tag:blogger.com,1999:blog-19649274.post114934012523816720..comments2024-03-27T17:16:12.789+05:30Comments on The Leap Blog: Lessons from recent market volatility for the margin systemAjay Shahhttp://www.blogger.com/profile/03835842741008200034noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-19649274.post-228867888646909062010-12-29T12:43:11.785+05:302010-12-29T12:43:11.785+05:30I like your article and it really gives an outstan...I like your article and it really gives an outstanding idea that is very helpful for all the people on web.Inventory POS Systemhttp://www.blackitsoft.com/inventory-pos-software.aspxnoreply@blogger.comtag:blogger.com,1999:blog-19649274.post-1149443962040374802006-06-04T23:29:00.000+05:302006-06-04T23:29:00.000+05:30As I have emphasised before, banks are hardly a ro...As I have <A HREF="http://ajayshahblog.blogspot.com/2006/02/banks-cdos-leverage.html" REL="nofollow">emphasised before</A>, banks are hardly a role model for sound financial risk management! As Merton Miller has said, banking is a `disaster-prone 19th century industry' - a toxic mixture of too much leverage, non-transparent assets, clumsy regulation and moral hazard.<BR/><BR/>With Basle-II there is an effort at taking away from dumb %-of-RWA type rules. Done right, this ought to take banks closer to a VaR type notion. Of course, model risk with banks is stupendous compared with what we see with securities.<BR/><BR/>(You used the words bull market and bear market - these are wrong. Margins change with _volatility_ not the sign of returns).Ajay Shahhttps://www.blogger.com/profile/03835842741008200034noreply@blogger.comtag:blogger.com,1999:blog-19649274.post-1149440116835953432006-06-04T22:25:00.000+05:302006-06-04T22:25:00.000+05:30Hi Sir,Isn't a bank similar to a highly leveraged ...Hi Sir,<BR/><BR/>Isn't a bank similar to a highly leveraged trader. If the CAR stands at say 10%, are the banks not leveraged to around 10-odd times. In comparison, a trader in the futures market pays around 20% (i think) to take positions. Leverage their is 5 times.<BR/><BR/>What I really mean is can we a margin system in the financial markets much like the CAR for banks? Wouldn't life be simpler if someone told me that I gotta pay 15% as margins to take a position in stocks or commodities? <BR/><BR/>In any case, we can never quite predict a LTCM catastrophe, or predict a nick leeson in the making. So why worry once you have a standard margin rule which is same for both bull markets or bear markets. <BR/><BR/>--<BR/>Ravi.Ravi Purohithttps://www.blogger.com/profile/17616076999283569192noreply@blogger.comtag:blogger.com,1999:blog-19649274.post-1149407200368978982006-06-04T13:16:00.000+05:302006-06-04T13:16:00.000+05:30A clearing corporation must have a 100% rules-base...A clearing corporation must have a 100% rules-based system through which margins are determined. So in 1974, when SPAN was invented by CME, it was a big step forward, even though it's a pretty bad system based on our understanding today. Yes, 2,500 years of epxerience in the hands of human trader is great. But a clearing corporation requires rules, not discretion.<BR/><BR/>I am the first to say VaR is not perfect, and that there is model risk. But I think it's better to setup a system using the best available models instead of trying to either inject human discretion into it, or of trying to fly by ordinary human intuition unaided by models. The unemployed electricial engineer's approach is a darn sight better than an innumerate approach.<BR/><BR/>BTW, the present Indian situation assumes there is no benefit from diversification. I would be very happy if we could have a discussion about what's a better covariance matrix. The trouble is, right now there is none! That's the sort of thing I classify under "portfolio margining". The problem goes back to the CME SPAN system, which is pretty crude in thinking about the relationship between products.<BR/><BR/>On the question of collateral charged by brokers of their customers, yes, it's very possible that there can be a race to the bottom where the broker who charges the least margin gains market share. But I think there's a fairly strong system of random inspections to catch and penalise such activity. My rough view is that it's hard to obtain nontrivial exposure in India today - as a client - even if the broker is a good friend of yours. That's one of the big achievements of the last 10 years.Ajay Shahhttps://www.blogger.com/profile/03835842741008200034noreply@blogger.comtag:blogger.com,1999:blog-19649274.post-1149399250066344202006-06-04T11:04:00.000+05:302006-06-04T11:04:00.000+05:30Interesting paper on the daily volatility in the I...Interesting paper on the daily volatility in the Indian markets..<BR/><BR/>http://www.iimcal.ac.in/res/upd%5CWPS%20588.pdf<BR/><BR/>The study uses data that ends in Jan 2004..so I guess it needs to be updated for more relevant conclusions..One of the few studies I have seen that uses high frequency data rather than end of day historical data...note the conclusion on FII activity...Free Thinkerhttps://www.blogger.com/profile/03724960238076985720noreply@blogger.comtag:blogger.com,1999:blog-19649274.post-1149397333822629962006-06-04T10:32:00.000+05:302006-06-04T10:32:00.000+05:301)Can regulators/exchanges ever control for market...1)Can regulators/exchanges ever control for market risk that is not captured by a VaR system?? There are, of course, a lot of criticisms about VaR and its usefulness in indicating statistical outliers..The most famous of which i have come across is that of Naseem Taleb:<BR/><BR/>"VAR has made us replace about 2,500 years of market experience with a co-variance matrix that is still in its infancy. We made a tabula rasa of years of market lore that was picked up from trader to trader and crammed everything into a co-variance matrix. Why? So a management consultant or an unemployed electrical engineer can understand financial market risks.<BR/><BR/>To me, VAR is charlatanism because it tries to estimate something that is not scientifically possible to estimate, namely the risks of rare events. It gives people misleading precision that could lead to the buildup of positions by hedgers. It lulls people to sleep. All that because there are financial stakes involved.<BR/><BR/>To know the VAR you need the probabilities of events. To get the probabilities right you need to forecast volatility and correlations. I spent close to a decade and a half trying to guess volatility, the volatility of volatility, and correlations, and I sometimes shiver at the mere remembrance of my past miscalculations. Wounds from correlation matrices are still sore."<BR/><BR/><BR/>2) The margin system that is enforced is for registered participants in the market like brokers. What about the margin that broker demand from their clients? It is natural to expect that the broker-client margin will be determined more by competition among brokers for clients rather than an extensive model based margin system (i.e. brokers who want to capture market share will let their clients run greater leveraged positions).. As it wouldn't be sensible for SEBI to ask brokers to maintain margins on this front as well, can a system of capital adequacy be specified so that only well capitalized brokers who can stand the risk of all their clients defaulting, be allowed to participate??Free Thinkerhttps://www.blogger.com/profile/03724960238076985720noreply@blogger.com