Professor Viral Acharya Named Fellow of the European Corporate Governance Institute

Viral Acharya, NYU SternProfessor Viral Acharya was named a fellow of the European Corporate Governance Institute (ECGI). The ECGI announced the appointment of five new fellows, including Professor Acharya, at their 2014 General Assembly in Brussels on April 29. Professor Acharya was appointed a member of the Review of Finance‘s Advisory Board for 2014-2016. In February, he participated in a panel discussion at the “Symposium on Financial Stability and the Role of Central Banks” at the Bundesbank Conference in Frankfurt. Again in March, he spoke about the role of central banks at the Bank of England. On April 21, he served as a panelist during a discussion on “Models and Risk Surveillance” at the International Monetary Fund.

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MSRM Welcomes the Class of 2015!

MSRM 2015 Module 1 Group Picture

 Last week, the Master of Science in Risk Management Program welcomed the Class of 2015. These 40 students represent 23 nationalities, 40% of which are women and 45% are expatriates. NYU Stern’s Master of Science in Risk Management program for executives, exposes its students to various areas of risk management in 5 executive-friendly modules. The MSRM program is proud to welcome the new cohort to Stern!

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Prof. Robert Engle is Interviewed About the Financial Services Industry

The following is an excerpt from the El Paso Times: 

Robert Engle NYU SternThe nation’s giant banks and other large financial institutions have regained much of the financial cushion they lost during the financial crash of 2008-09, a Nobel Prize-winning economist told University of Texas at El Paso faculty and city business leaders during a breakfast speech Friday.

But he also said government regulators need to keep a much closer eye on them than the yearly stress tests now being done.

Robert Engle, a New York University economist, said the U.S. financial sector is much less at risk of a systemic, or broad, failure now because banks are “making a lot of progress building up their capital cushions” that help weather financial crises.

Read the entire article here.

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Professor Stijn Van Nieuwerburgh on the Cost of Renting vs. Buying

The following is an excerpt from The Wall Street Journal:

svnieuweBuying a home has long been part of the American dream. But rising prices have made renting less expensive in many places.

People often aspire to own a home for reasons that have little to do with money, and rental options are limited in some communities. Yet owning property can limit your flexibility to move when you want and ties up a lot of your money.

The median sales price of existing single-family homes rose 11.4% in 2013 from the previous year—the highest yearly increase since 2005, according to the National Association of Realtors. Prices in many places, including Los Angeles, Baltimore and Portland, Ore., rose even more last year.

The monthly cost of renting was lower than buying in 20 large metropolitan areas at the end of last year, the most recent period for which data are available, according to figures provided exclusively to The Wall Street Journal by Deutsche Bank. DBK.XE -1.49% That is up from 15 large metropolitan areas a year earlier.

The bank calculates the costs in 54 markets based on average local rents and median home-sale prices, which it uses to estimate monthly mortgage payments for a hypothetical buyer in the 25% federal income-tax bracket.

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While those costs can be folded into monthly rent, apartment renters often pay a smaller share as landlords spread the costs among many tenants, says Stijn Van Nieuwerburgh, director of the Center for Real Estate Finance Research at New York University. If a window breaks or the toilet plugs up, your landlord—not you—pays for the repairs.

Renters don’t end up with a valuable asset, as buyers do when they pay off a mortgage. But renters might be able to make more money by investing the monthly savings, as well as the cash they would otherwise use for a down payment, he says.

Read the full article here.

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MSRM Class of 2013 Capstone Paper Published by INCAE Business Review

MSRM square avatarA Capstone paper by Alex Rubinstein, Kiran Dwarakanath, Claire Fox, Rose Kinuthia, Ted Rockwell, and Alex Solares of the MSRM Class of 2013 was published by INCAE Business Review.

The article is a summary, prepared in Spanish, of the paper titled, Managing Currency Risk in Small Emerging Markets: A Case Study in Costa Rica:

Executive Summary:

International trade is growing faster than world output, driven mainly by emerging
markets. Companies are doing more business abroad and increasing their exposure to
currency risk. Ordinarily readily available financial tools to manage and hedge currency
risk in developed financial markets may not be an option in many developing countries.
This research paper aims to provide guidelines and tools to manage currency risk in such a
scenario. Using Costa Rica as a specific case to apply the results, we used surveys, in depth
interviews, market data collection and simulation to gather information from bank
authorities and companies in the country regarding potential alternatives to manage this
risk. We analyze the effectiveness, cost and associated risks of industrial hedging, money
market hedging, financial hedging, indirect hedging, possible combinations or no hedging
at all. Our study finds that managing and hedging currency risk in a small emerging
economy such as Costa Rica is feasible yet with some limitations. We present
recommendations on what alternatives might be more suitable for different types of
companies according to their risk tolerance and strategic goals.

View the paper summary in Spanish on page 44 here

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Whatever Happened to Swiss Bank Secrecy? By Professor Ingo Walter

The following is an excerpt from an article titled, “Whatever Happened to Swiss Bank Secrecy?” by NYU Stern Professor and MSRM Academic Director, Ingo Walter:

iwalterFinancial secrecy – or more politely “confidentiality” – involves non-disclosure of financial information concerning individuals, firms, financial institutions and governments. It is a key element of banking and financial services, fiduciary relationships, and regulatory structures. It is vital in tax evasion, the drug trade, organized crime, money laundering, terrorism, political and economic corruption, and host of other activities that can cause real damage to civil society. But financial privacy can equally be considered a human right – what regime hasn’t made great efforts to compromise personal privacy in the name of the state?

What financial secrecy is worth depends on where the money came from and the consequences of disclosure, all the way from family tensions to the firing squad. And who’s tasked with safeguarding financial secrets? All the usual suspects ranging from uncle Harry, lawyers, accountants investment advisers, banks, and the ultimate gold standard – highly reputable financial institutions operating abroad in politically and economically stable sovereign countries that maintain tough secrecy laws and blocking statutes.

As long as the bankers can keep it up there’s a treasure trove of fees to be earned and high-paying jobs to be had, much more reliably than grinding away at the mug’s game of trying to outperform the competition on investment returns and risk. As in any good market, financial secrecy is bought and sold and both sides are happy – albeit sometimes at the expense of somebody else.

Read the full article published in Banks and Markets here.

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3D Risk Management: A Survivorship Framework by Dante Disparte, MSRM Class of 2014

MSRM Class of 2014 student, Dante Disparte compares the structural balancing act between risk management in finance versus the manufacturing context in a recent article titled, “3D Risk Management: A Survivorship Framework.”

Disparte, Dante pictureDante currently serves as the managing director of Clements Worldwide, a leading risk management firm and insurance brokerage serving customers in more than 180 countries.  Based in Washington, D.C., he is a specialist in risk reduction through the design and delivery of comprehensive insurance solutions of worldwide scope.  Dante is credited with designing the world’s first card-based life insurance program for the United Nations, a plan that placed more than a half billion USD of risk with the markets in more than 140 countries in 12 months. This innovation was heralded as one of the top product innovations of 2011 by the MENA Insurance Review.

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The following is an excerpt from the 3D Risk Management article:

For most firms risk management is a necessary evil, increasingly consigned to being an adjunct to compliance, finance and other so called “business prevention” functions. Non-financial firms traditionally address risk through a series of transfer mechanisms, such as insurance, self-funded vehicles or they merely absorb unforeseen losses with their earnings. The financial sector, on the other hand, applies sophisticated statistical methods in a form of speculative risk management that captures the upside and the downside of risk-taking. These approaches are used to calculate value at risk (VaR), regulatory capital and other internal and external risk measures. Many of these methods, however, are based on backward looking book values and a permissive fox watching the chicken coop environment, wherein financial institutions often develop their own internal risk metrics with loose guidance from regulators.

The frequency of potentially preventable losses, along with the calamitous effects of black swans, suggests that quants not only need qualitative tools in their arsenal, they need structural alternatives to one-dimensional risk management. This one-dimensional structure often misses the mark and can suffer from confirmation bias in that centralized risk managers who look for trouble, may in fact find it by chasing misleading risk signals. JP Morgan, long considered a best practitioner in banking risk management, missed the London Whale’s transgressions, despite some fairly obvious warning signs1. Under the first dimension, even though many firms like JP Morgan install ‘native’ Chief Risk Officers (CROs) in their business lines, these individuals are often marginalized and kept on a need-to-know basis. This has the placebo effect of creating a false sense of comfort that risks are being managed, when in reality often excessive risk-taking behavior is carried out in the CRO’s line of sight. The latency and backward orientation of traditional risk measures often negates proactive controls and when the smoke begins to rise, it is often too late.

Read the entire 3D Risk Management article here.

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Flash Boys May be Yesterday’s Story by Professor Roy Smith

The following is a recent paper written by NYU Stern Professor Roy Smith titled “Flash Boys May be Yesterday’s Story”:

rsmithMichael Lewis’ newest Wall Street bestseller, Flash Boys, claims that equity markets are “rigged” by high frequency traders who invested millions in fiber optic cables that enabled them to shave microseconds from the time it takes to trade stocks. Launched just a week ago in a blizzard of TV interviews with unknowing, uncritical journalists, it is the latest bomb to drop on an industry still struggling to regain its balance after the financial crisis of 2008.

Like his two other very popular books about financial firms and markets (Liar’s Poker and The Big Short), Flash Boys, tells a compelling, if improbable story of how a few really smart tech guys, investing millions in their own high speed cables, have outwitted the usual bunch of dull institutional investors by hijacking billions of dollars of other people’s trades.

Already the US Attorney General, Eric Holder, has announced he has directed the Justice Department to investigate high frequency traders for insider trading. He joins the SEC, the CFTC and the FBI, which say they are already investigating the market-rigging allegation.

Few people know enough about High Frequency Trading (HFT) to be able to take Lewis’ book apart, but many of those who do have chimed in to complain, about his conclusions.

Academics who have followed HFT as an innovation in market microstructure generally seem to believe that (a) it increases competition and has contributed to lowering trading costs, (b) the innovation was enabled by continuous deregulation in financial markets over the past 20 years that has increased transparency and forced traders to search among various market makers for the best execution price, (c) HFT probably adds to market liquidity, but not necessarily under especially stressful conditions.

Competition has eroded away much of the big profits that HFT operators made in the past, and that are featured in Flash Boys. According to Larry Tabb, a securities market consultant, revenues from HTF that were $7.2 billion in 2009 will be only a little more than $1 billion in 2014.

Such a revenue swing is typical of disruptive technologies – the first ones in with the new idea benefit disproportionately until competition catches up.

Trading technologies have been very disruptive in Wall Street, especially to large broker-dealers that act as intermediaries between clients. A surge in trading volume in the late 1960s forced brokers to computerize back offices, and many that didn’t manage the transition well failed. NASDAQ, an electronic over-the-counter marketplace was established as an alternative to the NYSE in 1971, and has been the second largest trading venue in the US ever since. Michael Bloomberg introduced his computerized black box for comparing bond prices in 1982, and forced the entire industry to adopt trading practices based on the new technology.

In the 1980s and 1990s, enhanced data processing capabilities led to the development of securitized mortgages, to a variety of hedging tools using futures, options, and other derivative instruments, and to trading strategies using solely quantitative analytical processes. These innovations were enormously important to the development of efficient, low cost financial markets, and very profitable for the firms that first introduced them. But Wall Street is famous for being able to copy new ideas quickly and erode profits from them.

In 2000, Goldman Sachs acquired Speer, Leeds & Kellogg for $6.5 billion to improve its equity market making capabilities, which it did for a while but the improved capabilities were later overtaken by technology developments in the industry. Goldman recently announced it was selling the firm for virtually nothing.

In  2001, Liquidnet was formed as an alternative institutional marketplace, now one of several so-called “dark pools” that allow institutional investors to trade directly with each other. Between them, the dozen or so dark pools now account for 36% of the global equities trading market.  Liquidnet operates in 41 markets on behalf of 700 asset managers with $12.5 trillion under management. The New York Stock and Exchange and NASDAQ between them now comprise only 33% of the market, according to Thomson Reuters.

And in 2002 Virtu Financial was formed as a “technology enabled market maker and liquidity provider.” In 2013 it had revenues of $624 million from trading 10,000 different securities on 210 exchanges in 30 countries, and profits of $243 million, a margin of 39%. It is hard to see how all this activity could be based simply on laying down their own fiber optic lines, or buying trading information from the dark pools as Lewis alleges.

Virtu, which has been staked by Silver Lake, a tech oriented venture capital firm, is one is 20-30 privately owned HFTs in the US and Europe. Virtu had made a preliminary filing for an IPO later this year, the first for this industry niche, but has since postponed it due to the controversy surrounding Flash Boys.

After an early effort to get in the HFT game, several Wall Street banks set up operations, but most of these have been shut down or phased out. Either the HFT business is too specialized, too expensive to carry on the books of a firm with heavy capital requirements, or the conflicts of interests and public relation exposures have proven to be too much.

Lewis based Flash Boys on a story that began in 2009. It may already be out of date. Things change fast in technology, and in financial markets where every trader is looking for an edge. Sometimes the edge is in quicker hardware, or in better software, or in mathematical algorithms that reveal arbitrage opportunities. Sometimes it’s in an ability to get around rules that moves transactions into territory previously unchartered by regulation.

But edges are constantly sought. They are means to improve market share and to make a lot of money, at least for a while. The excess profits fade away but the innovations usually remain as part of the competitive structure of the marketplace.

New things alike flash trading (or derivatives, or CDOs) are often suspect, and the more difficult they are for the public to understand, the more certain people are that their purpose is to rig markets or otherwise take advantage of others in the market.

It is very difficult, however, to rig markets when they are as large and competitive as global markets are today.

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RSVP Today to the Risk Management Symposium 2014

Symposium 2014 flyerWe cordially invite you to attend the second Annual Risk Management Symposium here at NYU Stern. Please join us and other senior business professionals for this opportunity to hear from a number of faculty members and practitioners who will share their insights into current risk management issues.

Date: Saturday, May 31st
Time: 8:00am – 1:30pm

NYU Stern School of Business
44 West 4th Street, KMC
New York, NY 10012

John Chambers, Deputy Head, S&P Sovereign Ratings Group, will be the keynote speaker. The symposium will also feature a number of faculty members, including Stern Professors Michael Posner, Bruce Tuckman and Viral Acharya, and practitioners who will share their insights into current risk management issues. Topics will cover sovereign risk, China risk, derivatives market and emerging market risk.

To register for this free event, please complete the RSVP Form found on the Risk Management Symposium 2014 website.

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The Changing Face of Global Risk

The following is a Project Syndicate excerpt from an op-ed written by NYU Stern Professor Nouriel Roubini on Project Syndicate:

roubiniThe world’s economic, financial, and geopolitical risks are shifting. Some risks now have a lower probability – even if they are not fully extinguished. Others are becoming more likely and important.

A year or two ago, six main risks stood at center stage:

  • A eurozone breakup (including a Greek exit and loss of access to capital markets for Italy and/or Spain).
  • A fiscal crisis in the United States (owing to further political fights over the debt ceiling and another government shutdown).
  • A public-debt crisis in Japan (as the combination of recession, deflation, and high deficits drove up the debt/GDP ratio).
  • Deflation in many advanced economies.
  • War between Israel and Iran over alleged Iranian nuclear proliferation.
  • A wider breakdown of regional order in the Middle East.

These risks have now been reduced. Thanks to European Central Bank President Mario Draghi’s “whatever it takes” speech, new financial facilities to stabilize distressed sovereign debtors, and the beginning of a banking union, the eurozone is no longer on the verge of collapse. In the US, President Barack Obama and Congressional Republicans have for now agreed on a truce to avoid the threat of another government shutdown over the need to raise the debt ceiling.

Read the entire opinion piece here.

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