Banks Will Keep Doing FX Stuff That Got Them in Trouble - Bloomberg View

Banks Will Keep Doing FX Stuff That Got Them in Trouble - Bloomberg View: "I mentioned yesterday that, as a condition of their probation, all the banks that pled guilty to a conspiracy to rig foreign-exchange rates have to send sad little "Disclosure Notices" to their clients. Here, for instance, is JPMorgan's disclosure notice, which on a cursory glance seems to be identical to the one attached to its plea agreement. It's an interesting little document. There's an introductory paragraph, and then a paragraph of contrite moaning that "conduct by certain individuals has fallen short of the Firm's expectations," specifically by being a massive antitrust conspiracy."



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Fund management performance

Active fund managers really can pick stocks - FT.com: "Unfortunately, the average investor does not see the fruits of managers’ stockpicking labours. Assuming a recent estimate from Jack Bogle, the founder of Vanguard, the world’s second-largest asset manager, is correct, the average active equity fund has all-in costs (including fees, transaction costs and a drag from cash holdings) of 2.27 per cent a year, swamping the raw "



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3i: three eyes - FT.com

3i: three eyes - FT.com: "3i counters that investors in its debt and infrastructure funds have different return targets to the group itself. Fair enough. But there remains the question of what sort of company 3i is. Does PE (investing 3i’s money) belong with asset management (investing other people’s money)?"



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Perfect Insider Traders Got Caught - Bloomberg View

Perfect Insider Traders Got Caught - Bloomberg View: "Still, Trader1 really is the greatest of all insider traders. He spread out his trades to avoid attention, he communicated in code, the code was golf code, and when he got caught he cooperated to minimize his sentence while also trying to undermine the prosecutors' legal theory on an FBI recording. He's learned all of the lessons I have to teach about insider trading, except the big one: Don't insider trade! You'll always get caught, and it's never worth it."



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Oil and consumer spending

James Hamilton has a report on the effect of oil prices on consumer spending.  Using a VAR to estimate the structural relationship between consumer spending and oil prices the effect of the 2006-07 oil prices increase and the recent decrease is assessed against the actual performance. Half of the 2007-09 decline in consumer spending is attributed to oil price increase.  The recent rise in US consumer spending appears to be a little less than would be expected, suggesting, in Hamilton's opinion, that people are not confident that lower prices will be sustained.



I am still looking to test the relative influence of oil prices and financial crisis on economic performance.  I suggest that a panel of countries GDP (relative to trend) and estimates of the size of the financial sector as well as the relative importance of oil in the economy as a test.  The latter is the most difficult to assess and model.

Finance and economics: What's wrong with finance | The Economist

Finance and economics: What's wrong with finance | The Economist:



"Mr Lo argues that this approach may sound arbitrary but such behaviour may be is rational from an evolutionary perspective. Take an animal that has a choice of nesting in a valley or a plateau; the valley offers shade from the sun (good for raising offspring) but vulnerability to floods (killing all offspring). The plateau offers protection from floods (good for offspring) but no shade (killing all offspring). The probability of sunshine is 75%. So the “rational” decision from the individual’s perspective would be to stay in the valley. But if a flood occurs, the entire species would be wiped out. It makes more sense for the species if individuals probability match. “When reproductive risk is systematic, natural selection favours randomising behaviour to avoid extinction” he writes.



Mr Lo’s view is that markets are normally efficient but not always and everywhere efficient. He dubs this “adaptive market theory”—and sees it as a consequence of human behaviour, particularly herd instinct. Watching other people suffer triggers an empathetic reaction. When other investors are panicking in a period of market turmoil, we tend to panic too.



 A similar approach, dubbed the fractal market hypothesis, is advanced by Dhaval Joshi of BCA Research. This acknowledges that investors with different time horizons interpret the same information differently. “The momentum-based high frequency trader might interpret a sharp one-day sell-off as a sell signal” he says, “but the value-based pension fund might interpret the same information as a buying opportunity. This disagreement will create liquidity without requiring a big price adjustment. Thereby it also fosters market stability.”"



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Finance and economics: What's wrong with finance | The Economist

Finance and economics: What's wrong with finance | The Economist:



"Mr Lo argues that this approach may sound arbitrary but such behaviour may be is rational from an evolutionary perspective. Take an animal that has a choice of nesting in a valley or a plateau; the valley offers shade from the sun (good for raising offspring) but vulnerability to floods (killing all offspring). The plateau offers protection from floods (good for offspring) but no shade (killing all offspring). The probability of sunshine is 75%. So the “rational” decision from the individual’s perspective would be to stay in the valley. But if a flood occurs, the entire species would be wiped out. It makes more sense for the species if individuals probability match. “When reproductive risk is systematic, natural selection favours randomising behaviour to avoid extinction” he writes.



Mr Lo’s view is that markets are normally efficient but not always and everywhere efficient. He dubs this “adaptive market theory”—and sees it as a consequence of human behaviour, particularly herd instinct. Watching other people suffer triggers an empathetic reaction. When other investors are panicking in a period of market turmoil, we tend to panic too.



 A similar approach, dubbed the fractal market hypothesis, is advanced by Dhaval Joshi of BCA Research. This acknowledges that investors with different time horizons interpret the same information differently. “The momentum-based high frequency trader might interpret a sharp one-day sell-off as a sell signal” he says, “but the value-based pension fund might interpret the same information as a buying opportunity. This disagreement will create liquidity without requiring a big price adjustment. Thereby it also fosters market stability.”"



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The Lewis Turning Point

China migration: At the turning point - FT.com:

 "The end of surplus rural labour — a significant milestone that economists call the Lewis Turning Point — carries profound implications for China’s economy. As the flow of low-paid migrants into Chinese factories slows, workers demand higher pay, a phenomenon that has been evident for several years. This either drives low-end manufacturers out of business or forces them to raise prices, actions that could slow the export growth that has helped drive the country’s economy for decades."

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Bond market liquidity

Healthy liquidity diet needed to survive future financial shocks:  'Healthy' means ample liquidity.  That requires speculation.

 "The inventories of US corporate bonds held by broker-dealer banks have plunged from $300bn in 2008 to $50bn, according to research from CQS."

HFT is not healthy liquidity.  All liquidity is volatile and susceptible to temporary withdrawal in the face of uncertainty.  However, HFT is at the extreme of this: machines are turned off, orders are temporary.  Investment bank liquidity tends to be more permanent and stable.

NBER data

INTERNATIONAL FINANCE AND MACROECONOMICS CATALOGUE OF DATA SOURCES: "All data sources are provided as is. See the cited paper or reference for details. Please cite the appropriate paper when using these data. There is no informational support, nor support of any other type, for the use of these data by the NBER nor by the researchers who are making the data available."



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Why Is Spoofing Bad? - Bloomberg View

Why Is Spoofing Bad? - Bloomberg View:  An overview of market microstructure.

"Who cares if the price is right? Well, you might want the price to be right if you are an individual investor buying stock in your E*Trade account on your lunch break. You're buying at 12:45 not because you think the stock is unusually undervalued at 12:45, but because it's your lunch break. It would be reassuring if the market price was as accurate as possible, so that you'd know you've got a good chance of getting a fair price. Index funds, which are similarly value-agnostic, might have similar preferences. Accurate prices probably also make spreads smaller, so trading costs for both big and small investors are lower."

The battle between short-term speculators and final money investors.

Crossing the river by feeling each stone

Chris Blattman (HT Brad DeLong) has an excellent overview of the trial and error approach:

"I’d make a different point: the way I’ve learned how things operate is to work with a government or organization to try out a policy and succeed or fail. This kind of trial and error seems crucial to me. Karl Popper called this the piecemeal social engineer. Deng Xiaoping called it crossing the river by feeling each stone.

"

This seems to be the way to overcome over-confidence and avoid the hubris that is associated with defending a defeated strategy.  This, of course, is the method of successful investment strategy:  try it out and be ready to change when it does not work.  Of course, ;-), you need to make sure that you do not sell at the low and buy at the top.

Tony Yates on John Taylor

Weekend Reading: Tony Yates on John Taylor (Brad DeLong's Grasping Reality...): There is a discussion of the use and abuse of the Taylor rule.  One of the weaknesses of the rule is that it does not include the financial sector.

 "Modifications of the rule such that central bank rates respond to spreads can be shown to deliver good results in prototype financial-inclusive DSGE models.  But these models are just a beginning, and certainly not the last word, on how to describe the financial sector. "

This suggests one of the ways that the rule could be modified.  Clearly, this may take the rule from being a description to being a prescription.  What other factor could be included in a model for each of these uses?   Where are the examples of these financial modifications?

Moneyness: Liquidity as static

Moneyness: Liquidity as static:  How market-priced indicators can provide false signals due to the liquidity premium.

"Government debt instruments like TIPS are useful as media of exchange, specifically as collateral, goes Williamson's argument. Those who own these instruments therefore enjoy a stream of liquidity services that gets embodied in their price as a liquidity premium. Rising TIPS prices (and falling yields) could therefore be entirely unrelated to returns on capital and wholly a function of widening liquidity premia. Bernanke and Summers can't make broad assumptions about returns on capital on the basis of market-driven yields without knowing something about these invisible premia. (Assiduous readers may remember that I've used a version of the liquidity premium argument to try to explain the three decade long bond bull market, as well as the odd twin bull markets in bond and equity prices.)
"

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Sampling distribution of the mean

Echoing these recommendations, articles describe how to simulate the SDM using a wide variety
of physical objects, a graphing calculator, or a computer. The demonstrations tend to use skewed
or bimodal populations, so that students are impressed with the counter-intuitive result.
Invariably, the authors anticipate that “the student will observe that the center of the distribution
remains about the same and the distribution becomes narrower. That is, as sample size gets larger
the approximations to the mean do not get better, but the variability about the mean decreases.”
(Koehler 2006, pp. 264-265).

Factor models

A step-by-step explanation on how to build a factor model - Quantitative Finance Stack Exchange:

 "Economically, the use of factor models can be either motivated using the ICAPM or the APT. Although there are some theoretical differences between the model, for empirical and practical work these differences are irrelevant. In the end, both models stipulate that returns and expected returns are linear functions of the factors:"

This is an overview of some of the issues involved in building a factor model.

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.

Asset Pricing [9a : Regime Switching] | Alpha Hive ::

Asset Pricing [9a : Regime Switching] | Alpha Hive provides an overview of the HMM.  There are reproductions of a paper by Kirtzman et al in the Financial Analysts journal.  That is gated.

"One point of departure between my and QP’s post relates to the library/package used to estimate the hidden markov model. While QP used the RHmm package, I can only use the depmixS4 package (RHmm seems to be incompatible with newer versions of R…at least for me). As far as I can tell,the depmixS4 package does not support forecasting which means that I will probably not be able to take a gander at the out-of-sample issues alluded to above"

The starting point for this is the discussion on stack exchange.

Why does the volatility smile flatten as maturities increase? - Quantitative Finance Stack Exchange

Why does the volatility smile flatten as maturities increase? - Quantitative Finance Stack Exchange: "First, I can't find a purely "financial" explanation for this.

Also the only mathematical explanation I've found so far was using the large deviations theory, which is quite complex.

Is there a rather simple mathematical explanation ?

Thanks !"



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Mr. Spearman or how to explore changes in trends

Mr. Spearman or how to explore changes in trends discusses the evolution of baby names, identifying break points and the use of the spearman coefficient:

"So what I need is a way of measuring how similar two ranked lists are… And good news! this metric exists and is provided by the Spearman’s Correlation Coefficient for Ranks (SCCR) -BTW, the Kendall correlation coefficient does the job as well-.
For each year, I computed the SCCR value with all other years split by gender. I created a scattered plot where the size and the transparency of each point is determined by the SCCR value. Intuitively if we have a look at the diagonal, bigger opaque points together form a cluster where the trend persists and places with almost no color in this diagonal represent trend interruption."

There should be a way to apply this to the MPC voting.  The order could be the dove to hawk and the change in personnel would be the equivalent to new members of the committee.

How a lone hacker shredded the myth of crowdsourcing — Backchannel — Medium

How a lone hacker shredded the myth of crowdsourcing — Backchannel — Medium: "Luckily for platforms like Wikipedia or Amazon’s Mechanical Turk, the prospect for longer-term crowdsourcing projects are not so bleak. Game theorists have found that systems where individuals can build up a good reputation, are (probably) not as prone to devastating attacks from within."



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Virtual firms

David Morris – Aeon speaks about virtual firms:

"Imagine, for instance, a bike-rental system administered by a DAC hosted across hundreds or thousands of different computers in its home city. The DAC would handle the day-to-day management of bikes and payments, following parameters laid down by a group of founders. Those hosting the management programme would be paid in the system’s own cryptocurrency – let’s call it BikeCoin. That currency could be used to rent bikes – in fact, it would be required to, and would derive its value on exchanges such as BitShares from the demand for local bike rentals."

The firms manage themselves and optimise their performance.  I need to understand more about biitcoin to understand this. This is the management in bunny slippers.

“Microfoundations” ain’t so microfounded

Bull Market and microfoundations:  fundamental right but does he miss the fact that these are supposed to be simplifying models?  The multiple layers of agency may be impossible to model.  Then you are left with a story.

 "And that tractable composite of all the principal and agent problems in the whole economy — what’s it going to look like? Well, it’s going to look like an “animal spirits”, from a classic Keynesian model, or one of Roger Farmer’s. We know that all the different levels of game theory interactions do sort of work out in the real economy, because investment behaviour does take place. But we also know that they’re subject to fairly wide swings and overreactions."

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The eurozone: A strained bond - FT.com

The eurozone: A strained bond - FT.com: The opposition to ECB policy in Germany.

"The German media are likely to be hostile. Commentators tend to criticise the ECB, sometimes virulently, with the financial weekly WirtschaftsWoche condemning low interest rates as a “diktat from a new Banca d’Italia, based in Frankfurt” — a reference to Mr Draghi’s Italian citizenship.
An ECB charm offensive has seen the usually media-shy president give interviews to German media. But PR will not win the day just yet. Marcel Fratzscher, head of the DIW think-tank and a former ECB official, says: “ A big majority of economists and journalists won’t like [QE]. Very few will support it.”"

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Background on technical analysis and technical trading

Scan for chart patterns software - Quantitative Finance Stack Exchange:

"Is there any software out there that currently would allow you to scan historical charts and look for a specific pattern and then show you that pattern for a list of stocks. Google finance and yahoo finance have all the charting data needed to visually detect certain patterns, but I was wondering if there was software out that I could define a particular pattern and then it would show me a bunch of real world examples of that pattern by scanning a dump of symbols. Does any such software exist or something to do something similar to this? I actually have a custom pattern I want to scan (that or I do not yet know the name of it) Not really sure how to word this but I am thinking of having it scan the recent behavior of a stock and then to scan a list of symbols for that pattern but historically back in time, not the present."

There are a lot of links to web sites, blogs and papers that will seek to find some quantitative trading techniques.

Heat Death: Venture Capital in the 1980s

Heat Death: Venture Capital in the 1980s: The importance of credit.



"The history repeats itself crowd thinks that that there must be a bubble sooner or later. “Now?” they constantly ask, “Is it a bubble now?” as if history has to repeat whatever was most memorable about the last time. History may repeat itself, but there’s an awful lot of history that this particular venture capital cycle could repeat. Below is a short history of venture capital in the 1980s, my interpretation and comparison to the ’90s and today, and some thoughts about what that means. It’s long. If you’re attention-deprived, skip to ‘1980s v. 1990s’, about four-fifths of the way down."



Inflation is always and everywhere a monetary phenomenon.  Not  just in the price of goods and services but also in assets.  This also affects the performance of financial services companies.  With more credits, the companies have an easier time.   Venture capital and private equity are a big beneficiary of that.

Uncertainty and disagreement

Liberty Street Economics (US Fed research blog) examines the difference between uncertainty and disagreement.

"Uncertainty is of considerable interest for understanding the behavior of individuals as well as the movements in key macroeconomic and financial variables. Despite its importance, direct measures of uncertainty aren’t widely available. Because of this data limitation, a common practice is to use survey-based measures of forecast dispersion—reflecting disagreement among respondents—to proxy for uncertainty. Is this a reliable practice? Here, we review the distinction between disagreement and uncertainty as concepts, and show that this conceptual distinction carries over to their empirical counterparts, suggesting that disagreement is not generally a good proxy for uncertainty. "

Financial Innovation and Risk Management

An overview of Shiller and his ideas about the way that financial innovation can be extended into fields that will help to manage and control risk.  Financial Innovation and Risk Management — Money, Banking and Financial Markets:

"Another example regards mechanisms to manage exposure to systematic income fluctuations at the aggregate level: Kamstra and Shiller have proposed that governments issue “trills” – a perpetual security with an annual coupon that pays one-trillionth of nominal GDP. For example, in the United States, that coupon would have been set at $17.60 as of the third quarter of 2014. In theory, when income growth is strong, government can afford higher coupon payments, while lower coupons would cushion the fiscal balance when the economy falters. At the same time, owning a trill would allow pension managers both to protect their clients against inflation and to benefit from the economy’s long-term growth – including the gains in both wages and profits. And, if many governments were to issue trills – with coupons related to their national GDP – savers could easily form a globally diversified investment portfolio, providing a cheap hedge against the idiosyncratic income risks of their domestic economy. So far, however, no government has issued a trill."

Useful for the ways that it can focus the discussion of the role of the financial system.



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Statisticians in World War II: They also served | The Economist

Statisticians in World War II: They also served | The Economist: "“Peace finally returned, and the statistical scene in the United Kingdom had been completely transformed,” wrote Barnard and Plackett. “No other method would have produced these changes in only six years.” Dozens of clever young people had been taught a fast-changing new subject—and in many cases done original research. Even routine work was elevated by the urgency and camaraderie of the war effort—and even the fact that they were new to the field. “A lot of the work was statistically boring,” Sir David says now. “But the point is that I didn’t really know anything.”"



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Piketty’s (unintended) advice for investors | Gavyn Davies

Piketty’s (unintended) advice for investors | Gavyn Davies: "Finally, though, let us circle back to the real rate of return on capital. Can it really stay indefinitely about 4 per cent, as Prof Piketty suggests, at a time when central banks are setting interest rates at zero, and when the growth rate, g, is slowing down? Boiled right down, he himself says that this is his central claim. But in modern textbook economic models, while the rate of return on capital can remain higher than g in the long term, it is likely to decline when g declines."



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Make policy for real, not ideal, humans - FT.com

Make policy for real, not ideal, humans - FT.com: "
ut of the crooked timber of humanity, no straight thing was ever made. This famous remark of the German philosopher, Immanuel Kant, is particularly relevant to economists. “Homo economicus” is far-sighted, rational and self-interested. Real human beings are none of these things. We are bundles of emotions, not calculating machines. This matters."



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My reading of the FT on China’s “turning away from the dollar” | Michael Pettis' CHINA FINANCIAL MARKETS

Michael Pettis' CHINA FINANCIAL MARKETS:  Michael, assesses the gloom and doom about changes in Chinese international capital flows.

"The authors provide the views of several analysts concerning the impact on the US bond markets and US economy more generally of reduced PBoC purchases of US government bonds, and these views range from neutral to very negative. I would argue however that in fact these views fail to understand the systemic nature of the balance of payments, in which any country’s internal imbalances must necessarily be consistent with its external imbalances. They assume implicitly assume that PBoC purchases only affect the demand for US government bonds, whereas in fact the flow of capital from one country to another must automatically affect both demand and supply. In fact the impact of reduced PBoC purchases of US government bonds is likely to be net positive, and while this view is probably counterintuitive, and certainly controversial, in another part of the article the authors cite a Chinese official whose statement, had they explored the implications fully, would have explained why."

Chinese current account surplus means a capital outflow.  As Michael indicates, the evidence from other major periods of capital flows:  US in the 1920s and 1950s, OPEC in 1970s, Japan in the 1980s, to which could be added UK in 1880s; suggests that it is not all beneficial to the exporter of capital.  Investment is difficult, mistakes are made. There are no many suppliers of safe, liquid assets.

At last the con has been taken out of econometrics

Tim Harford — Article — At last the con has been taken out of econometrics: "In 1983, Edward Leamer published an article with contents that would become almost as celebrated as its title. “Let’s Take the Con Out of Econometrics” began with an analogy that remains useful. Imagine an agricultural researcher who tests the effectiveness of a new fertiliser by dividing land into strips and spreading the new fertiliser only on a randomly chosen selection of those strips. Because of the randomisation, any effect will presumably be thanks to the fertiliser."



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U.S. Investment in Global Bonds: As the Fed Pushes, Some EMEs Pull

U.S. Investment in Global Bonds: As the Fed Pushes, Some EMEs Pull:  An analysis of the flow into EM bond markets.

"We analyze reallocations within the international bond portfolios of US investors. The most striking empirical observation is a steady increase in US investors' allocations toward emerging market local currency bonds, unabated by the global financial crisis and accelerating in the post-crisis period. Part of the increase in EME allocations is associated with global "push" factors such as low US long-term interest rates and unconventional monetary policy as well as subdued risk aversion/expected volatility. But also evident is investor differentiation among EMEs, with the largest reallocations going to those EMEs with strong macroeconomic fundamentals such as more positive current account balances, less volatile inflation, and stronger economic growth. We also provide a descriptive analysis of global bond markets' structure and returns."

You Want a Bigger Paycheck? Convince Me. - Bloomberg View

You Want a Bigger Paycheck? Convince Me. - Bloomberg View: "This last fact -- the increase in capital’s share of the national pie -- is really the big mystery. Why has it happened? There are two basic competing theses: the rise of the robots and the great labor dump."



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Automation Makes Us Dumb - WSJ

Automation Makes Us Dumb - WSJ: The limits and limitations of automation.

"When system designers begin a project, they first consider the capabilities of computers, with an eye toward delegating as much of the work as possible to the software. The human operator is assigned whatever is left over, which usually consists of relatively passive chores such as entering data, following templates and monitoring displays."

Finding a new role for the human.

The truth about UK living standards since the crisis - FT.com

The truth about UK living standards since the crisis - FT.com:



An analysis of UK income statistics.

"Come next year’s UK election, bread and butter issues of living standards will displace Europe and immigration from the top of the public debate. The problem is that there are so many different comparisons and data sources that many contradictory claims are true. Few will be both true and fair. Here, then, is a guide to British living standards since the crisis, which avoids cherry-picking data and the cop out of saying that results are all too uncertain and complicated to conclude anything"

One additional area of interest is the contrast between the UK, the US and the Euro area.  The UK has had a fall in real wages and relatively healthy employment growth. For the US, though the economy has been stronger overall, employment and wages have been higher.  I need to look at the Euro area to complete the picture.

Document classes for La Tex

document classes - What are the available "documentclass" types and their uses? - TeX - LaTeX Stack Exchange:

Link to stackexchange discussion of documents in la tex.

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Self-opinion and forecasting

Why we are unaware that we lack the skill to tell how unskilled and unaware we are:

"Dunning and Ehrlinger knew that most college students tend to hold very high opinions of themselves when it comes to abstract reasoning. It’s part of what they call a “chronic self view.” You have an idea of who you are in your mind, and it is kind of like a character in a story, the protagonist in the tale of your life. Some aspects of that character are chronic, traits that are always there that you feel are essential and evident, beliefs about your level of skill that are consistent across all situations. For most college students, being great at abstract reasoning is one of those traits, but being great at computer programming is not."

There is an experiment here that can be conducted with economic or financial forecasting.  How well do people forecast and how accurate do they think that they will be?

Oranges and lemons — the FX scandal in perspective — Bull Market — Medium

The WM benchmark fix.  Oranges and lemons — the FX scandal in perspective — Bull Market — Medium:

"The FX settlement was announced this week, prompting a lot of editorialising about how the banks Don’t Get It, and Are Systematically Corrupt and so on. To an extent this is the default position post LIBOR, post CDO and rightly so. But I think there’s a danger in viewing everything through the prism of previous scandals. Although there was some behaviour that was clearly on the other side of the line, the regulators also made clear that lots of the practices involved were not intrinsically criminal; this was an investigation into a grey area, not a straightforward case of lying. Of course, the industry has less than zero claim to the benefit of anyone’s doubt, and people will be instantly suspicious of claims that “it’s more complicated than that”, so maybe I can explain what went on in the FX market through the medium of a series of examples, all based on someone going down to market to buy oranges."

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Trading as gambling

Management Science: INFORMS: "This paper offers evidence from three different samples consistent with investors substituting between playing the lottery and gambling in financial markets. In the United States, increases in the jackpots of the multistate lotteries Powerball and Mega Millions are associated with significant reductions in small trade participation in the stock market. California-based discount brokerage clients and German discount brokerage clients are significantly less likely to trade during weeks with larger lottery prizes in the California and German lotteries, respectively. Variation in lottery prizes affects speculative trading in more lottery-like securities such as individual stocks and options, but not trading in bonds and mutual funds. Trading that is likely associated with long-term savings motives, such as trading in retirement accounts, does not respond to lottery jackpots, either. The negative relation between trading activity and jackpots is stronger for individuals who are more likely to play the lottery."



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. . . and the Cross-Section of Expected Returns

. . . and the Cross-Section of Expected Returns: "Hundreds of papers and hundreds of factors attempt to explain the cross-section of expected returns. Given this extensive data mining, it does not make any economic or statistical sense to use the usual significance criteria for a newly discovered factor, e.g., a t-ratio greater than 2.0. However, what hurdle should be used for current research? Our paper introduces a multiple testing framework and provides a time series of historical significance cutoffs from the first empirical tests in 1967 to today. Our new method allows for correlation among the tests as well as missing data. We also project forward 20 years assuming the rate of factor production remains similar to the experience of the last few years. The estimation of our model suggests that a newly discovered factor needs to clear a much higher hurdle, with a t-ratio greater than 3.0. Echoing a recent disturbing conclusion in the medical literature, we argue that most claimed research findings in financial economics are likely false."



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The productivity of PhDs: Lazy graduate students? | The Economist

The productivity of PhDs: Lazy graduate students? | The Economist: "But the vast majority of PhD students, even at top universities, produce nowhere near that much (see chart). The number of AER-equivalent papers of the median PhD student, six years after graduation, is below 0.2 for all universities. Yes, all—even Harvard, MIT and Chicago. The 50th percentile at almost all universities has a score of 0.1. That’s equivalent to publishing one paper in a second-tier field journal over six years. "

Gordon Tullock, R.I.P.

Gordon Tullock, R.I.P. | Competitive Enterprise Institute:



 "Imagine making Nobel-worthy contributions to a discipline in which you had almost no formal training. It’s an amazing feat. Gordon Tullock is one of the few to accomplish it. We at CEI are deeply saddened to learn that he has just passed away. But what a life he led, all 92 years of it. That, we can celebrate. Born in 1922 in Rockford, Illinois, Tullock served in World War II. He spent some time in the foreign service in China and Korea, and pondered making a career of it. But his pursuit of a law degree at the University of Chicago changed his life—along with many others."



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Mergers and insider trading

Bloomberg View: discusses rules on insider trading tendering.

 "The answer, I think, is that Rule 14e-3 is not about protecting investors from informational disadvantages. It's about protecting companies from tender offers. The "warehousing" problem is not that some people might sell to Pershing Square at too low a price and then be sad. It's that Pershing Square might acquire a lot of shares and then tender them in the offer, making Allergan's management sad."

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Keynesian rebirth

Anatole Kaletsky writes about the takeaway from six years of economic troubles?.  Keynes was right. In a crisis, fiscal policy is effective and monetary policy is close to impotent.

 "Monetarism overturned the Keynesian fiscal consensus that prevailed from the 1930s to the 1970s, by introducing one simple assumption into the models that guided governments and central banks. The case for Keynesian fiscal stimulus in deep recessions was simply assumed away by asserting that interest rates could always be reduced sufficiently to stimulate private investment, discourage private savings and so restore growth. As a result, the private sector as a whole would never suffer for long from a shortfall in spending. Therefore government borrowing would never be needed to balance inadequate private demand."

However, it appears that this is not the case when there is household de-leveraging that will not be affected by the level of interest rates and, as a result of the economic slump that ensues,  firms are too cautious to invest

The Taylor Curve

The Taylor Curve Has Two Dimensions In Both Hemispheres | Economics One:

"But more seriously, the evaluation of inflation-targeting as a strategy for monetary policy in John’s paper—the main purpose of the paper—was also misleading or at least incomplete. Rather than consider the performance of both inflation stability and output stability—as virtually all monetary policy evaluation studies have done for the past 40 years—he looked only at the first—inflation stability. To paraphrase Milton “the second is at least as important as the first.” Yes we know that inflation has been low and steady in recent years. The problem is that output or employment performance has been terrible—in the US we have had the Great Recession and the Not-So-Great Recovery. That deterioration should be part of the evaluation too."

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Queuing theory

Dear Mona, Which Is The Fastest Check-Out Lane At The Grocery Store? | FiveThirtyEight:

"I couldn’t find much research on express lanes specifically, but one paper from Amsterdam found the reduction in wait times for express-lane customers didn’t offset the overall increase in wait times for everyone. Maybe life would be easier if the supermarket didn’t have an express lane — or, better yet, if it got rid of multiple lines altogether and had all customers join a single infinitely sprawling line where there were no winners and losers. That might sound nightmarish, but the math actually suggests it would be anything but."

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The cosy between investment banking and private equity

The cosy between investment banking and private equity: Epicurean Dealmaker: The Privy Counselor:

"But most importantly, having M&A and industry bankers gives integrated investment banks an excuse to deliver ideas, industry and client insight, and all-important deal flow to the biggest-paying class of clients on Wall Street: private equity firms. While it is well known that private equity firms do not like paying M&A advisors for advice—usually because, rightly or wrongly, they think they know at least as much or more as bankers do about companies, deal-doing, and opportunities—they absolutely love paying investment banks to supply and arrange leveraged loans and high yield debt to finance buyouts of target companies. And banks love this too, because it is both huge and hugely profitable business. PE firms are usually happy to hire investment banks to sell their portfolio companies or take them public upon exit, too, although they tend to favor the banks which brought them the investment in the first place, financed it, and or smothered them with loving attention and juicy new buyout opportunities in the meantime."

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M&A synergies

M&A synergies and negative synergies Epicurean Dealmaker: The Privy Counselor:

"The point, in other words, is that Blackstone divesting its advisory business has nothing to do with bucking a nonexistent trend on Wall Street to add business lines like barnacles on a freighter. Instead, it has everything to do with dumping business lines that add no value, subtract value, or fail to realize their own value due to inherent negative synergies resulting from persistent structural conflicts of interest with the parent company. In other words, it is business as usual."

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Sorry, But Disruptive Technology WILL Kill Banks

Sorry, But Disruptive Technology WILL Kill Banks: "Allegedly, John Authers recently wrote an article in the Financial Times entitled “Disruptive technology will not kill banks“. I say allegedly because despite the article being cited and commented on by two people whose analysis and opinion I respect (Chris Skinner and Jeff Marsico), I cannot get through the FT’s phalanx of pop-up ads and paywalls to actually read it with my own eyes. By trying to open the link multiple times, I was able to spy a few words at a time before the ads obscured the subheading that read “Banking is too heavily regulated to be threatened by newcomers”"



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Volatility concepts and the risk premium

An interesting overview of risk and volatility from the BIS.  Volatility concepts and the risk premium:

"Statistical measures of volatility are based on observed asset returns over a given time interval. This can be done in various ways. A simple, model-free approach is to compute the standard deviation of the actual returns on a given asset over a particular time window, so-called realised (or "historical") volatility. Model-based approaches have also been proposed: ARCH (autoregressive conditional heteroscedasticity) models, for example, assume that the variance of returns fluctuates over time according to a specific time series model.

"

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Expectations of Returns and Expected Returns

Expectations of Returns and Expected Returns: "We analyze time-series of investor expectations of future stock market returns from six data sources between 1963 and 2011. The six measures of expectations are highly positively correlated with each other, as well as with past stock returns and with the level of the stock market. However, investor expectations are strongly negatively correlated with model-based expected returns. We reconcile the evidence by calibrating a simple behavioral model, in which fundamental traders require a premium to accommodate expectations shocks from extrapolative traders, but markets are not efficient."



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Learning means that behaviour is not stationary

Stationary processes | The Leisure of the Theory Class:

"I said earlier that in stationarity environment, the point in time which we denote by does not correspond to anything about the process itself but only reflect the point in time in which we start observing the process. In this example this is indeed the case with Craig, who starts observing the coin process at time . It is not true for us. Our subject matter is not the coin, but Craig. And time has a special meaning for Craig. Bottom line: Rational agent in a stationary environment will typically not behave in a stationary way."

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Trade

CONVERSABLE ECONOMIST: Evidence on the Samuelson Conjecture: "For a useful starting point to thinking about how the rise of emerging economies like China affect global trade, I recommend a symposium in the Spring 2012 issue of JEP. Gordon H. Hanson starts with "The Rise of Middle Kingdoms: Emerging Economies in Global Trade."  "Gains from Trade when Firms Matter," by Marc J. Melitz and Daniel Trefler, looks at the benefits of trade offers introduction to modern models of trade driven from variety, shifts toward more efficient firms, and technological gains. For an introduction to models of international trade based on by differences in relative productivity across countries--like the model used by di Giovanni, Levchenko, and Zhang--that same has a useful article called "Putting Ricardo to Work," by Jonathan Eaton and Samuel Kortum. Finally, Jonathan Haskel, Robert Z. Lawrence, Edward E.  Leamer, and Matthew J. Slaughter look at "Globalization and U.S. Wages: Modifying  Classic Theory to Explain Recent Facts." "



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Money and Entropy — Design Matters — Medium

Money and Entropy — Design Matters — Medium: "This all sounds terribly wonkish and academic, but understanding money in a scientific sense is important given what you can do with it (and the problems a lack of it create)."



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The real 10 algorithms that dominate our world — Medium

The real 10 algorithms that dominate our world — Medium: "The other day, while I was navigating Reddit I found an interesting post that was called The 10 Algorithms That Dominate Our World by the author George Dvorsky which was trying to explain the importance that algorithms have in our world today and which ones are the most important for our civilization."



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Pimco runs risks in turning up the ‘vol’ - FT.com

Pimco runs risks in turning up the ‘vol’



Nice overview from the F-Times of: risk to increase volatility specifically and the way that crowded trades can be build by conventions that become oversold.

"In fact, so many different kinds of investors are now “selling volatility” that BlackRock’s Dennis Stattman worried at the same conference that it had become a “crowded trade”. Sceptics worry these new players might be selling flood insurance on the cheap, just before a deluge."

Shadow Banking: In depth news, commentary and analysis in a series from the Financial Times

Shadow Banking: In depth news, commentary and analysis in a series from the Financial Times:

"Shadow banking covers a wide range of ‘non-bank’ institutions that perform many of the functions of traditional banks, including lending, but do so outside of deposit-taking banks. The FT examines this sector, which is reshaping how companies fund themselves"

The evolution of the financial system: the regulation and return of banks to traditional activities and the emergence of new institutions to fulfill the roles that have been abandoned.

Frequentism and Bayesianism IV: How to be a Bayesian in Python

Frequentism and Bayesianism IV: How to be a Bayesian in Python: "I won't be so much concerned with speed benchmarks between the three, as much as a comparison of their respective APIs. This post is not meant to be a tutorial in any of the three; each of them is well documented and the links above include introductory tutorials for that purpose. Rather, what I want to do here is a side-by-side comparison which will give a feel for how each package is used. I'll propose a single relatively non-trivial test problem, and show the implementation and results of this problem using all three packages. Hopefully by seeing the three approaches side-by-side, you can choose which package might be best suited for your particular application."



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Rules push on clearing houses poses risk to banks - FT.com

Rules push on clearing houses poses risk to banks - FT.com: "Trades not going through clearing houses will also need to be backed by more collateral. However, the LSE study argued that investors being allowed to net their portfolios in a single place dramatically reduced the changes in margin valuation. That single place could be either a single fully integrated clearing house, or a series of fully interoperable ones."



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Impact of Fed Tapering Announcements on Emerging Markets

Impact of Fed Tapering Announcements on Emerging Markets:

 "This paper analyzes market reactions to the 2013–14 Fed announcements relating to tapering of asset purchases and their relationship to macroeconomic fundamentals and country economic and financial structures. The study uses daily data on exchange rates, government bond yields, and stock prices for 21 emerging markets. It finds evidence of markets differentiating across countries around volatile episodes. Countries with stronger macroeconomic fundamentals, deeper financial markets, and a tighter macroprudential policy stance in the run-up to the tapering announcements experienced smaller currency depreciations and smaller increases in government bond yields. At the same time, there was less differentiation in the behavior of stock prices based on fundamentals."

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‘Yellen Index’ flashes imminent Fed tightening

‘Yellen Index’ flashes imminent Fed tightening - FT.com:

"This is the intriguing premise of a tool being used internally at BlackRock, the world’s largest fund manager, which it has nicknamed “the Yellen index”. It is a measure that suggests, on the economic indicators favoured by Ms Yellen, monetary tightening is already overdue and the Fed falls further behind the curve with every passing day."

This could be a really good additional exercise for the interest rate assignment: create a "Yellen Index".

Reproducible research is still a challenge

Reproducible research is still a challenge: "We used knitr to implement the analysis in a literate programming style. The entire analysis, including justification of the core functions, is available to interested people. However, working with blocks of ugly data-wrangling code, or with long-running calculations, remains a challenge."



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Buttonwood: Pensions à la mode | The Economist

Buttonwood: Pensions à la mode | The Economist: A comparison of pension returns across countries.  This is an exercise in assessing the returns from a standard investment 60% in equities and 40% in bonds.

"The most important thing for the typical worker is to avoid the worst outcome, not aim for the best. Yet, understandably, few feel they have the expertise to allocate their investments accordingly. As a result many opt for what appears to be the safe option in the form of target-date funds (in America) or default funds (in Britain). These funds are certainly a lot better than the choices employees might make if left to their own devices—placing their entire portfolio in cash or in their employer’s shares, for example. Such funds generally follow a “lifestyle approach” in which the bulk of the portfolio is invested in equities when the employee is young and then switched into government bonds as retirement draws near."

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The VIX Is Not A Great Way to Measure Complacency - Bloomberg View

The VIX Is Not A Great Way to Measure Complacency - Bloomberg View: "This is I think roughly the way to read the notion, which my Bloomberg View colleague Mohamed El-Erian examined today, that low readings on the VIX -- an index of implied volatility in short-dated S&P 500 index options -- mean that the market is "complacent." So:

Equity volatility is basically a mean-reverting thing.2
The volatility index is below its long-run average.
Therefore volatility will go higher.
Soon and horribly.
Run, you fools!
Why are you being so complacent?"



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Chimps and games

Chimpanzee choice rates in competitive games match equilibrium game theory predictions : Scientific Reports : Nature Publishing Group:

"The capacity for strategic thinking about the payoff-relevant actions of conspecifics is not well understood across species. We use game theory to make predictions about choices and temporal dynamics in three abstract competitive situations with chimpanzee participants. Frequencies of chimpanzee choices are extremely close to equilibrium (accurate-guessing) predictions, and shift as payoffs change, just as equilibrium theory predicts. The chimpanzee choices are also closer to the equilibrium prediction, and more responsive to past history and payoff changes, than two samples of human choices from experiments in which humans were also initially uninformed about opponent payoffs and could not communicate verbally. The results are consistent with a tentative interpretation of game theory as explaining evolved behavior, with the additional hypothesis that chimpanzees may retain or practice a specialized capacity to adjust strategy choice during competition to perform at least as well as, or better than, humans have."

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How the Recession Reshaped the Economy, in 255 Charts - NYTimes.com

Info graphics - how employment has changed post recession in the US:



How the Recession Reshaped the Economy, in 255 Charts - NYTimes.com:



Number employed and earnings.

Hedge Fund Investors Aren't as Dumb as They Look - Bloomberg View

Hedge Fund Investors Aren't as Dumb as They Look: Though returns have been poor, there is some evidence that they can help to reduce risk.

"Why invest in hedge funds? Citi says, "since the [global financial crisis], confidence that hedge funds can outperform the underlying markets has been strained and that more emphasis has been placed on their role in controlling volatility." But investors are happy enough to pay for that. An endowment manager quoted by Citi:"

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The demise of the bond market

The most obvious examples are governments. Greece, which returned to markets by issuing €3bn in five-year bonds in April, could have raised much more but its aim was to create benchmarks and rebuild its yield curve – the availability of a range of bonds with different maturities. 

Like Ferrari, Greece’s debt agency knows its interests lie in helping the resale market; the country’s future financing needs are considerable, to say the least. Companies looking to raise debt over a number of years think similarly.

http://www.ft.com/cms/s/0/fb3b651e-e6fb-11e3-aa93-00144feabdc0.html?ftcamp=published_links/rss/markets/feed//product&siteedition=uk#axzz3378rNeUm

Machines vs Routine Tasks

Brad DeLong reviews Summers on Piketty and returns to his theme.



"Think of it this way: Humans used to have five ways of creating economic value: through backs, through fingers, through routine control, through smiles, and through creative insight:

1. Strong backs (usually those bathed in the steroid testosterone) could do the heavy lifting. 
2. Nimble fingers could do the fine manipulating. 
3. Cybernetic control loops could keep the lifting and manipulating on their proper tracks. 
4. Smiles--in fact, an entire universe of human social interactions--could keep us as a group all pulling in roughly the same direction, playing positive-sum rather than negative-sum economic games, and could also provide the personal services from which we derive so much of our human well-being. 
   
5. Genuine creative insight could think up new ways of doing things and new things to do that would be useful: luxurious or convenient, and over the course of time could transform conveniences into necessities, luxuries into conveniences, and invent yet new dimensions of luxury."

His thesis that backs, fingers and brains are increasingly substitutes rather than compliments for machines.  In some ways this is an evolution of routine tasks.  As machines become more sophisticated, what is defined as routine becomes increasingly broad. 

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Keynes, possibility for our grandchildren

Elizabeth Kolbert: Discusses Economic possibilities in The New Yorker there is a nice overview of some of the reasons why the leisure has not arrived.  

"Joseph Stiglitz, of Columbia University, by contrast, takes a constructivist approach. People’s choices, he argues, are molded by society and, over time, become self-reinforcing. We “learn how to consume by consuming,” he writes, and how to “enjoy leisure by enjoying leisure.”"

Noahpinion: Entrepreneurship and the pricing of uncertainty

Noahpinion: Entrepreneurship and the pricing of uncertainty:

"Uncertainty", also called "Knightian uncertainty", is like risk, but not quite the same. Risk is when you can calculate the probability of gains and losses, like when you play roulette or blackjack. Uncertainty is when you don't know the odds. Frank Knight observed that entrepreneurship involves a lot more uncertainty than risk. When you start a new business, you don't really know how to calculate the odds that your idea will succeed - whether personal computer users will embrace a graphical user interface, whether people will want to post their pictures on a social network, etc."

This is similar to a theme of my research that says that speculation is in part an attempt to deal with uncertainty. Knight argues that entrepreneurship is not about risk (as this can be quantified and insured or hedged away).  As such, the wealth of the technology entrepreneurs is a return for taking a gamble when the odds are completely unknown. As Noah Smith says, people do not like uncertainty.  They at least want to know the odds.



Smith argues that the return to uncertainty is overpriced.  He cites the discussion by Felix Salmon and Gideon Lewis-Klaus' book No Exit.  However, can this be the way to look at it?  The risk or odds are unknown. If you want to think of it this way, there should be a balance of supply and demand and, with supply of potential entrepreneurs increasing, the price should fall.  This is not the return that comes from success but the probability of being successful.  The same amount of success could be spread over more entrepreneurs but it is not clear that the amount of success is fixed.  In other places it is argued that the more the supply of entrepreneurs, the more the chances of new and successful ideas.

A natural experiement

This gives a very good overview of a natural experiment.

British and French educational legacies in Africa | vox: "While the choice of colony was not random, the exact location of the border – up to some distance – was. In the partitioning process colonisers drew borders without accurate knowledge of the terrain, disregarding local circumstances and cutting through homogeneous geographic, cultural and ethnic entities. Thus, the drawing of borders provides a situation of a quasi-ideal natural experiment, where, by historical accident, individuals with otherwise identical background found themselves randomly divided into two groups: one subjected to French policies and another ruled by Britain."

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Wipe out rentiers with cheap money - FT.com

Martin Woof says Wipe out rentiers with cheap money - FT.com:  Is this a counter to the Piketty thesis?  May it suggest some way that r will be lower than g?

"This policy, however unpopular with some, is better than the available alternatives. Keynes even had a phrase for it – the “euthanasia of the rentier”. In a world of abundant savings, the available returns ought to be low; this is a consequence of market forces to which central banks are responding."

It would be consistent with a story that said with large blocks of inherited wealth seeking investment returns, the returns may fall; it would not counter the accusation that larger blocks of wealth have attractive investment opportunities that are not open to most.

Hedge funds, fortunes and merit | FT Alphaville

Hedge funds, fortunes and merit | FT Alphaville: "Small and young hedge funds are nimble, their managers are focused, and they can concentrate their capital in a small number of good ideas without moving prices or attracting attention. One study by Barclays found that funds under two year’s old, and managing less than $100m typically make better investment returns than their larger older peers."



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What Timothy Geithner Really Thinks

Geithner explains how the "bail out" has made money.

"He paused and looked out at a crowd that, it’s safe to say, probably did not fully appreciate how intense the anger around the financial bailouts had been and how close the country was to the precipice of a full-on depression. “We are going to earn, all in, a couple hundred billion dollars,” Geithner said. And six years after the bailouts, the too-big-to-fail banks and the insurance giant A.I.G. have since repaid the money they took from the government. Even the rescues of Fannie Mae and Freddie Mac, the mortgage-lending companies that once had to borrow $187.5 billion, have turned profitable. “Much of the dominant view about the strategy,” Geithner said, “is the inverse of the truth."

The Fed is filling a market failure.  The myopia and high-level of risk aversion mean that the government is the only institution that can provide liquidity to the system in exchange for assets that have value but are not valued at present.  The demand for liquidity is so great that additional liquidity must be provided.

Nobel economist Gary Becker showed that Mike Milken was history’s greatest feminist - Quartz

Nobel economist Gary Becker showed that Mike Milken was history’s greatest feminist - Quartz: "Gary Becker, who passed away this week, was a man who changed the field of economics. Before Becker, economics was the study of buying and selling things. But Becker realized that economics was really about tradeoffs, and that there are a lot of tradeoffs in the world that don’t involve money—or don’t only involve money. (For example, instead of writing this article, right now, I could be learning hip-hop dancing or starting a biotech company.)"



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About that AstraZeneca bid defence … | FT Alphaville

FT Alphaville:  

"According to Eroom’s Law, the number of drugs you can get to market per $1bn of R&D spending halves about every nine years and has done since 1950. Spiralling R&D costs and a failure rate at Phase I trials of about 90 per cent mean the economics at the sharp end of that law don’t make much sense, even for the biotechs. Better to leave the really experimental stuff to university spinouts and single-punt MBOs. Then, if their success looks plausible, the bigger pharma companies can in-licence, partner and acquire outright to lever scale on their own specialisms in areas such as imaginative trial design and patent evergreening."

'

Chromebooks: Not much room for competition

Chromebooks: Not much room for competition.  Its all about price.

"Major laptop makers are paying attention and are adding Chromebooks to their product lines. They require basically the same production methods as their Windows laptops, so it's a low-cost effort to build them. The Chromebook doesn't require big hardware, so the component inventory is not too heavy."

Product life cycle and perfect competition.

Win-Vector Blog » Learn Logistic Regression (and beyond)

Win-Vector Blog » Learn Logistic Regression (and beyond):

 " Logistic regression is often a winning method and we will use this article to discuss logistic regression a bit deeper. By the end of this writeup you should be able to use standard tools to perform a logistic regression and know some of the limitations you will want to work beyond."

Lovely overview

10 reasons to switch to ggplot | Mandy Mejia

10 reasons to switch to ggplot | Mandy Mejia: "Making plots is a necessary and useful task for anyone who works with data. While making the standard plots is a pretty straightforward task in most statistical programming languagues, including R, when it comes to using R‘s base graphics to make custom plots (the plots you actually want to make) things can get complicated. As with many of life’s problems, Hadley Wickham comes to the rescue."



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Why UPS Trucks Don't Turn Left

Why UPS Trucks Don't Turn Left: To reduce fuel use and accidents. Confirmed by Myth-busters.

"Mythbusters likely failed to save time on the route by following the rule even more stringently than UPS. While the no left turn rule has an appealingly simple and algorithmic quality to it, you will see UPS drivers take left turns on occasion, especially in residential neighborhoods without much incoming traffic. Asked how often UPS drivers turn right, a driver told ABC:"

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Smart beta

Is ‘smart beta’ the latest magic money tree? - FT.com: discusses passive investment with a "twist".

"The typical twist is to substitute the standard market capitalisation weighting of an equity index with an alternative weighting, such as dividends or earnings. This is claimed as a smarter approach as market cap indices will inevitably overweight expensive stocks and underweight cheap ones."

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Sampling bias and sampling error

Tim Harford FT.com: is a discussion of "Big Data" looks at sampling bias and sampling error.

"The Literary Digest, in its quest for a bigger data set, fumbled the question of a biased sample. It mailed out forms to people on a list it had compiled from automobile registrations and telephone directories – a sample that, at least in 1936, was disproportionately prosperous. To compound the problem, Landon supporters turned out to be more likely to mail back their answers. The combination of those two biases was enough to doom The Literary Digest’s poll. For each person George Gallup’s pollsters interviewed, The Literary Digest received 800 responses. All that gave them for their pains was a very precise estimate of the wrong answer."

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The cost of acquiring information

Streetwise Professor discussed Michael Lewis’s HFT Book: and highlight an application of the Grossman-Stiglitz idea that there will be an equilibrium where the cost of acquiring information will be equal to the benefit of obtaining that information.

 "Moreover, it’s not so clear that order flow information is “non-public”.  No, not everyone has it: HFT has to expend resources to get it, but anybody could in theory do that. Anybody can make the investment necessary to ping a dark pool. Anybody can pay to get a faster data feed that allows them to get information that everyone has access to more quickly. Anybody can pay to get quicker access to the data, either through co-location, or the purchase of a private data feed. There is no theft or misappropriation involved. If firms trade on the basis of such information that can be obtained for a price that not everyone is willing to pay, and that is deemed illegal, how would trading on the basis of what’s on a Bloomberg terminal be any different?"