Thursday, December 19, 2013

The Buffett difference, derivatives edition | FT Alphaville

The Buffett difference, derivatives edition | FT Alphaville: "The derivatives also showcase other Buffett skills — selling risk when many others are buying (pushing the price beyond what is rational) and the confidence that he will be able to invest the additional float successfully over time to make the whole enterprise worthwhile."

'via Blog this'

The Buffett difference, derivatives edition | FT Alphaville

The Buffett difference, derivatives edition | FT Alphaville: "The derivatives also showcase other Buffett skills — selling risk when many others are buying (pushing the price beyond what is rational) and the confidence that he will be able to invest the additional float successfully over time to make the whole enterprise worthwhile."

'via Blog this'


A discussion of microfoundations with Stephen Williamson: New Monetarist Economics: Microfoundations:

 "I've never much liked the word "microfoundations," which comes from the title of the Phelps volume. When the Phelps volume came out in 1970, micro and macro looked like they came from people living on different planets, and you had to convince people that it made sense to take ideas from Mars and use them on Venus. We know better now, of course, and economics is one unified whole. People who call themselves macroeconomists make liberal use of game theory, mechanism design, information theory, optimal growth theory, etc., etc. Solid economists worked all that stuff out for us to use, and it would be wasteful to leave it on the shelf."

and a reply by Nick Rowe
Microfoundsations that we like vs microfoundations that we can solve

Tuesday, December 17, 2013

A summary of the evidence that most published research is false | Simply Statistics

A summary of the evidence that most published research is false | Simply Statistics:

'via Blog this'

"Hold to maturity" or "Available for Sale" has a story about the effect of Volcker Rule.  It does not make clear why the rule requires the re-classification.  In any case, it highlights one way that accounting classification can affect the value of assets and the capital required to support those assets:

"financial officer, told analysts on a conference call, the bank is reclassifying the CDOs from “held to maturity” (HTM) to “available for sale” (AFS). Gains and losses on securities that are held as AFS feed into financial companies’ regulatory capital ratios under incoming Basel III rules.  Zions estimated that reclassifying its portfolio of CDOs to AFS would result in its tier one common equity ratio falling from 10.47 to 9.74 per cent."

Monday, December 16, 2013

Raising the Minimum Wage: Old Shibboleths, New Evidence -

Raising the Minimum Wage: Old Shibboleths, New Evidence -

 "For a good overview, look to a paper by Arindrajit Dube of the University of Massachusetts, Amherst; T. William Lester of the University of North Carolina, Chapel Hill; and Michael Reich of the University of California, Berkeley. Using two decades of data and side-by-side comparisons of bordering counties in the United States, they find that higher minimum wages raise the earnings of low-wage workers and have negligible effects on employment levels. According to their estimates, an increase of 10 percent in the minimum wage would have a statistically negligible effect on employment in industries and occupations employing minimum-wage workers."

'via Blog this'

Saturday, December 14, 2013


Worthwhile Canadian Initiative: We know the economy needs a bubble; but how big?: "Mr Ponzi issues a financial asset. Assume that the demand to hold that asset grows at the same rate as GDP. If people are willing to hold that asset at a rate of return less than the growth rate of GDP, Mr Ponzi can run a sustainable Ponzi scheme. He can issue new assets to pay the interest on the existing assets, and still issue a few more to provide some income for himself. Another name for a sustainable Ponzi scheme is a rational bubble."

'via Blog this'

Friday, December 13, 2013

Tim Harford Fairness is shared by our environment

Tim Harford — Article — Fairness is shared by our environment:

 "Kaplan teamed up with other researchers, including Vernon L Smith, a winner of the Nobel memorial prize for economics, to test this idea. They concluded that sharing accompanies “unsynchronized variance in resource availability” – researcher-speak for “You never know who’ll be next to bag a monkey.”
Megan McArdle, in her fascinating forthcoming book The Up Side of Down, observes that modern societies can’t make up their minds whether to adopt the morality of farmers or of hunters. The idea that hard work needs to be rewarded is a farmer’s view of fairness. The claim that “we’re all in this together” is hunter-thinking"

'via Blog this'

Thursday, December 12, 2013

Can robots write sports previews? |

Can robots write sports previews? |:   Yes

"If we can now plug in team-specific names, places and data wherever there’s one of those blue-bracketed placeholders above, we could customize a game preview so specifically to a given event that I’m confident 95% of the reading public couldn’t tell if those sentences were composed by a human writer or an algorithm, like the one I pseudo-reverse-engineered and highly simplified below:"

Monday, December 09, 2013

The government is the only reason U.S. inequality is so high

The Washington Post The government is the only reason U.S. inequality is so high:

"But it's worth noting that you can get U.S. inequality down to the levels seen in extremely egalitarian societies like Sweden by doing nothing but changing tax and transfer policies. Pre-tax/transfer inequality in the U.S., as the above chart by the Luxembourg Income Study’s Janet Gornick shows, is about equal to that of Sweden, Norway, and Denmark. Finland, Germany, and Britain actually have higher pre-tax/transfer inequality than the U.S. does. The only reason these countries enjoy such low levels of inequality is that their tax and transfer systems reduce inequality much, much more than the U.S. system does."

'via Blog this'

Friday, December 06, 2013

Environmental Economics: Env-Econ 101: Hotelling's Rule Part 1

Environmental Economics: Env-Econ 101: Hotelling's Rule Part 1:

 "That's Hotelling Rule in its simplest form.  For a non-renewable, exhaustible resource with completely known stock, no discoveries possible, no alternatives, no recycling, private ownership and constant costs of extraction, the price of the resource will increase at the interest rate over time."

Looking forward to part 2.

Monday, December 02, 2013

A statistical review of 'Thinking, Fast and Slow' by Daniel Kahneman - Burns Statistics

A statistical review of 'Thinking, Fast and Slow' by Daniel Kahneman - Burns Statistics: "I failed to find Kahneman’s book in the economics section of the bookshop, so I had to ask where it was.  ”Oh, that’s in the psychology section.”  It should have also been in the statistics section."

'via Blog this'

Saturday, November 30, 2013

FIFA Seeding Explained

World Cup seeding: How to play the game:  Don't play Indonesia.  This will bring down the average points in a world cup year.

"Unfortunately for the orange hordes of Dutch fans, that is exactly what their team did in June 2013. If they hadn't played that game they would be one of the top seeds, not Switzerland, who played fewer friendlies than most teams in the final 12 months that counted towards World Cup qualifying ranking points."

'via Blog this'

Thursday, November 28, 2013

Who needs machines anyway?

Nicholas Carr - The Atlantic: Assesses the implications of allowing machines to do more and more tasks.

"Who needs humans, anyway? That question, in one rhetorical form or another, comes up frequently in discussions of automation. If computers’ abilities are expanding so quickly and if people, by comparison, seem slow, clumsy, and error-prone, why not build immaculately self-contained systems that perform flawlessly without any human oversight or intervention? Why not take the human factor out of the equation? The technology theorist Kevin Kelly, commenting on the link between automation and pilot error, argued that the obvious solution is to develop an entirely autonomous autopilot: “Human pilots should not be flying planes in the long run.” The Silicon Valley venture capitalist Vinod Khosla recently suggested that health care will be much improved when medical software—which he has dubbed “Doctor Algorithm”—evolves from assisting primary-care physicians in making diagnoses to replacing the doctors entirely. The cure for imperfect automation is total automation."

The humans become the supervisors of the machines, but can they be ready to jump in if that is necessary/

Monday, November 25, 2013

Magnus Carlsen's Win in Chess

Magnus Carlsen's Win in Chess Championship Shows Powerful Role of Computers - "The last chess match to get as much publicity as Mr. Carlsen's triumph was the 1997 contest between then-champion Garry Kasparov and International Business Machines Corp.'s Deep Blue computer in New York City. Some observers saw that battle as a historic test for human intelligence. The outcome could be seen as an "early indication of how well our species might maintain its identity, let alone its superiority, in the years and centuries to come," wrote Steven Levy in a Newsweek cover story titled "The Brain's Last Stand.""

'via Blog this'

Saturday, November 23, 2013

Felix Salmon - ETFs

Felix Salmon: demolishes the idea that not everyone can be passive.

"But the point at which passive investing becomes self-defeating is a bit like the point at which the gradient of the Laffer curve turns negative, and tax hikes cause revenue losses rather than revenue gains: both points are far beyond any state of the world that obtains in real-life America. Passive investors are still a minority of all stock-market investors — and, what’s more, they could easily become a majority without doing any harm to the markets’ price-discovery abilities. The only thing that matters is that there’s a reasonably large number of active marginal price-setters. Since there always will be a reasonably large number of active marginal price-setters, no one ever need fear that the rise of passive investing is going to become self-defeating."

and highlights the gains to be made from cheap and systematic investment.

Blame Rich, Overeducated Elites as Our Society Frays

Blame Rich, Overeducated Elites as Our Society Frays - Bloomberg: "A related sign is the overproduction of law degrees. From the mid-1970s to 2011, according to the American Bar Association, the number of lawyers tripled to 1.2 million from 400,000. Meanwhile, the population grew by only 45 percent. Economic Modeling Specialists Intl. recently estimated that twice as many law graduates pass the bar exam as there are job openings for them. In other words, every year U.S. law schools churn out about 25,000 “surplus” lawyers, many of whom are in debt. A large number of them go to law school with an ambition to enter politics someday."

'via Blog this'

Tuesday, November 19, 2013

Premature evaluation: when local relationship banking attacks! | A Fistful Of Euros

Premature evaluation: when local relationship banking attacks! | A Fistful Of Euros: "Relationship banking is often seen as a good thing that we need more of, counterpoised to faceless trading-floor turbo-finance. But relationship banking was precisely what Anglo did. Anglo tended to keep clients for many years, to involve itself deeply in their businesses, and to go to extraordinary lengths to serve them. It would also take risks to win or retain them. Its unique selling point was that it would do anything to get your deal done, and it would do it quickly. They frequently closed property transactions up to a billion euros within the week. In exchange for this, its clients put up with interest rate spreads and fees that were much higher than its competitors’.

This raises a second point, which is that you know it’s a bubble when capital gains come in so fast that changing the interest rate is irrelevant.


'via Blog this'

Sunday, November 17, 2013

A Talk With Lars Peter Hansen, Nobel Laureate -

A Talk With Lars Peter Hansen, Nobel Laureate - "Lars Peter Hansen, an economist at the University of Chicago, is one of three winners of this year’s Nobel Memorial Prize in Economic Science, along with Eugene F. Fama, a fellow professor at the University of Chicago, and Robert J. Shiller, a professor at Yale."

'via Blog this'

Monday, November 11, 2013

House prices "bubbled" because Turgot's land beats Samuelson's "money"

Worthwhile Canadian Initiative: House prices "bubbled" because Turgot's land beats Samuelson's "money": "If I am right about this, the financial crisis was not caused by the bursting of a land bubble, because it wasn't a bubble. It was caused by the appearance of a "money" bubble. And the crisis will only end when Turgot's land once again replaces Samuelson's "money""

'via Blog this'

Sunday, November 10, 2013

Angry Bear » Rational Vs Adaptive Exectations

Angry Bear » Rational Vs Adaptive Exectations: "I note that the assumption of naive expectations leads to the belief that there will be irrational speculative bubbles in which agents assume some asset price will increase because it has in the past. This is one of they key features of the data. It is possible to reconcile this witih the rational expectations assumption, because anything at all can be reconciled with the assumption (note I never assert that the rational expectations hypothesis is false since we all agree that there is no falsifiable rational expectations hypothesis)."

'via Blog this'

Saturday, November 09, 2013

Poisson distribution and crisis

Create a model for financial crisis that is based on a Poisson distribution. The number of world financial shocks in a decade.  What is the distribution?  Does this change over time?  Use the Rogoff data.

Poisson distribution - Wikipedia, the free encyclopedia: "The distribution was first introduced by Siméon Denis Poisson (1781–1840) and published, together with his probability theory, in 1837 in his work Recherches sur la probabilité des jugements en matière criminelle et en matière civile (“Research on the Probability of Judgments in Criminal and Civil Matters”).[3] The work focused on certain random variables N that count, among other things, the number of discrete occurrences (sometimes called "events" or “arrivals”) that take place during a time-interval of given length. The result had been given previously by Abraham de Moivre (1711) in De Mensura Sortis seu; de Probabilitate Eventuum in Ludis a Casu Fortuito Pendentibus in Philosophical Transactions of the Royal Society, p. 219.[4]"

In this way there is a link to reliability engineering: what are the policy measures that make the system more or less stable?

There is a worked example on hurricanes here.


Tim Harford:Swallow your contempt – Wonga is the symptom, not the problem -

"No high-street bank comes close to this clarity, and an unauthorised overdraft may cost far more than the loan that prevents that overdraft. Outcompeted on convenience, on comprehensibility and perhaps even on price by the likes of Wonga, Britain’s banks should hang their heads in shame."

People who can borrow from conventional banks turn to Wonga because

  1. It is easy to understand what you pay back
  2. It is quick and impersonal
  3. They do not trust banks
(Student Project will at bank) 

Wednesday, November 06, 2013

The siren call of Microsoft Excel -

The siren call of Microsoft Excel - "“Reality is a crutch for people who can’t handle drugs,” proclaimed a sticker I once purchased in a suburban shopping centre. It fitted in perfectly with my collection of risqué buttons and key chains. As a teenager I had discovered accessorising was the easiest way to at least give the appearance of defying authority."

'via Blog this'

Enron Emails and Central Bank policy

There are two posts here with Model Analysis of the Enron Email Corpus from Data and Analysis with R, for Fun (and Maybe Work!):   This could be useful to try to replicate with Bank of England MPC minutes or even the Fed or ECB press conference.

"Having only ever played with Latent Dirichlet Allocation using gensim in python, I was very interested to see a nice example of this kind of topic modelling in R.  Whenever I see a really cool analysis done, I get the urge to do it myself.  What better corpus to do topic modelling on than the Enron email dataset?!?!?  Let me tell you, this thing is a monster!  According to the website I got it from, it contains about 500k messages, coming from 151 mostly senior management users and is organized into user folders.  I didn’t want to accept everything into my analysis, so I made the decision that I would only look into messages contained within the “sent” or “sent items” folders."

'There are a number of possibilities:

  1. Think about how the emphasis of monetary policy changes over time.  What is the effect of the financial crisis on one of more central banks. 
  2. The effect that new members or a new hear has on policy. 
  3. The common characteristics of central bank policy.  How does this tie in with co-movement of international assets? 

Saturday, November 02, 2013

Inequality: Labour's share lost | The Economist

Inequality: Labour's share lost | The Economist:  What is behind the fall in labour share of income?
"Part of the decline, especially in Europe in the 1980s and 1990s, is attributable to labour-market liberalisation. Some of the decline, especially in America in the 2000s, can instead be attributed to exposure to imports from big emerging markets. But across the whole of the period and all countries (including emerging markets like China) technology seems to be the most important factor. Technology has gotten better and much cheaper over the past generation, and that has allowed firms to substitute capital for labour across a broad range of occupational categories. In the 1980s and 1990s technology had its greatest effect in production activities, in automation of routine physical tasks. From the 1990s on the impact of technology became more apparent in information-processing roles. Highly skilled workers mostly benefited from these technological shifts, as new technologies (especially in information and communication technology) have been complementary to their abilities. Owners of capital have also prospered. But middle-skill workers have done poorly, as have low-skill workers, thanks to increased competition from those displaced from middle-skill work"

'via Blog this'

Economic history: Smith's word | The Economist

Economic history: Smith's word | The Economist:

"ADAM SMITH is known as the father of economics. Most people think of him as the archetypal free-marketeer. But Smith is often misquoted. This post will give a few examples of how people have misinterpreted Smith’s ideas—and show what he really meant.
Smith sowed the seeds of his own problems. He tended to write pithy soundbites that left his ideas open to distortion. One of his best-known quips:"

'via Blog this'

Thursday, October 31, 2013

Detecting an Unfair Die with Bayes’ Theorem | The Chemical Statistician

Detecting an Unfair Die with Bayes’ Theorem | The Chemical Statistician:

"An occasionally dishonest casino uses 2 types of dice.  Of its dice, 97% are fair but 3% are unfair, and a “five” comes up 35% of the time for these unfair dice.  If you pick a die randomly and roll it, how many “fives”  in a row would you need to see before it was most likely that you had picked an unfair die?”"

This is the same problem of identifying the correct regime that should use a Hidden Markov Model to detect which is the most likely.  This is the same problem that will seek to identify the state of the Minsky cycle by looking at the returns that are recorded in the carry trade.

Wednesday, October 30, 2013

Using Chaos Theory to Predict and Prevent Catastrophic 'Dragon King' Events - Wired Science

Using Chaos Theory to Predict and Prevent Catastrophic 'Dragon King' Events - Wired Science:

"Dragon king events may be freakish, but they are not freakishly rare. In fact they occur much more frequently than you would expect. Small fluctuations in the stock market happen all the time and very large ones rarely. But a dragon-king-type stock market drop would be one that was both extremely large and occurred somewhat regularly. It would be like seeing a once-in-a-century stock market crash every decade or so."

The dragon is an unusual animal as if the wealth of a king.  These outliers may be explained by the particular circumstances in chaotic systems that cause occasional, unusual activity.

"Even more interestingly, the researchers found that dragon king events displayed characteristic signals announcing their approach (they could only occur when the two circuits were on the “body” of the strange attractor butterfly). Knowing that a dragon king was coming, they could apply tiny perturbations to make sure the circuits stayed in sync. In essence, they could forecast the arrival of a catastrophic event and suppress it, prevent it from occurring".

Wednesday, October 23, 2013

The demise of Knight Capital

Python Sweetness on How to lose $172,222 a second for 45 minutes:

"How to lose $172,222 a second for 45 minutes This is probably the most painful bug report I’ve ever read, describing in glorious technicolor the steps leading to Knight Capital’s $465m trading loss due to a software bug that struck late last year, effectively bankrupting the company.  The tale has all the hallmarks of technical debt in a huge, unmaintained, bitrotten codebase (the bug itself due to code that hadn’t been used for 8 years), and a really poor, undisciplined devops story."

Tuesday, October 22, 2013

Crisis models of boom and bust

Vox asks Could an early warning system have predicted the crisis? | vox:

 "In a recent paper, we empirically model the cross-country incidence of the financial crisis (Rose and Spiegel 2009). Because the time-series component of an early warning system has proven harder to predict, we view the ability to predict relative performance in the cross section as a necessary, but not sufficient, condition for early warning models to be successful. We estimate a “MIMIC” (Multiple-Indicator Multiple Cause) model (Goldberger 1972), which we apply to a cross-sectional data set of 107 countries. The MIMIC specification explicitly acknowledges that the severity of a financial crisis is a continuous, rather than a discrete phenomenon, and one that can only be observed with error."
There is more work here and here that may be useful

This may be one way to look at the Minsky model and the bank lending model that will flow from it.

When did “How I Met Your Mother” become less legen.. wait for it… | Data and Analysis with R, for Work and Fun

When did “How I Met Your Mother” become less legen.. wait for it… | Data and Analysis with R, for Work and Fun:

"Enter IMDB average user ratings of every episode of How I Met Your Mother (until season 9, episode 5).  Once I brought up the page showing rated episodes by date, I simply copy and pasted the table into LibreOffice Calc, saved it as a csv, and then loaded it into R.  As you can see in DiffusePrioR’s post (and also in mine), the purpose of the changepoint package is to find changepoints, or abrupt baseline shifts, in your data."

Looking at the structural change in the data. This may be something that can be used in the regime-change paper.  At what point did things change?  What was happening then?

Monday, October 14, 2013

Why Microsoft Word must Die - Charlie's Diary

Monopoly power Why Microsoft Word must Die - Charlie's Diary:

 "I hate Microsoft Word. I want Microsoft Word to die. I hate Microsoft Word with a burning, fiery passion. I hate Microsoft Word the way Winston Smith hated Big Brother. Our reasons are, alarmingly, not dissimilar ..."

'via Blog this'

Sunday, October 13, 2013

UK house price

Lots from Joe's Data Diner: on UK house prices, including the link to the data.  This is something that can be used to assess the ratio of house prices to income and the question of whether this is a measure that can identify the points where the market is overvalued.

"There seems nothing the British press likes more than a good house price story. Both the OECD and 'The Economist' studies quoted in The Telegraph recently use the house price to household income ratio as a consideration of affordability and sustainability of the market. Most often this is a ratio of average house prices to average incomes; I keep wondering if this ratio is itself a function of income? What follows is a first (and not that rigorous!) look at this idea."

Do extremes tell us something about future prices?

Saturday, October 12, 2013

Review: What Happened to Goldman Sachs -

Another look at how investment banks changed after the abandonment of partnership.  This is a book review that is behind a paywall.  However, the book may be worth the read.

Review: What Happened to Goldman Sachs - "The year after Goldman Sachs went public in 1999, the investment bank threw a raucous party for clients at the Venetian Hotel on the Las Vegas Strip. Girls in high heels served candy and cigars while synchronized swimmers performed in the pool. Jay Leno was flown in for a private show. Traders bet tens of thousands of dollars on single hands of poker downstairs in the casino. It was one heck of a party. (Full disclosure: I attended as a rube analyst at the firm.)
It was also a very un-Goldman-like event. A private partnership since 1869, the bank had ..."

Wednesday, October 09, 2013

Poisson or Binomial distribution?

When to use the Poisson or Binomial distribution?:

"If a mean or average probability of an event happening per unit time/per page/per mile cycled etc., is given, and you are asked to calculate a probability of n events happening in a given time/number of pages/number of miles cycled, then the Poisson Distribution is used.

If, on the other hand, an exact probability of an event happening is given, or implied, in the question, and you are asked to calculate the probability of this event happening k times out of n, then the Binomial Distribution must be used."

(Adapted from this page).  Therefore, if there is on average 2 bank failures per month, what is the probability that there are no bank failures in a month?
Poission Distribution (lambda t) = (2 errors per page * 1 page) = 2.
Hence P0 = 2^0/0! * exp(-2) = 0.135

There are 20 banks in a state, the probability of one going bust is 0.1.  What is the probability of losing two banks?

Here it is binomial with n = 20.   Expand (q + p)^20
q^20 + 20 q^19 p + 20(20-1)/2! q^18 P^2  + ...

So P(2) = 20(20-1)/2! q^18 p^2 = 0.285.

Tuesday, October 08, 2013

Light sweet saturation and a malinvestment *alert* | FT Alphaville

FT Alphaville: The origin of the US oil 'glut'.

"In other words, oil prices were simply not high enough to justify energy investment during that period. The industry had to squeeze itself to make the investment case compelling enough to attract all that surplus capital. It was only when oil prices soared to 2008 record levels, that enough of the risk was removed to once again attract capital to the sector."

Monday, October 07, 2013

Understanding Society: Issues about microfoundations

An overview of microfoundations:

"A microfoundation is something like this: an account of the mechanisms at the individual actor level (and perhaps at levels intermediate between actors and the current level -- e.g. institutions) that work to create the structural and causal properties that we observe at the meso or macro level. A fully specified microfoundational account of a meso-level feature consists of an account that traces out (1) the features of the actors and (2) the characteristics of the action environment (including norms and institutions) which jointly lead to (3) the social pattern or causal power we are interested in. A microfoundation specifies the individual-level mechanisms that lead to the macro- or meso-level social fact. This is the kind of account that Thomas Schelling illustrates so well in Micromotives and Macrobehavior."

A contrast to the ideas of emergence, the belief that the sum is greater than the parts '

Saturday, October 05, 2013

How traffic actually works

How traffic actually works: "At the risk of being helpful, here are some things YOU can do that are actually guaranteed to improve commute times for everyone:

Drive a shorter car.
Don’t let people merge in front of you, ever.
Don’t drive during rush hour.
Move to New York. Seriously, no one owns a car here. It’s great. I don’t even know why I’m writing this.

'via Blog this'

Thursday, October 03, 2013

Millisecond data disputes, part 2.0000000100 | FT Alphaville

FT Alphaville, overview of the dissemination debate:

"Does ‘other dissemination’ mean that the decision can be sent to other internal servers run by news organisations? That seems to be the key question, and we suspect there will be more clarity coming on the matter now that this episode has received so much attention.
In any case, it seems that a broader discussion needs to be had about how markets have evolved, and about how their evolution affects the release of public and private data to the market."

Background and information about the question of whether news agencies have been releasing news about Fed decisions from New York or from New York AND Chicago.

Wednesday, October 02, 2013

Scott E.D. Skyrm » 10 Events That Changed The Repo Market

Scott E.D. Skyrm » 10 Events That Changed The Repo Market:

The history of repo

Hedge funds becoming more interested in repo.

Link to FT article.

What I saw as a Wall Street trader

What I saw as a Wall Street trader: a culture of bad behaviour | Business  The most interesting is the way that the investment banking partnerships turned into monsters owned by a disparate range of diversified funds with little interest in the minutia of what is going on.

"In my final years many of my last trades were approved by – well, I don't really know what they looked like, since most conversations were held over the phone. Sometimes it would be a gentleman with an Indian accent. Sometimes it was a nervous-sounding man in a satellite office somewhere. For six sweet months it was nobody: I had fallen between administrative cracks in a reshuffle. I set my own limits for trades.

Now each person is a small cog in the larger whole but there is no ownership or responsibility.

Tuesday, October 01, 2013

Saltation level and Avalanche

Saltation layer in avalanche adds weight and momentum to the avalanche models. This layer is from the Latin "saltus" meaning "leap".  Solids are picked up by the flow and transported forwards.  The solid objects are pulled off the ground level and become part of the fluid.  This adds to the mass and increases the power.

Saturday, September 28, 2013


Tim Harford reports the experiment where students rated music with and without access to other peoples' opinion.  Unsurprisingly, other views are influential.

"Watts and his colleagues split the music fans at random into eight “worlds”. Some “worlds” were asocial: people listened to and rated songs without knowing what others were doing. In other “worlds”, people were shown what others in their world were rating and downloading. The social “worlds” produced two striking results. Inequality increased: the most popular songs were far more popular than in the asocial world, as people herded together. The unpopular songs were even less popular."

If this is the case with something that is very subjective, how much more in financial markets when there is assumed to be important information available that would influence the perceived value?  This is a good argument for momentum and a social aspect to valuation.

Thursday, September 26, 2013

Rajiv Sethi: Information, Beliefs, and Trading

Rajiv Sethi: Information, Beliefs, and Trading:  Rajiv investigates the market for the US Presidential election and finds five groups of traders:  two large players, one biased to Romney and one trading an algorithm, another large group that points in one direction or the other, some arbitragers and a small group of independent traders reacting to news.

 "This kind of reasoning, when pushed to its logical limits, leads to some paradoxical conclusions. As shown by Aumann, two individuals who are commonly known to be rational, and who share a common prior belief about the likelihood of an event, cannot agree to disagree no matter how different their private information might be. That is, they can disagree only if this disagreement is itself not common knowledge. But the willingness of two risk-averse parties to enter opposite sides of a bet requires them to agree to disagree, and hence trade between risk-averse individuals with common priors is impossible if they are commonly known to be rational."

This means that they must be acting irrationally or they do not have a common prior.  If they are not acting rationally, they may be noise traders.  Market makers can then bring informed and uninformed traders together (taking a cut of the transfer of resources from those without information who want to trade to those with information). An alternative is that traders disagree about the implication of the common information. In the jargon, there is 'heterogeneous interpretation of public information'.

Wednesday, September 25, 2013

Science can help to spot symptoms of executive hubris -

 Gillian Tett - looks at some work trying to assess hubris from the words of political or corporate leaders.

 "“From a total of 148 sentences identified as being good news, 57 per cent was attributed to the chief executive himself, while only 39 per cent was attributed to the company and a further 4 per cent to outside parties,” they write. But the chief executive “did not attribute any bad news to themselves or the company but stated it was the result of external factors”."

It looks really interest and could tie in with some analysis of the MPC documents.  However, there is clearly a risk that if some patterns are found, they will be used by corporate communications and spin doctors to change the words of politicians.

Tuesday, September 24, 2013

Bubbles Tomorrow, Yesterday, but Never Today?

John C. Williams at the Federal Reserve Bank San Francisco discussed bubbles and takes a thorough look at asset price bubbles and sets through the assessment of bubble conditions as well as the explanation for mis-pricing.

 "Many researchers are probing why people have the procyclical pattern of optimism seen in these surveys. One key element in the theories coming out of this research is that people do not possess the full set of information assumed in the standard asset price model with rational expectations. Instead, they must make do with the limited information at hand when judging likely future discounted dividend payments and the future price of the asset. Indeed, a growing body of evidence in behavioral economics and finance shows that people’s expectations of future asset returns depend on their past experiences (Vissing-Jorgensen 2003 and Malmendier and Nagel 2011). This process of forecasting with limited information has been shown to cause forecast errors that can drive a wedge between asset prices and the values implied by economic fundamentals (Cutler, Poterba, and Summers 1991 and Barsky and DeLong 1993)."

There is more here about momentum in expectations and how this explains asset price swings.  This looks particularly at 'extrapolative expectations'.  This could be a very useful way to start building a banking model.  There are more references in the item.

The 'possibility effect' - Lex

The suggests that there is something called the 'possibility effect'.  It makes intuitive sense:  the hope for a large gain; a lottery ticket; an acting career.

"The best explanation of the bizarre trading may be the same one that behavioural economists use to explain the allure of lottery tickets. Small probabilities of big gains do strange things to people’s risk appetites. If the chance of a gain moves from, say, 51 to 52 per cent, most people will pay just a bit more to invest. But if you move the probability from 0 to 1 per cent, some investors (or punters, if you prefer) will stump up big. This is the “possibility effect,” and it is ugly when it goes into reverse. Those who held on to BlackBerry until Friday were emotionally attached to the big gain they could make if BlackBerry fixed things. This sort of hope cannot be extinguished by strong evidence – only ironclad proof. The lesson is to be careful about buying a beat up stock because “the worst is priced in”. You may be co-investing with dangerous optimists."

What does this do for risk. It suggests that a large right-tail is really valuable or a portfolio with more risk assets can be valued more highly than one with modest risk (and opportunity).  Can this be back by research and modelled?

Monday, September 23, 2013

Measuring Uncertainty

Abstract from a paper by Kyle Jurado, Sydney Ludvigson and Serena Ng.  Can this be used to get another estimate of uncertainty?  What is the relationship between this uncertainty and the carry trade profit?

Measuring Uncertainty: "This paper exploits a data rich environment to provide direct econometric estimates of time-varying macro uncertainty, defined as the common variation in the unforecastable component of a large number of economic indicators. Our estimates display significant independent variations from popular uncertainty proxies, suggesting that much of their variation is not driven by uncertainty. Quantitatively important uncertainty episodes appear far more infrequently than indicated by popular uncertainty proxies, but when they do occur, they have larger and more persistent correlations with real activity. Our estimates provide a benchmark to evaluate theories for which uncertainty shocks play a role in business cycles."

'via Blog this'

Saturday, September 21, 2013

Econometrics by Simulation: Cluster Analysis

Econometrics by Simulation provides a thorough example of cluster analysis.

"Cluster analysis is class of tools in which you use to group complex data into distinct clusters based on observable variation.  Cluster analysis is closely related to the idea of latent class analysis in which data is grouped into classes based on observable characteristics."

However, why can't this be used to classify carry trade returns in different regimes.  The clusters can be things like (high level of international risk aversion; exchange rate type; month; interest rate differential; stock market performance; housing market performance; political tension.  Could be done in the same fashion?

Wednesday, September 18, 2013

Major projects

The Guardian reports on the cost of the abandoned NHS computerisation system.  Daniel Kahneman recalls a failed education project in Kahneman, D., & D. Lovallo, 1993, Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking', Management Science, 39 (1).

In 1976 one of us (Daniel Kahneman) was involved in a project designed to develop a curriculum for the study of judgment and decision making under uncertainty for high schools in Israel. The project was conducted by a small team of academics and teachers. When the team had been in operation for about a year, with some significant achievements already to its credit, the discussion at one of the team meetings turned to the question of how long the project would take. To make the debate more useful, I asked everyone to indicate on a slip of paper their best estimate of the number of months that would be needed to bring the project to a well-defined stage of completion: a complete draft ready for submission to the Ministry of Education. The estimates, including my own, ranged from 18 to 30 months. At this point I had the idea of turning to one of our members, a distinguished expert in curriculum development, asking him a question phrased about as follows: "We are surely not the only team to have tried to develop a curriculum where none existed before. Please try to recall as many such cases as you can. Think of them as they were in astage comparable to ours at present. How long did it take them, from that point, to complete their projects?" After a long silence, something much like the following answer was given, with obvious signs of discomfort: "First, I should say that not all teams that I can think of in a comparable stage ever did complete their task. About 40% of them eventually gave up. Of the remaining, I cannot think of any that was completed in
less than seven years, nor of any that took more than ten". In response to a further question, he answered: "No, I cannot think of any relevant factor that distinguishes us favorably from the teams I have been thinking about. Indeed, my impression is that we are slightly below average in terms of our resources and potential".

Monday, September 09, 2013

Speculative Investors and Tobin's Tax in the Housing Market

Speculative Investors and Tobin's Tax in the Housing Market:  Interesting support here for the notion that speculators provide liquidity and assist in the process of price discovery.

"This paper examines the impact of a policy change in Tobin’s tax on housing market speculators. The policy intervention effectively raised the transaction cost in the market segment with a high presence of speculators. Relative to the unaffected control sample, we find that the rise in transaction cost substantially reduced speculative trading activities in the treatment sample. However, it significantly raised its price volatility and reduced the price informativeness. We further show that the unintended consequences are likely due to a relatively greater withdrawal by informed speculators than by destabilizing speculators after the transaction cost increase."

There is an interesting addition with the finding that informed speculators disappeared more than those that they deem destabilising.  The authors use the fact that speculators in the housing market cannot short the market to assert that there must be more informed speculators in markets where houses were undervalued than where they were over-valued.  This is identified by future price performance and it is found that there is a greater volume decline in those areas that were under-valued than those that are over-valued.

Sunday, September 08, 2013

Spillovers, feedback and impreciseion

A beautiful overview by Chris Dillow of the difficulties of forecasting has this nugget.

 "Of course, the idea of keeping up with the Joneses is an old one. But until recently, it's been hard to find proper evidence for it: if we see a group of neighbours spending more, how can we tell whether some are copying others or simply that the neighbourhood generally has enjoyed some good fortune? Perhaps the neatest evidence here comes from a study of the effects of the Dutch postcode lottery. Every week, this selects a postcode at random and gives a BMW to everyone in it who bought a ticket. Researchers have found that the neighbours of winners who didn't win themselves are significantly more likely to buy a new car. This is a clean sign of a network effect between consumers."

The whole article has an excellent overview and great links.

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Data for financial bubbles

Here is an indicator from Phillips,Wu and Yu to determine bubbles.

There is a need for data to test bubbles.  This can come from Reinhart and Rogoff or Ahamed.

Financial booms and busts were, and continue to be, a feature of the economic landscape. These bubbles
and crises seem to be deep-rooted in human nature and inherent to the capitalist system. By one count there
have been 60 different crises since the 17th century.

Ahamed (2009).

'via Blog this'

Coase's Penguin

The theory of the firm explains why firms exist and provides a framework for analysing where the boundaries of the firm will lie.  In itself this can be interesting as this is the arena to discuss the benefits of mergers or disposals or outsourcing.  See John Naughton at the Guardian for an introduction.

However, with Coase's Penguin:, Yochai Benkler suggests that this can also explain a new method of producign goods and services. 

"In this paper I explain that while free software is highly visible, it is in fact only one example of a much broader social-economic phenomenon. I suggest that we are seeing is the broad and deep emergence of a new, third mode of production in the digitally networked environment. I call this mode "commons-based peer-production," to distinguish it from the property- and contract-based models of firms and markets. Its central characteristic is that groups of individuals successfully collaborate on large-scale projects following a diverse cluster of motivational drives and social signals, rather than either market prices or managerial commands."

Paper also available from this page. '

Friday, September 06, 2013

Nokia revisited

Following up the earlier post, Surowiecki looks at what went wrong.  Where Nokia Went Wrong : The New Yorker:  Inability to take risk?

" Diverting a lot of resources into a high-end, low-volume business (which is what the touch-screen smartphone business was in 2007) would have looked risky. In that sense, Nokia’s failure resulted at least in part from an institutional reluctance to transition into a new era"

A new company can take a chance on a new area with less risk because you do not add on losing what you already have to the inherent uncertainty of any such business decision.  Breaking into the market involves taking risk.  There were similar potential benefits and much fewer costs for Apple.

Thursday, September 05, 2013

IS-LM and bank lending

An old one but a golden look at IS-LM from Brad DeLong

S(Y - T) = BL(i; π, ρ)

with rho the parameter for the risk premium in the original. However, this could also be risk aversion and therefore bank lending (BL) could fail to expand to match savings S or may expand beyond savings in a boom.

The point made here is that the government borrowing (via bond market) increases the quality of borrowing.

Wednesday, September 04, 2013

Decline and fall

Alongside some criticism of the Microsoft acquisition of Nokia and a view of the increase in Microsoft employees, Felix Salmon quotes The New York Times. 

 "Nokia’s fall has been most spectacular in Asia, a region that its phones once dominated. As recently as 2010, the company had a 64 percent share of the smartphone market in China, according to Canalys, a research firm. By the first half of this year, that had plunged to 1 percent"

The potential for large companies to disappear is much greater than is ever envisaged.  Remember that Nikia and Microsoft were one the Apple and Google of the day.  QZ has a overview of some of the things that Microsoft is said to have done as a word of warning for Google.

Monday, September 02, 2013

Bayesian vs. Frequentist in PracticeEran Raviv

Bayesian vs. Frequentist in PracticeEran Raviv: "I apply both Bootstrap and Bayesian inference in the following toy example and push forward the point that (Oy vey..) the choice between the two approached does not matter much."

'via Blog this'

Pricing of skew risk

Todd Mitton and Keith Vorkink suggest that diversified firms have to offer higher expected returns to compensate for the lack of positive skew.  This is tied to the well known phenomenon of individuals buying lotteries with a small chance of making large gains. 

In this paper, we seek to add to our understanding of why firms with diversification
discounts have higher expected returns. We consider an explanation based on the return
distributions of the stocks of diversified firms relative to single-segment firms. Specifically,
we consider whether investors pay a premium for single-segment firms because the return
distributions of single-segment firms have higher upside potential (positive skewness) than do
the return distributions of diversified firms. If investors have a preference for stocks with
positive skewness, then stocks of diversified firms may have to offer higher returns in order to
compensate investors for a lack of upside potential.
The assumption that investors would place a premium on stocks with greater skewness
exposure is grounded in theory. Arditti (1967) and Scott and Horvath (1980) demonstrate
that investors with typical preferences demonstrate a preference for positive skewness in return
distributions. Kraus and Litzenberger (1976) and Harvey and Siddique (2000) build on these
results to develop asset pricing relationships in a representative agent framework, finding that
an asset’s coskewness with the market portfolio should be priced. Other research shows that
even idiosyncratic skewness may be a priced component of stock returns. Barberis and Huang
(2005) show that when investors have preferences based on cumulative prospect theory, stocks with greater idiosyncratic skewness may command a pricing premium. Mitton and Vorkink (2006), in a model incorporating heterogeneous investor preference for skewness, also predict a pricing premium for stocks with idiosyncratic skewness. The optimal expectations model of Brunnermeier and Parker (2005) also produces qualitatively similar asset pricing implications for skewness as Barberis and Huang (2005) and Mitton and Vorkink (2006).

This seems to be about positive skew.  What does this mean for negative skew.  The obvious implication would be that investors would be more cautious about investments that have a negative skew. However, work on the carry trade suggests that they do not fully take notice of this risk.  Is this a case where risk is considered in an asymmetric fashion?  Could it be considered something akin or equivalent to Prospect Theory. 

Milton, T., & K. Vorkink, 2010, 'Why do firms with diversification discounts have higher expected returns?', Journal of Financial and Quantitative Analysis, 45 (6), pp. 1367-1390

Thursday, August 29, 2013

The Man Who Invented Modern Probability - Issue 4: The Unlikely - Nautilus

The Man Who Invented Modern Probability - Issue 4: The Unlikely - Nautilus: "Kolmogorov drew analogies between probability and measure, resulting in five axioms, now usually formulated in six statements, that made probability a respectable part of mathematical analysis. The most basic notion of Kolmogorov’s theory was the “elementary event,” the outcome of a single experiment, like tossing a coin. All elementary events formed a “sample space,” the set of all possible outcomes. For lightning strikes in Massachusetts, for example, the sample space would consist of all the points in the state where lightning could hit. A random event was defined as a “measurable set” in a sample space, and the probability of a random event as the “measure” of this set. For example, the probability that lightning would hit Boston would depend only on the area (“measure”) of this city. Two events occurring simultaneously could be represented by the intersection of their measures; conditional probabilities by dividing measures; and the probability that one of two incompatible events would occur by adding measures (that is, the probability that either Boston or Cambridge would be hit by lightning equals the sum of their areas)."

'via Blog this'

Knowledge, uncertainty and Bayesian priors

A fantastic journey from a discussion of job insecurity through the basis of knowledge and back to how to estimate the probability of being sacked.  Not Quite Noahpinion: Perceiving Job Insecurity:

"Keynes was one of many to critique this principle. His views on probability and uncertainty remain controversial, as does the Principle of Insufficient Reason. There is actually quite a large body of literature in statistics concerning "noninformative priors" that continues to study the fascinating and controversial issue of how to represent ignorance. There are also subfields of behavioral economics that study how people treat probability, particularly when it comes to low-probability events (like job loss, usually)."

Excellent links provided.

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Sunday, August 11, 2013

Noahpinion: A healthy side effect of High Frequency Trading?

Lovely overview of HFT,

Noahpinion: A healthy side effect of High Frequency Trading?: "High Frequency Trading is nearly universally reviled. The Tournament Externality is just too obvious; it yields no social value to bring a piece of information to the market 1 millisecond before it would otherwise have arrived, but people are apparently spending lots of money in an effort to do so. It can't be efficient to commit our best and brightest minds to beating each other to the punch by 1 millisecond. Because of this, many have suggested a small Tobin Tax to curb HFT. Others have suggested"

'via Blog this'

Tuesday, August 06, 2013


Interesting case. Does the demise of Nintendo suggest that the previous success was just luck.  They had two good products:  Nintendo DS and wii?   The alternative is changing clans.  It would add the gamecube and say that it had an era and some fundamental change allowed Microsoft to take over.

"Iwata expects sales of 3DS and Wii U hardware to increase, and promises return to "Nintendo-like profits"; lines up new Nintendo Direct web session to reveal fresh game details"


Monday, August 05, 2013

Calendar-based Sector Strategy | Systematic Investor

EMH in action.

Calendar-based Sector Strategy | Systematic Investor: "I recently came across the Kaeppel’s Sector Seasonality Strategy which is described in Kaeppel’s Corner: Sector Seasonality and updated in Kaeppel’s Corner: Get Me Back, Clarence."

It depends on the interpretation. This is how I interpret it.

Productivity and inequality

At some point the gap between inequality and productivity must make people move between the two spaces to reduce the gap.  How does that not happen?

There are barriers, such as the social capital of being from a different class, though these can be overcome after a certain point and return reach an extreme level; there is ignorance of the ability or requirements that are necessary to move; there are other barriers such as legal and educational constraints.

What determines this gap?  It is clearly larger in the US than in Germany or some Scandinavian countries.  Do these constraints have other effects?

'via Blog this'

Michael Lewis: Did Goldman Sachs Overstep in Criminally Charging Its Ex-Programmer? | Vanity Fair

Michael Lewis: Did Goldman Sachs Overstep in Criminally Charging Its Ex-Programmer?
A month after ace programmer Sergey Aleynikov left Goldman Sachs, he was arrested. Exactly what he’d done neither the F.B.I., which interrogated him, nor the jury, which convicted him a year later, seemed to understand. But Goldman had accused him of stealing computer code, and the 41-year-old father of three was sentenced to eight years in federal prison. Investigating Aleynikov’s case, Michael Lewis holds a second trial."

'via Blog this'


An idea for an assignment in finance.  Look for a project on Kickstarter.  Investigate the potential returns and risk.  Make an assessment of the sort of funding that you would be prepared to make and the additional information that you would like.  This can begin as a sort of Dragon's private equity financing but can be expanded to a discussion of different options and the relative merits of these options.

Friday, August 02, 2013

Smith and Speculation

In the middle of a debate about Smith, Brad DeLong quotes the Theory of Moral Sentiments:

"Let us suppose that the great empire of China, with all its myriads of inhabitants, was suddenly swallowed up by an earthquake, and let us consider how a man of humanity in Europe, who had no sort of connexion with that part of the world, would be affected upon receiving intelligence of this dreadful calamity. He would, I imagine, first of all, express very strongly his sorrow for the misfortune of that unhappy people, he would make many melancholy reflections upon the precariousness of human life, and the vanity of all the labours of man, which could thus be annihilated in a moment. He would too, perhaps, if he was a man of speculation, enter into many reasonings concerning the effects which this disaster might produce upon the commerce of Europe, and the trade and business of the world in general."

It seems to suggest speculation.  What is the effect of this on trade?  Buy spice and silk, sell whiskey and shortbread.

Tuesday, July 30, 2013

Gladwell on Taleb

Very Interesting.  Gladwell has a profile of Tlaeb. The hedge fund that buys out of the money options. There is a good link to Kahneman and Tversky.

 "Nonetheless, we have strong preferences among them. Why? Because we're more willing to gamble when it comes to losses, but are risk averse when it comes to our gains. That's why we like small daily winnings in the stock market, even if that requires that we risk losing everything in a crash."

The most interesting point is whether options are under-priced.  We know about the smile and the way that this allows fat-tails.  Is that sufficient?  I supposed they checked.

The Future of Computer Based Trading

Tim Johnson has a blog Magic, maths and money: Here is is looking at a government report on computer based trading.  He makes the distinction between broking and jobbing or market-making and speculating.

 "Modern criticism of high frequency trading  is a continuation of a long tradition of distinguishing the activities of Monied Men investing in the market and Traders speculating within the market.  As such it can get entangled in a web of social judgements, such as it is OK for the rich to gamble but not the poor.  To make decisions about HFT, therefore, requires some understanding of this mess."

This is the same issue that arises time after time through Thomas Mortimer, Keynes and into the assessment of HFT.  The role of speculation in the market is a major issue.  One interesting point that Tim makes is that Big Bang blurred the line between broking and speculation.

Sunday, July 28, 2013

Life In The Slow Lane

Paul Krugman shows how traffic congestion encourages road rage.  Life In The Slow Lane (Trivial) -  Probably a good exercise to conduct all these calculations:

  1. What is total journey time? 
  2. How much time spent flashing past others? 
  3. How much time watching others flash past? 
  4. Time saved with a 50 mph train.  

Saturday, July 27, 2013

Data analysis

The FT has an interesting article today looking at
the work of James Cheshire on spatial analysis. The link to the FT article is here.  James's website is here.  He also blogs at  Some of the work appears to have been done with R. 

Friday, July 26, 2013

Hungary struggles with foreign currency loan burden

Hungarian foreign currency loans.

"But the financial crisis sent the forint tumbling. The capital value and servicing costs of the loans mushroomed in forint terms; consumer spending slumped. At the end of March, Hungary still had over Ft3.55tn ($15.8bn) of foreign currency mortgages outstanding, equivalent to 12 per cent of gross domestic product. More than 20 per cent of the loans by value had repayments more than 90 days overdue."
This is the resolution of the HUF carry trade, conducted by domestic households:  borrowing EUR and CHF to purchase higher yielding domestic assets.

Measuring Recession

Jeffrey Frankel compares US and European methods of assessing recessions and comes down firmly on the side of the US version: not two quarters of negative growth but a more holistic assessment of the economy and its potential.

"These measurement issues may sound like minor technical details; but they can have significant real-world implications. So, what are the differences between European and US criteria for judging recessions?"

The US measurement removes the constant twitter about double or triple dips.

Sunday, July 21, 2013

Bandwaggons and herding

The Economist assess why missing out on one job application is bad news for your chances in the next.

"The existence of bandwagon behaviour can be hard to prove. A product or an asset usually becomes popular (or unpopular) in the first place because it is genuinely superior (or inferior). But some have tried to isolate the self-fulfilling effects of popularity. One 2004 study* by Alan Sorensen, now of the University of Wisconsin, examined accidental omissions from the New York Times bestseller list"

As with the carry trade, there is some underlying effect but it is magnified by the attempt to deal with asymmetric information. This magnification causes a distortion that can eventually be significant.

Two decades ago Abhijit Banerjee, now at the Massachusetts Institute of Technology, devised a model of “rational herding” in which market participants base their decision on a combination of their own information and the actions of others. Over successive rounds of transactions, participants responded less to their own information and more to the herd.

Friday, July 19, 2013

Expectations and learning

Learning from Inflation Experiences assess the way that expectations are formed and finds that personal experience has an impact.

: "How do individuals form expectations about future inflation? We propose that personal experiences play an important role. Individuals adapt their forecasts to new data but overweight inflation realized during their lifetimes."

There is scope here to use some of these ideas in understanding how expectations about the probability of success with the carry trade can affect the trade itself. What is the recent experience?  How have traders experienced the carry?

Wednesday, July 17, 2013

Frequency of words over time

The ngramr – an R package for Google Ngrams can create charts of the frequency with which words are used over time.  The package uses the Google Books diagnostics to scan Google Books to look for names.  The chart needs to be turned into data.

 "The Ngram Viewer will display an n-gram chart, but does not provide the underlying data for your own analysis. But all is not lost. The chart is produced using JavaScript and so the n-gram data is buried in the source of the web page in the code. It looks something like this:"

This can be used to see how economic words change over time and use this as a proxy for sentiment or thinking and then look for how this sentiment or general thinking affects things like the work of the central bank or the structural budge deficit, the PE ratio or more.

Wednesday, July 03, 2013

Budget iPhone: ugly on purpose | BGR

Analysis by BGR suggests that the Budget iPhone is ugly on purpose

"Pictures of candy-colored entry-level iPhones with rounded corners have started circulating. Many have branded them hideous, crude atrocities. They need to be. Apple is facing a unique dilemma: Because of the stellar success of the iOS app universe, the entry-level iPhone has to have nearly the same specs as the flagship iPhone. The display has to be large. The processing power has to be substantial. Apple cannot afford to fragment the iPhone device base, particularly since it has spent years mocking Android vendors mercilessly for doing just that. Still, the budget iPhones have to be something that affluent and aspirational consumers despise."

Is this price discrimination?  Some textbooks provide the example of French third class train carriages that, they say, used to have the roof taken off to make sure that they were inferior to the second class.

Tuesday, June 11, 2013

Global factors in capital flows and credit growth | vox

Consistent with the idea that loose monetary policy can be translated across borders and that the Japanese half-hearted attempt at quantitative easing was at least partially responsible for the global financial crisis by spreading Japanese money across the globe (through the carry trade).

"In a recent paper (Bruno and Shin 2012a) we examine the theoretical and empirical basis for global liquidity. Schematically, global liquidity propagates as shown in Figure 1. When global banks apply more lenient conditions on local banks in supplying wholesale funding, the local banks transmit the more lenient conditions to their borrowers through greater availability of local credit. In this way, global liquidity is transmitted through the interactions of global and local banks through the waxing and waning of bank risk-taking."

Valenina Bruno and Hyun Song Shin take a look in Global factors in capital flows and credit growth | vox.  Is there a link between the global carry trade and the transmission of liquidity.  Can the waxing and waning  of the carry identify increased global financial risk?

Thursday, June 06, 2013

Unreliable friends and survival time

Mat Asher and the Unreliable Friend takes a look at survival functions.

"You can think of these curves as the chance that your friend will show up in the coming minutes, given how long you’ve already been waiting. At the very beginning of your wait, modeled by the orange curve at the far left, you can be almost certain that your friend will show up in the next 10 minutes. But by the time you’ve been waiting for 500 minutes, as seen in the blue curve at the far right, you are only 50% sure that she will show up in the next 500 minutes. Are those probabilities exact? It seems like it, but let’s zoom in on the first 25 minutes:"

My interest is whether this can be used to model time until financial crisis.  There would have to be two dimensions to the wait:  as the time expands, the intensity of the crash that ensues will be greater; as the time expands, the memory of the previous crash gets less well defined. The model has to be built up in this way with some sort of random exponential crash.  There are lots of small crashes and some major explosions.

Tuesday, June 04, 2013

Use of odds ratio with event studies

Jenny Hope talks about the use and mis-use of odds-ratio in medical science.  How can 2% become 20%? | Understanding Uncertainty:

"An odds ratio is a standard measure that statisticians and epidemiologists (yes, them again) use to measure an association between an exposure (here statins) and an event (muscle problems). It is defined as the odds of the event given the exposure, divided by the odds without the exposure."

Why not use this quantitative measure of the effect of an event as an addition to an event study.  The Event Study provides the picture of the effect of the event but the odds ratio should compare aftermath with and without the event.

Wednesday, May 29, 2013


Chris Dillow has identified some data that shows the evolution of inequality across the income spectrum.  It comes from the ONS and  shows that there is a substantial increase in inequality between 1977 and 1993.  After that clear peak, it becomes a little more messy.  For the top decile relative to the lowest, the original income ratio fell to 25.69 from 30.53 between 2010-11 and 1993.  However, disposable income (after tax and benefit adjustments) rose to 9.95 from 9.23.  For the 6th decile (the middle) the same figures were 10.77 and 7.96 for original income and 3.25 and 3.86 for disposable income.

Tuesday, May 07, 2013

Cross Discipline

"The Great Inflation of the 2010s: Hoisted from Niall Ferguson's Archives from Two Years Ago" 

A reminder of the limits of disciplines. There are probably numerous inflationary cases that appeared through history.  What of the cases where budget deficits increased but there was no inflation?  It is clear that economists ignored economic history but this appears to be a case of a historian without economic knowledge.

Friday, March 15, 2013

John Maynard Keynes, The end of laissez-faire (1926)

Worthwhile for having the whole paper.

John Maynard Keynes, The end of laissez-faire (1926): "The maxim laissez-nous faire is traditionally attributed to the merchant Legendre addressing Colbert some time towards the end of the seventeenth century.

('Que faut-il faire pour vous aider?' asked Colbert. 'Nous laisser faire' answered Legendre)."

Saturday, March 02, 2013

Productivity and potential market

Dan Liu and Christopher Meissner Market Potential and the Rise of US Productivity Leadership:

 "The US advantage in per capita output, apparent from the late 19th century, is frequently attributed to its relatively large domestic market. We construct market potential measures for the US and 26 other countries between 1880 and 1913 based on a general equilibrium model of production and trade. When compared to other leading economies in 1900, the year around which the US overtakes Britain in productivity leadership, the US does not have the overwhelming lead in market potential that it has in GDP per capita. Still, market potential is positively related to the cross-country distribution of income per capita, but the impact of market potential is likely to be very heterogeneous. We illustrate this in a quantitative calculation of the welfare gains from removing international borders in 1900 within a parsimonious general equilibrium trade model. While there are gains from trade for all nations, the largest European countries do not close their per capita income gaps with the US after this hypothetical rise in market potential. On the other hand, many small countries could have done so."

'via Blog this'

Monday, February 04, 2013

Sunday, February 03, 2013

Peak Oil

Brad DeLong : Liveblogging World War II: February 3, 1943:
A caveat to the predictions of economic collapse as a consequence of 'peak oil'.
"It needs to be said, of course, that the dire predictions of Hitler and his economic advisers in 1941 and 1942 about the certain collapse of the German war machine if no new sources of oil were obtained proved to be exaggerated. The German war effort did not grind to a halt when the campaign to capture the Caucasus oilfields failed. Although Germany's oil situation remained acute, and became desperate after the Allied air offensive against its synthetic fuel plants and the Rumanian oilfields began, the Reich continued fighting until May 1945."
There are alternatives.  They may not be sustainable themselves, but..
'via Blog this'

Tuesday, January 29, 2013

The Allais Paradox

The Allais Paradox | Wired Science |
There is some explanation of the Allais Paradox here in  The is a tendency to value certainty but once this is gone, there is a tendency to take risk. For speculation, this means that the positive skew to returns are very attractive but the negative skew does not have very much influence.
"But why was certainty so attractive? Kahneman and Tversky wanted to understand the psychology behind the paradox. Their breakthrough came by accident. Kahneman had been reading a textbook on economic utility functions, and was puzzled by the way economists explained a particular aspect of our behavior. When evaluating a gamble—like betting on a hand of poker, or investing in a specific stock—economists assumed that we made the decision by taking into account our wealth as a whole. (Being rational requires factoring in all the relevant information.) But Kahneman realized that this isn’t how we think. Gamblers in Las Vegas don’t sit around the card table contemplating their complete financial portfolio. Instead, they make quick decisions that depend entirely upon the immediate terms of the gamble. If there is a $100 wager, and you’re trying to decide whether or not to ante in with a pair of aces, you probably aren’t thinking about the recent performance of your mutual fund, or the value of your home."

This may mean that fat tails are attractive as the possibility of large gains draws attention while the possibility of large losses is given less weight than it should.  There is loss aversion.  If there are large potential losses, losses should be cut swiftly, but there is a tendency to hand on a hope - with potentially catastrophic results.

Sunday, January 13, 2013

Compartments and belief

The Mind’s Compartments Create Conflicting Beliefs: Scientific American: An overview of the idea that the mind contains compartments that may contain conflicting ideas.  The key thought that when there is conflict, there is more agitation and people are more likely to shout or try to assert their belief.

"Cognitive dissonance may also be at work in the compartmentalization of beliefs. In the 2010 article “When in Doubt, Shout!” in Psychological Science, Northwestern University researchers David Gal and Derek Rucker found that when subjects' closely held beliefs were shaken, they “engaged in more advocacy of their beliefs ... than did people whose confidence was not undermined.” Further, they concluded that enthusiastic evangelists of a belief may in fact be “boiling over with doubt,” and thus their persistent proselytizing may be a signal that the belief warrants skepticism."

'via Blog this'