Saturday, December 08, 2012

Rajiv Sethi: Risk and Reward in High Frequency Trading

Rajiv Sethi: Risk and Reward in High Frequency Trading: "These are interesting findings, but there is a serious problem with this interpretation of risk-adjusted performance. The authors are observing only a partial portfolio for each firm, and cannot therefore determine the firm's overall risk exposure. It is extremely likely that these firms are trading simultaneously in many markets, in which case their exposure to risk in one market may be amplified or offset by their exposures elsewhere. The Sharpe ratio is meaningful only when applied to a firm's entire portfolio, not to any of its individual components. For instance, it is possible to construct a low risk portfolio with a high Sharpe ratio that is composed of several high risk components, each of which has a low Sharpe ratio."

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Tuesday, November 06, 2012

Knight, Risk, Uncertainty, and Profit, Part III, Chapter X | Library of Economics and Liberty

Knight, Risk, Uncertainty, and Profit, Part III, Chapter X   Profit is the return for having belief in the ability to forecast the future.  Of course this is self-fulfilling if luck ensures success and increased profits increase confidence.

 "The receipt of profit in a particular case may be argued to be the result of superior judgment. But it is judgment of judgment, especially one's own judgment, and in an individual case there is no way of telling good judgment from good luck, and a succession of cases sufficient to evaluate the judgment or determine its probable value transforms the profit into a wage."

However, the build up of confidence, profits and positions that are based on luck rather than ability to forececast the future could increase risk, particularly if risk is identified as a risk of reversal or crash.

Sunday, October 28, 2012

The New Physiocrats -

The New Physiocrats - "What’s really going on here, as far as I can tell, is a modern version of the 18th century physiocratic notion that only agriculture is real, that everything else is fluff on top. And we really shouldn’t be seeing a rebirth of that sort of nonsense in the 21st century. If you believe that we should have fewer schoolteachers and firefighters — or that education should be privatized — make that case. Don’t try to hide your prejudices under a mystical doctrine in which important, productive jobs somehow don’t count if they come from a place with a .gov email address."
We could also point to the idea that manufacturing is all powerful and useful while services are to be avoided.
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Friday, September 07, 2012

Another side of the credit crunch

Gillian Tett assesses the fall in credit card debt and use of plastic. It should not be a great surprise given the increase in the savings rate.
"Yes, you read that right. Although Americans are (in)famous for their addiction to credit card debt, that love affair is cooling, or being forcibly cooled. By the middle of this year, the number of credit card accounts in circulation had tumbled to 383m, 23 per cent below its 2008 peak, and fresh applications for credit were declining too. Put another way, while cards are still being flogged to consumers (and even sometimes marketed, via direct mail, to pets), not all Americans are saying “yes”."
Another way to look at this is from the supply side.  As part of the 'credit crunch' and cut back in advances to risky credits.

Monday, September 03, 2012

Skin in the game - indeed

Finance is in need of a technological revolution - "Less than two months before the Facebook fiasco, another IPO suffered an even more shocking fate. BATS Global Markets, which operates the third-largest stock exchange in the US, went public on its own exchange. If ever an organisation had sufficient “skin in the game” to get it right, it was BATS and if ever there was a time when getting it right really mattered, it was on the day of BATS’s own IPO. So when BATS debuted at an opening price of $15.25, no one expected it to plunge to less than a tenth of a penny in a second and a half due to a software error affecting stocks whose ticker symbols began with the letter A or B. The ensuing confusion was so great that BATS suspended trading in its own stock and ultimately cancelled its IPO."

Wednesday, August 15, 2012

BBC News - Olympic counties: Does it matter where medal-winners come from?

Wiggins Belgium and the South African cricketer
Andy Murray's gold postbox is in Dunblane, where the tennis gold medallist grew up - although he was, in fact, born in Glasgow, moved to Barcelona to train at 15 and now lives near Wimbledon in south-west London."

Saturday, August 04, 2012

Rajiv Sethi: Belief Heterogeneity

Rajiv Sethi: Belief Heterogeneity the paper described here analyses competing views.  This can be used in the model of speculation and the carry trade in particular.  The simple carry trade is successful for some time and the more successful it is, the more traders are drawn to the trade, increasing its success.  It requires a shock to burst the bubble.

"Not surprisingly, then, the presentation I found most appealing was that of Blake LeBaron. Blake is a pioneer in the development of agent-based computational models of financial markets, and the paper he presented belonged to this class. A large number of different forecasting strategies, some based on fundamental information and others on technical data analysis, compete with each other and with a traditional buy-and-hold strategy in his model. The resulting trading dynamics give rise to asset price returns that exhibit both moderate levels of short-run momentum as well as mean reversion over longer horizons. Moreover, the long run population of forecasting rules is ecologically diverse, with both passive and active strategies well represented. "

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Crowds and networds

Tim Harford highlights the work of Mark Granovetter on networks and crowds.

: "Consider the following simple model of a potential riot, based on an idea published in 1978 by the sociologist Mark Granovetter. There are 1,000 people in a crowd of protesters, and all of them have some underlying tendency to embark on a looting spree. We might reckon that an outbreak of rioting might be triggered by insensitive policing, or by the poverty of the crowd, or the opportunities for theft or for violent protest. But for simplicity let’s assume that the only thing everyone in the crowd cares about is what everyone else in the crowd is doing. Some people will start looting without much company. Others will hang back until the riot is well under way."

This can also be used, I think, to look at the way that speculation can build.  Given the information cascade that builds when valuation is difficult and that activity of others can imply some understanding that may not exist.  

Thursday, July 26, 2012

John Kay - The parable of the ox

Interesting - though I am not sure that the Chicago model (Black-Scholes?) manages to generate a price from thin air - it needs important elements (such as the current price and the estimate of volatility).  It is also important to remember that there are people like Buffett making guesses and if the crowd is very wrong, he will be the closest.  John Kay - The parable of the ox:

"One difficulty was that sometimes there were few, or even no, guesses of the oxen’s weight. But that problem was soon overcome. Mathematicians from the University of Chicago developed models from which it was possible to estimate what, if there had actually been many guesses as to the weight of the animal, the average of these guesses would have been. No knowledge of animal husbandry was required, only a powerful computer."

Interesting, non-the-less. '

Monday, July 23, 2012

How Do You Choke Away the British Open? The Science of the Tight Collar | Wired Science |

The explanation for why English Premier League players can be good for their club and poor for their country (outside ability of the rest of the team).

Sport psychology: "“You can’t dictate your genes,” says Stone. “But among the many identities you have, you can choose which to operate from.” Tiger Woods, for instance, has clearly forged an identity that transcends the potential vulnerabilities of his multiracial makeup. You can wallow in your most negative identity — the slow one, the overthinker, the one who doesn’t care — or you can foreground another identity, the one who is ready, the one who knows what’s coming, the one who calmly attacks the problem."

With a solution

The shocking story of how a council pursued Peter Williams

It raises the question of how different are the private and public institutions.

The shocking story of how a council pursued Peter Williams | Liberal Conspiracy: "On the 8th of February a man took his own life. Peter Williams was a gifted engineer, whose invention, still manufactured today, landed him in the Guinness World Records, but he was driven to bankruptcy and suicide by an unthinking and inhumane bureaucratic system"

Sunday, July 15, 2012


Krugman explains that models are tools or simplifications that are used to solve a problem.  However, the assumptions of the model cannot be used to explain the implications of the model.  That would be circular.  Gadgets Versus Fundamentals (Wonkish) -

"The point is that all this work USES Dixit-Stiglitz, but it’s not ABOUT Dixit-Stiglitz; D-S is a gadget, a tool that helps you work with the fundamental issues, but you don’t ever want to forget that it is no more than that."

Monday, July 09, 2012

George Monbiot – False Summit

George Monbiot – False Summit: "We were wrong about peak oil: there’s enough in the ground to deep-fry the plane"

It is always dangerous to make forecasts.  There is always some unsuspecting element that can crop up.

and then!

Monbiot peak oil u-turn based on bad science, worse maths
Oil glut forecaster Maugeri admits duff maths

David Strahan
Energy writer

Description: New Scientist 17.5.12

Wednesday, June 20, 2012

Easter Island - people or rats?

Easter Island 

"Jared Diamond drew heavily on Flenley’s work for his assertion in Collapse, his influential 2005 book, that ancient Easter Islanders committed unintentional ecocide."
When the wood was gone and civil war began, the islanders began toppling the moai. By the 19th century none were standing. Easter Island’s landscape acquired the aura of tragedy that, in the eyes of Diamond and many others, it retains today.

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Andrew Gelman on political statistics

Andrew Gelman on How Americans Vote | FiveBooks | The Browser: "The idea is that these people know enough about us so that they can manipulate our vote. Realistically, political consultants nowadays know a lot about us, and they do try to convince us. There are two kinds of people they follow. One is people where they know who they’re going to vote for, but they’re not sure that they’re going to vote. The other is people who are very likely to vote, but you don’t know which way they’re going to vote. The first type of person they try to mobilise just to turn out and vote, and the second kind of person they try to persuade. They’re pretty good at knowing who people are. In fact, at this point, a lot of this is just a question of resources. To the extent they have resources they will go out to people and call you on the phone. If they think you’re already likely to vote for a certain candidate, they’ll try to find somebody to knock on your door and convince you that it’s an important election and it’s worth voting for. In some sense it’s not as mysterious or conspiratorial as it’s made out to be in that book."

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Greece’s ailing economy grinds to a halt -

The looks at the effect that a lack of credit is having on the Greek economy.

"But after thinking it over, Yannis Stamos, the company’s co-founder, turned the customer away. Filling the order would have meant reaching into Medical Service’s own pockets to cover the €35,000 cost of such a machine, since Greek banks have stopped lending and the company’s German suppliers now demand pre-payment in cash."

Friday, June 01, 2012

Bond market liquidity discusses the lack of liquidity in the corporate bond market.  A combination of risk-aversion, Volcker rule and capital costs seem to have combined to encourage banks to hold less inventory.  

 "Data from the Federal Reserve on Thursday showed corporate bond holdings among the largest dealers fell last week to $45bn. These inventories reached highs of more than $200bn in 2007 before falling to $90bn a year ago.
Asset managers are concerned that reduced liquidity will make it harder to move in and out of large positions, particularly at times of market stress.
“The buyside is looking for an answer on how to fix this,” said one of the dealer participants."'
Declining liquidity makes the market more of one where deals are worked over time and ultimately increases the cost of borrowing as final investors know that there is limited possibility of a swift sale.

Thursday, May 17, 2012

Social network vs critics

The Guardian: reports on a Harvard business school study that compares Amazon book reviews to critics and finds that evaluation is similar, though the reviews are swift to find new authors.

 "Amazon reviewers were more likely to give a favourable review to a debut author, which the Harvard academics said suggested that "one drawback of expert reviews is that they may be slower to learn about new and unknown books".
Professional critics were more positive about prizewinning authors, and "more favourable to authors who have garnered other attention in the press (as measured by number of media mentions outside of the review)"."

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Tuesday, May 08, 2012

Collateral and rating

A good overview of the effect of rating downgrade and increased risk aversion on the profitability of investment banks and, inevitably, the liquidity of financial markets.
M Stanley reassesses downgrade impact - "The additional collateral needed could reduce Morgan Stanley’s fixed income derivatives revenues by almost a third, analysts at AllianceBernstein estimated in a recent note. In addition to having to stump up extra collateral to its trading partners, Morgan Stanley could also face a higher cost of funding, the analysts said."
This also gives some indication of the importance of the economies of scale in investment banking.

Monday, May 07, 2012

International holding of bonds and capital

International holding of government bonds.

Bank adequacy: weight and see - "But what would be the effect of removing the zero weighting on banks’ domestic sovereign debt holdings? In its latest stability report, the IMF takes a stab at estimating the “correct” risk weightings to use, via default rates embedded in sovereign credit default swap spreads. Doing this lowers the average capital adequacy ratios across banks in emerging countries by 2-3 percentage points – no small sum. Ratios for European banks fall by less, between 0.5-2 percentage points. The reduction for US lenders is smaller still. Even so, more capital would be needed."

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Thursday, May 03, 2012

Funds move directly into loan market

If funds cannot If funds cannot get access to loans via structured products, can they go into the market themselves by making loans?  M&G are in £266m property financing deal -  
"It is the second time this week a UK insurer has provided debt finance for a property deal, with Legal & General issuing its maiden property loan on Tuesday.
The relationship between the two sectors is deepening rapidly as insurers snap up opportunities created by the shortage of bank lending."

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Sunday, April 29, 2012

German banks rein in exposure to Spain -

German banks rein in exposure to Spain - "Will Spain – where house prices have fallen more than 22 per cent from their peak, with analysts expecting worse to come – bring more pain? Figures published this month by the Bank for International Settlements show that German banks had $146bn of exposure to Spain at the end of 2011 – more than the banks of any other country. Some $53bn of the exposure is to Spanish banks, while a further $68bn is to the rest of the private sector"

End-December 2011
           Denmark France     Germany     Greece     Ireland      Italy       Japan       Mexico
Spain   1,951      115,162   146,096        292       4,696       26,939    21,691       540 ...

Saturday, April 28, 2012

FX Momentum trades

Forex momentum trade yields long-term gains - "Currency momentum strategies that buy or sell currencies according to whether they have risen or fallen over the previous month yielded annual returns of nearly 10 per cent between 1976 and 2010, according to the Cass study, which analysed 48 currencies against the US dollar. The paper, “Currency Momentum Strategies”, is due to be published in the Journal of Financial Economics."

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Wednesday, April 18, 2012

Investment Bank Leverage

The FT reports on the rise in capital at investment bank Goldman.

Goldman Sachs: then and now - "Spookily, it is as if nothing has changed for six long years. But a financial crisis has come and gone since then and regulators are now throwing everything at banks. Of course, there is one huge difference between the two periods, but it is not to be found in the profit and loss account. Flip to the balance sheet and be astounded to remember that in 2006 Goldman was running on just $27bn of common shareholders’ equity. With exactly the same earnings today, that number is now two and a half times higher."

Monday, April 09, 2012

Hedge funds and leverage

Hedge funds keep a lid on leverage - "According to the UK’s Financial Services Authority, which in February published its annual survey of the global hedge fund industry, the average hedge fund currently uses leverage of about 2.5 times its capital – as it has done for the past three years.
Indeed, unlike prop desks, most hedge funds have to grapple with all too finite liquidity and financing – issues no manager has been able to ignore since 2008."

How the leverage has been reduced as pro trading transfers from investment banks to hedge funds.

Monday, March 05, 2012

The BBK seeks insurance against EMU break-up

The Bundesbank has no right at all to be baffled -
"It also tells us something else: by seeking insurance against a collapse of the euro, the Bundesbank tells us it no longer regards the demise of the euro as a zero-probability event. If the Bundesbank seeks insurance, so should everybody else."

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Wednesday, February 15, 2012

Are Credit Ratings Massively Overrated? | Economics Intelligence

The informational content of credit rating agencies seems to be minimal - worse than a simple indicator that can be constructed.

Are Credit Ratings Massively Overrated? | Economics Intelligence:
"Hilscher and Wilson reply that they do not claim that ratings have no informational content whatsoever. Having a S&P rating was certainly better than no information at all, stresses Hilscher"

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Sunday, January 08, 2012

Do hedge funds offer value for their fees? No -

Not surprising if the absolute returns are from finding inefficiencies. Given an absolute amount of inefficiencies, these are shared over more funds.

Do hedge funds offer value for their fees? No -
"Just as individual hedge funds tend to do better when they are small, so too, his analysis shows, the industry as a whole performed better when it was a largely unknown $200bn business, rather than the high profile $1.9tn industry it had grown to become, before the financial crisis in 2008 so dramatically exposed some of its shortcomings. The comforting compounded rates of return reported in hedge fund indices give a misleading impression of the actual cash returns achieved by hedge fund investors. Most of the client money that has flowed in since the industry began to be institutionalised has not achieved anything like the returns the long-term headline index figures suggest.

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Monday, January 02, 2012

Delete rows from R data frame « Heuristic Andrew

Use for getting rid of rows of data where there is no response. For instance, the missing values in a large dataframe can be removed in this way with simplicity.

Delete rows from R data frame « Heuristic Andrew:

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