Thursday, December 23, 2010
Monday, December 13, 2010
"John Maynard Keynes started off as a currency trader, moving to commodities a bit later on. He attempted to invest based on macroeconomic predictions—keep in mind that he was an economist—and it didn't exactly work out in the short run. I didn't quote the rest of the article but Keynes appears to have broke even later on but this was definitely a painful start."
"Few universal banks split out their transaction banking performance. But Deutsche Bank, for example, recorded transaction banking pre-tax profits of €1.1bn in 2008, up 17 per cent and equivalent to an ROE of 108 per cent. Though the number slipped back – to €776m – in 2009, that relatively stable performance contrasts with the investment banking result, which was €7.4bn in the red in 2008, thanks to the toxic asset fall-out from the financial crisis, and then €4.3bn in the black again last year."
Tuesday, November 23, 2010
"Settlements estimates that UK lenders account for almost 30 per cent of European banks’ total $509bn exposure to Ireland. RBS and Lloyds, both partially state-owned, have taken the most Irish pain, falling by about 8 and 9 per cent respectively over the past week before regaining some ground on Tuesday"
Saturday, November 13, 2010
"Ireland joined Greece this week in the negative basis club. That is, the five-year asset swap spread for Ireland outpaced movement in equivalent credit default swaps. So (in basic terms) spreads in the CDS market were trading lower than in the cash market for Ireland."
Friday, November 12, 2010
Sunday, October 31, 2010
"We can have the money for a national system of higher education distributed either in accordance with the tastes of 18-year-olds or in accordance with the tastes of a group of older people in London: there’s no other way to do it."
Wednesday, October 27, 2010
"That seems about right: car companies stand or fall, ultimately, on the strength of their product, and teaching a giant company how to build a quality car again is something that can’t be done on the private-equity timetable. The problem is that no private-equity manager wants to be thought of as a mere financial engineer."
Tuesday, October 26, 2010
"We’ll quickly note that the Fed’s expected QE2 measures will, if successful in bringing about inflationary pressures, further add to the pressure on China to appreciate."
Saturday, October 23, 2010
Monday, October 11, 2010
And he being gone, and what company there was, my father and I, with a dark lantern; it being now night, into the garden with my wife, and there went about our great work to dig up my gold. But, Lord! what a tosse I was for some time in, that they could not justly tell where it was; that I begun heartily to sweat, and be angry, that they should not agree better upon the place, and at last to fear that it was gone but by and by poking with a spit, we found it, and then begun with a spudd to lift up the ground. But, good God! to see how sillily they did it, not half a foot under ground, and in the sight of the world from a hundred places, if any body by accident were near hand, and within sight of a neighbour’s window, and their hearing also, being close by: only my father says that he saw them all gone to church before he begun the work, when he laid the money, but that do not excuse it to me. But I was out of my wits almost, and the more from that, upon my lifting up the earth with the spudd, I did discern that I had scattered the pieces of gold round about the ground among the grass and loose earth; and taking up the iron head-pieces wherein they were put, I perceive the earth was got among the gold, and wet, so that the bags were all rotten, and all the notes, that I could not tell what in the world to say to it, not knowing how to judge what was wanting, or what had been lost by Gibson in his coming down: which, all put together, did make me mad; and at last was forced to take up the head-pieces, dirt and all, and as many of the scattered pieces as I could with the dirt discern by the candlelight, and carry them up into my brother’s chamber, and there locke them up till I had eat a little supper: and then, all people going to bed, W. Hewer and I did all alone, with several pails of water and basins, at last wash the dirt off of the pieces, and parted the pieces and the dirt, and then begun to tell [them]; and by a note which I had of the value of the whole in my pocket, do find that there was short above a hundred pieces, which did make me mad; and considering that the neighbour’s house was so near that we could not suppose we could speak one to another in the garden at the place where the gold lay — especially my father being deaf — but they must know what we had been doing on, I feared that they might in the night come and gather some pieces and prevent us the next morning; so W. Hewer and I out again about midnight, for it was now grown so late, and there by candlelight did make shift to gather forty-five pieces more. And so in, and to cleanse them: and by this time it was past two in the morning; and so to bed, with my mind pretty quiet to think that I have recovered so many. And then to bed, and I lay in the trundle-bed, the girl being gone to bed to my wife, and there lay in some disquiet all night, telling of the clock till it was daylight.
Tuesday, October 05, 2010
"As for the proportion of trading conducted this way? According to the last stats seen by FT Alphaville, something like 31 per cent of all US equity orders were being internalised as of January, 2010."
Monday, October 04, 2010
A commonplace physical illustration of a “catastrophic event” – in this formal sense of the term — may be experienced by letting your finger trace the surface of a draped fabric until it reaches a point where the surface (the “manifold” as mathematicians would speak of the shawl or cloak’s three-dimensional surface) has folded under itself; there gravity will cause your finger’s point of contact to drop precipitously from the surface along which it was traveling smoothly – to land upon the lower level of the drapery beyond the fold. That little passage is the “catastrophe.” In the present context, what is especially relevant about this conceptualization of the “event” experienced by your finger is its generic nature: catastrophes thus conceived are not phenomena belonging to a category delimited by some size dimension of the system in which they occur, or according to the severity of their sequelae; nor are they to be uniquely associated with processes that that operate only in one or another range of temporal velocities (whether slow, or fast). Instead, the catastrophes to which this essay’s title refers are fractal, possessing the property of self-similarity.
Sunday, October 03, 2010
"For investors who do not want to take simple long/short positions, an alternative tactical approach to foreign exchange markets is offered by Deutsche Bank and its db x-trackers currency returns ETF. This combines three strategies widely used by traders in currency markets: carry, momentum and valuation. Like a quantitative hedge fund, it uses a rules-based process to take long and short positions in G10 currencies with regular rebalancing of the components."
Saturday, October 02, 2010
In a new book called “The Dragonfly Effect: Quick, Effective, and Powerful Ways to Use Social Media to Drive Social Change,” the business consultant Andy Smith and the Stanford Business School professor Jennifer Aaker tell the story of Sameer Bhatia, a young Silicon Valley entrepreneur who came down with acute myelogenous leukemia. It’s a perfect illustration of social media’s strengths. Bhatia needed a bone-marrow transplant, but he could not find a match among his relatives and friends. The odds were best with a donor of his ethnicity, and there were few South Asians in the national bone-marrow database. So Bhatia’s business partner sent out an e-mail explaining Bhatia’s plight to more than four hundred of their acquaintances, who forwarded the e-mail to their personal contacts; Facebook pages and YouTube videos were devoted to the Help Sameer campaign. Eventually, nearly twenty-five thousand new people were registered in the bone-marrow database, and Bhatia found a match.
Tuesday, September 28, 2010
Because of the capital costs of holding commodities directly, investing is almost exclusively done using futures (exceptions include commodity producers, consumers, etc.) Commodity indices, ETFs, ETNs and mutual funds manage their portfolios very similarly when using futures contracts. For the most part, they construct the portfolio by purchasing near-dated futures contracts. As the contracts near maturity, they sell the contract at or near the spot price of the commodity and purchase new near-dated contracts and the process repeats itself. The frequency and magnitude of this roll leads to the importance of the yield it generates.
Unfortunately, investing in commodity futures contracts can be complicated since total returns are comprised of three return components:
- Collateral Yield: Futures contracts require very little collateralization (~10%). The remainder is frequently invested in high-quality, short-term instruments such as a 90-Day T-Bill. The yield from these investments is often very small relative to the total return and is known as the collateral yield.
- Spot Price Change/Yield: This represents the price change in the underlying commodity contract and is often quoted during a discussion of a commodity’s return. Investors are usually seeking exposure to these returns when choosing to invest in commodities.
- Roll Yield: This component of return is the focal point of the recent articles and is a little more complicated. Commodity investors (e.g. indices, funds, etc.) tend to buy near-dated contracts (e.g. 1-month from expiration) and sell them just prior to settlement. The revenue generated is immediately used to purchase another near-dated contract to maintain exposure to the commodity. This process continues indefinitely and represents the roll yield (sale price less purchase price). If the subsequent purchase cost is less than the revenue gained from the sale, then the roll yield is positive; if the sale prices is less than the purchase price the roll yield is negative. A positive roll yield is referred to as backwardation while a negative yield is called contango.
Saturday, September 25, 2010
Tuesday, September 21, 2010
No, he does not die, because his species and that of the creature on this foreign planet do not share an evolutionary past or a common ancestor. Although they may both be made of proteins formed from amino acids, their independent evolutionary paths should made it highly improbable that they use similar neurotransmitter molecules within their respective brains and bodies. Every spaceman from Flash Gordon to Captain Kirk to Luke Skywalker should feel safe walking around any planet (except their own) with impunity from animal and plant toxins. For this same reason, the intoxicating drinks and powerful medicines that always seem to be popular in these foreign worlds in science fiction movies would also have totally different effects, if any effects at all, on the brains of our plucky spaceman. Eating otherworldly foods might be the most disappointing and distressing experience of all: Even if they were filling and somehow tasted delicious, as products of utterly alien biochemistries they would probably prove devoid of nourishment for our Earthly bodies. Thus, starvation might be the greatest threat to any future explorers of alien biospheres. Unless, perhaps, they’d brought along a large supply of chocolate.
Monday, September 20, 2010
Second is the pro-cyclical nature of value-at-risk, a measure of the risk of loss. Recent high market volatility is sharpening attention towards risk and the need to measure and manage it. At the same time, rapid financial innovation has increased the ability to monitor and control risks, allowing measures like Var to gain further ground. This would all be good news, if the markets were using the right type of Var for establishing the risk limits.
Generally, when prices move down, Var goes up, eventually triggering the risk limits and thus enlarging the troops of sellers. Symmetrically, the reduction of Var in good times encourages traders and fund managers to pile on risk, increasing their risk exposures when prices are already high and while demand is thriving. This can compound the positive feedback mentioned earlier.
The interesting thing here is the way that a period of low volatility will provide a sample of low volatility and increased risk taking. Increased volatility leads to less risk taking. Can we model this?
Wednesday, September 08, 2010
Saturday, August 21, 2010
Thursday, August 19, 2010
In Germany during the same period, publishers had plagiarizers -- who could reprint each new publication and sell it cheaply without fear of punishment -- breathing down their necks. Successful publishers were the ones who took a sophisticated approach in reaction to these copycats and devised a form of publication still common today, issuing fancy editions for their wealthy customers and low-priced paperbacks for the masses.
Monday, August 16, 2010
Monday, July 26, 2010
The National Endowment for Science, Technology and the Arts, an independent trade body, calculates that just 6 per cent of the highest growth businesses generated 54 per cent of new jobs over the last decade.
Saturday, July 03, 2010
In addition, stock market structure today is geared for large‐capitalization stocks with typically symmetrical order books but disastrous for the vast majority of small‐capitalization stocks with asymmetrical order books (where there is not naturally an offsetting buy order to match against a sell order and vice versa)... The “Flash Crash” was an example of where even normally liquid securities went to a state of “asymmetry” and price discovery broke down...
[Until] all trades, quotes and other messages in all interrelated markets are tagged and traceable to the trading venue, broker and ultimate investor, and disclosed to the market, markets will not be perceived as fair... With full tagging, tracking and reporting and the application of posttrade analysis and test bed techniques such as Agent‐Based Models, regulators and market participants will... once and for all be in a position to judge the impact of other participants and to regulate and plan accordingly...
Monday, June 21, 2010
Wednesday, June 16, 2010
Tuesday, June 15, 2010
I presently resolved of my father’s and wife’s going into the country; and, at two hours’ warning, they did go by the coach this day, with about 1300l.in gold in their night-bag. Pray God give them good passage, and good care to hide it when they come home! but my heart is full of fear: They gone, I continued in fright and fear what to do with the rest. W. Hewer hath been at the banker’s, and hath got 500l. out of Backewell’s hands of his own money; but they are so called upon that they will be all broke, hundreds coming to them for money: and their answer is, “It is payable at twenty days — when the days are out, we will pay you;” and those that are not so, they make tell over their money, and make their bags false, on purpose to give cause to retell it, and so spend time. I cannot have my 200 pieces of gold again for silver, all being bought up last night that were to be had, and sold for 24 and 25s. a-piece.
Tuesday, June 01, 2010
Sunday, May 30, 2010
As I have written, Greece is in a better legal position to reschedule its sovereign debt on favourable terms than, say, Argentina back at the end of 2001. About 90 per cent of Greek sovereign debt is in the form of bonds governed by Greek law.
That means if Greece wants to reschedule the interest rate and maturity of its debt, its national parliament can just pass a law decreeing the new terms. Investors would have no legal recourse.
The practical problem with doing that unilaterally is that Greece is still running large fiscal and trade deficits, so it cannot yet run its economy on a cash basis, as Argentina and others did after their defaults. That is why the European Union-International Monetary Fund stabilisation package is needed to cover maturing debt issues and also the continuing twin deficits, at least for the three years the facilities are supposed to be in place.
From the Greek point of view, though, it doesn't make sense for the three-year plan to run its course, even if the country meets its financial targets. Assuming it all works, Greece would have a substantially higher debt that would not be in the form of loosely covenanted Greek-law bonds, but virtually un-defaultable obligations to European governments, the EU and the IMF. The notion that banks or bond investors would be willing, at that point, to offer deeply subordinated credit to Greece is mere fantasy.
Monday, May 24, 2010
The so-called Volcker rule would be slightly less feared. Prop trading is not as profitable over the long run as many realise, but if banks are also forced to stop investing in hedge funds and private equity, normalised earnings could fall by about 2 per cent, according to Goldman Sachs.
There is also this from Tyler Durden
So with a delay of about six months since Zero Hedge started pounding on the topic of prop trading as the last bastion of perfectly legal front-running, which co-opts clients into "efficient" flow execution with the few remaining monopolist entities left on Wall Street in exchange for assorted prop trading desks taking advantage of complete flow visibility (i.e., the hedge fund nature of all modern Wall Street bail out recipients) which is simply a way to run alongside (or in front of) whale orders, thus providing guaranteed and risk free returns, the administration has finally realized what we have claimed for many months: that prop trading is nothing but a quasi-illegal operation, which was made explicitly and perfectly permissible with the adoption of the disastrous Gramm-Leach-Bliley act. As long as prop trading exists, Goldman (which is reporting earnings tomorrow, and we expect will announce another quarter of 90%+ profitable trading days only thanks to it taking full advantage of a thorough visibility of the FICC and equity flow market and a commingled prop and flow order book) will have record earnings, until such time as the Minsky Moment in Goldman's balance sheet arises again and blows up the financial system one more time.
Wednesday, May 19, 2010
A potential answer is that global banking models are being subtly revised in response to increased regulation. One of the little understood mysteries of the boom years is why banks expanded internationally when there were no synergy benefits and shareholders could themselves diversify more efficiently. The reason was leverage: if you are 30 times geared, it is crucial to have a stable earnings base. Geographic diversification was one way to get it, even if returns in individual countries were low.
Monday, May 10, 2010
But all of this changes market microstructure in insidiously destabilizing ways. For the first time we have large providers of this shadow liquidity, algorithms and high-frequency sorts, that individually account for large percentages of daily trading activity, and, at the same time, that can be turned off with a switch, or at an algorithmic whim. As a result, in market crises, when liquidity was always hardest to find, it now doesn't just become hard to find, it disappears altogether, like water rushing out sight via a trapdoor to hell. Old-style market-makers are standing aside as panicky orders pour in, and they look straight at shadow liquidity providers and say, "No thanks. You battle bots take it". And, they don't
Larry Tabb, chief executive of consultancy The Tabb Group, says: “We really need to step back and think about centralisation versus fragmentation and who is providing liquidity. It opens the up market to a whole series of questions about how we want our markets to function.”
Thursday, May 06, 2010
A key measure of bank risk, the overnight index swap spread on futures contracts in the eurozone, rose to a record high this week. This measures the premium over “risk-free” overnight rates of three-month rates, which carry greater credit risk.
Another warning sign is a significant shift to overnight lending by banks, particularly within troubled areas of the eurozone. Of the €450bn ($589bn) in daily turnover in the European money markets, 90 per cent is now in overnight lending, according to interdealer broker
Friday, April 23, 2010
he e-mails show signs of the agencies’ knowledge of the impending financial collapse. But in the interests of maintaining market share both S&P and Moody’s felt the need to continue their practices – even though many employees had misgivings.
“Screwing with (the model’s) criteria to ‘get the deal’ is putting the entire S&P franchise at risk – it’s a bad idea,” said one S&P employee. Another S&P employee described the drive for revenue and its effect on the relationship between banks and rating agencies as “a kind of Stockholm syndrome”.
Yet another captures that alleged conflict of interest almost perfectly: “Rating agencies continue to create an even bigger monster – the CDO market,” wrote an S&P staffer. “Let’s hope we are all retired by the time this house of cards falters.”
The agencies also failed to incorporate their growing awareness of fraud in the lending industry into their rating practices, as it was seen as a potential block to revenue.
In January 2007, an S&P analyst rating a Goldman Sachs CDO with subprime loans issued by Fremont Investment and Loan, which had just stopped using 8,000 of its brokers because they were agreeing loans with some of the highest delinquency rates in the country, asked superiors whether to take Fremont’s reputation into account.
Saturday, April 10, 2010
Friday, April 09, 2010
But it strains language to breaking point to describe CDS transactions as anything but gambling. The traders in AIG’s financial products division were inheritors of the amusements of Edward Lloyd’s coffee shop rather than the values of Swiss farmers.
Tuesday, April 06, 2010
Things like economies of scale and network effects have confounded people from Smith to Malthus to Marx. In this case, there is a need to compare the cost (lightbulb for one hour) against any possible benefit.
Greece’s most recent sales of euro-denominated bonds have attracted lower levels of interest and the government is now aiming to issue in dollars, targeting emerging market investors who are attracted by higher yields.
Saturday, April 03, 2010
Indeed, the first plea of Joanne Segars, the NAPF chief executive in its pre-Budget submission was to ask that borrowing be tilted to the long end of the market where it can do the most to alleviate funding woes for pensions. Already, government issuance of 20-, 30- and 50-year debt has risen sharply. In the fiscal year ending April 2010, issuance of conventional long-dated gilts soared to £33.9bn from £23.4bn just two years earlier. Thirty-year yields have risen, too, from 4.09 per cent at September 30 2009 to 4.52 per cent as at March 31 2010.
Wednesday, March 31, 2010
The trouble is, with margins near pre-crisis levels again for products like rates and forex, the free lunch enjoyed by the smaller boys is being taken away. Scale once more is king. Banks down the order in certain flow products should be asking themselves serious questions. Even including the crisis, the top five banks in equities, for example, have increased their market share by 10 per cent since 2006. As the level of concentration increases again, expect more money – not to mention heat – to be generated in the biggest dealing rooms.
In the wake of the financial crisis, the use of collateral backing derivative trades in order to appease counterparty credit concerns has continued to expand.
This means that once a swap trade is executed, more margin is required if the trade starts losing money.
This daily management of margin also makes it harder to maintain an arbitrage over time as the value of any trade between swaps and Treasuries changes constantly.
Analysts at Credit Suisse say: “This makes it increasingly harder to hold arbitrage strategies to termination as arbitrageurs are forced to realise not just gains but also losses through margin calls resulting in frequent stop outs [forced exits from the trade].
Tuesday, March 30, 2010
Sunday, March 28, 2010
Shorting bonds can be done using futures or repos [repurchase agreements], or credit default swaps. The last method is not ideal, warned Mr Inker. “There is the risk of governments declaring your contract invalid.” A number of politicians have called for restrictions on CDS trading.
Thursday, March 18, 2010
Lawyers for American companies spent hundreds of billable hours drawing up contracts to which no one ever referred. Their Japanese counterparts engaged in complex business relationships with no formal agreements at all, or ones that covered a single sheet of paper. But the commercial relationships that emerged in Japan’s car industry were more successful in securing component reliability and managing just-in-time inventory than those hammered out by the hard-nosed negotiators of Detroit.
The financial crisis of 2007-09 featured large-scale losses to financial institutions from assets such as AAA rated tranches of mortgage-backed securities. Simultaneously, markets for collateralised borrowing (“repos” or repurchase agreements) froze or experienced severe stress. Investors lending in repo transactions started charging large “haircuts”. In other words, repos could be rolled over only with successively high levels of over-collateralisation, which disrupted the financing model of broker-dealers and in fact caused Bear Stearns to fail in March 2008.
The moral of the story is that regulators need to impose tighter constraints, such as higher capital requirements, on activities such as holdings of AAA rated tranches and repo financing of risky assets where there is a conflict of interest between the privately optimal and socially optimal choices. Bankers will fight such a proposal. But it should be well understood that they have all incentives to ignore the attendant systemic risk
Tuesday, March 16, 2010
Monday, March 15, 2010
In normal market conditions, yields on government bonds, such as US Treasuries, UK gilts and German Bunds, trade at a discount to swap rates. This is because swap rates are based on a funding rate that is linked to the interbank lending market. This rate is higher than the repo rate used for financing government bonds. Swaps are money market instruments whereas Treasuries reflect triple A sovereign risk.
Saturday, March 13, 2010
Friday, March 12, 2010
Lehman’s rapid growth saw net assets increase by 48 per cent, or almost $128bn, from the fourth quarter of 2006 through the first quarter of 2008. But the bulk of the assets, according to the report by court-appointed examiner Anton Valukasreleased on Thursday, were in illiquid assets that could not easily be sold. Such assets nearly doubled to $175bn in that same time frame
Monday, February 22, 2010
Saturday, February 20, 2010
Thursday, February 18, 2010
Tuesday, February 09, 2010
Saturday, February 06, 2010
Thursday, February 04, 2010
Thursday, January 28, 2010
This can take a panel analysis.
1990 or first available year 2007 or latest available year average interest rate
India 11.9 14.2
Russian Federation 0.8 14.7 8.86
Slovak Republic 14.8 16.9 4.93
Czech Republic 16.9 17.3 3.24
Norway 17.4 17.9 4.59
Poland 10 18.4 8.42
Greece 16.7 19.4
Turkey 11 20.2 17.5
Mexico 20.7 20.3 9.31
Finland 16.2 21.2 3.18
Korea 14.9 21.6 4.67
Spain 17.2 22.1 3.18
South Africa 16.1 22.1 9.12
Portugal 20.2 22.4 3.18
Hungary 14.6 22.6 4.9
Switzerland 16.2 23.6 1.58
Austria 17.7 24.2 3.18
Denmark 21.5 24.7 3.38
Sweden 20.3 24.8 2.91
Canada 22.7 25.6 3.32
Iceland 16.7 26.2 10.63
Japan 20.7 26.7 0.36
Italy 20.1 27.6 3.18
Ireland 16.4 28.1 3.18
Netherlands 20.7 28.3 3.18
New Zealand 25.4 28.3 6.35
OECD total 24.3 28.4
Belgium 22.6 29 3.18
Germany 23 29.2 3.18
Australia 25.2 29.8 5.72
United Kingdom 21.6 31.9 4.54
United States 24.8 33.1 3.2
France 27.1 33.3 3.18
Luxembourg 28.5 47.3 3.18
There is probably a need for some dummy variables to account for the US reserve currency status, UK history and the developments in Ireland and Luxembourg. What other explanatory variables?
Wednesday, January 27, 2010
Well, consider this. A fund with a highly levered balance sheet, and its investment fingers in many pies, is hit with losses in one of its sub-portfolios. Due to the nasty two-edged bite of leverage, its equity drops significantly, and the only way it can restore its risk profile is to raise more equity or liquidate some of its investments. Given the poor market conditions in the affected sub-portfolio, it is often more prudent to liquidate securities in other sub-portfolios. But this, as you can imagine, puts downward price pressure on securities in those previously unrelated markets. Presto, contagion. This is the "common holder" problem which some believe is the primary culprit.
Wednesday, January 20, 2010
For the past year, as the size and number of US Treasury debt sales each month has surged in order to fund the gaping US budget deficit, there has been increasing evidence of “direct” buying activity. But last week the trend became particularly apparent when big chunks of the three and 10-year note auctions were bought by domestic investors such as large money managers, hedge funds and smaller US financial institutions.
The academics who dominate modern central banking were ideologically committed to the notion of efficient markets and to exclusive reliance on inflation targetting regardless of imbalances arising from easy credit and soaring asset prices – a spectacular case of one-club golfing. This mindset led to the silly belief that bubbles could not be identified at the time and that it was better to clean up after the bust than to lean pre-emptively against the wind in the boom. Monetary policy was thus asymmetric. Interest rates were reduced when asset prices fell, but were not raised in response to wildly overheating markets.
Another alternative to mean-variance is to select the portfolio that has the highest expected geometric mean return. This, in effect, maximizes the expected value of terminal wealth.
The geometric mean is defined as:
where Rij is the ith possible return on the jth portfolio and each outcome is equally likely.
If the likelihood of each outcome is different and Pij is the probability of the ith outcome for the jth portfolio, then
and can be written as,
The resulting portfolio is usually very well diversified and extreme values have a tendency to be eliminated. If a strategy has a probability of bankruptcy then the whole product will become zero.
The geometric mean is a measure of central tendency, just like a median. It is different from the traditional mean (which we sometimes call the arithmetic mean) because it uses multiplication rather than addition to summarize data values. Geometric means are often useful summaries for highly skewed data.
The geometric mean for any time period is less than or equal to the arithmetic mean. The two means are equal only for a return series that is constant (i.e., the same return in every period). For a non-constant series, the difference between the two is positively related to the variability or standard deviation of the returns.
The main problem with this method is that it does not differentiate between investors and thereby does not explicitly refer to risk. If our expected return forecasts were the same, then every investor, irrespective of their circumstances, would hold the same portfolio.
Arguably, this method could be used by a mutual fund that has a broadly diversified group of investors. It is very quick and easy to use.
Maximizing the geometric mean is equivalent to maximizing the expected value of a log utility
Sunday, January 17, 2010
Second, much of China's extraordinary development has been based on moving peasants into manufacturing. The key to future job growth, says Stephen Green, chief economist at Standard Chartered Bank in Shanghai, will lie in the services sector. And the largest components of the services sector—financial services, entertainment, media—remain firmly in the grip of the state. Going forward, it will become more difficult for a services-based economy to prosper with restraints on communication and expression. China faces a fundamental paradox, says Damien Ma, an analyst at the Eurasia Group. "It needs to have fairly closed information flow for political stability purposes, but doing so stifles innovation."
Saturday, January 16, 2010
When Friedman died, a couple of years ago, we had a symposium for the alumni devoted to the Friedman legacy. I was talking about the permanent income hypothesis; Lucas was talking about rational expectations. We have some bright alums. One woman got up and said, “Look at the evidence on 401k plans and how people misuse them, or don’t use them. Are you really saying that people look ahead and plan ahead rationally?” And Lucas said, “Yes, that’s what the theory of rational expectations says, and that’s part of Friedman’s legacy.” I said, “No, it isn’t. He was much more empirically minded than that.” People took one part of his legacy and forgot the rest. They moved too far away from the data.
Friday, January 15, 2010
Wednesday, January 13, 2010
Monday, January 11, 2010
So, there's a lot wrong with the standard view. Luckily, though, there's an alternative. Don't think of shares as the discounted present value of future cashflows at all. Think of them instead as state-contingent securities that pay off different amounts in different states of the world.
So volatility can be the result of small changes in the probability attached to extreme events rather than large changes in the risk premium. More here.
We therefore estimate non-linear class size effects controlling for unobserved heterogeneity of both individual students and faculty. We find that: (i) at the average class size, the effect size is ?.108; (ii) the effect size is however negative and significant only for the smallest and largest ranges of class sizes and zero over a wide range of intermediate class sizes from 33 to 104; (iii) students at the top of the test score distribution are more affected by changes in class size, especially when class sizes are very large
I find the Court full of great apprehensions of the French, who have certainly shipped landsmen, great numbers, at Brest; and most of our people here guess his design for Ireland. We have orders to send all the ships we can possible to the Downes. God have mercy on us! for we can send forth no ships without men, nor will men go without money, every day bringing us news of new mutinies among the seamen; so that our condition is like to be very miserable. Thence to Westminster Hall, and there met all the Houblons, who do laugh at this discourse of the French, and say they are verily of opinion it is nothing but to send to their plantation in the West Indys, and that we at Court do blow up a design of invading us, only to make the Parliament make more haste in the money matters, and perhaps it may be so, but I do not believe we have any such plot in our heads.
Sunday, January 10, 2010
The debt markets surged not only in scale but complexity. Since 2000, for example, the amount of US bond market debt has nearly doubled in size, according to the Securities Industry and Financial Markets Association. That boom can partly be attributed to ultra-low US interest rates in the first half of the decade, coupled with an Asian savings glut, which flooded the financial system with liquidity.
In many ways this is the heart of the financial crisis. Huge international imbalances generate huge international capital flows. These capital flows, in most cases, run form central banks or other official monetary authorities through to liquid capital markets in US dollars. How could the financial sector not increase in size?
This leaves peripheral countries in a trap: they cannot readily generate an external surplus; they cannot easily restart private sector borrowing; and they cannot easily sustain present fiscal deficits. Mass emigration would be a possibility, but surely not a recommendation. Mass immigration of wealthy foreigners, to live in now-cheap properties, would be far better. Yet, at worst, a lengthy slump might be needed to grind out a reduction in nominal prices and wages. Ireland seems to have accepted such a future. Spain and Greece have not. Moreover, the affected country would also suffer debt deflation: with falling nominal prices and wages, the real burden of debt denominated in euros will rise. A wave of defaults - private and even public - threaten.
A Fistful of Euros makes the same point. If the currency area is not optimal, political will is necessary to overcome pain caused by imbalances. This has already been seen in the 1980s in the UK when divergent economic conditions in the north and south caused schism. The left-leaning Labour councils in Liverpool and other northern cities seeking to stimulate their local economies could be overcome by Thatcher and the central government. Will we get the same kind of conflict between Brussels and some of the periphery governments?