Tweets

  • Mon Nov 20
    RT @adriantoll: The shortest papers ever published. https://t.co/MalVfYyjvJ https://t.co/gt1sCcIyP9
  • Sun Nov 19
    RT @IanDunt: Good metaphor for how the rest of us have felt since June last year https://t.co/oSi7pvFrqD
  • Sat Nov 18
    The end result of the use of AI for managing financial risk and supervision is likely to be lower lower day-to-day… https://t.co/3VeohR7sQ1
  • Sat Nov 18
    RT @bbclaurak: UK urging others to move on day when EU leaders lining up to say it's UK to budge - like two parallel universes
  • Sat Nov 18
    Paradoxically, the more we trust AI to do its job properly, the easier it is to manipulate and optimise against the… https://t.co/Bo30C7azJD
  • Fri Nov 17
    RT @JonDanielsson: Artificial intelligence threatens to destabilise markets and increase systemic risk. @voxeu https://t.co/JHfDjaX7nP
  • Thu Nov 16
    RT @JonDanielsson: Use of artificial intelligence for risk management and supervision can lead to lower volatility and fatter tails. @voxeu…
  • Thu Nov 16
    its discussed in detail in the longer piece, https://t.co/eBDytE34pF https://t.co/zHkNosmZ35
  • Thu Nov 16
    AI cannot cope well with uncertainty because it is not possible to train an AI engine against unknown data.… https://t.co/TSbOOwAWGi
  • Thu Nov 16
    AI empowers agents optimising against the financial system https://t.co/JHfDjbeIMp https://t.co/eBDytE34pF
  • Thu Nov 16
    AI favours best practices and standardised best-of-breed models that closely resemble each other, all of which, no… https://t.co/Oy1NLzliVe
  • Thu Nov 16
    RT @schulte_stef: "If there are no observations on the consequences of subprime mortgages put into CDOs with liquidity guarantees, there i…
  • Thu Nov 16
    RT @BaldwinRE: _icymi By Jon Danielsson @voxeu https://t.co/JaOXN3tdt6
  • Thu Nov 16
    RT @angusarmstrong8: @LSE_SRC AI for managing financial risk => lower volatility but fatter tails; lower day-to-day risk but more systemic…
  • Thu Nov 16
    RT @econromesh: Artificial intelligence threatens to destabilise financial markets and increase systemic risk, @JonDanielsson @voxeu https:…
  •  

    Here be dragons

    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.

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    VIX, CISS and all the political uncertainty

    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?

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    European bank-sovereign doom loop

    European banks and sovereigns are much more closely linked than American banks and their government. The resulting bank-sovereign doom loop has been gathering strength, since the 2008 crisis.

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    Do the new financial regulations favour the largest banks?

    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.

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    The ECB Systemic Risk Indicator

    The European Central Bank has an indicator of systemic risk called the Composite Indicator of Systemic Stress , CISS. So what sort of signal does it send and what is it to be used for?

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    Finance is not engineering

    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.

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    University of Iceland seminar

    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?

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    Should macroprudential policy target real estate prices?

    Keynote speech at the bank of Lithuania on “Should macroprudential policy target real estate prices?”

    The slides can be downloaded here and the presentation can be seen here.

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    Is Julia ready for prime time?

    I really want to like Julia. She promises to solve all the frustrations with other numerical languages.

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    With capital controls gone, Iceland must prioritise investing abroad

    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%.

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    Competing Brexit visions

    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.

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    Systemic consequences of Brexit

    I got to present on the systemic risk consequences of Brexit in a SUERF conference. The slides can be downloaded here. The main conclusions are:

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    Interview on þjóðbraut on Hringbraut

    I was interviewed on the new programme þjóðbraut on the Icelandic TV station Hringbraut. Only if you speak Icelandic.

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    The McNamara fallacy in financial policymaking

    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?

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    Farewell CoCos

    One can only welcome ECB’s rethinking on CoCos. They make banks’ capital structures unnecessarily complicated and create hidden risks.

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    Will Brexit give us the 1950s or Hong Kong?

    At the risk of overgeneralising, Brexiteers have two, rather different world views — 1950s Britain or the hip, modern, perhaps like Hong Kong. One certainly is more likely.

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    Of Brexit and regulations

    One often hears from Brexit supporters that too many regulations come from Brussels, that it would be much better if we could regulate ourselves. At least when it comes to finance, that argument just does not hold water.

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    Is MacroPru Procyclical?

    I know it is heretical to even suggest it, but is it possible, just possible that MacroPru could be procyclical?

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    IMF and Iceland

    I just spotted an interview with the IMF representatives to Iceland about their policy prescriptions, and it did make for an interesting reading.

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    Stability in Iceland

    I got to address the annual meeting of Business Iceland today on the topic of “On fiscal and monetary policy in Iceland”. The main theme was about what to do about the high economic volatility.

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    Of tail risk

    Suppose one cares about tail risk, what is the best way to estimate it? There are two, not mutually exclusive, ways; statistical and structural. Which is right?

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    What are risk models good for?

    One can endlessly criticize risk models, but that is just too nihilistic. So, what are the good for? There are three camps, the model believers, the rejectionists and the healthy skeptics. I’m going to make the case for the last below.

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    Perceived and actual risk

    Risk can be classified into what is predicted by models — perceived risk — and the the fundamental — underlying risk, actual risk.

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    Models and regulations and the political leadership

    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.

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    Why do we rely so much on models when we know they can't be trusted?

    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.

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    Does a true model exist and does it matter?

    When designing models, the underlying assumption is often that the model captures the true data generating process. Does a true model exist? To me, the question is completely irrelevant.

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    The point of central banks

    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:

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    Impact of the recent market turmoil on risk measures

    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:

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    Objective function of macro-prudential regulations

    I have been in a conference for the past few days, and have seen a few presentations on macropru type regulations.

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    Risky business: Finding the balance between financial stability and risk

    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.

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    Regulators could be responsible for next financial crash

    LSE report warns that forcing financial institutions to forecast risk in the same way could mean they will all end up being caught unawares.
    A writeup in the Telegraph about our Magazine.

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    How Iceland is falling behind. On Sprengisandur

    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.

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    Greece on Sprengisandur

    I got to talk about Greece on the radio show Sprengisandur, if you understand Icelandic.

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    Market moves that are supposed to happen every half-decade keep happening

    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”

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    Capital controls

    May 12, 2015
    I got to participate in a discussion on capital controls, sponsored by Samtök Atvinnulífsins which could be translated as the Icelandic Chamber of Commerce. The event was held in the lovely Harpa. If you read Icelandic, the writeup is here with my slides.

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    What do ES and VaR say about the tails

    So, does ES capture tail risk, but VaR not? Therefore the Basel committee is correct, and we all should use ES. Is that true?

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    The Danish FX event

    Denmark had a small FX event on March 20, in the context of the Swiss FX shock, it is not much a of an event, but it does reinforce stereotypes.

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    On the Swiss FX shock

    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.

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