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Christopher Finger

Research and Insights

Articles by Christopher Finger

    Research Insight - Understanding Credit Charge Add-Ons in CreditManager - March 2014

    Research Report | Mar 7, 2014 | Attila Agod, Christopher Finger, Arnold Juster

    Since the adoption of the Basel II standards, banks have been subject to minimum capital requirements based on the Internal-Ratings Based (IRB) formula, which is based on a simple credit portfolio model that accounts for some, but not all, possible sources of portfolio risk. To address the additional sources of risk, banks work with richer models and supervisors demand additional capital add-ons under "Pillar 2" of the BIS capital standards, which has created the need for a...

    Market Insight - Margin Replication: A Necessity in the New Derivatives Regime - December 2013

    Research Report | Dec 11, 2013 | Christopher Finger

    The year 2013 has seen mandatory central clearing of many major derivatives become reality.  In today’s new derivatives regime, counterparty credit risk is mitigated through margining, but at the cost of greater liquidity risk.  A new capability, then, is to replicate and analyze margin requirements, thus enabling monitoring of current and potential liquidity demands.  This Market Insight is a re-print adapted from two recent Op-Ed articles on “Market...

    Market Insight - Introducing Macroeconomic-Based Stress Testing - December 2013

    Research Report | Dec 4, 2013 | Christopher Finger, Rachael Smith

    From quantitative easing to talk of tapering, a recurrent theme of 2013 among investors has been concern over rising interest rates. There are many ways to design a rising interest rate stress test,though basing this on history alone is a challenge. Historically, interest rates have risen for numerous reasons: central bank actions, inflation, flight to quality, and so on. The commonality between past regimes of rising interest rates is not obvious. In order to simplify and use a direct link...

    MSCI Comments on Basel Committee's Regulatory Framework Paper

    Research Report | Nov 19, 2013 | Christopher Finger

    In July 2013, the Basel Committee on Banking Supervision released a Discussion Paper entitled The Regulatory Framework:  Balancing Risk Sensitivity, Simplicity and Comparability, which presented the background for a risk-sensitive capital framework that has evolved during the last two decades.  The challenge put forth was whether a future capital regime could be simpler and could provide improved comparability across banks, while retaining the benefits of risk sensitivity. ...

    Comments on SEC Proposed Rule - Money Market Fund Reform

    Research Report | Sep 19, 2013 | Christopher Finger

    The SEC Proposed Rule, released in June 2013, presents two alternatives for addressing the dynamics that can lead to run-like behavior in Money Market Funds. In addition, the Proposed Rule introduces a richer set of stress testing guidelines than those required at present. We offer some thoughts and comment mostly on these guidelines. The main points of our comments are:The two alternatives—the floating NAV and the liquidity gates—both aim to reduce the likelihood of...

    Examining 2012 Bank Risk Disclosures: Making a Case for Risk Standards

    Research Report | Jul 9, 2013 | Christopher Finger, Rachael Smith

    It has been common practice for over a decade for banks to make public risk disclosures. The detail provided in these disclosures varies across banks, which makes comparison difficult. In this paper, we propose a set of standards in order to analyze these disclosures. In particular, we compare a sample of bank risk disclosures with our set of standards, identifying banks whose risk appears to have moved by enough to suggest a degree of active management.

    Research Insight - Case Study on Managing Portfolio Liquidity Costs - June 2013

    Research Report | Jun 18, 2013 | Christopher Finger, Zita Marossy

    Rebalancing a passive portfolio can be costly.  A simple way to minimize costs is to place constraints on turnover, but this approach overlooks differences in liquidity across securities. In this case study, we demonstrate the effect of liquidity information on trading. We develop a hypothetical portfolio following an EMU sovereign bond benchmark and present a selection of rebalancing strategies, each incorporating a different degree of liquidity information.  Our example...

    Product Insight - Credit Risk Attribution Using RiskMetrics CreditManager - April 2013

    Research Report | Apr 10, 2013 | Christopher Finger, Mark Schmude

    Risk based pricing and performance evaluation rely on a meaningful capital charge for individual exposures.  While the capital statistics produced by complex, simulation-based models might be monotonic in any one parameter, it is not clear how these different parameters interact.  In this paper, we provide a framework for credit risk attribution that isolates the capital assigned to individual obligors according to distinct risk factors.  Utilizing CreditManager, we begin with...

    Market Insight - Risk Models for Capital and Margin - March 2013

    Research Report | Mar 12, 2013 | Christopher Finger

    Recent regulatory publications indicate a need for risk sensitivity for both capital and margin requirements.  Risk sensitivity calls for risk models, but the successful application of these for regulatory purposes has been a challenge for the industry.  We suggest the adoption of a common framework of risk standards as a mechanism to help ensure the success of risk sensitive regulatory standards.

    Market Insight - 2012 Year in Review - January 2013

    Research Report | Jan 7, 2013 | Christopher Finger, Rachael Smith

    This white paper presents model backtesting results, using RiskManager, for a number of standard risk models applied to fixed income and equity portfolios during the period December 2011 to November 2012.  This is a follow up to a similar exercise published for the 2011 calendar year.  Compared to 2011, this past year has been less dramatic, with all models producing relatively stable forecasts.  In terms of risk forecast performance, comparing ex-ante forecasts with ex-post...

    Stress Testing Market Report - Risk-On, Risk-Off, Risk Up - December 2012

    Research Report | Dec 5, 2012 | Christopher Finger, Zita Marossy

    The risk-on, risk-off (RORO) behavior of markets relates to the fluctuating appetite of investors for risky assets. There are periods with optimism in the markets and higher willingness to take risk – this is risk-on. Then after a change in risk perception, risk-aversion increases, and there is a flight-to-safety; risky assets decline in price and investors buy safe-haven investments – this is risk-off. In this paper, we present a way to calculate stressed standard deviation and...

    Market Insight - When Hurricane Sandy Closed Wall Street - November 2012

    Research Report | Nov 10, 2012 | Oleg Ruban, Christopher Finger

    The US equity market closures necessitated by Hurricane Sandy posed the potential for returns or risks to spike once the markets reopened.  We examine a number of RiskMetrics and Barra risk models in the aftermath of the storm, concluding that markets largely returned to normalcy, and no special model treatment of those days was necessary.

    Reviewing the FRTB: Commentary on the Basel Committee's Fundamental Review of the Trading Book

    Research Report | Sep 28, 2012 | Christopher Finger

    The Basel Committee on Banking Supervision published its Fundamental Review of the Trading Book (FRTB) in May 2012. The Review is a response to the shortcomings of trading book regulations that were exposed during the financial crisis, and sets out a vision for the future state of capital standards for trading risks. This note outlines the key points of the Review, and summarizes the remarks made by MSCI in its formal response.

    Stress-Testing in RiskManager: Contemplating a Eurozone Breakup - February 2012

    Research Report | Jul 13, 2012 | Audrey Costabile, Christopher Finger

    Since the beginning of the Eurozone crisis in 2009, it is apparent that structural issues persist, particularly in the European peripheral economies. Stress testing plays a pivotal role in the risk management process. This paper shows how a well-specified scenario can be used to understand and mitigate contagion effects resulting from a hypothetical sovereign default in Greece, Spain or Italy. Global asset and factor representative portfolios are stressed to reflect the impact of default on...

    Market Insight - Over-the-Counter Derivatives under Central Clearing

    Research Report | Jun 26, 2012 | Christopher Finger

    The market for Over-the-Counter derivatives is transforming from a market of mostly bilateral contracts to a market where many contracts are executed through a central counterparty (CCP).  As part of this transformation, derivatives market participants now face constraints imposed by the CCPs, notably the need to post and update variation and risk-based margin.  Derivatives risk management in this new paradigm requires an assessment of the liquidity required to meet these margin...

    Market Insight - The JP Morgan Surprise and the Need for Risk Governance

    Research Report | May 26, 2012 | Christopher Finger

    During a conference call on May 10, JP Morgan’s CEO disclosed a surprise loss of over $2 billion on its Chief Investment Office Portfolio, and at the same time revised previous disclosures about the risk of this portfolio in the first fiscal quarter. Based on what the bank has disclosed, what lessons on risk governance can the industry draw from this episode?

    Missing the Same Risk Twice

    Research Report | Dec 15, 2011 | Christopher Finger

    In this paper, we review dynamics of the CDS-bond basis during the 2008 Crisis and how it behaves in this new period of market distress. We explore the risk modeling challenges posed since 2008, and suggest a new model for keeping pace with the market today.

    Greece, Contagion, and Credit Derivatives

    Research Report | Jul 28, 2011 | Christopher Finger

    In this Research Bulletin, we examine market exposures to the crisis in Greece and the risk of contagion in the event of credit default swaps. The memory of 2008, and the central role played by credit derivatives, is painfully fresh. Our findings show that while plenty of risks exist, credit derivatives do not appear to be the core of the problem.

    CreditMetrics and Constant Level of Risk

    Research Report | Sep 9, 2010 | Christopher Finger

    In this paper, a framework is developed to think through the interpretation of an important piece of the new Basel guidelines for setting trading book capital. This piece – the Incremental Risk Charge (IRC) – is intended to cover default and migration risks in the trading book. Any bank that already has approval to use their internal models to set VaR-based trading book capital will be required to come up with an IRC model by the end of 2011. An important aspect of...

    Fishing for Complements

    Research Report | Sep 1, 2008 | Christopher Finger

    A survey of stress testing practices in 2005 stated that stress testing serves as "a complement, rather than as a supplement" to other risk management tools. As we tour stress testing practices, we begin with those that do no more than make up for basic flaws in statistical models, without adding much to our understanding of the flaws in our portfolio. Where there is power in stress testing is where we already have confidence in a statistical loss estimate, and can better...

    Much Ado About Correlation

    Research Report | Apr 1, 2007 | Christopher Finger

    Correlation is at once an old and new problem in risk: old because it is a necessary parameter of all risk models, and new because it now drives pricing of a growing class of financial products. While most of us are wise enough to worry about correlation risk, this concept tends to mean different things to all of us. In this piece, we attempt to sort out the various problems that fall under the label of correlation risk, and at the same time try to distinguish between correlations that move...

    How Historical Simulation Made Me Lazy

    Research Report | Apr 1, 2006 | Christopher Finger

    In this month's note, we discuss a somewhat disturbing trend: the movement toward utilizing historical simulation as the sole statistical measure of risk. Though the method does have its benefits, we argue that few of these relate to producing good forecasts. Further, one of the primary benefits cited, that historical simulation somehow requires fewer assumptions than its alternatives, is misguided. Thus, our note is an appeal that just because statistical forecasting is difficult, we...

    Incorporating Equity Derivatives into the CreditGrades Model

    Research Report | Jun 1, 2005 | Christopher Finger, Robert Stamicar

    In this paper, we extend the CreditGrades model by using implied volatilities as an alternative to the standard model by way of two approaches. The first approach is to estimate asset volatility by replacing equity volatility with implied volatility, while keeping the same leverage estimate from the standard approach. The second extends the first by not only estimating asset volatility from options data, but also implying leverage from market data (see Hull, Nelken, and White (2005) for a...