Thursday, January 16, 2014

It Cost JPMorgan $1.5 Billion to Value Its Derivatives

Bloomberg assesses the accounting for derivative contracts.  The cost of funding a position that is in the money.

"But that's weird too, because not every bank has the same funding cost. It would be odd if, say, JPMorgan (5-year CDS in the 60s) was willing to pay more to do a derivative trade than Goldman Sachs (high 80s), just because it funds more cheaply. Presumably that sometimes happens,6 but mostly people trade based on market prices, and in theory at least there should be one market price. How do you calculate that market price? Probably you can take your own credit spread into account, but presumably also there are some disconnects. So if "the market" charges 50 basis points of FVA, and your own funding costs blow out to be, say, 200 basis points, then the value of the derivative receivable to you is less than its market value."


Monday, January 13, 2014

A history of macroeconomic thinking

Roger Farmer: My Economic Window: Neo-Paleo-Keynesianism: A suggested definition:

"There has been a lot written on the blogosphere in recent weeks about the microfoundations of macroeconomics. Tony Yates argues in favour of micro-founded structural models. Adam Posen is sceptical of micro-foundations and Simon-Wren Lewis, Noah Smith and Nick Rowe call for a more eclectic approach. For those looking for a neat summary of these debates, Paul Krugman traces the history of macroeconomic ideas.  Responding to a  piece by Brad Delong, he argues that there has been a recent resurgence of what he calls “neo-paleo-Keynesianism”.  This is very useful concept and I have much in common with the ideas expressed in Paul's piece. This essay offers a novel definition of the term that Paul coined and an invitation to fellow academics to join me in pursuing an agenda based on this definition."

'via Blog this'

Thursday, January 09, 2014

What's That You're Calling a Bubble? - Justin Fox - Harvard Business Review

What's That You're Calling a Bubble? - Justin Fox - Harvard Business Review:

"So maybe we should tweak the second sentence of Brunnermaier’s definition, to something like: Bubbles arise if the price far exceeds the asset’s fundamental value, to the point that no plausible future income scenario can justify the price. A little clunky, and of course “plausible” is a judgment call. But it does get at the idea that we shouldn’t be calling every last rise in P/E ratios a bubble."

The bubble in bubbles and the difficulty of calling bubbles before the event relative to how easy it is after the event.

Wednesday, January 08, 2014

Scholarship: Beyond the paper

Scholarship: Beyond the paper : Nature : Nature Publishing Group:

"Henry Oldenburg created the first scientific journal in 1665 with a simple goal: apply an emerging communication technology — the printing press — to improve the dissemination of scholarly knowledge. The journal was a vast improvement over the letter-writing system that it eventually replaced. But it had a cost: no longer could scientists read everything someone sent them; existing information filters became swamped."

The future of academic publishing (maybe).


Learning about social learning in MOOCs: From statistical analysis to generative model:

"We study user behavior in the courses offered by a major Massive Online Open Course (MOOC) provider during the summer of 2013. Since social learning is a key element of scalable education in MOOCs and is done via online discussion forums, our main focus is in understanding forum activities"

Why do people drop out?

Saturday, January 04, 2014

Risk, money illusion and new financial assets

Worthwhile Canadian Initiative: Nominal-loss-aversion and its consequences:

"Suppose some promoter comes along with a new financial asset. The promoter promises that you will never lose money if you invest your savings in this new financial asset. Even better, he promises that he will buy back that financial asset at the issue price any time you ask him to. And suppose all the people who suffer from nominal-loss-aversion take him up on his offer, and buy the new financial asset."
There is clearly some political power involved here. However, this is not the whole story.  The safe assets are being swallowed up by overseas central banks as a parking space for US dollars accumulated as a result of foreign exchange intervention.  This means that the return on the safe asset is not longer a compensation for real losses (it does just about cover nominal loss). As such there is a demand for a safe asset with a higher return. It may be impossible, but where there is demand, there is supply.

Mind and Machine - logistics

Unhappy Truckers & Other Algorithmic Problems - Nautilus: The scheduling problem.

"Powell’s biggest revelation in considering the role of humans in algorithms, though, was that humans can do it better. “I would go down to Yellow, we were trying to solve these big deterministic problems. We weren’t even close. I would sit and look at the dispatch center and think, how are they doing it?” That’s when he noticed: They are not trying to solve the whole week’s schedule at once. They’re doing it in pieces. “We humans have funny ways of solving problems that no one’s been able to articulate,” he says. Operations research people just punt and call it a “heuristic approach.”"

  Machine optimisation vs the controller.

'via Blog this'