Posts tagged with markets

An Insider’s Perspective on the Basel Reforms (por stanfordbusiness)

  • regulatory framework contributed to market uncertainty over distresed banks
  • worried about transmitting financial distress to real economy
  • reduce procyclicality
  • focus on interconnectedness
  • trying really hard not to screw things up worse
  • trying to avoid unintended conequences … although some consequences were intended
  • common equity may be the only thing that really matters
  • didn’t intend Basel II to incent hybrid capital
  • even though Basel III didn’t increase capital requirement ratios much, it did increase the required capital simply by redefining risk
  • distressed banks, in order to save face, were paying dividends and buying back shares—blowing out their capital base—because if they conserved like they needed to, the market would smell blood and eat them
  • prior to the crisis of 2008, even regulators weren’t clear on why capital requirements were necessary or what capital actually meant
  • "tie our own hands"
  • countercyclical buffer
  • capital conservation is no longer about solvency or market perceptions: it’s about having enough capital to withstand a period of market stress and still being solvent even during the duress
  • "to state the obvious, we can’t know what «the capital level at which the firm would be viewed as viable by the market»"
  • trying to find a real-world 99% confidence interval for firm failure
  • (not easy, since probability doesn’t exist)
  • empirical 99% risk-weighted loss
  • "eye of the beholder"
  • "leap of faith" (#econometrics)
  • "translating fun things like economics into real things like accounting is challenging"
  • only have Basel I and Basel II risk classifications, can’t find out what Basel III risk-weighting will be
  • requires a lot of “judgement” (I could think of a less nice word for that)
  • We have never seen the market’s worst because the Federal Reserve stepped in in 2008—so we really don’t know the most catastrophic case that banks might self-insure at.
  • Basel III requires 4.5% minimum capital ratio (Basel I was 4%-6%). “How did we get the half percent? Having sat in the room the whole time I’m still not sure how we got a half percent.”)
  • …plus Capital Buffer 2.5%
  • …plus Counteryclical Buffer up to 2.5%

Audience questions

  • Evan Pico, $C: Why assume wholesale credit can go all the way to zero?
  • "We’re trying to assume something worse than history could happen.”
  • The Basel Committee bases its rules not on the firms that did OK in the crisis but on failed banks—which if they weren’t acquired would have failed even harder—and on what might have happened if X,Y,Z hadn’t saved our arses as much as they did. Worst case scenario.
  • observation period
  • Mimi Mangus, Union Bank: QIS template. We don’t have the data to calculate LCR or NSFR. So it seems like you’re analysing B.S. Are we supposed to pay money to answer your questions?
  • MM: “Regional banks don’t have 100% Liquidity Coverage Ratio like Goldman. We hold a lot of GSE’s, MBS, and traditional loans. Maybe we need to replace Fannie and Freddie with a member-bank mutual.” Comparison of US to Australia.
  • "We want collateral to be liquid both in private markets and through the central bank."
  • "I have new sympathy for people who try to predict climate change—predicting something uncertain in the future with very certain costs in the now."

Why is gold considered a hedge against fiat currency? If the monetary system collapsed — as in, the USD or the GBP or the JPY were no longer accepted in exchange for goods — are you absolutely sure people would accept Gold as a substitute?

This is not gold coins minted by a current government — it’s gold bars, gold bullion, or gold coins from some historical government (like, Spanish doubloons).

Gold, just exactly like fiat currency, is worth something just because other people think it will be worth something.
So if that’s the case — then why is gold considered a hedge against inflation?

Why is gold considered a hedge against fiat currency? If the monetary system collapsed — as in, the USD or the GBP or the JPY were no longer accepted in exchange for goods — are you absolutely sure people would accept Gold as a substitute?


This is not gold coins minted by a current government — it’s gold bars, gold bullion, or gold coins from some historical government (like, Spanish doubloons).

Photo detail

Gold, just exactly like fiat currency, is worth something just because other people think it will be worth something.

So if that’s the case — then why is gold considered a hedge against inflation?



179 Plays

BHP Billiton from The Economist

  • the cut and thrust of dealmaking
  • putting finance types in the C suite rather than engineers
  • diversifying as mines are both very large and financially volatile

Asset class — Market Size

  • Bonds — $93T
  • Loans — $64T
  • Equities — $54T
  • OTC Derivatives — $27T

via supervenes


✚ Here’s a summary of the history of funding rounds of the three major Hadoop players:

Cloudera: $141M

  • 2009: $5M
  • 2009: $6M
  • 2010: $25M
  • 2011: $40M
  • 2012: $65M

Hortonworks: $70M

  • 2011: $20M
  • 2013: $50M

MapR: $52M

  • 2011: $20M
  • 2013: $32M

Note: the data I had for the MapR raises $30mil in Series C seems to be a bit different to the data I’ve collected today.

  • $150 billion per year is spent on text messaging.
  • Recorded music is a $17 billion market
  • Yearly box office receipts are $32 billion
  • Video games $7 billion

(And the SMS market was created completely by accident.)

Tom Standage of The Economist


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.

“Prediction is very difficult, especially if it’s about the future.” —Niels Bohr

Consensus has consistently expected USD/JPY cross to rise—2009, 2010, 2011, 2012.

Graphic from a recent HSBC’s currency outlook, via Making Sense of the Skew in Yen.


The logic of Marshallian S&D curves are wonderful in several respects:

  1. resolves the “diamonds and water paradox” (why does unnecessary jewelry cost more than necessary water?)
  2. sounds reasonable across a variety of real-world scenarios (FCOJ futures, corporate bond issuance, grocery stores, machine parts, olive oil exports, Tyler Cowen’s umbrella term “markets in everything”)
  3. actually works in experiments! The legend is that Vernon Smith used to say in class that Marshallian S&D was “just a theory” — and then was shocked that prices actually converged to the predicted P*


Here’s a great way to misapply the Marshallian logic and arouse my ire:

  • Say "Markets make sure that people who want things more are the ones who get them."

That’s not what the theory says. We use the jargon willingness to pay or reserve price to talk theoretically about the maximum someone would counterfactually give up for something—and equate this (by rational consistency hypotheses) to how much utility they derive from obtaining it. (The experiments I mentioned above literally created a reserve price—a redeemable coupon for $13 if you get the paper at P*, so we as non-omniscient lab-gods know that you actually assign a personal dollar value on the good—and know what it is. So the fact that those experiments worked doesn’t prove the extra assumptions about the way people’s consent, pleasure, engagement, and desires interface with an opportunity for economic exchange.) Laura’s measured willingness to pay does not say how badly she wants something relative to Gemma. Why? Because maybe Gemma is poor and Laura is rich.

In the real world, rich people engage in retail therapy at prices that would pay for a poor person’s housing and food for months.

Maybe it makes them feel good, or they do it as a way to socialise (if you don’t consider yourself rich but you’re reading this on a computer: do you socialise at bars or restaurants or just outside on the street? Why?), or maybe they’re bored. Whatever.


Tip Top Bar

Clearly we can’t give Gemma £100 and give Laura £100,000 and conclude that Laura wanted the dress more because she paid more for it. It might be reasonable if both were in the same place with the same financial resources.

The mathematics behind the S&D graph aren’t that complicated. (It does require thought—but not years’ worth of thought—to understand the Marshallian model.) But still, I think because of the transition from English → maths → English, and the jargon words interposed with normal words, the overall rhetorical effect is to cover the obvious fact of inequality whilst redirecting attention to “optimal” (another jargon word budging in on the default namespace!) allocation.

The hypothesis of logarithmic utility per individual has been around since the 1700’s at least. (Implying €1000 means more to a poor person than to a rich person.) And yet people still use this fallacious reasoning that markets allocate goods to those who “want it the most”.

Sorry: willingness to pay is a function of both desire and of ability to pay.

150 Plays • Download

The Needham Question: why was China so culturally, intellectually, and economically dominant and then it was the UK / Dutch / Belgians / Portuguese who subverted the rest of the world fully 6 centuries after China developed 3-masted ships?

  • Gunpowder was developed by Daoists searching for the elixir of life…trying to subdue KNO₃ (viz, Alchemy discovering things; in general non-QM-level chemistry leading to inventions)
  • a mixture of sulphur, honey, and saltpeter (i.e., poop)
  • the idea of competing governments in Europe —vs— two in China. This is apparently due to Hume.
  • Needham mis-characterised Chinese thought as being either: Confucian (ethical concerns only), Buddhist (fleeing the world), or Daoist.

    I bet this is where Kenneth Clark (or was it James Burke) got his silly sinology: saying that “the Chinese mind” wanted to “go with the flow” rather than Europeans who want to change the world to suit themselves. (Rubbish.)
  • But Buddhists were also interested in science. 8th cent mathematician/astronomer: “We have to get the secular stuff right, or people will think we are stupid”
  • Invention of the printing press: “The ruler [in Japan] was able to produce large numbers of holy objects [scriptures of the Buddha]” which was great for his image.
  • canals, ceramics; trading with Japan, SE Asia
  • Trade: “What went out from China was eagerly sought; what was brought back was trinkets and frippery for the rich to enjoy”
  • Tang dynasty (600-900 A.D.) markets were more tightly controlled than laissez-faire past. People move more freely and freer markets during Song Dynasty. Banknotes.
  • "Too successful for its own good?" Complacency.
  • Paper in lavatory, wallpaper, clothing, decorations. Not only printing paper.
  • 19th century Sinologists wanted to “look for the reasons for failure” — but it’s ahistorical to read the past in terms of what happened later.
  • Christian Jesuits in China. The Indians had been tolerant simply because India is tolerant of so many G-ds. Why not one more? (oops)
  • Natural theology. The Chinese must have inherited the good order and right thinking of Eden. (medieval) “All we need to do is let them know about Christ” As opposed to how savages were treated.
  • Jesuits beating Islamic astrologers at prediction; teaching maths to the Emperor in his own chamber.
  • Sinophilia in Europe, Chinese perceived as more enlightened
  • The governance of China (imperial bureaucracy) surprised Europeans. Not hereditary aristocrats nor paying for the post.
  • a career open of talents (where the British Civil Service came from) #meritocracy
  • silk, porcelain, agriculture, lochs & canals; hydraulic China
  • Diderot, Leibniz, Hume all took a negative view of China
  • "Those foolish Chinese don’t understand Science! That is, they don’t know the world is composed of four elements (due to Aristotle). They think it’s composed of five! The nincompoops!"
  • The West finally got a technical lead with steam power.
  • Lord Macartney had been seducing Catherine the Great.
  • diving bell, hot air balloon, telescopes, burning glasses,
  • Qen Leung emperor “We have no need of your toys”
    — partly because Jesuits had sold science previously as a fascination or entertainment (rather than, say, military application)
    — partly because Qen Long was well informed about British intrusions into India. First “We just want to trade” and then they’re all up into the Chinese border of Nepal. No, thanks, I’d rather not have the trade and keep you outta my Kingdom.
  • awful Western medicine killing Chinese orphans in the countryside. Rumours: “Westerners need a baby’s eye to create a mirror. That’s why they take and kill them” “Westerners need to put a dead baby under each sleeper in order to build a railway” (for me this is reminiscent of Guatemalan rumours about white North Americans stealing Guatemalan babies … maybe the mother didn’t want to admit she gave it up for adoption because that’s shameful, so when confronted she said the adoption agency took it)
  • Lu Gwei Jen was the woman behind Joseph Needham’s work.
  • a Chinese book in 1922 Why China Has No Science — they’d missed their own history
  • Like Frank Wilczek’s advice for success: Needham was looking at new data — rather than measuring with devices that had never been used before, he was reading books that everyone had ignored.
  • "There are different ways of looking at science. 'Science' doesn't just mean 'modern Western science' but achievements in other cultural contexts” (Indian, Chinese, Muslim)
  • invention versus science (science having roots in Greek philosophers)
  • Chinese ways of abstract thinking were very different”
  • "Once there’s one industrial revolution—with all the power, military & commercial, that that gives—there’s no room for another"
  • "If the Seung navy had sailed up the Thames sometime in the 13th century, brought us gunpowder and compass and printing presses and completely swept us away into the Chinese culture…there might have been some Chinese historians saying ‘But look at all that interesting stuff those Greeks did…why didn’t they have the Seung Industrial Revolution first?”
  • pirates on the East China coast were quick to acquire the latest ballistics
  • "People are already beginning to write narratives of Chinese history that try to depict even the 19th century as a ‘success story’"
  • Einstein said the Chinese lagged because they never had Euclidean geometry and the idea of proving things. But the better question isn’t why didn’t they start proving things: rather why did anybody start proving things?

No mention of this other story I heard which was, rather than broad historical determinism, specifically just that the eunuchs in the 13th century sabotaged all the ships in the harbour to fight their enemies, the Mandarins. Local maximum achieved; global maximum put off for at least another 7 centuries.

(Source: BBC)