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.

Streetwise Professor » Spoof Me Once, Shame on You: Spoof Me Twice, Shame on Me

Streetwise Professor » Spoof Me Once, Shame on You: Spoof Me Twice, Shame on Me: "I’ve often written that HFT firms are the best able to detect spoofers, and to take preventative measures (which reduce the profitability of spoofing, and hence its prevalence). The whole business of HFT is extracting signals from orders and order flow, and trading accordingly. Spoofing is based on manipulating the order flow–in essence, injecting noise into it. HFT firms evaluate their executions, and attempt to identify patterns that predict both winning and losing trades. If spoofers systematically impose losses on HFT firms, eventually the latter will figure it out."



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The Rise and Fall of American Growth | The Enlightened Economist

The Rise and Fall of American Growth | The Enlightened Economist: "There are three sections: the first covers 1870 to 1940; the second 1940-2015; the third is about the sources of growth and why it was fastest from the 1920s to 1950s (this is just about the US so this is earlier than European readers would recognise as the peak growth era) – and is slowing now. The final chapters are a kind of crescendo, for the whole book is organised to support Gordon’s well known thesis that the days of miracle and wonder, the rapid growth era of the early to mid-20th century, is long gone, and slower growth lies ahead of us. "



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Stack Exchange and replication

Some links to site with replication code of financial papers? - Quantitative Finance Stack Exchange: Mostly this is about replication rather than providing code. There is an project in economics to promote replication.

The Underground Is Massive: How Electronic Dance Music Conquered America by Michaelangelo Matos – review | Books | The Guardian

The Underground Is Massive: How Electronic Dance Music Conquered America:

"The meat of his thesis is that the medium is the message. As he puts it: “The rise of the US rave scene and the rise of the internet, besides being concurrent, mirrored one another in many ways. Both mixed rhetorical utopianism with insider snobbery ... As a style whose digital nature was encoded into its very name, techno is the music of early adopters.”"

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The end of capitalism has begun

The end of capitalism has begun | Books | The Guardian:

 "New forms of ownership, new forms of lending, new legal contracts: a whole business subculture has emerged over the past 10 years, which the media has dubbed the “sharing economy”. Buzzwords such as the “commons” and “peer-production” are thrown around, but few have bothered to ask what this development means for capitalism itself."

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scripts - How to make my system delete all the files in a certain directory older than a certain time while keeping the directory structure intact? - Ask Ubuntu

scripts - How to make my system delete all the files in a certain directory older than a certain time while keeping the directory structure intact? - Ask Ubuntu: "have a directory on my machine, think of it as my own sort of tmp directory, but it's in my ~ directory. And I want to make it so that my system every 3 hours deletes all the files in (though keeping any directory structure intact, but still deleting all the files in all the levels of the directories recursively) that directory which are older than a da"



Lot of good information about automating repetitive tasks.,



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Models of the minimum wage (for what they’re worth) | Jared Bernstein | On the Economy

Excellent overview: Jared Bernstein Blod

"Thee recent minimum wage debates among the various campaigns are pretty disconnected from a model of how the damn thing actually works in the real world. In part, that’s a function of campaigns not doing nuance, but it’s also because there is no model that economists agree on as per why the empirical results on minimum wage increases are so different from the predictions of the classical model."

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Crowdfunding or Crowdphishing? by Robert J. Shiller - Project Syndicate

Crowdfunding or Crowdphishing? by Robert J. Shiller - Project Syndicate: "NEW HAVEN – If one were seeking a perfect example of why it’s so hard to make financial markets work well, one would not have to look further than the difficulties and controversies surrounding crowdfunding in the United States. After deliberating for more than three years, the US Securities and Exchange Commission (SEC) last month issued a final rule that will allow true crowdfunding; and yet the new regulatory framework still falls far short of what’s needed to boost crowdfunding worldwide."



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Three centuries of macroeconomic data | Bank of England

Three centuries of macroeconomic data | Bank of England: "The three centuries dataset was originally constructed for the purposes of writing the 2010 Q4 Quarterly Bulletin article The UK recession in context — what do three centuries of data tell us?.  It was updated and expanded for the launch of the One Bank Research Agenda in February 2015 and the latest edition of the spreadsheet (version 2.2) has now been updated to 2014."



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Showcase of beautiful typography done in TeX

big list - Showcase of beautiful typography done in TeX & friends - TeX - LaTeX Stack Exchange: "If you were asked to show examples of beautifully typeset documents in TeX & friends, what would you suggest? Preferably documents available online (I'm aware I could go to a bookstore and find many such documents called 'books'). Extra bonus for documents whose LaTeX source is available."



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Short and long presentations in one beamer document - TeX - LaTeX Stack Exchange

Short and long presentations in one beamer document - TeX - LaTeX Stack Exchange: "I look for a sensible way to keep different versions of the same talk in one beamer file: e.g., 15 min and 1 hour versions, where some content is common, but some is not. Is there a nice way to toggle between versions?"



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portfolio management - Which algorithms do robo-advisors use? - Quantitative Finance Stack Exchange

A good overview of the quantitative fund management.



portfolio management - Which algorithms do robo-advisors use? - Quantitative Finance Stack Exchange: "Wealthfront modifies historic asset-class returns with current market implied expected returns (Black-Litterman) as well as with the in-house views of Chief Investment Officer Burton Malkiel’s team. In addition, Wealthfront sets minimum and maximum weights for each asset type. The resulting portfolio has an unmistakable Malkiel flavor to it, with an emerging market allocation that reflects his interest in China."



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How humans can wrest control of the markets back from computers - FT.com

How humans can wrest control of the markets back from computers - FT.com: "Yes, you read that right: according to CFTC researchers, on three dozen occasions prices for West Texas Intermediate crude have gyrated so dramatically that they have been defined as flash crashes. This means prices swung 200 basis points in less than an hour, before recovering at least 75 basis points."



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How does rehypothecation cause systemic risk? - Quantitative Finance Stack Exchange

How does rehypothecation cause systemic risk? - Quantitative Finance Stack Exchange: This is all about the re-used of repos.

"Re-hypothecation occurs when banks or broker-dealers re-use the collateral posted by clients such as hedge funds to back the broker's own trades and borrowing."

This is an interesting story to add to the general trading game. It is also interesting for the regulation of finance post-crisis.

How NOT to Wipe Out with Momentum

How NOT to Wipe Out with Momentum:

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

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

Hayek, The Use of Knowledge in Society:



The dispersion of knowledge and the use of the market.

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

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

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

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

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Information Transfer Economics: The emergent representative agent

Information Transfer Economics: The emergent representative agent.

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

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

On-line lenders

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

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

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

European banks: loss recognition — FT.com

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

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

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

Python Data Analysis Library — pandas: Python Data Analysis Library

Python Data Analysis Library — pandas: Python Data Analysis Library: "pandas is an open source, BSD-licensed library providing high-performance, easy-to-use data structures and data analysis tools for the Python programming language"



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Macroeconomic models and estimation

Angry Bear asks, How Many Equations Should There be in Macroeconomic Models ? in an assessment of the relative merits of Cowles Commission, VAR and DSGE models.  

"This post is long. The punchline is that I think that a promising approach would be to combine CC models with a pseudo prior that a good model is not too far from a standard DSGE model. This is the sort of thing done with high dimensional VARs using the so called Minnesota prior."

Part of the rational expectations, macroeconomic debate.

Book extract: ‘The Silo Effect’, by Gillian Tett - FT.com

Book extract: ‘The Silo Effect’, by Gillian Tett - FT.com:

 "First, they were organising the company into discrete project teams, dedicated groups to perform tasks. A company such as Facebook needs silos, in the sense of specialist departments and teams, simply to get its work done. Project groups were needed for focus and accountability. But the second aim of Bootcamp was to overlay those project teams with another set of informal social ties not defined by the formal department boundaries. This, it was hoped, would prevent the project teams from hardening into rigid, inward-looking groups and ensure that employees felt a sense of affiliation with the entire company, not just their tiny group. “Boot camp [can foster] cross-team communication and prevent the silos that so commonly spring up in growing engineering organisations,” Boz said. Facebook was both creating the preconditions for silos and instilling systems to break down those silos."

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CPB World Trade Monitor June 2015

CPB World Trade Monitor reports "The volume of world trade expanded 2.0% in June 2015, following a 1.3% decline in May (initial estimate: -1.2%). This is shown by the CPB World Trade Monitor."



This is an excellent resource for exercises in digging into data.  What do the data show?  How are they measured?  What theories can be used to understand more about the data here?

A Tale of Two Liquidities - Bloomberg View

A Tale of Two Liquidities - Bloomberg View: "Now in some ways this is a weird thing to say. Traditionally, what we talk about when we talk about "liquidity" is something like "a market's ability to facilitate the purchase/sale of an asset without causing a change in the asset's price." If bond prices aren't changing much, despite all the sound and fury in the equity markets, then that seems like a sign that liquidity is unusually good."



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Long term views

"To finish, James Surowiecki at the New Yorker finds an ounce of method in the financial madness. Why have the likes of Amazon and Netflix lost more share value than the average US stock? The answer, he submits, is that these are companies whose valuation depends on their promise of making significantly more money over the long term than they are today. So even a slight downgrade in investors’ hopes for economic growth — which a huge emerging markets financial crisis could easily induce — would justify a big adjustment in the most future-heavy companies’ value."



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‘The Weather Experiment,’ by Peter Moore - The New York Times

‘The Weather Experiment,’ by Peter Moore - The New York Times: "Before the Royal Charter storm, FitzRoy had been agitating in London for government funding for collection of weather data. He and other Victorian men of meteorology knew that the more they could parse what the weather had done in the past, the better they could warn what it might do in the future. FitzRoy called the concept “forecasting.” To show just how ludicrous that idea seemed at the time, Moore unearths a telling 1854 Commons debate. When a scientifically enthusiastic member of Parliament suggested that amassing weather observations from sea and land could someday mean “we might know in this metropolis the condition of the weather 24 hours beforehand,” laughter broke out raucously enough to stop the proceeding."



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Why you can't trust journalism | Fusion

Why you can't trust journalism | Fusion: "But here’s the thing: it turns out that the scientific world is actually far, far ahead of the journalistic world on these matters. Yes, the world of online journalism is full of parasites, and a lot of those parasites have real value. But all that the parasites have to go on are published articles: no one is transparent about the process that created those articles. No one shows their work, and no one ever tries to replicate anything."



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More on US bond liquidity

The FT.com looks at US bond market liquidity:

There are two major issues:

1) the risk of price shocks due to the lack of liquidity -

“There will be discontinuous pricing,” says Richie Prager, head of trading and liquidity strategies at BlackRock, the largest asset manager in the world. “Anyone who doesn’t expect some sort of discontinuous pricing as interest rates normalise, as volatility returns, is really just not realistic.”

2) the intermediation role that is now unfulfilled

"Anecdotally, traders say they used to step in during volatile price swings to help clients, with the aim of securing more business for when markets were calm. It was part of the client relationship. As banks have reduced balance sheets and declining fixed income revenues, the incentive to step in during market turmoil has been reduced".

There is a real risk  of market gyrations and of a new form of intermediation to reduce the thereat of these price movements. 

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Nobody Knows How Much Bonds Cost - Bloomberg View

Nobody Knows How Much Bonds Cost - Bloomberg View shows the role of intermediation:

"And it probably is. It's just that the latter skill set is better for figuring out what bonds do cost. Dealers have lots of information about order flow, market sentiment, which customers want to buy and sell which bonds, etc. They are good at price. Investors have lots of information about companies and credit and economic fundamentals. They are good at value. When they think the price is out of line with value, they trade. If they don't know the price, then they don't know how out of line it is with value, and they don't trade. "

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printing - "Print it later" software - Ask Ubuntu

printing - "Print it later" software - Ask Ubuntu: "Sometimes when I'm working on my laptop, I want to queue up a few documents to print later, since I'm not connected to a printer at the time."



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git ready » get a file from a specific revision

git ready » get a file from a specific revision: "Enter git show, which is an awesome tool for this job. This command is quite versatile and deserves several tips on what it can do, but let’s stick to the task at hand: we want to pull a file’s contents out from a specific revision. Usually the command would be done like so"



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git ready » get a file from a specific revision

git ready » get a file from a specific revision: "Enter git show, which is an awesome tool for this job. This command is quite versatile and deserves several tips on what it can do, but let’s stick to the task at hand: we want to pull a file’s contents out from a specific revision. Usually the command would be done like so"



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How to make a graph of heteroskedasticity with TikZ/PGF? - TeX - LaTeX Stack Exchange

How to make a graph of heteroskedasticity with TikZ/PGF? - TeX - LaTeX Stack Exchange: "This graphic is a typical representation of the problem of heteroskedasticity in a model of linear regression. If someone could guide me on how to do with tikz , I would be very grateful."



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The Bloomberg terminal: clunky, costly, addictive, ubiquitous — FT.com

The Bloomberg terminal: clunky, costly, addictive, ubiquitous — FT.com: "Moreover, rival data providers such as Thomson Reuters and Dow Jones are attempting to chip away at its incumbent advantage in instant messaging. Even banks are unhappy about shelling out small fortunes for what some wags say is a glorified chatroom, and are spooked by Bloomberg’s dominance."



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Standard Chartered: easily said — FT.com

Standard Chartered: easily said — FT.com:

"Bill Winters, new chief at Standard Chartered, has a clear mandate. Decide which of the bank’s businesses can produce high and sustainable risk-adjusted returns. Ensure there is enough good-quality capital to support them. Cull assets at the other businesses. Cut costs viciously. Play nice with regulators and politicians. Watch the stock price rise at last, and be seated to general applause."

As the FT points out, all the other banks are going through the same process.  If everyone leaves a field that is not currently profitable, this leaves an open market; if they all crowd into the currently profitable areas, the margins will shrink.

Modeling market sentiment and pricing options by volume, open interest

Modeling market sentiment and pricing options by volume, open interest - Quantitative Finance Stack Exchange:

"Are there any empirically-proven methods/formulas for weighting IV surfaces, pricing a discount/premium in an option, and/or adjusting any of the 1st- or 2nd-order Greeks for the magnitude (volume or dollar-volume basis traded) of activity in each option contract for a market?"

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The envelope (theorem) please: Profits, efficiency wages, and monopsony | Arindrajit Dube

The envelope (theorem) please: Profits, efficiency wages, and monopsony | Arindrajit Dube: "As Krugman points out, this is logic of the “envelope theorem.” What I want to clarify in this post is that the logic behind this argument is more general than the particular efficiency wage model Krugman works through.  Any time firms are choosing wages to balance various concerns—as opposed to simply accepting a “market wage” as a constraint—the logic of the envelope theorem applies.  What’s more, two types of empirically relevant models of the labor market—monopsonistic competition and efficiency wages—look pretty similar in this regard, and can be thought of as special cases of a more general model."



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Asset managers’ push into bonds prompts regulatory scrutiny

Asset managers’ push into bonds prompts regulatory scrutiny - FT.com: "The FSB is chaired by Mark Carney, governor of the Bank of England, who in April said: “Concerns arise about rising risks stemming from the overestimation by investors of the degree of liquidity [in] fixed income markets, as well as the growth of assets under management in funds that offer on-demand redemptions but invest in less liquid assets.”"



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The Funnel Framework - Stratechery by Ben Thompson

The Funnel Framework - Stratechery by Ben Thompson: "THE FUNNEL FRAMEWORK
All three companies succeed with very different product focuses, but all share the ability to capture a specific type of customer and funnel them to someone who is willing to pay:"



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Startups and the productivity puzzle

Startups and the productivity puzzle:assesses the effect of cheap labour and bizarre consumer choice on UK productivity.

 "In other words, it’s easier to make money by using cheap labour than by investing in machinery. Furthermore, in this example, people would be mad to invest in new machinery because they would be unlikely to make enough to cover their investment. The media love to talk about high-tech entrepreneurship. There may be a few such firms but most of Britain’s startups are low tech or no tech.

Has this county become an El Dorado for cheap labour? Does the business opportunity now lie in setting up a business to exploit what the Economist described as Britain’s pitiful pay and its even more impoverished freelancers? That might explain why, far from improving the country’s productivity, Britain’s startups are making it worse."

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Bond liquidity

Dear Buy-side. You seem very concerned about liquidity. Can I suggest paying for it? — Bull Market — Medium: "What needs to happen? Basically, the buy side needs to face up to reality. It needs to start looking at its cost of execution in the long run, rather than on a transaction-by-transaction basis, and understanding that if it prices the brokers out of business, it will have nobody left to make its trades. At present, the regulators aren’t helping with this at all — in a misguided attempt at consumer protection, they make it more or less impossible for a fund manager to make an investment in helping its counterparties. But really, the issue is with the clients themselves. If they want to keep on offering immediate liquidity to their investors (and they do), they need to stop creating the conditions under which that sort of immediacy is impossible for the market to provide."



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Difference Between Economic Growth Rates and Treasury Interest Rates Significantly Affects Long-Term Budget Outlook - Washington Center for Equitable Growth

Must-Read: Richard Kogan et al.: Difference Between Economic Growth Rates and Treasury Interest Rates Significantly Affects Long-Term Budget Outlook

" We analyze U.S. data for the 223 years since 1792 and find that, on average, economic growth has exceeded interest rates, helping to shrink the burden of existing debt…"

This should also affect the Piketty argument that capital will rise as as share of the economy.  Though the treasury bill rate is not the same as the return on capital, it could, assuming that the increased return for taking risk and rate of depreciation cancel out.

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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