VAR Trend is Your Friend (or at least a good early indicator)

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com 

 

For some reasons a lot of stuff has come across my desk recently that is bashing Value at Risk (VAR) and saying that it is a symbol for all that is bad in risk modeling.  I think it is time for a time-out.  As risk specialists, we also have to be optimists and look for the good in everything. 

One thing that I think that VAR is good at is indicating change.  I too recognize the limitations of VAR.  (One of the reasons so much is crossing my desk is that I teach several different courses in financial risk and also in Enterprise Risk Management.)  The limitations have been well documented. 

What is less well recognized is that VAR is still a very useful tool.  One of the ways to use VAR that helps to maximize its usefulness while minimize its weaknesses is to follow the trend of how the company (or project) VAR is tracking.  Looking at the trend, rather than the absolute number, can help you to ascertain when a shift in risk exposure has occurred.  It will also help to base-line out the traditional faults such as the use of parametric statistics or the use of the incorrect distribution. 

Tracking the trend of VAR is not a perfect remedy.  Watching the trend of a bad and inaccurate model, will still give useless and potentially misleading results.  However if a decent VAR model is constructed, and if more attention is paid to the trend than the absolute VAR number, then more useful (and accurate) information will be generated.

“15 reasons to love the loonie”: Exporters and global investors take note

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

I have been blogging about the long term strengthening of the Canadian dollar (the loonie) for around 2 years now. More recently David Rosenberg summarized in 15 quick reasons why the loonie is currently rising against the US dollar (see list below). What is interesting is that 13 of the 15 reasons are arguably long term habits of the Canadian economic and political system and thus reinforce the continuing steady rise of the currency. 

What is also interesting to note about the past two weeks is that the traditional “flight to safety” to the USD in the face of geo-political and economic uncertainty has not been happening (gold, silver and the Swiss Franc are the current safe havens).  I believe that is a significant event and should have the risk managers looking more closely at their US market/investment exposure.

 

15 Reasons to love the loonie:  

1. Better growth than in the U.S.A. and without need for stimulus

2. Responsible central bank, limiting growth in its balance sheet

3. Better fiscal backdrop

4. More conservative political environment

5. Triple the exposure to raw material than the U.S.A.

6. Investors get 115 basis points premium over US Treasuries at the front end of

the government yield curve

7. Canada in the top 15 net oil exporters globally … U.S.A. top importer

8. TSX dividend yield at 2.36%; S&P 500 dividend yield at 1.82%

9. Housing market in balance in most of the metro areas; no foreclosure

supply coming

10. Inflation is low and stable with minimal risk of deflation

11. Economic recovery being fuelled principally by business spending

12. Corporate tax rates on a sliding scale down

13. Immigration and capital flows running at record levels

14. Vancouver rated top city in the world to live (Toronto 4^th, Calgary 5^th)

15. Stable banking system with consistent dividend growth”

 

from:    David A. Rosenberg  (March 2, 2011)

Chief Economist & Strategist Economic Commentary 

Gluskin Sheff + Associates Inc.

The Judgment Deficit

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com 

 

On my most recent plane trip I read a Harvard Business Review article by Amar Bhide that I have been meaning to read for some time.  The article is titled “The Judgment Deficit” (HBR, September 2010, pp 44 - 53).  

In this article, Bhide essentially points out that we have surrendered judgment to models and rule based thinking.  While he points out that there are times and situations where rules or models are appropriate, they can never capture the complexity and value of human judgment.  I wholeheartedly agree with him.  The article points out deficiencies in having computer models make lending decisions as well as other examples from the banking sector, but the surrender of human judgment to models (and even worse -  audits) is endemic throughout risk management – whether in the financial sector or not. 

As Bhide argues, it is time to get back to basics and get back to using human judgment.  A great judgment to start with is to read Amar Bhide’s article.

NYT not WSJ

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

 

When I worked on a trading desk in New York I always made it a point to read the New York Times rather than the Wall Street Journal.  Those who know me will laugh and wonder why – I am not what you would call your typical NYT person. 

There are three main reasons why I did so:

1. Everyone else read the Journal and thus if there was something worth knowing about in the WSJ, I was sure to find out about it through the chatter on the desk
2. It gave me a different point of view and something different to talk about on the desk and with my customers (most of whom also read the WSJ) 
3. The NYT frequently left me angry after reading its editorials which I often did not agree with.  I figured it was good to get out of my comfort zone on a regular basis. 

 

Does everyone in your risk department read the same newspaper?  Do they easily and comfortably get into groupthink having their ideas continually and consistently generated from the same source?  Do their sources for information generate a broad portfolio of ideas?  (Are a lot of ideas a good thing?)  Do they ever wander outside of their comfort zones?  Do they get passionate about ideas?

 

 

Face it

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

I was reading a very interesting Harvard Business Review article by Amar Bhide that I have been meaning to read for some time.  The article is titled “The Judgment Deficit” (HBR, September 2010, pp 44 - 53).  I will outline the article in my next blog as I believe it is an important article that has a lot of relevance for risk managers. 

The point I want to make in this blog is about a quote from futurist Paul Saffo that Bhide puts in his article.  The quote is: “Face it, innovation is an elite activity”.  What bull%$#^! was my first reaction.  And then I realized that we now depend on the almighty financial engineers and risk doctors (of which I am one) before we dare make a move.  Crap – he may be right was my second reaction.  Sad is how I currently feel.

Lamborghini sales exceed forecasts in Saskatchewan and Iowa: WSJ June 2015

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com 

 

Difficult to believe? This “news” headline maybe more the reality than you think. Followers of this blog know that we have blogged about the new normal of high and volatile agricultural commodity prices consistently since the beginning of this year. Indeed in the first two months of the year some basic commodities have experienced some wide swings, with agriculturals generally rising and industrials generally falling (an economic slowdown warning sign?). However, according to American Jim Rogers of Rogers Holdings in Singapore we are still in the early stages of the bull market in agricultural commodities and have a long way to go to reach inflation adjusted historic peaks. His arguments are sound; increased wealth in the emerging economies, erratic weather patterns and more people. In the longer term Mr. Rogers foresees “farmers driving Lamborghini’s and stock brokers working for them” for wealth will be created down on the farm once again. It is perhaps not surprising that the world's uber rich are buying up agricultural land. 

If you work for a firm that represents commodity end users ask yourself; How has the corporate risk management strategy changed to reflect this new normal of volatility with the added long term uptrend in commodity prices? 

 

For more on commodity prices in perspective from CNN Money follow the link below:

http://tinyurl.com/4m9kexf 

For more from Jim Rogers follow the link below:

http://www.bloomberg.com/video/67100110/