Friday, February 25, 2005


24 March 2004: "But for everyday purposes, it is quite enough to know the story of the $10 bill and its unexpectedly complex interpretation. The efficient market hypothesis is 90 per cent true, and you will lose money by ignoring it. The search for the elusive 10 per cent, like the search for discarded $10 bills, attracts effort greater than the rewards. But for the very few skilled searchers, the rewards can be large indeed. "

Current account adjustment and capital flows - BIS Working Papers No 169 - February 2005

Current account adjustment and capital flows - BIS Working Papers No 169 - February 2005: "This paper examines episodes of current account adjustment in industrial countries over the past 30 years. We find that they were typically associated with a sizeable slowdown in domestic growth and a large exchange rate depreciation. There was no discernable change in the nature of capital flows in the period just prior to an adjustment, with the possible exception of non-residents� holdings of currency and deposits. This suggests that a current account adjustment may be an endogenous event - responding to the resolution of domestic imbalances - rather than an exogenous event where the size of the current account deficit itself precipitates the adjustment in the domestic economy and the exchange rate. Econometric evidence suggests that global developments trigger the adjustment, possibly because they trigger the unwinding of the domestic imbalances. We find that the bulk of the ex post adjustment of the financial account was in private sector flows, primarily on the part of foreign investors. Finally, we document some notable differences in the adjustment of the current account in the United States in 1987 compared with that observed in the other episodes. "

Wednesday, February 23, 2005 Investing in art | The Buttonwood column: "Britain�s Barclays Capital tests this theory in detail in the latest edition of its Equity Gilt Study, published on February 22nd. Barclays looks at how art and other assets performed over different phases of the business cycle and over different periods of time, using data from 1970 onwards. Art does best when the economy is growing, and it survives the ravages of inflation better than most, it transpires. Art prices rise when bond returns slump, and move broadly in tandem with property and (less so) commodities. Because its price bounces around so much, investors have to hold art for at least 35 years to be certain of real annual returns. All in all, and subject to tonnes of caveats, the best portfolio mix for a pension-fund investor, in particular, with a horizon of ten years or more would include a 10% weighting in art."

Tuesday, February 22, 2005

VIX Needs a Friend

The Big Picture: VIX Needs a Friend: "For a buy indicator, few things in life beat a spike in the VIX over 50. But as a shorter term sell indicator, I've gotten better results -- and more consistently -- using the VIX in tandem with one or two other signals. "

I wonder if this can be applied to FX rates - taking a basket of options prices and bringing them together with some other sentiment indices (futures positions etc).

LTCM vs Enron


The fall compared.

Sunday, February 13, 2005

Can This Black Box See Into the Future?

RedNova News - Can This Black Box See Into the Future?:

"DEEP in the basement of a dusty university library in Edinburgh lies a small black box, roughly the size of two cigarette packets side by side, that churns out random numbers in an endless stream.

At first glance it is an unremarkable piece of equipment. Encased in metal, it contains at its heart a microchip no more complex than the ones found in modern pocket calculators. But, according to a growing band of top scientists, this box has quite extraordinary powers. It is, they claim, the 'eye' of a machine that appears capable of peering into the future and predicting major world events"

Very strange, slightly scary. I would be more comfortable if it just anticipated changing human emotion....

Keeping the Yuan Down...

Keeping the Yuan Down...

Brad Delong summarises the discussions of the dollar and yuan in San Francisco.

Saturday, February 12, 2005

Inflation-Risk Premium

macroblog: More On The "Inflation-Risk Premium"

One interesting thing here is whether the sharp increase in personal borrowing is associated with this fall in inflation expectation. The increased willingness to take on debt appears to be most evident in the likes of the US, the UK and Australia (where the fall in inflation expectations is probably much greater than in Germany for instance).

Tuesday, February 08, 2005

Brad DeLong's Website: Why Capital Gains Are Likely to Lag Economy-Wide Growth

Brad DeLong's Website: Why Capital Gains Are Likely to Lag Economy-Wide Growth: "Why stock-index earnings growth lags economy-wide profit growth--and why, with a constant P/E ratio and a constant profit share in income, real GDP growth is likely to average 1% per year more than the (non buyback-induced) capital gains on a diversified stock portfolio."

This is a lovely comment by Brad on the relation between earnings growth and GDP growth and how even a complete diversification will miss out on the returns to future entreprenurship.

What do we know about currencies and interest rates?

Marginal Revolution: What do we know about currencies and interest rates?
Great summary of what we know and what we don't know - including links to authoritative papers.

Sunday, February 06, 2005

Is Antitrust Worthwhile?

Cafe Hayek: Is Antitrust Worthwhile?: "Does the evidence show that antitrust enforcement is worthwhile? Robert Crandall and Clifford Winston say no."

This is an interesting drive through the practicalities of competition and contestable markets.

Friday, February 04, 2005

Bubble, risk and insurance

Bubbles and risk
This paper looks at bubbles through history and questions the usual risk assessments that inform financial theory. Lots of useful information about bubbles.

Thursday, February 03, 2005

Capitalizing Central Banks: A Net Worth Approach

Capitalizing Central Banks: A Net Worth Approach

This is an IMF paper that may provide some insight into the pressure on Asian central banks to think about the value of the USD reserves that they hold. It seems to me that there is little pressure on central banks to think about the ruture value of the reserves. Other policy considerations (maintainance of favourable exchange rates) are more important.

Wednesday, February 02, 2005


Mahalanobis: "This magazine article has a great headline ('Zero intelligence' trading closely mimics stock market), and technically it's true: they calibrated a model where noise traders (also known as 'zero intelligence' traders) mimic stock price patterns, with the standard fat tailed distributions."