< The Finance Professionals' Post: March 2014

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11 posts from March 2014


“Old-Fashioned” Study Methods a Hit

A recent Internet search for “online CFA exam prep” yielded over a million results, and included a dizzying array of study options. Test banks, mobile apps, instructional videos, digital study guides, virtual study groups, and forums just to name a few. Trying to figure out what works best can make your head spin, so to help cut through the noise, I reached out to people who should know. I asked current exam candidates, as well as those who recently earned their charter, for advice.

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Macroprudential Stress Tests Should Not Rely on Regulatory Risk Weights

The capital ratio of a bank1 is usually defined as the ratio of a measure of its equity to a measure of its assets. Regulatory capital ratio usually employs book value of equity and risk-weighted assets, where individual asset holdings are multiplied by corresponding regulatory ‘risk weights’. Macroprudential stress tests rely on models that translate an adverse macroeconomic scenario into losses to assets on the balance sheet of banks. These losses are assumed to be first borne by equity. The resulting capital ratios determine which banks fail the test under the stress scenario, and what supervisory or recapitalisation actions are undertaken to address this failure.

Recent concerns on the denominator of capital ratios – the risk-weighted assets – have been expressed in multiple surveys that point out the inconsistency in the calibration of risk weights (Le Lesle and Avramova 2012, Mariathasan and Merrouche 2013, BCBS 2013, Haldane 2012). This column argues that the inadequacy of risk-weighted assets is also responsible for producing an inadequate ranking of the required capitalisation of banks in stress tests. In order to establish the inadequacy of risk-weighted assets, Acharya et al. (2013) examine complementary approaches to measuring capital ratios and relate them to capital ratios based on risk-weighted assets.

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Recent Research: Highlights from March 2014

"Mortgage Option Deltas"
The Journal of Retirement (Winter 2014)
Michael Landrigan and Danny Sun

Mortgage options are European options on TBA contracts that are forwards on securitized pools of agency-backed mortgages. Because of the significant negative convexity of TBAs, calculation of option deltas is a delicate issue. It is common to model TBA options with the S-curve framework. Mortgage option prices, however, may be significantly higher than such a model predicts. There are various ways of dealing with this price discrepancy, including adjusting the TBA DV01 curve, applying a scaling factor to swaption volatilities used in calibration, or adding an extra rate-independent variance to TBA prices. These different modifications of the base S-curve framework may lead to the same option prices but different deltas. In this article, the authors estimate deltas using local price volatility and compare the deltas resulting from different modifications of the base S-curve framework to these “model-free” estimates. The analysis is primarily important for risk management in terms of mark-to-the-market pricing of mortgage options and its implication for the deltas. Although in practice only at-the-money mortgage options are marked to market, the authors also discuss the implications for skew and some valuation implications.

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Yellen’s 2.25% Target for 2016 May Be a Huge Mistake

Janet Yellen surprised almost everyone on March 19 by speaking off-script and providing forward policy guidance that can undermine the Fed’s credibility, at best, or cause another crisis, at worst. If the economic data comes in weak by the end of tapering and the markets swoon, the Fed will have no choice but to implicitly admit it was wrong and keep interest rates close to zero indefinitely. However, if the Fed continues with its plan to raise rates in the face of a weaker economy and declining market, the actions may cause another violent crash.

Zero short-term rates and the first round of QE were essential to avoid a complete financial meltdown. Subsequent rounds did little for the real economy yet unintentionally produced high leverage and asset bubbles in various places by providing cheap financing for companies, investors, and speculators alike. The policy also resulted in a massive transfer of wealth from labor to asset owners leading to the largest wealth and income inequality in recent history.

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How to Dress Like You Should Be a Banking Big-Shot


Late July in Cambridge and the swarms of tourists are given a rare photo opportunity. It is graduation day and the university’s students walk in procession from their ancient colleges, through the city’s cobbled streets to the Senate House, where they are awarded the degrees that will give them access to the highest levels of Britain’s society. To the untrained eye, the gowns are all pretty similar – Harry Potter-style wizard robes – but the differences are intricate and infinite.

For those who haven’t yet graduated the college gown must be worn to formal occasions, each with their subtle variations – a bow here and a plait there. When graduating or matriculating, the type of gown and hood worn depends on the type of degree you are doing – whether it’s a BSc, BA, MPhil, MLitt, Phd, MusD and so on – and what your academic discipline is. If you’ve completed a doctorate at the 804-year-old institution, the Doctor’s gown – a little crimson silk number with a comical gold tasselled hat – must be worn.

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Don’t Sabotage Your Website’s News Page

A news page featuring your firm’s mentions in the media can boost your credibility as long as you avoid one financial advisor’s mistake.

“Wow! This advisor hasn’t gotten any press since 2006.” That was my first thought when I looked at this advisor’s news page earlier this year. I immediately thought, “He should delete his news page.”

But then I scanned the rest of the page. I realized that the advisor had listed his media coverage in chronological order. He started in 2006 and continued up to the present day way, way down the page.

Unfortunately, most readers won’t scan the entire page. They’ll stop with the misperception that the advisor is a dud at getting the attention of the press.

The lesson for you? List your news coverage in reverse chronological order, putting the most recent items at the top of your page. For an example, see my “In the News” page.

Using the proper order is a small step with a big impact.



–Susan Weiner, CFA, is the author of Financial Blogging: How to Write Powerful Posts That Attract Clients, which is tailored to financial planners, wealth managers, investment managers, and the marketing and communications staff that supports them. Read her blog or follow her on Twitter, Google+ or the Investment Writing Facebook page.


The Paths to a Career in Investment Management

More than one third (37%) of all CFA® Charterholders are portfolio managers or research analysts. The remaining 63% are strewn across a variety of job functions. Before becoming a CFA candidate, check the CFA Institute website to make sure your dream career aligns with the job functions held by current CFA Charterholders.

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How to Gain the Position You Really Want and Keep It

I have spent the last 32 years in the wealth management business as a manager and as a financial advisor. During that time, I managed several hundred financial advisors and related staff. I have had the opportunity to interview hundreds of people for various jobs within wealth management. I thought I would share some observations and perhaps some advice related to developing your career.

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Can We Escape Bank Regulation by Lawsuit?

When I worked at JPMorgan in the 80s and 90s, even in the context of deregulation, the concept of “self-regulation” in the financial industry was discussed with a straight face. 

Last week, Better Markets, a sophisticated civil society non-profit organization, run by former Skadden attorney Dennis Kelleher and committed to protecting the public interest in the government’s regulatory response to the financial crisis, filed a lawsuit against the Justice Department and Attorney General Eric Holder.  The suit seeks to block what Better Markets calls an “unlawful” $13 billion settlement with JPMorgan Chase & Co. over bad mortgage loans sold to investors leading up to the crisis.  We now have lawyers suing the United States Attorney General on the public’s behalf for failing to properly prosecute a record $13 billion settlement on the nation’s most powerful and flagrant abuser of the self-regulation ethic.

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Book Review: Encyclopedia of Finance


This book is a valuable resource for those in need of a quick definition or formula as well as a vehicle for those wishing to dig more deeply into any of a wide range of topics. New in this edition are 200 definitions, 24 articles, and four derivations.

The 2,400 definitions in the Encyclopedia of Finance, edited by Cheng-Few Lee, a distinguished professor of finance at Rutgers University, and Alice C. Lee, a vice president of finance at State Street Corporation, could stand alone as a valuable reference for both practitioners and academics. Lee and Lee, however, have taken a more ambitious approach than simply providing definitions for common finance terminology. They have also included in the volume 74 papers by well-respected academics and practitioners, as well as derivations of a number of important formulas.

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Video: The Endless Summer Debate

In this year's NYSSA Market Forecast™ leading economists, investment strategists, and geopolitical experts discussed and debated financial market issues. In this brief clip, watch the panel of experts including Richard Bernstein, Chief Executive Officer and Chief Investment Officer, Richard Bernstein Advisors LLC; Philip J. Orlando, CFA, Senior Vice President, Senior Portfolio Manager, Head of Macro/Balanced Team, Chief Equity Market Strategist, Federated Investors, Inc.; Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.; and Vinny Catalano, President and Chief Investment Officer, Blue Marble Research; discuss price earnings multiples.


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