An insight into prop trading and risk management

Quite interesting..link

Fama and French on Taleb

Nassim Taleb (of Black Swan fame) has received a lot of press of late for his argument that returns are fatter tailed than the normal distribution assumes. He has taken his arguments one step further and consistently railed against Nobel prize winners in financial economics (and actually academics in general - although this latter piece is more of an incoherent rant).

A fair question then is whether the idea of fatter tails is new to financial economics. Turns out it isn't. As Gene Fama points out the idea is well known and well understood (at least by academics).

Furthermore, Fama's book "Foundations of Finance" which is used by many finance Ph.D. programs as a basic text discusses the issue. My edition of the book is copyrighted 1976.

Fama does point out that from a risk management point of view, the issue of whether tails are fat or not is crucial. But from a portfolio management view it doesn't really matter too much.

WSJ on Finance Jobs...

The Wall Street Journal today talks about MBA students who are moving away from traditional finance jobs (which in their world is investment banking) to alternative jobs (corporate finance). The article is not very interesting, but wins the "Duhhhh" prize for most obvious article to write about Finance MBAs.

Notably though, Risk Management is a hot topic.

Confessions of a risk manager

Great article on the Economist website giving the views of a risk manager at a major bank at what went wrong in the credit crunch.

We had not fully appreciated that 20% of a very large number (of AAA bonds) can inflict far greater losses than 80% of a small number (of sub investment grade bonds).

italics added by me

Although he doesn't blame the traders, he does say that the risk managers were frequently ignored or overruled, or were under pressure to approve deals. And not surprisingly, the most pressure was on the highest returning deals....