Sunday, September 14, 2014

Volatility concepts and the risk premium

An interesting overview of risk and volatility from the BIS.  Volatility concepts and the risk premium:



"Statistical measures of volatility are based on observed asset returns over a given time interval. This can be done in various ways. A simple, model-free approach is to compute the standard deviation of the actual returns on a given asset over a particular time window, so-called realised (or "historical") volatility. Model-based approaches have also been proposed: ARCH (autoregressive conditional heteroscedasticity) models, for example, assume that the variance of returns fluctuates over time according to a specific time series model.

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Friday, August 15, 2014

Expectations of Returns and Expected Returns

Expectations of Returns and Expected Returns: "We analyze time-series of investor expectations of future stock market returns from six data sources between 1963 and 2011. The six measures of expectations are highly positively correlated with each other, as well as with past stock returns and with the level of the stock market. However, investor expectations are strongly negatively correlated with model-based expected returns. We reconcile the evidence by calibrating a simple behavioral model, in which fundamental traders require a premium to accommodate expectations shocks from extrapolative traders, but markets are not efficient."



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Monday, July 21, 2014

Learning means that behaviour is not stationary

Stationary processes | The Leisure of the Theory Class:



"I said earlier that in stationarity environment, the point in time which we denote by does not correspond to anything about the process itself but only reflect the point in time in which we start observing the process. In this example this is indeed the case with Craig, who starts observing the coin process at time . It is not true for us. Our subject matter is not the coin, but Craig. And time has a special meaning for Craig. Bottom line: Rational agent in a stationary environment will typically not behave in a stationary way."


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Saturday, July 19, 2014

Trade

CONVERSABLE ECONOMIST: Evidence on the Samuelson Conjecture: "For a useful starting point to thinking about how the rise of emerging economies like China affect global trade, I recommend a symposium in the Spring 2012 issue of JEP. Gordon H. Hanson starts with "The Rise of Middle Kingdoms: Emerging Economies in Global Trade."  "Gains from Trade when Firms Matter," by Marc J. Melitz and Daniel Trefler, looks at the benefits of trade offers introduction to modern models of trade driven from variety, shifts toward more efficient firms, and technological gains. For an introduction to models of international trade based on by differences in relative productivity across countries--like the model used by di Giovanni, Levchenko, and Zhang--that same has a useful article called "Putting Ricardo to Work," by Jonathan Eaton and Samuel Kortum. Finally, Jonathan Haskel, Robert Z. Lawrence, Edward E.  Leamer, and Matthew J. Slaughter look at "Globalization and U.S. Wages: Modifying  Classic Theory to Explain Recent Facts." "



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Thursday, July 17, 2014

Money and Entropy — Design Matters — Medium

Money and Entropy — Design Matters — Medium: "This all sounds terribly wonkish and academic, but understanding money in a scientific sense is important given what you can do with it (and the problems a lack of it create)."



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Saturday, July 12, 2014

The real 10 algorithms that dominate our world — Medium

The real 10 algorithms that dominate our world — Medium: "The other day, while I was navigating Reddit I found an interesting post that was called The 10 Algorithms That Dominate Our World by the author George Dvorsky which was trying to explain the importance that algorithms have in our world today and which ones are the most important for our civilization."



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Friday, June 27, 2014

Pimco runs risks in turning up the ‘vol’ - FT.com

Pimco runs risks in turning up the ‘vol’



Nice overview from the F-Times of: risk to increase volatility specifically and the way that crowded trades can be build by conventions that become oversold.



"In fact, so many different kinds of investors are now “selling volatility” that BlackRock’s Dennis Stattman worried at the same conference that it had become a “crowded trade”. Sceptics worry these new players might be selling flood insurance on the cheap, just before a deluge."