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Posts tagged with finance

Subtraction Is Crazy

I was re-reading Michael Murray’s explanation of cointegration:

and marvelling at the calculus.

Of course it’s not any subtraction. It’s subtracting a function from a shifted version of itself. Still doesn’t sound like a universal revolution.

(But of course the observation that the lagged first-difference will be zero around an extremum (turning point), along with symbolic formulæ the (infinitesimal) first-differences of a function, made a decent splash.)

definition of derivative

Jeff Ryan wrote some R functions that make it easy to first-difference financial time series.

image

Here’s how to do the first differences of Goldman Sachs’ share price:

require(quantmod)
getSymbols("GS")
gs <- Ad(GS)
plot(  gs - lag(gs)  )

image

Look how much more structured the result is! Now all of the numbers are within a fairly narrow band. With length(gs) I found 1570 observations. Here are 1570 random normals plot(rnorm(1570, sd=10), type="l") for comparison:

image

Not perfectly similar, but very close!

Looking at the first differences compared to a Gaussian brings out what’s different between public equity markets and a random walk. What sticks out to me is the vol leaping up aperiodically in the $GS time series.

I think I got even a little closer with drawing the stdev’s from a Poisson process plot(rnorm(1570, sd=rpois(1570, lambda=5)), type="l")

image

but I’ll end there with the graphical futzing.

What’s really amazing to me is how much difference a subtraction makes.




Since the onset of the Great Recession, 24 bonds that were rated, intended to finance essential services, and backed by tax revenues, have defaulted.


Among Moody’s rated municipal bonds, there have been only 3 school district defaults and two utility defaults since 1971.


Bond insurance was present in at least 5 of the 8 most significant defaults since 2009.

Breckinridge Capital Advisors, quoting Municipal Market Advisors, Default Trends, 5 June 2012.

A while ago I was naïvely wondering how you would compare financial risks in investing in sovereign bonds, municipal bonds, corporate bonds, versus equity risk in public stock markets.

Spurred by wondering why anyone would lend to the United States Treasury when the rates are so, so low. (That question came from reading op-eds about austerity, fiscal cliffs, and so on—where someone inevitably brings up that the US can borrow for free so it shouldn’t worry about its short-term deficit. Keyword “bond market vigilantes”) I mean, couldn’t you get much more money lending to pretty much anywhere else? Answer, found.

(although probably part of the answer is that US TSY, Bunds, and Gilts can soak up huge huge quantities, and there’s no “bank” where you can put a few hundred billion dollars.)

(Source: breckinridge.com)




A Quant in King Arthur's Court by Aaron C. Brown

Did (do)

  • financial derivatives,
  • synthetic vehicles,
  • structured products fine-tuned for clients’ risk appetites (in a CAPM sense of risk),
  • securitisation,
  • public corporations,

and “modern finance” generally add real value to the economy?

Aaron Brown addresses the question by imagining a finance quant sent to the fantasy-history of Medieval Europe.

Do we [quants] knowanything … that is useful or interesting on its own? Or do… we … represent a small and arbitrary cog in a large machine? Have we addressed basic human questions of interest to the ages? Or are our skills specific to our era, about as useful in the sixth century as knowing the keystrokes to use Windows without a mouse or the names of all the Academy Award winners for costume design?

Basically, AB’s answer is that:

  • securitisation spreads risk around to various parties, making the financing of large projects possible. For example small merchants could band together, with the aid of contracts, to jointly finance ventures they would be unable to finance alone. (Also less economic inequality is required to finance ventures.) More trade voyages means more trade means more wealth.
  • because of reasons given in the Central Limit Theorem and Modern Portfolio Theory, pooled risks can make an overall safer portfolio. So a large investment portfolio composed of fractions of twenty ships bound for different ports has lower variance than a portfolio composed of one ship.

It’s a clever restatement of the standard reasons that finance Is supposed to be good.




&#8220;Prediction is very difficult, especially if it&#8217;s about the future.&#8221; &#8212;Niels Bohr Consensus has consistently expected USD/JPY cross to rise&#8212;2009, 2010, 2011, 2012. Graphic from a recent HSBC&#8217;s currency outlook, via Making Sense of the Skew in Yen.

hi-res




According to the FDIC, there was $664.3 billion credit card debt outstanding in the second quarter of 2012. Of that, $16.5 billion was 30 days or more past due. Banks had charged off $8.5 billion.

Doug Henwood

HT supervenes

(Source: lbo-news.com)




You may have heard of &#8220;structured finance&#8221; and its role in the 2008+ financial markets problems. Well, here are some structured finance deals &#8220;in the flesh&#8221;. You can view current ones here: http://www.krollbondratings.com/ratings/transactions

hi-res




The twitter hedge fund died.

sellthenews:

In May the Financial Times reported that Derwent Capital, the hedge fund that partnered with Johan Bollen and Huina Mao to trade the “Twitter Predictor” Strategy “shut down”. The official story is that Derwent’s Capital Markets’ Absolute Return fund opened for investments in July 2011, and…The official story is that Derwent’s Capital Markets’ Absolute Return fund opened for investments in July 2011, and shuttered after a single month, with reported returns of 1.86%.

There are a few oddities here:

  1. Why is the FT reporting in May 2012 that a hedge fund closed in August 2011?1 It would seem this is no longer news. To confirm this is not an error on the part of the Financial Times, I quote a ‘weekly sentiment email’ sent by Derwent Capital on June 6, 2012: “Some of you may have read about our Hedge Fund closing last year in press articles this week.” What? I just caught up on the news of this ‘moon landing’, and now you’re telling me there are more events happening in the world?
  2. As late as the end of March 2012, Derwent was posting performance numbers for managed accounts on their webpage. The reported performance was generally positive, but not consistent, with the spectacular performance promised by Johan Bollen. This period of Derwent’s existence has gone down the memory hole.

You can follow @shabbychef on twitter as well.