What do you want? Coke and prostitutes.

Via Paul Krugman, an interesting comment on The Irish Economy blog: The markets want money for cocaine and prostitutes. I am deadly serious. Most people don’t realize that “the markets” are in reality 22-27 year old business school graduates, furiously concocting chaotic trading strategies on excel sheets and reporting to bosses perhaps 5 years senior […]

Me thinks the executive doth protest too much

Ahmass Fakahany says according to Bloomberg: I don’t know anyone who wouldn’t have done certain things differently in retrospect, Now to evaluate this, you need to know that Risk Management reported to Ahmass when Merrill had its little problem in 2008, and that some people think that it was on his watch that many of […]

Monetising liquidity premiums

FT alphaville points out an article in Risk’s Life and Pensions edition which discusses an interesting trade: pension funds and insurance firms — presumably under pressure to generate returns in a low-yield environment — are seeing logic in giving up their liquid holdings in return for illiquid asset backed securities, for a fee. In other […]

Woodwork not research

Is all quantitative financial risk management bunk? No. Next. OK, I will honour this idiotic question with a more detailed reply than it deserves. Quantiative financial risk management is not an attempt to understand the fundamental dynamics of the market. It does not pretend to model the world they way that physics does. It simply […]

Winter sun

VAR – direction but not comparison

There has been some talk recently of Morgan Stanley’s VAR vs. the same measure for Goldman. Let’s start with the reasonable from Reuters: Morgan Stanley’s firm-wide VaR for all assets averaged $142 million a day in the third quarter, up 2 percent from the second quarter and 4 percent from a year ago. Its commodities […]

Osborne: bungee jumping without a cord

This is the day we stepped over the brink. Osborne’s cuts are regressive, unfair, bad economics, and partisan politics of the worst kind. The rich prosper; the poor pay. Lib Dems, I blame you.

Incentives for equality

A typically well observed post on Jonathan Hopkin’s blog reminds me of something I have been meaning to blog about for a while – income inequality. The evidence here is, if not absolutely unambiguous, then pretty persuasive. Higher income inequality is bad for society. So what’s to be done? I know this is simplistic, but […]

Know your counterparty (if you can)

More from Caballero: In Caballero and Simsek (2009a, b), we capture the idea of a sudden rise in complexity followed by widespread panic in the financial sector. In our model, banks normally collect basic information about their direct trading partners, which serves to assure them of the soundness of these relationships. However, when acute financial […]

Lawyering up and the foreclosure losses

Unlike many, whose righteous indignation is driven by moral certainty, I am in two minds about the foreclosure mess. There seem to be many different things going on here. There are clear operational errors, as in getting the wrong address on a mortgage document. Obviously this is indefensible, and banks should get this kind of […]

Theory danger

Exhibit one, from Ricardo Caballero: In this paper I argue that the current core of macroeconomics—by which I mainly mean the so-called dynamic stochastic general equilibrium approach—has become so mesmerized with its own internal logic that it has begun to confuse the precision it has achieved about its own world with the precision that it […]

What’s fair vs. What’s right

Vince Cable is struggling to get his University fees bill through parliament. Good. At first sight the policy seems fair and sensible, especially to an economist. People who benefit from University education – graduates – should pay for it when they can. Those that don’t earn high salaries don’t pay, and richer graduates support poorer […]

The stock market as a distributed system

My PhD is in computer science, specifically the theory of distributed computation, so I naturally tend to use that metaphor. It does make sense, though, for the stock market. After all, a lot of volume is being driven by exactly that: distributed computers interacting. In The stock market as a single, very big piece of […]

Apologies for the silence last week…

… I was away.

Correlation – problems, causes, trades

There has been quite a bit of talk recently about the high levels of correlations between returns both within asset classes and between them. See for instance here for the FT or here for Bloomberg. The causes of this higher level of correlation are clear. Increased trading of indices and index-based products such as many […]