International Finance. What is Risk? Campbell R. Harvey. January 19, 2017

Transcription

1 International Finance What is Risk? Campbell R. Harvey January 19,

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3 Three Greatest Systemic Risks General ideas 3

4 Brainstorm Local/Regional Macro Risks General ideas 4

5 Brainstorm Financial Risks General ideas (continued) 5

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7 International Finance What is Risk? Campbell R. Harvey January 13,

8 A Partial List of Financial Risks Variability Downside variability Variability relative to a benchmark Higher moments Diversifiable vs. Systematic risk Factor exposure Risk vs. misvaluation Habitats and time diversification Uncertainty: Ellsberg s paradox Ex ante vs. ex post Conditional vs. unconditional Model risk (internal and external) Operational risk Delegation problem 8

9 Variability: standard deviation, mean absolute deviation, Value at Risk (VaR) 9

10 Downside: Semi variance, downside deviation 10

11 January 15, 2015 Daily CHF= BarOHLC, CHF=, Bid 1/19/2015, , , , , , (+2.02%) 1/20/2005-7/29/2015 (GMT) Price /USD Campbell 2009 R Harvey: International Finance, Auto 11

12 January 15, Jan. 14, 2015 mean Jan. 14, 2015 std dev Sept. 6, 2011 max Jan. 15, 2015 min Sept. 23, nd min Full sample Move= standard deviations 12

13 January 15, 2015 Prob of 21 std.devs Occurs once every Occurs once every E E E+101 days years Excel: norm.dist(observed value, mean, stdev, cumulative=1) 13

14 January 15, 2015 Prob of 21 std.devs Occurs once every Occurs once every E E E+97 days years Age of universe= 13.8 billion years Number of fundamental particles in the universe 1x

15 Tracking error: Variability of deviation from benchmark 15

16 Higher moments: What if distribution is non Normal? Skew Kurtosis Value at Risk See Harvey and Siddique (2000) Journal of Finance 16

17 Higher moments: What if distribution is non Normal? Two distributions: Same mean, same variance Which one do you prefer? 17

18 Diversifiable vs. Systematic Should diversifiable or idiosyncratic risk be rewarded? Big question for both investments and corporate finance 18

19 Factors: Exposures, betas, loadings What are the factors? Financial vs. economic How do we measure loadings? 19

20 Factors: Exposures, betas, loadings See Harvey, Liu and Zhu (2016) Review of Financial Studies. 20

21 Misvaluation vs. risk premia Some factors might proxy for misvaluation Other factors genuine risk What is alpha? 21

22 Habitats and time diversification Risk premia determined by the marginal investor You might be different than the marginal investor 22

23 Uncertainty: Ellsberg Paradox Urn 1: 50 black balls, 50 white Urn 2: 100 white or black balls (unknown proportion) 23

24 Ex ante vs. ex post: Peso Problem 24

25 Ex ante vs. ex post: Beware: Abstracting from the financial crisis, we conclude that active management of both equity and fixed income has significantly contributed to the returns of the fund. 25

26 Ex ante vs. ex post: Beware: Abstracting from the financial crisis, we conclude that active management of both equity and fixed income has significantly contributed to the returns of the fund. <<Like saying: We made significant profit on the insurance policy we wrote 26

27 Ex ante vs. ex post: Beware: Abstracting from the financial crisis, we conclude that active management of both equity and fixed income has significantly contributed to the returns of the fund. Like saying: We made significant profit on the insurance policy we wrote not including the fire that burned down our client s house 27

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30 Conditional vs. unconditional Related to previous Unconditional is long term average Risk could vary through time depending on economic conditions When risk measurement is conditioned on current circumstances, it is conditional risk which is by definition ex ante 30

31 Model risk Internal/External 31

32 Model risk Internal/External 32

33 Model risk Madoff 33

34 Operational risk We will have a long list of risk with respect to project evaluation from: completion risk, input risk, output risks, political risk, etc. Operational risk also very important for investment firms 34

35 Delegation Classic problem in both investment and corporate finance You delegate certain decisions to a manager who is acting in his/her best interests not yours 35