Dollars and Jens
Thursday, May 27, 2010
Three Can Keep A Secret if Two of Them Are Dead
Federal authorities alleged Wednesday that a Walt Disney Co. executive assistant and her boyfriend engaged in a ham-handed plot to sell Wall Street traders inside information, first offered in a chirpy missive sent to dozens of investment companies.I'm not sure what is the correct way to try to profit from insider information, but putting your illegal plan in writing and mailing it to dozens of strangers is not it.
"Hi, I have access to Disney's (DIS) quarterly earnings report before its release on 05/03/10," the March 5 letter began. "I am willing to share this information for a fee that we can determine later."
The alleged plan went awry. Instead of taking the bait, "multiple hedge funds reported the illicit scheme," the Securities and Exchange Commission said in a press release.
The story is from today's Wall Street Journal.
Wednesday, May 19, 2010
Causes of the Great Depression
If you're looking to fill 68 minutes, you could do worse than this video of Scott Sumner talking about the causes of the Great Depression. The audio could be better quality.
Friday, May 14, 2010
fool me twice, Euro edition
The European Commission on Wednesday recommended that Estonia be allowed to adopt the euro next year despite a critical report from the European Central Bank.Wouldn't an exchange-rate--fixing mechanism with support from both sides seem a more prudent approximation about now? (In fact, looking at an exchange-rate chart, it looks to me like there might be a peg right now. 48 euros to 751 kroons or so?)
The divergent views evoked a similar split a decade ago over Greece’s readiness to join the euro zone, which is now struggling with a sovereign debt crisis set off by Greece.
Europe asunder
Euro plumbs new lows, European stock markets tank, sovereign spreads gap out:
The "End of the World" tag is premature, but I'm warming it back up, on the assumption that it is, in fact, merely premature.RTRS-GREEK FIVE-YEAR CREDIT DEFAULT SWAP AT 611 BPS VS 528.7 BPS AT NEW YORK CLOSE ON THURSDAY – CMA DATAVISION
RTRS-PORTUGUESE CREDIT DEFAULT SWAP AT 247 BPS VS 201 BPS AT NEW YORK CLOSE THURSDAY – CMA DATAVISION
RTRS-SPANISH CREDIT DEFAULT SWAP AT 180 BPS VS 155.1 BPS AT NEW YORK CLOSE THURSDAY – CMA DATAVISION
RTRS-FRENCH CREDIT DEFAULT SWAP AT 71.5 BPS VS 64.9 BPS AT NEW YORK CLOSE THURSDAY – CMA DATAVISION
Labels: End of the World
Thursday, May 13, 2010
2009 state tax revenues
Tax revenues fell in 45 of the 50 states from 2008 to 2009.
Overall state tax revenues increased in the other five states:
- Wyoming: 13.9%
- North Dakota: 4.3%
- Oregon: 1.9%
- Iowa: 1.3%
- South Dakota: 0.9%
Wednesday, May 12, 2010
big trading houses and liquidity
The New York Times reports that
Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase & Company produced the equivalent of four perfect games during the first quarter. Each one finished the period without losing money for even one day.Even before reading much deeper, I had suspected this:
Risk management experts said the four banks, as well as other Wall Street players, reaped big rewards without necessarily placing big bets that stocks or bonds would go up or down. Instead, they mostly played matchmaker, profiting from the difference between the prices at which clients were willing to buy and sell. Banks said that customer order flows were particularly strong during the period.Since the beginning of 2009, these companies have moved away from big market bets toward simply providing liquidity to clients on comparatively simple products. A lot of players left the market or scaled back their presence, either because they failed or because they can't bring as much capital to the table, because of losses, prudent deleveraging, or some combination of the two. It may be a while before enough competition returns to the sell-side to bring this down in a serious way; in the meantime, the juicy profits should remain there, gradually drawing it back in.
Saturday, May 01, 2010
Econometric Errors in Factor Models
A lot of my favorite papers demonstrate common econometric errors by using the econometric techniques to derive results from random data. There's a new example in this month's issue of the Journal of Financial Economics:
It has become standard practice in the cross-sectional asset pricing literature to evaluate models based on how well they explain average returns on size-B/M portfolios, something many models seem to do remarkably well. In this paper, we review and critique the empirical methods used in the literature. We argue that asset pricing tests are often highly misleading, in the sense that apparently strong explanatory power (high cross-sectional R2s and small pricing errors) can provide quite weak support for a model. We offer a number of suggestions for improving empirical tests and evidence that several proposed models do not work as well as originally advertised.An important law of applied econometrics, especially in a setting in which the correlation structure is poorly understood, is that no matter how many corrections you include in your standard error calculations, your calculated standard errors will be too low.
For the record, Lewellen got his PhD from the program I'm in at the University of Rochester while Shanken was a professor here.
Labels: asset pricing
