections drove up Italian bond yields in mid-August and pressured the shares of domestic banks, which are large holders of the country’s debt.

The banking sector can ill-afford another political crisis. Italian banks have spent the past three years raising capital and restructuring bad loans. Those efforts appeared to have reached a turning point last summer. The ratio of non-performing loans in Italy has been cut...

A repeat of the kind of conduct risk failures that saw Australia’s largest banks and insurers bribing staff to hit sales quotas and selling life insurance to dead customers will be met with the full force of newly beefed-up laws, a senior regulator at the Australian Securities and Investments Commission has warned,

Cathie Armour, a commissioner at Asic, said her watchdog intended to take full advantage of recent changes to the law when it comes to conduct risk enforcement, which have seen jail

Risk Journals deliver academically rigorous, practitioner-focused content and resources for the rapidly evolving discipline of financial risk management.

Each quarter Risk Journals contain peer-reviewed research and technical papers, delivered to a global audience in print and online. Now in its twenty-first year, the Risk Journals portfolio serves, broad and international readership communities that bridge academia and industry. The mission of Risk Journals is to equip readers with the tools to fulfill their professional potential.

Risk Journals publishes original and innovative papers, ensuring subscribers are kept up-to-date with the ever-changing complexity behind the science of risk management.

Speaking with practitioners, regulators and other stakeholders, Asia Risk team develops the most in-depth agenda to help market participants understand the latest developments and challenges of risk management and regulation in the region.

The programme is backed by the editors of Risk.net and Asia Risk, world’s leading source of in-depth news and analysis on risk management, derivatives and regulation.

Revealed: FRTB impact three times higher than expected

Undisclosed Isda study finds capital hike outweighs previous Basel Committee estimate

Complex op risk models open to high error, study finds

Measuring 1-in-1,000 year loss events ‘unrealistic’, researchers say

Korean regulator likely to probe issuers of rate-linked products

Mis-selling enquiry may extend to structuring banks as global rates plunge threatens retail notes

 

COMMENTARY: Confidence intervals

This week saw some unsettling news for banks preparing for the reform of market capital rules: a study by the International Swaps and Derivatives Association revealed the Fundamental Review of the Trading Book (FRTB) could have a capital impact three times higher than its authors predicted, potentially doubling risk-weighted assets.

The study, unfortunately, raises more questions than it answers. For a start, the Basel Committee on Banking Supervision...

Jump to Spotlight: Bulgaria data breach | In Focus: Sanctions fines

In August’s largest operational risk loss, ABN Amro provisioned €114 million ($127.7 million) for a customer due diligence remediation programme after a probe by the Dutch central bank found that the lender had given most of its retail customers a neutral risk profile.

The central bank ordered ABN Amro to screen its five million retail customers in the Netherlands for criminal activity, including money laundering, and to

Jump to Spotlight: Bulgaria data breach | In Focus: Sanctions fines

In August’s largest operational risk loss, ABN Amro provisioned €114 million ($127.7 million) for a customer due diligence remediation programme after a probe by the Dutch central bank found that the lender had given most of its retail customers a neutral risk profile.

The central bank ordered ABN Amro to screen its five million retail customers in the Netherlands for criminal activity, including money laundering, and to

As the summer draws to a close, we look back at an exciting conference season that has showcased recent developments in quantitative finance. One of the field’s flagship events, with strong engagement from The Journal of Computational Finance, was the biennial International Conference on Computational Finance (ICCF), held this year in A Corun˜ a, Spain (July 8–12). From an impressive lineup of excellent presenters, around twenty were considered to receive the new JCF Young Researcher Award. A jury of journal editors and other leaders in the field ultimately split the award between two recent PhD graduates: Anastasia Borovykh was awarded a prize for her work on novel neural network techniques in financial time series forecasting, while Beatriz Salvador was recognized for her rigorous analysis and computation of partial differential equation models in counterparty credit risk. I congratulate them most warmly for their fantastic achievements, and I look forward to following...

Analysis of the frauds and forgeries returns reported by Nigeria Banks show that 2008 and 2016 had the highest frequency of frauds. Both years recorded 16,783 and 16,751 cases of frauds respectively. In terms of the severity, 2009 recorded the highest loss at N37,179,898.00 followed by 2008 with a loss severity of N34,311,721.00.

The devil’s in the details.

The CME Group is putting the finishing touches on its new value-at-risk margin framework Span 2, an abrupt break from the Span 1 vernacular, now in its fourth decade. As the fine print of Span 2 starts to seep out, risk managers are looking at where it departs from current orthodoxy.

The differences are stark. Among them: correlations for purposes of netting out contracts will be crunched by computer for an entire portfolio – a sea change from the manual, product-by

We find a new hybrid classifier based in DBN to credit evaluation. Our research finds the new model is better than some traditional base classifiers with a German and Australian credit dataset. The model has a better performance in the imbalanced German dataset than balanced Australian dataset.

This paper informs about risk data validation solutions under BCBS 239: Principles for effective risk data aggregation and risk reporting. This paper focuses on proving data lineage under BCBS 239 that goes beyond the ability to validate risk data at any point. This paper advises on what is needed to become compliant with BCBS 239 in the area of risk data validation. This paper provides guidance for master data management, data lineage, metadata management and end user implementations that serve the purpose of validating risk data. The paper provides practical advice for internal model validation teams facing the Targeted Review of Internal Models (TRIM) that puts emphasis of the data validation components.

In this episode of Quantcast, Carlo Acerbi, head of valuation and quantitative solutions at Banque Pictet in Geneva, discusses his latest paper written with former colleague Balazs Szekely, an economic adviser at the Central Bank of Hungary in Budapest, which proposes a new backtest for expected shortfall (ES).

The new method, developed when the two quants were employed at MSCI, improves on their 2014 proposal by minimising ES backtesting’s sensitivity to the accuracy of value-at-risk prediction.

Operational risk models used by many large banks could produce flawed results when calculating extreme tail risk events, upcoming research shows. The findings suggest that firms may be holding too much, or too little, capital against these risks.

The Basel II capital rules gave banks the option – at their regulators’ discretion – of using internal models to calculate their own Pillar 1 capital requirements for operational risk, under the advanced measurement approach, one of three options for