Gabriel Ryan, FRM on LinkedIn: Vasicek Interest Rate Model Vasicek model. A term that has different… (2024)

Actuarial Science & Credit RiskSome thoughts on the two distinct professions and activities. Insurance actuarial risk and banking credit risk is kind of in a quantum superposition - similar yet different at the same time.Some key similarities -1. Uncertainty around time to event, either future claims or loan default2. Modeling time to event3. Both require loss reserves4. Both require capital buffersSome key differences -1. Insurance, receive regular cash flows from premium, which contributes to a pool of surplus and can be invested. While risk event requires insurance companies to meet claims obligations. No upfront cash overlay. 2. Bank loans, the bank disburse cash upfront and borrowers repay i.e receive regular cash flows. Upon risk event i.e default on loans, bank suffers a short fall on the loan balance owed.Thus the reserves between the insurance companies and banks are deployed differently.- Actuaries set reserves such that on average the insurer can meet its future claims obligation- Bank risk modelers set loan loss reserves to plug the shortfall in loan balances in defaultIn both cases, movements in reserves are directly attributable to P&L. Capital also is also in a quantum superposition - similar but different:- Similar in a sense, both insurance companies and banks hold capital to cover any unexpected losses - different in a sense, insurers may face unexpected large claims and need buffer to meet such obligations. Banks on the other hand, may face large unexpected defaults, losses eating into its capacity to lend further. Risk events also trigger different actions:- For the insurer, upon receiving a claims, insurers either proceed with settlement or dispute the claim, leading to some court battle. - For banks, upon default of loan, banks start the loan recovery / collection to reduce losses. Involve recovery agents, liquidators etc. Thus we can see, from an actuarial and credit risk point of view, much similarities and much differences. PS:I am no insurance expert. Happy for experts to chip in.

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Earnings call.Tesla: Earnings miss, shares + 12%Meta: Earnings beat, shares - 12%🤷Well of course it has to do with the forecast. One sells "dreams and promises", the other sells ads with AI ambition.

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Malaysia, Rest World And BabiesMy view is that declining fertility rate is irreversible. Malaysia and globally - Japan, Korea, Singapore etc. There is a direct negative correlation between economic wealth and fertility. More wealthy a nation, as a consequence goods become expensive (a natural economic phenomenon), people stop thinking about babies. I don't see an intersection between a growing economy and wanting more babies. Each couple needs 3 or more children to keep the population on an upward trajectory. 2 is only "replacement". But think about the following:1. Couples are having children later and later in terms of age2. Working female professionals, when they get pregnant - many companies feel the females become a baggage instead3. Most couples, probably have 1 to 2 children tops. Rarely see modern couples having 3 or more children. Some don't intend to have children.4. In many cases, young people don't intend to get married.Combine all these, its almost a guarantee fertility rate will fall below 2.0, often nearing 1.0. Which is a ratio that accelerates a nation towards an "ageing society". The next 50 years, the labour market will see a drastic shift. Not only labour, but consumer spending - the key driver of "growth". And more stress on health care, social service, social benefits, pensions.Naturally, for Malaysians, the aspirations of becoming a "high income" nation. Its either now or never for firms and individuals to come to a common goal of not low-balling wages.Inspired by post from Ganeshwaran Kana

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A Candidate,Changed a company every 2 years and you consider them a “Job Hopper”.Stayed with a company for 10 years and you consider them “Stagnated”.Left a company without a job and you consider them “Incompetent”.Changed a different industry and you consider them “Not Specialized”.Worked in only local companies not MNCs and you consider them "No culture fit".Stayed with the company average 3-5 years somewhat perfect but you consider them “Too Expensive”.The perfect candidate, they don’t exist. Instead look for Personality and Potential and hire the right ones and make them become perfect.Credit: Original author (seen this multiple times).

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When will Mr. Salary grow up? Mr. Salary does grow older though. Reality!Image: author

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Credit Risk - Vasicek Model For Default Probability (PD)The Vasicek model is probably the most well known structural credit risk model, being the basis for credit risk RWA model under advanced internal ratings based IRB approach.The Vasicek model describes the condition default probability, conditional on the realisation of a systematic state variable.The back story is that a borrower's assets is seen as random, and the returns on the assets are described by a standard normal random variable, V, that is decomposed into a systematic variable Y and borrower specific idiosyncratic variable, with an asset correlation parameter.Then we can derive the conditional default probability, a well known formula. Then from here there are few areas this can be used:1. Firstly, under the Large hom*ogeneous Portfolio approximation assumption, we can derive the Basel IRB formula. Probably topic for next post.2. For IFRS9 - the conditional default probability model can be used to convert a through the cycle TTC PD to a point in time PIT PD. This can be achieved by constructing a time series of the systematic variable Y, or the so-called credit cycle. More for wholesale, large corporate exposures.3. Stress testing. We can stress the cycle Y and obtain a stressed PD4. Portfolio credit analytics (from asset managers perspective)Probably a few other use cases but broadly, these are major uses.PS:Often in the IRB sense, the systematic variable Y is latent, not observed. But in IFRS9, stress testing, the systematic variable is necessary.

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Sometimes, have to take a breather and appreciate the skylines of Singapore - a country and city state that is about 1.5x smaller than Hong Kong and 3x smaller than Tokyo, with virtually no natural resources.The air is fresh (barring smog from neighbouring countries), among the safest countries, high income per capita. For all that isn't rosy e.g sky high property prices, there are enough roses around in Singapore.The DBS, HSBC, Standard Chartered, Citi, MUFG (Japan's largest bank) buildings in the background.

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Llama 3 For Everyone 🦙🦙OpenAI and ChatGPT made large language models LLMs and AI mainstream. This week, Meta released its most advanced model yet, the Llama 3. It is now integrated with the most of Meta's products, including WhatsApp.Just a random prompt, asking on WhatsApp what is the Black Scholes model. Pretty decent to be able to use WhatsApp to learn some introduction to Black Scholes and financial derivatives.Probably bad news for schools and student homework? 😂

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Malaysia and Its Unique English (Manglish)Being a former British colony, some feel Malaysians (and our Singaporean neighbours) have butchered the English language. But it is what makes Malaysia (and Singapore) unique. A localised version of English amongst locals, while we try to conform to standard English when communicating more formally.The Manglish (and Singlish) amalgamates most of the local languages together (English, Chinese, Malay, sometimes Tamil). Some takes in Malaysia:- We don't say "I finally understand, I get it now". We say "Ooooo" a long prolonged "Oh".- We don't say "I beg your pardon, can you repeat please?". We say "Haarr?"- We don't say "Here you go, this is for you." We say "Nahh".Notice intonations and sounds matter alot in delivering a message 😂. Single word sentences are more than enough to say a thousand things. Some other takes:- We say "eat where?" instead of "where shall we have lunch / dinner?". Probably a direct translation from Malay i.e "makan mana?" Could be a direct translation from Cantonese too.- We say "don't play-play" to mean "that's dangerous, don't do it or it might get you in trouble". Probably a direct translation from Malay's "jangan main-main".A single sentence could contain multiple languages simultaneously, like:"Eh bro, eat where? Think fast fast. If not, just tapao. Later late for meeting, boss marah nanti". Translation: "We need to decide quickly where should we go for a meal. Otherwise, let's do take away meal. We have a meeting later. If we are late, the boss won't be happy ". This is what makes the country unique and brings the people together. For most part. I should like to think the majority of people are thinking straight and ignoring the political rhetorics from politicians.So many more examples, I am sure my fellow Malaysians can give more examples. PS:- Video from Epic Asian YouTube channel - Gostan likely came from the phrase "go astern", a old English sailing term to mean "go back" towards the stern, the back of the ship.

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