How NOT to Wipe Out with Momentum

How NOT to Wipe Out with Momentum:

"The crashes periodically experienced in a momentum strategy can be significant, as Figure 2 shows. The relentless upward climb of prices depicted in Figure 1 disguises (thanks to the log-scale of the chart) the sudden and abrupt drawdowns that a momentum investor must live with. These drawdowns usually occur following periods of heightened volatility, typically a function of a crisis event. Since 1927, drawdowns have generally been under 20%, but the granddaddy of all drawdowns was the 74% plunge in prices in the aftermath of the Great Depression. In the last 15 years, the U.S. equity market has been visited with two major negative momentum events: the first, a 31% drawdown after the tech bubble burst in 2000, and the second, a 57% drawdown, in the wake of the 2008 global financial crisis. "

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Hayek, The Use of Knowledge in Society | Library of Economics and Liberty

Hayek, The Use of Knowledge in Society:



The dispersion of knowledge and the use of the market.

"It is a curious fact that this sort of knowledge should today be generally regarded with a kind of contempt and that anyone who by such knowledge gains an advantage over somebody better equipped with theoretical or technical knowledge is thought to have acted almost disreputably. To gain an advantage from better knowledge of facilities of communication or transport is sometimes regarded as almost dishonest, although it is quite as important that society make use of the best opportunities in this respect as in using the latest scientific discoveries."

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The 'Flash Boys' Exchange Is Growing Up - Bloomberg View

The 'Flash Boys' Exchange Is Growing Up: HFT and market delays.

"On the other hand it does feel a little weird to protect quotes that you can't instantly trade against. If a market delayed orders by 10 minutes, instead of 350 microseconds, it would be sort of unfair to force investors to trade there rather than take an apparently inferior but immediately available price elsewhere. And this is something that the SEC has actually thought about. The order protection rule is Rule 611 of Regulation NMS, which requires a trading center "to prevent trade-throughs on that trading center of protected quotations." Those terms are defined in Rule 600; the meaning for our purpose is that an exchange can't execute a trade at a price lower than the best bid (or higher than the best offer) of any displayed "automated quotation" on another exchange. An "automated quotation" is one displayed on an exchange that "immediately and automatically" responds to incoming orders. And the SEC, in adopting Regulation NMS, had this to say about that requirement:"

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Information Transfer Economics: The emergent representative agent

Information Transfer Economics: The emergent representative agent.

 "This maximum entropy view reproduces the basics of the utility maximization model without the utility. In fact, utility can be seen as emergent [2]. And since utility, a real number, can be used to describe the solutions (equilibria) we see in the maximum entropy view we see that transitivity (or GARP, both equivalent to real number utility) is an emergent property of the emergent representative agent. This is important: transitivity is explicitly not true of the individual agents -- they have random consumption baskets that they have revealed they prefer! Their preferences are not transitive -- they aren't even stable! Agent 9000 prefers A to B one day and B to A another."

The representative agent is not real but a composite of all the diverse individuals in the economy and therefore the behaviour of the representative agent is emergent.

On-line lenders

FT looks at on-line lenders and the tendency to seek institutional funds and to make money only from the intermediation. 

Take Lending Club, for instance. In the second quarter, it had revenues of $96m, of which $86m came from transaction fees. Strip those out and you would have almost nothing to pay the company’s $100m in expenses. Were it to slow or stop lending, the losses would quickly pile up.

Though this is worrying for Lending Club and the investors, it is not such a systematic issue as it does not leave bad loans and a weakened financial institution.  It suggests that an adjustment would be clean and swift. 

European banks: loss recognition — FT.com

European banks: loss recognition — FT.com:  Lex looks at the new accounting provision for loans.

 "Bad loans are made in good times. And the International Accounting Standards Board wants banks’ expected credit losses to be recognised far sooner than they were in the crisis. Today’s practice is to make an initial provision when a loan payment is missed. IFRS 9, which takes effect in 2018, will force banks to make one when a loan is first granted, and top it up if risks mount. Standardised reporting should improve comparisons between banks, the thinking goes."

The aim seems to be to make provision in the good times;  the more loans made, the higher the provision. This aims to reduce the amount of cyclicality in bank earnings.