German banks rein in exposure to Spain - FT.com

German banks rein in exposure to Spain - FT.com: "Will Spain – where house prices have fallen more than 22 per cent from their peak, with analysts expecting worse to come – bring more pain? Figures published this month by the Bank for International Settlements show that German banks had $146bn of exposure to Spain at the end of 2011 – more than the banks of any other country. Some $53bn of the exposure is to Spanish banks, while a further $68bn is to the rest of the private sector"

End-December 2011
           Denmark France     Germany     Greece     Ireland      Italy       Japan       Mexico
Spain   1,951      115,162   146,096        292       4,696       26,939    21,691       540 ...

http://www.bis.org/statistics/r_qa1206_anx9b.pdf

FX Momentum trades

Forex momentum trade yields long-term gains - FT.com: "Currency momentum strategies that buy or sell currencies according to whether they have risen or fallen over the previous month yielded annual returns of nearly 10 per cent between 1976 and 2010, according to the Cass study, which analysed 48 currencies against the US dollar. The paper, “Currency Momentum Strategies”, is due to be published in the Journal of Financial Economics."

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Investment Bank Leverage

The FT reports on the rise in capital at investment bank Goldman.

Goldman Sachs: then and now - FT.com: "Spookily, it is as if nothing has changed for six long years. But a financial crisis has come and gone since then and regulators are now throwing everything at banks. Of course, there is one huge difference between the two periods, but it is not to be found in the profit and loss account. Flip to the balance sheet and be astounded to remember that in 2006 Goldman was running on just $27bn of common shareholders’ equity. With exactly the same earnings today, that number is now two and a half times higher."

Hedge funds and leverage

Hedge funds keep a lid on leverage - FT.com: "According to the UK’s Financial Services Authority, which in February published its annual survey of the global hedge fund industry, the average hedge fund currently uses leverage of about 2.5 times its capital – as it has done for the past three years.
Indeed, unlike prop desks, most hedge funds have to grapple with all too finite liquidity and financing – issues no manager has been able to ignore since 2008."

How the leverage has been reduced as pro trading transfers from investment banks to hedge funds.

The BBK seeks insurance against EMU break-up

The Bundesbank has no right at all to be baffled - FT.com:

"It also tells us something else: by seeking insurance against a collapse of the euro, the Bundesbank tells us it no longer regards the demise of the euro as a zero-probability event. If the Bundesbank seeks insurance, so should everybody else."

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Are Credit Ratings Massively Overrated? | Economics Intelligence

The informational content of credit rating agencies seems to be minimal - worse than a simple indicator that can be constructed.

Are Credit Ratings Massively Overrated? | Economics Intelligence:

"Hilscher and Wilson reply that they do not claim that ratings have no informational content whatsoever. Having a S&P rating was certainly better than no information at all, stresses Hilscher"

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Do hedge funds offer value for their fees? No - FT.com

Not surprising if the absolute returns are from finding inefficiencies. Given an absolute amount of inefficiencies, these are shared over more funds.

Do hedge funds offer value for their fees? No - FT.com:

"Just as individual hedge funds tend to do better when they are small, so too, his analysis shows, the industry as a whole performed better when it was a largely unknown $200bn business, rather than the high profile $1.9tn industry it had grown to become, before the financial crisis in 2008 so dramatically exposed some of its shortcomings. The comforting compounded rates of return reported in hedge fund indices give a misleading impression of the actual cash returns achieved by hedge fund investors. Most of the client money that has flowed in since the industry began to be institutionalised has not achieved anything like the returns the long-term headline index figures suggest.
"

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Delete rows from R data frame « Heuristic Andrew

Use for getting rid of rows of data where there is no response. For instance, the missing values in a large dataframe can be removed in this way with simplicity.

Delete rows from R data frame « Heuristic Andrew:

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Friedman and Krugman

New Frontiers in Economic Barbarism - NYTimes.com: "Quite. What Matt may not know, however, is that this is a classic argument in international macro, and the person who made it best was …. drumroll … Milton Friedman. Here’s a snip from Friedman’s 1953 essay “The case for flexible exchange rates”:


Is it really possible that people at the University of Chicago have unlearned not only Keynes but Friedman? Alas, yes."

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Cross Validation

A number of related ideas about the cross validation of models:

Arlot paper on cross validation

Rob Hyndman

R code for comparison

Why Only Germany Can Fix the Euro | Foreign Affairs

At the heart of the Euro area crisis.

Why Only Germany Can Fix the Euro | Foreign Affairs:

" According to Eurostat, Germany's trade surplus with the rest of the EU grew from 46.4 billion euro in 2000 to 126.5 billion in 2007. The evolution of Germany's bilateral trade surpluses with the Mediterranean countries is especially revealing. Between 2000 and 2007, Greece's annual trade deficit with Germany grew from 3 billion euro to 5.5 billion, Italy's doubled, from 9.6 billion to 19.6 billion, Spain's almost tripled, from 11 billion to 27.2 billion, and Portugal's quadrupled, from 1 billion to 4.2 billion. Between 2001 and 2009, moreover, Germany saw its final total consumption fall from 78.5 percent of GDP to 74.5 percent. Its gross savings rate increased from less than 19 percent of GDP to almost 26 percent over the same period."

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Unintended consequences

The unintended consequences of trying to reduce the Greek debt burden while preventing the triggering of CDS has the unintended consequence of making all bond positions look vulnerable (even when there was a previous CDS protection. The FT quotes Commerzbank chief a:

"Mr Blessing criticised the Greek agreement since investors that insured Greek bonds using CDS had not received a pay-out because the voluntary agreement was not deemed to be a so-called “credit event” and thus did not trigger CDS payments."

This can lead to other bond holders selling the bonds because they find that they are not protected from default.

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Michael Lewis on Prospect Theory

Prospect Theory and MoneyBall

"The moment the psychologists uncover some new kink in the human mind, they bestow a strange and forbidding name on it (“the availability heuristic”). In their most cited paper, cryptically titled “Prospect Theory,” they convinced a lot of people that human beings are best understood as being risk-averse when making a decision that offers hope of a gain but risk-seeking when making a decision that will lead to a certain loss. In a stroke they provided a framework to understand all sorts of human behavior that economists, athletic coaches, and other “experts” have trouble explaining: why people who play the lottery also buy insurance; why people are less likely to sell their houses and their stock portfolios in falling markets; why, most sensationally, professional golfers become better putters when they’re trying to save par (avoid losing a stroke) than when they’re trying to make a birdie (and gain a stroke)"

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Unintended consequences

Unintended consequences: "In the UK, the “Merton Rule” – it originated in the Borough of Merton and has been widely emulated – demands that substantial new developments include the capacity to generate 10 per cent of the building’s energy needs through renewable sources, on site.

Alas, such a rule is hopelessly slack for an out-of-town supermarket – an environmental disaster because of all the driving it encourages, yet with plenty of real estate for solar panels. Meanwhile it is too challenging for a city-centre skyscraper, which is naturally a low-energy building because of its compactness and proximity to public transport."

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The evolution of overconfidence

A paper in Nature makes the case for the positive aspect of over-confidence: it encourages action and decisive response; it is generally successful or adaptive; when it goes wrong, it goes very wrong.

The evolution of overconfidence : Nature : Nature Publishing Group:

This would be consistent with the behaviour that is mirrored in financial markets. The carry trade is such a confident trait. There is the belief that the exit can be achieved before the shock. This is generally successful, certainly more successful than the alternative strategy that would hold back and worry about the risk of a funding currency appreciation. Those who embark on the strategy make years of gains. Those who stay on the sidelines, lose out. When the hit happens, it is a shock that is explained away by specific circumstances. The over-confident are not blamed and the cautious and not proved 'right' in most cases.

The price of protection - FT.com

The price of protection - FT.com: "However, most banks expect the biggest impact to be felt by corporate customers, particularly mid-sized companies that rely heavily on bank debt. Analysts believe these businesses will sit outside the ringfence, alongside the investment bank activities – the part most at risk of a sharp rise in wholesale funding costs. Creditors generally give higher ratings to banks with retail and investment banking under one roof as they believe they are more stable. Remove that benefit and ratings are likely to fall, making it harder and more expensive to access funds."

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The Social Responsibility of Business is to Increase its Profits, by Milton Friedman

The Social Responsibility of Business is to Increase its Profits, by Milton Friedman: "The New York Times Magazine, September 13, 1970. Copyright @ 1970 by The New York Times Company.

When I hear businessmen speak eloquently about the "social responsibilities of business in a free-enterprise system," I am reminded of the wonderful line about the Frenchman who discovered at the age of 70 that he had been speaking prose all his life. The businessmen believe that they are defending free en­terprise when they declaim that business is not concerned "merely" with profit but also with promoting desirable "social" ends; that business has a "social conscience" and takes seriously its responsibilities for providing em­ployment, eliminating discrimination, avoid­ing pollution and whatever else may be the catchwords of the contemporary crop of re­formers. In fact they are–or would be if they or anyone else took them seriously–preach­ing pure and unadulterated socialism. Busi­nessmen who talk this way are unwitting pup­pets of the intellectual forces that have been undermining the basis of a free society these past decades."

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Technology Can't Save Us From Math Mishaps - WSJ.com

Nice

Technology Can't Save Us From Math Mishaps - WSJ.com: Mr. Clarke, the economist, suggests that we go easy on statisticians. "Everyone makes spreadsheet mistakes," he says. He repeats advice he received from his best man at his wedding: "The best way to remember your wedding anniversary is to forget it once."

Profits from ETF

FT.com: "Why are ETFs so profitable when they appear to be so cheap? Annual management fees have been driven down by price wars, which have been particularly fierce in the US. Synthetic ETFs obviously offer scope for profitable derivative trading and collateral management, but the opportunity to extract revenue is less obvious with physical ETFs, being mainly confined to securities lending. Perhaps running an ETF business is at least in part a means of running a securities lending operation, in which case providers should reveal what proportion of stocks in a portfolio are lent, as the associated counterparty risks are material to investors."

2011 World’s Most Ethical Companies | Ethisphere™ Institute

Useful for the selection of 'ethical companies'.

2011 World’s Most Ethical Companies | Ethisphere™ Institute: "The World’s Most Ethical Companies designation recognizes companies that truly go beyond making statements about doing business “ethically” and translate those words into action. WME honorees demonstrate real and sustained ethical leadership within their industries, putting into real business practice the Institute’s credo of “Good. Smart. Business. Profit.”"