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Finance

The rise of VaR

October 1, 2009

Simon Johnson and James Kwak take a look at how VaR got to be so popular in the first place. They make the insightful observation that a bad (or at least an incomplete) model can gain acceptance not only because of its simplicity but, oddly, because of its output as well. Indeed, VaR succeeded not [...]

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An interview with Mandelbrot

October 1, 2009

The FT has posted a lengthy video interview with the brilliant mathematician Benoit Mandelbrot, whose book The (Mis)behavior of Markets first inspired me to enter finance and risk management in particular. I do find  that some of John Auther's questions mar an otherwise interesting (but extremely high-level) overview of Mandelbrot's thoughts on finance. Right from [...]

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Measuring aggregate risk in CDS markets

September 25, 2009

The ECB recently published this lengthy report (PDF link) on the state of the CDS market, with particular focus on counterparty risk. It is well worth a read for either a cursory overview or more in-depth look at the mechanics and concerns of that market. Section 3.4 regarding counterparty risk measures was especially interesting to [...]

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Because no one knows commodities like we do

September 22, 2009

Why did a post up titled "How To Play Natural Gas With Small Cap Stocks" pop up in Silicon Alley Insider's RSS feed? A little investigating (elementary, my dear Watson) shows that it's actually from The Money Game - another blog under the Business Insider umbrella. The blogs themselves and current RSS feeds show no [...]

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You can keep the note

September 14, 2009

I re-watched the classic Marx Brothers movie Duck Soup last night and three (barely) finance-related bits stuck out. Yes, this as a thinly veiled attempt to get the Marx Brothers on TGR. First, a timely discussion of the politics of debt, in Groucho's extended introduction: Groucho: "Now, how about lending this country 20 million dollars [...]

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Yet more risky testimony

September 11, 2009

Nassim Taleb and Chris Whalen also participated in Wednesday's House hearing on risk management. The full text of their remarks are available here (Taleb) and here (Whalen). Taleb's thoughts are familiar, consisting largely of his well-known opinions on VaR and financial regulation. Whalen, however, provides an excellent quote: The problem is not with models themselves. [...]

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Bookstaber's testimony on risk

September 11, 2009

Rick Bookstaber testified to the House on Wednesday regarding risk management; the text of his remarks is available here. It is a must-read. The bulk of his testimony focuses on VaR: it's use, misuse and role in the recent crisis. I find his greatest insight in this paragraph: I remember a cartoon that showed a [...]

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Only in America

September 3, 2009

The law firms of Pearson, Simon, Warshaw & Penny, LLP and Tydings & Rosenberg, LLP have just announced a class-action lawsuit against ProShares Trust on behalf of everyone who has ever owned shares of SKF, the double-short financials leveraged ETF. Key quote from the press release: For example, in a six week period from September [...]

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Greater fool theory

August 21, 2009

Today's Dilbert: I think the last panel could stand alone.

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An unhelpful VIX

August 19, 2009

A post at Vix and More includes the following graph of the VIX and the forward-looking 21-day realized volatility: The post discusses the fact that realized vol has remained well below implied vol, but I think there's a much more interesting facet to this chart. First, consider what is being plotted: the VIX, marked in [...]

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Deconstructing the Gaussian copula, part III

August 11, 2009

The intuition behind copula models: dependence, correlation, single factors and more.

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Deconstructing the Gaussian copula, part II and a half

August 11, 2009

An aside on static recovery assumptions in CDO pricing.

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VaR at risk

July 31, 2009

In a piece called "The Risk Mirage," BusinessWeek assails its peers for falling for VaR-based evaluations of Goldman's risk levels: [A] VaR-based analysis of any firm's riskiness is useless. VaR lies. Big time. As a predictor of risk, it's an impostor. It should be consigned to the dustbin. Firms should stop reporting it. Analysts and [...]

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Recovering from false news

July 17, 2009

Via Alea, a very interesting econometric study on the impact of false news on stock prices. In September 2008, an article on United Airlines' 2002 bankruptcy resurfaced and was distributed as if it were new information. The company's stock plummeted immediately, but bounced back and by the end of the day was off only 11% [...]

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Dilution in action

July 17, 2009

A lot of sites are reporting Bank of America's year-over-year income comparison without batting an eye: Bank of America posted income of $3.22 billion, or 33 cents a share, down from $3.41 billion, or 72 cents a share, a year earlier. The number wasn't particularly surprising (EPS slightly beat, revenue slightly missed) but couldn't anyone [...]

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Stocks are a zero-sum game

July 15, 2009

I firmly hold that all financial contracts are zero-sum games. Recently, however, I have heard many arguments premised on the idea that the stock market is positive sum because economic growth creates wealth, which is reflected in universally rising stock prices. But in this scenario, you purchase $1 of stock on Day 1. On Day [...]

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CDS Markets, briefly (or not so briefly)

July 15, 2009

In response to Daniel Indiviglio's call for "someone who understands the derivatives market," I posted the following comment on the Atlantic Business blog - and I reprint it here not just because it turned out a surprisingly complete thought, but because I'm a glutton for blogging laziness: The CDS market works similarly to any other [...]

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Deconstructing the Gaussian copula, part II

July 9, 2009

A math-free introduction to CDO pricing.

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Trading Twitter

June 24, 2009

Bubble 2.0 datapoint of the day: StreamBase has announced that their CEP (complex event processing) software for algorithmic trading now supports Twitter. One CIO admits in an otherwise Hallelujah-esque article that "traders he has spoken to haven't yet jumped onto the Twitter bandwagon." But here's the clincher (emphasis mine): A key benefit of Twitter is [...]

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Things that keep me up at night: the FDIC

June 19, 2009

Is the FDIC too big to fail?

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Yet more reverse convertibles: positive sum games?

June 19, 2009

Did Felix Salmon really just write this in defense of his reverse convertibles stance?? For one thing, stocks generally go up over time: they’re a positive-sum game. ... Retail investors, as a rule, have no business buying instruments with limited upside but 100% downside — I’d even include individual bonds in that, despite the fact that [...]

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More reverse convertibles: cutting the nose to spite the face?

June 18, 2009

Felix is back at the forefront of the "ban reverse convertibles" charge. He makes some salient points, but continues to encourage a slippery slope form of regulation that would ultimately handicap an industry to protect the naive daytrader. Referring to embedded short options in general, he notes: But retail-facing financial instruments should never embed such [...]

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Wilmott's stages of derivatives

June 18, 2009

Wilmott adapts the Kubler-Ross stages of grief to describe derivatives. An excellent read. Confused disbelief: I'm a great believer in education playing a bigger role in derivatives in future. But not the sort of education that we've got at the moment. I understand Warren Buffett when he says "The more symbols they could work into their writing [...]

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Reverse convertibles

June 17, 2009

Ever since the WSJ published this article on the front page of section C, a lot of people are talking about "reverse convertible notes." James Kwak and Felix Salmon led a charge to ban the instruments but Felix, at least, seems to have backed off a little bit after these responses. I've seen many varieties of [...]

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CNBC thinks Taleb is a bad trader

June 17, 2009

More on Taleb: CNBC is running a piece called "Swan Song: Why Nassim Taleb is Still Wrong." The crux of the argument seems to be this paragraph: Arguing against Taleb is a little embarrassing; who among us wants to side with the plodders when for the price of a paperback you can join the elect? [...]

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Slow news day?

June 17, 2009

The WSJ is reporting today on Nassim Taleb and Mark Spitznagel's new hyperinflation fund. It's basically the same story they reported two weeks ago when this news broke. And it's not a hyperinflation fund, anyway.

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Misreading misleading charts: VIX edition

June 16, 2009

Get your tin foil hats back out! Zero Hedge can't seem to keep their manipulation theories under control (I addressed one here in one of TGR's most popular posts) and today's example is to egregious to pass up. In this post, Zero Hedge reviews ground breaking "research" from Innovative Quant Solutions "on the very relevant topic [...]

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Random forecasts (with echoes!)

June 15, 2009

And speaking of forecasts, I'm reminded today of one of my favorite forecasting errors: the echo. This morning, the manufacturing survey missed the forecasted amount, and many pundits commented that it contributed heavily to the market's fall. Here is a plot of the manufacturing survey level as reported each month in red (prior to any [...]

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Spotted: a free lunch

June 11, 2009

The internets are buzzing about the CDS trade that netted small brokerage firm Amherst a nice profit at the expense of Wall Street giant JPM. I may be missing something, but it seems to me that the risk hasn't disappeared (as is being implied), it has merely been transferred from the mortgage originators (or whomever [...]

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Irrational markets: V-shaped edition

June 8, 2009

The market shot up late this afternoon because Paul Krugman stated: “I would not be surprised if the official end of the U.S. recession ends up being, in retrospect, dated sometime this summer,” he said in a lecture today at the London School of Economics. “Things seem to be getting worse more slowly. There’s some [...]

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