Friday, April 18, 2014

Why UPS Trucks Don't Turn Left

Why UPS Trucks Don't Turn Left: To reduce fuel use and accidents. Confirmed by Myth-busters.



"Mythbusters likely failed to save time on the route by following the rule even more stringently than UPS. While the no left turn rule has an appealingly simple and algorithmic quality to it, you will see UPS drivers take left turns on occasion, especially in residential neighborhoods without much incoming traffic. Asked how often UPS drivers turn right, a driver told ABC:"


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Monday, April 14, 2014

Smart beta

Is ‘smart beta’ the latest magic money tree? - FT.com: discusses passive investment with a "twist".



"The typical twist is to substitute the standard market capitalisation weighting of an equity index with an alternative weighting, such as dividends or earnings. This is claimed as a smarter approach as market cap indices will inevitably overweight expensive stocks and underweight cheap ones."


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Friday, April 04, 2014

Sampling bias and sampling error

Tim Harford FT.com: is a discussion of "Big Data" looks at sampling bias and sampling error.


"The Literary Digest, in its quest for a bigger data set, fumbled the question of a biased sample. It mailed out forms to people on a list it had compiled from automobile registrations and telephone directories – a sample that, at least in 1936, was disproportionately prosperous. To compound the problem, Landon supporters turned out to be more likely to mail back their answers. The combination of those two biases was enough to doom The Literary Digest’s poll. For each person George Gallup’s pollsters interviewed, The Literary Digest received 800 responses. All that gave them for their pains was a very precise estimate of the wrong answer."


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Thursday, April 03, 2014

The cost of acquiring information

Streetwise Professor discussed Michael Lewis’s HFT Book: and highlight an application of the Grossman-Stiglitz idea that there will be an equilibrium where the cost of acquiring information will be equal to the benefit of obtaining that information.



 "Moreover, it’s not so clear that order flow information is “non-public”.  No, not everyone has it: HFT has to expend resources to get it, but anybody could in theory do that. Anybody can make the investment necessary to ping a dark pool. Anybody can pay to get a faster data feed that allows them to get information that everyone has access to more quickly. Anybody can pay to get quicker access to the data, either through co-location, or the purchase of a private data feed. There is no theft or misappropriation involved. If firms trade on the basis of such information that can be obtained for a price that not everyone is willing to pay, and that is deemed illegal, how would trading on the basis of what’s on a Bloomberg terminal be any different?"



Wednesday, March 26, 2014

IS-LM vs. Minsky | LARS P. SYLL

IS-LM vs. Minsky | LARS P. SYLL:  The limitations of mechanical IS-LM"



IS-LM is typically set in a current values numéraire framework that definitely downgrades the importance of expectations and uncertainty — and a fortiori gives too large a role for interests as ruling the roost when it comes to investments and liquidity preferences. In this regard it is actually as bad as all the modern microfounded Neo-Walrasian-New-Keynesian models where Keynesian genuine uncertainty and expectations aren’t really modelled. Especially the two-dimensionality of Keynesian uncertainty — both a question of probability and “confidence” — has been impossible to incorporate into this framework, which basically presupposes people following the dictates of expected utility theory (high probability may mean nothing if the agent has low “confidence” in it). Reducing uncertainty to risk — implicit in most analyses building on IS-LM models — is nothing but hand waving."


There is no uncertainty.

Sunday, March 23, 2014

Shadow rate

Summarizing monetary policy | Econbrowser and the use of the shadow rate.



 "A recent paper by Dora Xia, a UCSD graduate student who expects to complete her Ph.D. this spring, and Cynthia Wu, a former UCSD student who is now an assistant professor at the University of Chicago, makes several contributions to this literature. First, most previous applications of the shadow rate model have involved arduous numerical simulations to calculate its full predictions. By contrast, Wu and Xia develop a very simple closed-form expression that gives a very good approximation to the predictions of the model for the yield of any maturity. Here is a graph showing the estimate of the shadow rate that comes out of their approach. Up until 2009, this basically coincides with the observed fed funds rate, but since then, the implied shadow rate has been quite negative."


This can be used to assess whether monetary policy is appropriate and can be utilised to make forecasts about interest rates.  This could be a supplement to the Taylor Rule.



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Thursday, March 20, 2014

Surprise

Surprise and Digression | The Leisure of the Theory Class:  An interesting area.  What is a "surprise"?  When thinking about economic expectations, the surprise is something that is unusual, it is something that is not expected.  Does this mean that it is at the tail of the probability distribution?  Does it mean something outside of that distribution?  Is it possible to use insights from other fields to get of a handle on this and assist in the understanding of crash risk?



"They propose that surprise be measured by the Kullback-Liebler divergence between the prior and the posterior. As with many good ideas, Itti and Baldi are not the first to propose this. C. L. Martin and G. Meeden did so in 1984 in an unpublished paper entitled: `The distance between the prior and the posterior distributions as a measure of surprise.’ Itti and Baldi go further and provide experimental support that this notion of surprise comports with human notions of surprise. Recently, Ely, Frankel and Kamenica in Economics, have also considered the issue of surprise, focusing instead on how best to release information so as to maximize interest."