I recently got invited to go & talk to a SAS shop, a big one! This has not happened for a while (to me), well it wouldn't, would it? These (recent) days I (have been) a confirmed R man1, maybe a wee bit of S+ but R; Revolution R2 if possible but R; Hadoop3 4yes, Netezza5 6, yes & the deliriously beautiful SAP HANA7 but for me it has to be R, well that's the way I have attitudinised8 it here on asymptotix!!
There is a developing issue in Macro-Econometric Modeling right now. It has been burning for about a year; we at asymptotix have some practical engagement with it which is reflected in our essay called 'Crowding Out 2'. That essay and its related comments simply document our experience at the client coal-face where we naively found ourselves addressing in a commercial engagement a great intellectual challenge of our time, probably way ahead of the academic curve. At a much more global and higher media oriented level this issue is documented in what is known as the Krugman / Ferguson debate or put more crudely (cf Niall Ferguson) the Keynesians versus the Monetarists (or more strictly the Classicists or Neo-Classicists).
The European Central Bank unveiled new provisions Saturday regarding key refinancing operations that should tighten some conditions for banks seeking to borrow central bank funds. The European Central Bank is to beef-up its powers to act against struggling eurozone banks in a move that could foreshadow a tougher line towards those depending on its liquidity to survive.The changes follow other reforms already proposed for the global financial system that could determine how much credit is available to drive an uncertain economic recovery. Although a largely technical change, the timing of the step is significant. ECB policymakers have become increasingly frustrated that a number of banks remain “addicted” to the offers of unlimited liquidity it has been making since the collapse two years ago of Lehman Brothers.
Brussels, 06/07/2009 (Agence Europe) - European ministers of finance will reach an agreement this Tuesday on the introduction into European banking legislation of "dynamic provisioning", in an effort to improve the fight against financial instability. In its provisional conclusions on the pro-cyclical effects of safeguard rules and accounting standards in force, they say that they are in favour of an instrument which, "consists in constituting provisions deducted from profits in good times for expected losses on loan portfolios". One ambassador, who said that there was consensus between member states on such an important subject added that, "certain safeguards or accounting standards highlight the (economic) tendency, whereas, during a crisis we want to find a way of confronting cycle tendencies...A cycle is necessary for getting over future difficulties". The Commission will propose a revision in the direction of the Basle II directive in the autumn on capital bank requirements (EUROPE 9930).
In April, the Bank for International Settlements has published three new papers which develop the body of knowledge (the theory forge, as we like to call it) in the topic of Credit Risk analytics, stress testing and Economic Capital quantification. This post will summarise and refer them for you.
Banks asked to keep quiet on Stress Tests
WASHINGTON (Reuters) - The U.S. Treasury Department is asking banks not to mention the regulatory "stress tests" as part of their first-quarter earnings results, according to a source familiar with government discussions. Many of the top 19 U.S. banks who are undergoing regulatory stress tests have already completed internal versions of the examinations, which are designed to determine their capital needs under more adverse economic conditions.
see intro text box : August 2012 : point of order : August 2012; " the '@ the ECB' predicate in the title is more than a little redundant & 'wears' as time goes on but I am stuck with it; the ECB does move with the times, particularly after the Trichet speech in Clare College, Christmas 2009 & one can even begin to see DG ECFIN lumber towards modernity also; the historical lesson below still retains relevance however .. "
I noticed an inocuous looking little text box on the enormous European Central Bank (ECB) website, it describes four approaches to macroeconomic modeling going on at the European Central Bank, the first thing that strikes one is just how elderly the methodological underpinning is.
That does not by defintion mean that the approach in this modelling is weak or flawed or anything like that at all but it may entail that when a commercial financial institution is looking for a methodological guide for stress testing or asset valuation, these methodologically elderly models may not be the best blueprint for them. This is particulalry so currently where what could be described as a 'Logical Positivist' approach needs to be adopted in Stress Testing and Asset Valuation problems. By this I mean the 'partial equilibrium' or purely statistical methods deployed simply to quantify risk or economic capital or fair value. In this context I thought it might be useful to look briefly at the 4 macroeconomic models referenced on the ECB site and summarise what these models are doing and what their objective is.
STRESS TESTING FOR PILLAR 2
Asymptotix published a White Paper (WP) on Credit Risk Economic Capital, Open Source R and High Performance Computing. REvolution Computing (now called Revolution Analytics) kindly supported this paper. The paper is extensively referenced and more and more right now I am being asked about the references, as a body of work in their own right, which indeed they are, my paper isn't really necessary (although I would argue that REvolution is!). My paper simply glues together in a narrative, that body of theoretic work which constitutes the leading thinking in the Economic Risk Capital space. You could view the references as a theoretical forge from which a set of R objects could be refined from that universe and then optimised in REvolution. At least that's way I see it. You can reference my paper here, at this url;
Below is a presentation of the set of references I used both the theoretical work (alot of it is very applied) on issues in Risk and Economic Capital and the specific applied papers on Stress Testing.