Lex in-depth: Universal banks - FT.com

Lex in-depth: Universal banks - FT.com speaks about the economies of scale in banking.  There is reference here to the work that has been done looking at economies of scale in banking.

"Academics are less convinced. Berenberg points out that two years ago the Bank for International Settlements looked at whether size brought benefits in banking. Of 37 academic studies reviewed, only 15 said it did. Hardly a resounding show of support."

Profitability of time series momentum

Profitability of time series momentum: "Abstract
We propose a continuous-time heterogeneous agent model consisting of fundamental, momentum, and contrarian traders to explain the significant time series momentum. We show that the performance of momentum strategy is determined by both time horizon and the market dominance of momentum traders. Specifically, when momentum traders are more active in the market, momentum strategies with short (long) time horizons stabilize (destabilize) the market, and meanwhile the market under-reacts (over-reacts) in short-run (long-run). This provides profit opportunity for time series momentum strategies with short horizons and reversal with long horizons. When momentum traders are less active in the market, they always lose. The results provide an insight into the profitability of time series momentum documented in recent empirical studies."



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Momentum has its moments

Momentum has its moments: Finding ways to take off the momentum fund.

"Compared with the market, value, or size factors, momentum has offered investors the highest Sharpe ratio. However, momentum has also had the worst crashes, making the strategy unappealing to investors who dislike negative skewness and kurtosis. We find that the risk of momentum is highly variable over time and predictable. Managing this risk virtually eliminates crashes and nearly doubles the Sharpe ratio of the momentum strategy. Risk-managed momentum is a much greater puzzle than the original version."

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graphics - Amusing exercise - ouroboros file - Output of TeX includes itself recursively ad infinitum - TeX - LaTeX Stack Exchange

graphics - Amusing exercise - ouroboros file - Output of TeX includes itself recursively ad infinitum - TeX - LaTeX Stack Exchange: "The question here to write an "ouroboros" in TeX, i.e., a file that includes itself as a figure. In other words, the output should include in it a figure which presents the figure. In a sense, this is like a fractal, since the figure would show a the entire document, which hopefully is only one page. Now, in this figure, you would see a scaled down image of the output, which would have in it a figure."



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An Extrapolative Model of House Price Dynamics

An Extrapolative Model of House Price Dynamics: Buyers make mistakes and cause momentum.

"A modest approximation by homebuyers leads house prices to display three features that are present in the data but usually missing from perfectly rational models: momentum at one-year horizons, mean reversion at five-year horizons, and excess longer-term volatility relative to fundamentals. Valuing a house involves forecasting the current and future demand to live in the surrounding area. Buyers forecast using past transaction prices. Approximating buyers do not adjust for the expectations of past buyers, and instead assume that past prices reflect only contemporaneous demand, as with a capitalization rate formula. Consistent with survey evidence, this approximation leads buyers to expect increases in the market value of their homes after recent house price increases, to fail to anticipate the price busts that follow booms, and to be overconfident in their assessments of the housing market."

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Outsourcing: Trading places.

Outsourcing: Trading places: Recruiting traders from around the world with less expensive offices and a hunger to learn.

 "Supplied with Bloomberg terminals, stacks of analyst research, biryani and foreign capital, he and fellow young traders — graduates of the best Indian universities — learnt to decipher Federal Reserve statements and US oil inventory reports published 8,500 miles away in Washington. They watched from afar as Lehman Brothers failed, then coolly traded through the aftermath. One of Mr Mishra’s colleagues made so much money shorting crude oil in 2008 that he bought a string of flats around Bangalore."

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Market Data Sources Bloomberg Vs Reuter - Quantitative Finance Stack Exchange

finance - Market Data Sources Bloomberg Vs Reuter - Quantitative Finance Stack Exchange: "In my project, we have two version of systems. One version is for derivative trades and other version is for bond trades.For derivatives we get the market data from Reuters and for Bonds we are getting the data from Bloomberg. Currently we are planning to upgrade both version systems and migrate to a single version. I am analyzing the difference between Bloomberg and Reuters market data. To start with,i am just trying to find out whether there is any difference between these 2 sources in terms of market feed.Can we have just one real time feed, or should we have both the feeds. If only one real time feed, which one we should go with. Does both provide ISIN download information?"



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VIX as a hedging tool

Amid a discussion of the decline in open interest in the VIX index, the FT discusses some strategies that have used the index.  These include a range of hedging strategies (including credit) and funds that aim to find an alternative asset class. US ‘fear gauge’ trades hit by steep drop - FT.com:

"David Speth, vice-president of research at the CBOE, acknowledged that open interest figures had dropped in recent weeks.
“There are a number of factors,” Mr Speth said in an interview. “There are a lot of credit players who have used Vix options as a tail hedge, to protect against a drop in credit quality. When credit quality dropped in oil at the end of the year, the hedge didn’t work as well as they liked.”"

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Stumbling and Mumbling: "We'll have to look at the data"

Measuring risk is only useful if that measure means anything.  "We'll have to look at the data" summarises some cases where data is misused or measures something in a way that provides excess confidence on knowledge,  

"Some stats are just bad and can give a mere illusion of knowledge. For example, in 2007-08 banks' risk models were based on data which over-sampled low volatility and under-sampled high. The upshot was that the crisis came as a shock. David Viniar, Goldman’s chief financial officer, famously said: "We were seeing things that were 25-standard deviation moves, several days in a row.” But in fact, a better inference would have been that risk was mismeasured."

If the sample is not representative of the whole population (too much attention on what has happened recently) or does not have sufficient cases of extremes that are most important in risk measurement, this will provide a feeling of confidence and knowledge that is not warranted.

Tougher regulation hits investment banking power houses

Tougher regulation hits investment banking power houses - FT.com: With new regulations, the costs of investment banking (relative price of funds and the necessary capital) is rising.

"But the German group’s co-chief executives are also gearing themselves up to take an axe to their vast investment bank, according to people familiar with the situation. This will be seen as a U-turn for the duo, who have said they want to be the last big European Investment Bank standing as rivals rein in their global ambitions."

There are two ways to look at this:  from the point of view of a competitive market, some supply has to drop out of the market to ensure that the price is sufficiently high to cover these new costs.  The other way to look at that is from an oligopolistic point of view. The weaker, more expensive firms leave.  They each point in the same direction: fewer, larger more monopolistic investment banks.

The UK experience here.

ICE chief Jeff Sprecher warns London risks losing derivatives lead - FT.com

ICE chief Jeff Sprecher warns London risks losing derivatives lead - FT.com: "The US and Europe have similar rules on derivatives, but Mifid II will add an extra layer of European regulation in 2017. Clients would vote with their feet, he predicted. “It’s amazing how sensitive the market is to these changes in collateral. Europe immediately becomes non-competitive,” Mr Sprecher said."



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The rise of private equity

Why private equity has venture capital envy - FT.com:

"Returns are coming down, fees are coming down and the landscape is becoming more competitive. In 2005, the industry had $1.2tn in funds under management, in the hands of about 3,355 firms.  By last year, the figure had swelled to $3.8tn in the hands of 5,868 firms, of which a remarkable 2,252 are currently in fundraising mode, according to data from Carlyle co-founder David Rubenstein."

The starting point for a more significant overview of private equity, venture capital and alternative funding.

floats - Changing the font size in a table - TeX - LaTeX Stack Exchange

Changing the font size in a table - TeX - LaTeX Stack Exchange: "What's the recommend way of changing the font size in a particular table? Is there a better way than enclosing all values with, for example, the \tiny function."



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Mitteleuropa’s financial sector - FT.com

FT.com looks at the risk to a financial model build on government bond ownership when the returns on  those bonds move towards zero.

 "The result of the simulation is shocking. In the milder of the two stress scenarios, 12 of the 85 German insurance companies under investigation would be insolvent by 2023. In the harsher version, that number would rise to 32 companies with a total market share of 43 per cent. And this is only the life insurance industry. Many German companies have underfunded pension schemes, which may also be in trouble."

It is possible to simulate the return on the capital structure of an insurance company as the portfolio of bonds becomes more dominated by the new issues.  This can highlight the importance of maturity matching, interest rate risk, reinvestment risk and duration.

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Financial friction

There is a lot of discussion of macroeconomic models that include financial frictions.  These attempt to add something that resembles the financial crisis to the standard DSGE model.



There is a discussion on Robert's Stochastic Thoughts that attempts to link Keynes' Chapter 12 to the models of the consumption function.  There is plenty of scope here to mix theory and empirical evidence on the performance of savings.



I will add more here as I find it.