Remarks at Panel Discussion on OTC Derivatives Reform and broader financial reforms agenda
Remarks at the 2013 OTC Derivatives Conference, Paris, France.
Risk-management lessons from recent financial turmoil.
Presented by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, for the Conference on New Challenges for Operational Risk Measurement and Management, Boston, Massachusetts, May 14, 2008
Risk aversion, the labor margin, and asset pricing in DSGE models
In dynamic stochastic general equilibrium (DSGE) models, the household's labor margin as well as consumption margin affects Arrow-Pratt risk aversion. This paper derives simple, closed-form expressions for risk aversion that take into account the household's labor margin. Ignoring the labor margin can lead to wildly inaccurate measures of the household's true attitudes toward risk. We show that risk premia on assets computed using the stochastic discount factor are proportional to Arrow-Pratt risk aversion, so that measuring risk aversion correctly is crucial for understanding asset prices. ...
What you don’t know can hurt you: keeping track of risks in the financial system
The financial crisis of 2007-2008 left in its wake new responsibilities for regulators to monitor the economy for risks to financial stability. The new task of monitoring financial stability includes tracking the risks of financial instruments and learning where these risks are located within the financial marketplace. One way to do this is to track the quantities of financial instruments and which institutions hold them. In this article, Leonard Nakamura discusses some limitations of the current data and the current data framework and the extent to which we can use the Flow of Funds for ...
Financiers of the world, disunite
Diversity across banks and other financial firms promotes a resilient financial system because differing risk profiles reduce the likelihood of systemic crises caused by shared economic shocks. Consolidation and uniformity among banks and other financial intermediaries do the opposite. ; Yet some have suggested that any policy steps to reverse the financial system?s dramatic consolidation might yield little stability benefit because herd-like behavior among financial firms could still reduce diversity and mitigate any strengthening. If these firms moved in concert, the argument goes, they ...
Reflections on the TALF and the Federal Reserve's role as liquidity provider
Remarks at the New York Association for Business Economics, New York City.
Nested simulation in portfolio risk measurement
Risk measurement for derivative portfolios almost invariably calls for nested simulation. In the outer step one draws realizations of all risk factors up to the horizon, and in the inner step one re-prices each instrument in the portfolio at the horizon conditional on the drawn risk factors. Practitioners may perceive the computational burden of such nested schemes to be unacceptable, and adopt a variety of second-best pricing techniques to avoid the inner simulation. In this paper, we question whether such short cuts are necessary. We show that a relatively small number of trials in the ...
Some lessons from the crisis
Remarks at the Institute of International Bankers Membership Luncheon, New York City, October 13, 2009.
Temporal risk aversion and asset prices
Agents with standard, time-separable preferences do not care about the temporal distribution of risk. This is a strong assumption. For example, it seems plausible that a consumer may find persistent shocks to consumption less desirable than uncorrelated fluctuations. Such a consumer is said to exhibit temporal risk aversion. This paper examines the implications of temporal risk aversion for asset prices. The innovation is to work with expected utility preferences that (i) are not time-separable, (ii) exhibit temporal risk aversion, (iii) separate risk aversion from the intertemporal ...
Part 5: Concluding observations: New Directions for Understanding Systemic Risk
The Federal Reserve Bank of New York released a report -- New Directions for Understanding Systemic Risk -- that presents key findings from a cross-disciplinary conference that it cosponsored in May 2006 with the National Academy of Sciences' Board on Mathematical Sciences and Their Applications. ; The pace of financial innovation over the past decade has increased the complexity and interconnectedness of the financial system. This development is important to central banks, such as the Federal Reserve, because of their traditional role in addressing systemic risks to the financial system. ; ...