Recommended articles: Investment and Risk Management

VOX, CERP Policy Portal:

1. The dissonance of the short and long term. The type of risk we most care about is long-term, what happens over years or decades, but we tend to manage that risk over short periods. This column argues that the dissonance of risk is that we measure and manage what we don't care about and ignore what we do.
2. Fast trading and the virtue of entropy. Many policymakers are concerned that fast trading has adverse effects on markets, although the existing evidence is ambiguous. This column argues that high-frequency trading can increase market efficiency and the quality of trade. By creating noise, fast trades may prevent traders with a herd mentality from pushing prices in one direction.
3. Externalities - and cheating - in the financial crisis. Externalities can have a powerful effect on financial stability. This column studies the amplification effect that can operate despite value at risk regulation, which suffers from the ‘fallacy of composition’. It shows that the magnitudes of booms and busts are amplified by two significant externalities triggered by aggregate shocks: the endogeneity of bank equity due to mark-to-market accounting and of bank liquidity due to 'fire-sales' of securitised assets. In addition to economic models, legal and political factors should also be considered.

Plus:

• Data Behind Fear of Yield Curve Inversions (The Big Picture).
• Edward Altman: Where Are We in the Credit Cycle? (CFA Institute Enterprising Investor).