Discussion of economic research methods

Equitable Growth in Conversation: An interview with David Card and Alan Krueger - Equitable Growth: "avid Card: There are several origin stories that meet sometime in the late ’80s, I would say, in Princeton. One part of the origin story would be Bob LaLonde’s paper on evaluating the evaluation methodologies. So, in the 1970s, if you were taking a class in labor economics, you would spend a huge amount of time going through the modeling section and the econometric method. And ordinarily, you wouldn’t even talk about the tables. No one would even really think of that as the important part of the paper. The important part of the paper was laying out exactly what the method was.

But there was an underlying current of how believable are these estimates, what exactly are we missing. And some of that came to the fore in LaLonde’s paper."



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How Argentina Settled a Billion-Dollar Debt Dispute With Hedge Funds - The New York Times

How Argentina Settled a Billion-Dollar Debt Dispute With Hedge Funds - The New York Times: "In a hotel conference room, a top Argentine politician drank coffee with two hedge fund executives — a meeting that was nothing short of remarkable after more than a decade of bitter legal skirmishes between Argentina and a group of disgruntled debt holders who at one point seized an Argentine Navy ship. The previous Buenos Aires government reviled the hedge funds as “vultures.”"



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Technology: Breaking the law — FT.com

Machines beats the lawyers. FT.com looks at the scope for uberisation of the law:

"Over a decade ago, a group of US academics set up a contest: humans against the machine. Each side would attempt to predict the decisions of the US Supreme Court in the 2002 term. A group of experts used their knowledge of the law and of the justices’ behaviour to forecast the outcomes. The researchers fed data from 628 cases into their computer model. The results were startling. The experts’ correctly predicted 59.1 per cent of the court’s decisions, but the model got 75 per cent of them right."

The welfare state is a piggy bank for life — FT.com

The welfare state is a piggy bank for life — FT.com: "Third, in the course of adult life, only 7 per cent of individuals receive more in benefits than they pay in taxes, even though 36 per cent of people receive more in benefits than they pay in taxes in any given year."



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Leave the bubble before it bursts

In “Brazil in Drag”: Hyman Minsky on Donald Trump, J.W. Mason says,



 "The trick to making money in an asset bubble is to cash out before it pops. Doing this by selling at the peak is hard; you have to time it just right. It’s easier and much more reliable to cash out the capital gains as they accrue; that just requires some way of moving them to a different legal entity. The precedent for Trump, in this reading, would be the utility holding companies that played such a big part in the stock market boom of the 1920s and were such a big target for regulation in the 1930s. Another parallel would be today’s private equity funds. To the extent that the funds cash out via so-called “dividend recapitalization” (special dividends paid by the acquired company to the PE fund) rather than eventual resale, an acquired company that doesn’t end in bankruptcy is money left on the table. It’s interesting, in this context, to think about Romney and Trump as successive Republican nominees: They may embody different cultural stereotypes (prissy Mormon patriarch vs womanizing New York vulgarian) but fundamentally they are in the same business of financial value extraction.



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Why Are Big Banks Offering Less Liquidity To Bond Markets?

Forbes asks Why Big Banks Offering Less Liquidity To Bond Markets? and finds that this is the result of the need to put aside the same capital for repo as for another other assets.

 "The “rent” for the balance sheet space associated with a given trade is the cost to bank shareholders when bringing the trade onto the bank’s balance sheet, above and beyond the mark-to-market profit on the trade. The main source of this cost is “debt overhang.” When a bank finances the purchase of an asset, it effectively transfers some of the value of the asset to its legacy creditors, who now have more backing for their debt claims. Similarly, when a bank issues equity in order to meet a higher regulatory capital requirement for a new position, thus making its balance sheet safer, creditors benefit from a transfer of wealth through the increased safety of their claim. For a trade to be viable, its mark-to-market profit must exceed the associated wealth transfer to creditors. Debt overhang is smaller for more highly capitalized banks, giving them an important advantage in competing for trades."

The profit required for the capital employed makes market less attractive for banks and increased the cost of funds (even when colleralised).





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Andrew Gelman: The problems with p-values are not just with p-values

The problems with p-values are not just with p-values:



Andrew Gelman says:

"Ultimately the problem is not with p-values but with null-hypothesis significance testing, that parody of falsificationism in which straw-man null hypothesis A is rejected and this is taken as evidence in favor of preferred alternative B (see Gelman, 2014). Whenever this sort of reasoning is being done, the problems discussed above will arise. Confidence intervals, credible intervals, Bayes factors, cross-validation: you name the method, it can and will be twisted, even if inadvertently, to create the appearance of strong evidence where none exists.

What, then, can and should be done? I agree with the ASA statement’s final paragraph, which emphasizes the importance of design, understanding, and context—and I would also add measurement to that list."

He concludes that there are two issues:  taking dataset and the statistical method as given, rather than these being part of the process of analyis; seeing statistics as a process that translates random nature into certainty.

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What should be included in "good practices" for Tikz 101

Beamer - What should be included in "good practices" for Tikz 101:  Stefan Kottwitz

"Use styles. Whenever you have color, shape, fonts, alignment, define a TikZ style for it and use it. Don't apply such formatting details to nodes or edges, apply the style. A single point for consistent customizing.

Inherit styles. Start with a base node style (font family, base color), define styles which use base styles and add size or color or alignment - no repetitions, single points for global changes.

Use macros. Have consistent TikZ commands or command sequences, which can be reused and changed.

Use constants. For every value needed, such as distances, declare a constant via \def or a TikZ length command, so you can use it repeatedly and adjust it at a single source code position to customize a whole drawing or a lot of drawings.

Use relative positions. So you can change a reference coordinate, and all other positions will be automatically adjusted.

Let TikZ calculate for you. Once certain points such as corners are defined, use TikZ syntax to define a relative positions such as middle points and intersection points. Let TikZ do the geometry for you. If you change the reference points or image size, all will automatically adjust.

Name everything. Especially in non-trivial drawings, edges between named coordinates are much clearer to read than using coordinate numbers everywhere.

Use scopes. Don't repeat things - if you cannot apply a bunch of properties via styles, use a scope to apply settings to a whole area of a drawing. Also here, it's easy to change that part at a single position.




Use loops. If you need to repeat things, benefit from the power of TikZ \foreach loops to reduce the amount of repeated code.



Don't nest TikZ pictures. There is always another way to do it."



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The death and rebirth of the stock exchange — FT.com

The death and rebirth of the stock exchange — FT.com: "The clue as to why the London Stock Exchange has risen sevenfold in value in the past seven years is not contained in its name. The best days of being a stock exchange are in the past, when they were near-monopolies owned by market-making members and could easily make money. That was long ago."



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Hedge funds seek refuge

Hedge funds seek refuge from unfair European regulations — FT.com: "Why did Brussels indulge in such a great act of displacement activity? One hedge consultant received the explanation from a Belgian MEP. “It is simple,” he said. “If you are in a bar and a fight breaks out, you do not hit the person who started the fight but the person you have always wanted to hit.” This would be funny if it was not serious. Nobody feels sorry for hedge funds but the reason the EU’s institutions left banks alone for so long is more worrisome."



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Switching from C++ to R - limitations/applications - Quantitative Finance Stack Exchange

Development - Switching from C++ to R - limitations/applications - Quantitative Finance Stack Exchange: "I've only recently begun exploring and learning R (especially since Dirk recommended RStudio and a lot of people in here speak highly of R). I'm rather C(++) oriented, so it got me thinking - what are the limitations of R, in particular in terms of performance?"



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Proof that no trading system always wins

mathematics - Proof that no trading system always wins - Quantitative Finance Stack Exchange: "This doesn't really suffice as an existence proof, but you can start with a series of mathematical results collectively known as no free lunch theorems. The linked paper proves the average performance of any optimization algorithm over arbitrary problem domains is independent of the algorithm. That is, no single algorithm can ever be better than others on any problem, meaning optimal performance over any single problem domain requires some level of domain knowledge, and knowledge has to be learned. Learning requires inference."



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yield curve - Is trading mean reversion of small principal components of prices profitable? - Quantitative Finance Stack Exchange

yield curve - Is trading mean reversion of small principal components of prices profitable? - Quantitative Finance Stack Exchange: "PCA is most commonly used for structuring so-called "butterfly trades." In this, you're neutralizing the first two PCs (level and slope) and trade on the third PC (curvature). For example, after running a PCA on 2y, 5y, and 10y yields, you may conclude that 5y yields are too high relative to 2- and 10-year yields (i.e., 5-year bonds are "cheap"). In this case, you'd buy 5-year bonds, while simultaneously shorting 2- and 10-year bonds. PCA comes into play, because for each unit of 5-year bonds, you have to choose appropriate units of 2- and 10-year bonds ("risk weights") so that the the first two principal components are neutralized, allowing you to trade any abnormalities in the third principle component"



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New ways of diversifying

The FT uses a Healthy eating analogy to discuss the new ways of trying to diversify risk. This involves the use of factor rather than diversification through assets and countries:

1. Volatility (traditional volatility)
2. Momentum (buying of winners)
3. Quality (strong balance sheet firms)
4. Value (cheap investments)
5. Yield (high income)
6. Growth (high earnings growth)
7. Size (Small companies do better)

There are also bond factors

1. Duration (sensitivity to  rate changes)
2. Curve (maturity and return)
3. Volatility (sensitivity to foreign exchange movements)
4. Spread (credit risk)

These  move beyond value and growth or carry and momentum. Though all asset classes may fall in crisis, the value drivers tend to find more diverse performance. 

Bear territory: Avoid urge to flee — FT.com

Bear territory: Avoid urge to flee.  Some interesting research from the FT.com, but not, as they say because it shines light on technical analysis, which it does not, but because it illuminates the risk of overs-shooting:

"According to those fonts of wisdom the technical analysts, the FTSE 100 and Nikkei 225 indices both on Wednesday slipped into bear market territory, as defined by a 20 per cent fall from an earlier peak. To normal ears, this sounds like a sell signal."

This is consistent with the herding that Olivier Blanchard has been speaking about earlier in the week.

Passive investors are good corporate stewards

Passive investors are good corporate stewards — FT.com:  Passive investment not so passive.

 "Worries that passive management is inhibiting price discovery will continue. But this research is a very promising sign that when investors entrust their money to passive fund managers, their interests are indeed being represented aggressively with company managements."

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Poor white deaths

Following on from the Case and Deaton identification of increased death rates for middle age non-Hispanic whites, Andrew Gelman and Jonathan Auerbach identify the increase in the average age of the cohort as being the main cause of this trend (rather than the more satisfying work-life experience of the group as was commonly inferred from the data).  Even more intriguing, adjusting for gender and state, it appears that souther women are the dying at a more rapid pace that in the past.  The clear pictures of this change are here. :

Blanchard: oil and China

Oliver Blanchard takes a look at the effect of China and oil prices on the stock market:  While the fall in oil prices has traditionally been a positive for the oil consumers like the US, the US has a much larger role in the new environment.  The effect of bad loans to fracking companies combines with what Paul Krugman has suggested are the non-linear effects of oil price declines.  

"Take the oil price explanation. It is even more puzzling. Traditionally, it was taken for granted that a decrease in the price of oil was good news for oil importing countries such as the United States. Consumers, with more money to spend, would increase consumption, and increase output. Energy using firms, with lower cost of production, would increase investment. We learned in the last year that, in the short run, the adverse effect on investment on energy producing firms could come quickly and temporarily slow down the effect, but this surely does not undo the general conclusion. Yet the headlines are now about low oil prices leading to low stock prices. I can think of two potential explanations, neither of them convincing."

The momentum behind selling from China have been is also an issue for Blanchard.



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Japan: Deflated generation - FT.com

Japan: Deflated generation - FT.com: "This year’s celebrants, born in 1995 and 1996, are the first to have spent their entire journey to adulthood in an economy of mostly falling consumer prices. Their lives have been so infused by the phenomenon that several say deflation, one of the main obstacles to growth through the 2000s, has evolved into a source of low-level apprehension that limits ambition."



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John Maynard Keynes: Great Economist, Terrible Currency Trader - The New York Times

John Maynard Keynes: Great Economist, Terrible Currency Trader - The New York Times:

"“Keynes’s experience shows how difficult currency speculation is,” Mr. Chambers said. “He was trading his own money and he understood what he was doing. He was able to absorb losses. Some hedge funds are trying to do this stuff and live hand-to-mouth on a quarter-to-quarter basis, and that’s really difficult to do.  Keynes was also an active investor in the stock market, and in the 1920s tried to time stock picks. But his returns were low, and he took a big hit in the market crash of 1929."

Some argue that the long-term equity investment was driven by inside-information that he received from his contacts in government and business. That may be unfair.