My article Introduction to Basis Instruments Contracts (BICs) for Mathematics, Finance, and Economics has received a Google Knol "Top Pick Knol Award". Cheers!
Ah! Someone highjacked the review section of the article and messed it up, Ritu..? anyways..
Friday, December 11, 2009
Friday, November 27, 2009
BICs Vs. The Tobin Tax
I write this article as a commentary on Paul Krugman's support of a Tobin tax on all financial transactions.
It has gained steam lately after being picked up by British leaders including the top financial regulators and the prime minister as the Turner-Brown proposal. When French President Chirac would say this a few years ago, everybody laughed at him....
I think putting incentives that may or may not be short of a tax aimed at directing hedging and speculative activities on securitizing BICs that mirror the value of target underlyings without having an effect on them is the farsighted and most effective proposal that still stimulates rather than slow down economic activity.
"Turner-Brown"
- Op-Ed Columnist - Taxing the Speculators - NYTimes.com (view on Google Sidewiki)
Monday, November 9, 2009
Damned Yankees -Republican/Democrat President
This thought of Republican Vs. Democrats having an impact on NYY winning odds crossed my mind but I did not have the extensive background of Mr. Fleisher on the observation. It is easy to add such an insight in the pricing of NYY odds of winning the series as an additional factor in assessing odds of winning individual games using the BICs framework.
The interested reader is invited to look at the Wolfram demonstration (http://demonstrations.
"Damned Yankees"
- Op-Ed Contributor - Damned Yankees - NYTimes.com (view on Google Sidewiki)
Saturday, November 7, 2009
New York Yankees World Series Triumph!
As a tribute to fellow New Yorkers, to Baseball and World Series fans the world over, I do dedicate my new Wolfram Demonstration on Baseball & BICs.
To the New York Yankees!
To a magnificent victory!
To the New York Yankees!
To a magnificent victory!
Wednesday, November 4, 2009
The Reach for a new paradigm: BICs
The new paradigm is to be found in a widening of the concept of probability to mind trading, hedging and risk management issues. The traditional probabilistic framework by failing to account for risk and uncertainty, perpetuates dangerous expectations based fallacies. BICs (http://tinyurl.com/cyxhpa) theory are already a comprehensive theory to help effectively navigate these issues. See:http://www.
"Economist Profiles In the wake of the worst financial crisis since the Great Depression, economists are racing to provide policy makers with the tools they need to avert a repeat -- a process that some believe could require a revolution in economic thought. In doing so, they are building on the work of colleagues who saw early on the dangers presented by an unstable financial sector. Here are some of the people who did the early work, and who are now using it to build new models of the economy."
- Crisis Compels Economists To Reach for New Paradigm - WSJ.com (view on Google Sidewiki)
Wednesday, October 7, 2009
World Bank launches distressed assets programme - Risk.net
World Bank launches distressed assets programme - Risk.net: "World Bank launches distressed assets programme"
This program looks more like the Treasury PPIP/TARP and has copied the features of those, notably the "Public/Private" partnership dimension. Their is no discussion of the Equity/Debt distribution or source of the funds.
It is regrettable no one has thought about being a market maker on the distressed assets traded at refined levels of granularity as we proposed.
This program looks more like the Treasury PPIP/TARP and has copied the features of those, notably the "Public/Private" partnership dimension. Their is no discussion of the Equity/Debt distribution or source of the funds.
It is regrettable no one has thought about being a market maker on the distressed assets traded at refined levels of granularity as we proposed.
Monday, October 5, 2009
Public-Private Investment Program Almost Ready to Begin - NYTimes.com
Public-Private Investment Program Almost Ready to Begin - NYTimes.com
This article has some important numbers to bear in mind:
"The International Monetary Fund estimated last week that financial institutions worldwide still held about $2.8 trillion in troubled mortgages and securities, and that they had booked losses on less than half that amount so far. A big share of those assets is in American banks.
The Public-Private Investment Program would acquire only a tiny fraction of those assets, amounting to $12 billion. All told, the Treasury said, the five firms have thus far raised $3.07 billion in private equity. The Treasury will match that amount, dollar for dollar, with its own equity investment. It will also provide up to $6.13 billion in financing guaranteed by the government.
In effect, the money-management firms will be able to buy about $12 billion in troubled assets. The firms will split any profits evenly with the Treasury, but taxpayers would ultimately be on the hook if the investments lost money."
Finally it looks like it is going to start at long last along the lines that we outlined in The Investment Professional
http://www.theinvestmentprofessional.com/vol_2_no_3/abstract-bics.html
See also my knol articles:
1. Fair Value Pricing, Government Market Making and PPIP
2. Estimating Costs for PPIP Assets in a Market Making Framework & BICs
This article has some important numbers to bear in mind:
"The International Monetary Fund estimated last week that financial institutions worldwide still held about $2.8 trillion in troubled mortgages and securities, and that they had booked losses on less than half that amount so far. A big share of those assets is in American banks.
The Public-Private Investment Program would acquire only a tiny fraction of those assets, amounting to $12 billion. All told, the Treasury said, the five firms have thus far raised $3.07 billion in private equity. The Treasury will match that amount, dollar for dollar, with its own equity investment. It will also provide up to $6.13 billion in financing guaranteed by the government.
In effect, the money-management firms will be able to buy about $12 billion in troubled assets. The firms will split any profits evenly with the Treasury, but taxpayers would ultimately be on the hook if the investments lost money."
Finally it looks like it is going to start at long last along the lines that we outlined in The Investment Professional
http://www.theinvestmentprofessional.com/vol_2_no_3/abstract-bics.html
See also my knol articles:
1. Fair Value Pricing, Government Market Making and PPIP
2. Estimating Costs for PPIP Assets in a Market Making Framework & BICs
Saturday, September 19, 2009
Op-Ed Columnist - No, It’s Not About Race - NYTimes.com
Op-Ed Columnist - No, It’s Not About Race - NYTimes.com: "For example, for generations schoolchildren studied the long debate between Hamiltonians and Jeffersonians. Hamiltonians stood for urbanism, industrialism and federal power. Jeffersonians were suspicious of urban elites and financial concentration and believed in small-town virtues and limited government. Jefferson advocated “a wise and frugal government” that will keep people from hurting each other, but will otherwise leave them free and “shall not take from the mouth of labor the bread it has earned.”"
This Hamiltonian Vs. Jeffersonians divide which has recently been stated as Blue Vs. Red states is a very rational behavior even though it does not seem so a priori and can be explained via population density and the holistic theorem: The more concentrated a population, the more it makes sense for it to seek government intermediation. The more people there are, the more government intervention makes sense, on a linear cost bringing in quadratic benefits basis.
This Hamiltonian Vs. Jeffersonians divide which has recently been stated as Blue Vs. Red states is a very rational behavior even though it does not seem so a priori and can be explained via population density and the holistic theorem: The more concentrated a population, the more it makes sense for it to seek government intermediation. The more people there are, the more government intervention makes sense, on a linear cost bringing in quadratic benefits basis.
Monday, September 7, 2009
How Did Economists Get It So Wrong? - NYTimes.com
How Did Economists Get It So Wrong? - NYTimes.com
This piece is well written and offers a plausible explanation within the framework of mainstream accepted knowledge. But it's explanations merely reflect what has emerged as conventional wisdom and the intellectual strengths and weaknesses of its author, namely strength in economic history understanding and relative weakness in mathematical fluency.
As a result the piece trashes mathematical skill and look to economic history in Keynesian analysis to seek prescriptions for the current predicament.
What Mr. Krugman may not be able to grasp is not that there are good maths and there are bad maths. The maths used in economic theory and neoclassical economic theory since the end of WWII is transposed from Physics and seems a priori impressive. But we seek to address economic issues. "It ain't Physics" . It is only suitable and built for a world with no constraints on resources, continuity of time and space, unrestricted trade i.e. no frictions, perfect rationality of operators, etc.
There have been recent attempts to correct those assumptions, but all withing the edifice of the traditional mathematical architecture.
Indeed behavioral economics and finance are descriptive theories and provide a well deserved criticism of rational agents theories, but these have not been translated in efficient prescriptive formulations.
BICs are built from the ground up to provide a more resilient framework for more effective formulations that reflect actual human economic reality and behavior. They provide the math to efficiently accommodate evolving economic realities
My biggest concern is with prescriptions that are derived from Mr. Krugman's analysis. They are backward looking and fail to integrate the economic transformations that have taken place since the 1930s, notably the advent of the Internet, the rise of the service and network economies, the relative decline of manufacturing as a source of economic wealth, globalization, the environment...
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PS: The following section made me scratch my head:"The theoretical model that finance economists developed by assuming that every investor rationally balances risk against reward — the so-called Capital Asset Pricing Model, or CAPM (pronounced cap-em) — is wonderfully elegant. And if you accept its premises it’s also extremely useful. CAPM not only tells you how to choose your portfolio — even more important from the financial industry’s point of view, it tells you how to put a price on financial derivatives, claims on claims."
Although the original vanilla call option was originally priced by Fischer Black using a CAPM based argument, derivatives pricing theory in all subsequent textbooks more the arbitrage arguments along Merton's Rational Pricing Theory. It is true that Merton makes a CAPM style argument to value derivatives in incomplete settings such as underlyings driven by jumps, but a robust and replicative pricing argument can still be made without reference to the CAPM and its outrageous assumptions, as I do with BICss.
OK, here let's just say the proposition on CAPM as the modern tool used to value derivatives is debatable. As far as I know, the CAPM is more commonly used in corporate finance for corporate valuation purposes where one uses the CAPM to obtain the required rate of return that is used to discount expected future earnings to deduce present value.
But what's really is a bit startling to me is the characterization of derivatives as "claims on claims"... Derivatives are contracts whose payout is is derived from(i.e. is a function of )the value of other observables(stocks, credit indices, temperature,...) at payout payment time(i.e. maturity).
This piece is well written and offers a plausible explanation within the framework of mainstream accepted knowledge. But it's explanations merely reflect what has emerged as conventional wisdom and the intellectual strengths and weaknesses of its author, namely strength in economic history understanding and relative weakness in mathematical fluency.
As a result the piece trashes mathematical skill and look to economic history in Keynesian analysis to seek prescriptions for the current predicament.
What Mr. Krugman may not be able to grasp is not that there are good maths and there are bad maths. The maths used in economic theory and neoclassical economic theory since the end of WWII is transposed from Physics and seems a priori impressive. But we seek to address economic issues. "It ain't Physics" . It is only suitable and built for a world with no constraints on resources, continuity of time and space, unrestricted trade i.e. no frictions, perfect rationality of operators, etc.
There have been recent attempts to correct those assumptions, but all withing the edifice of the traditional mathematical architecture.
Indeed behavioral economics and finance are descriptive theories and provide a well deserved criticism of rational agents theories, but these have not been translated in efficient prescriptive formulations.
BICs are built from the ground up to provide a more resilient framework for more effective formulations that reflect actual human economic reality and behavior. They provide the math to efficiently accommodate evolving economic realities
My biggest concern is with prescriptions that are derived from Mr. Krugman's analysis. They are backward looking and fail to integrate the economic transformations that have taken place since the 1930s, notably the advent of the Internet, the rise of the service and network economies, the relative decline of manufacturing as a source of economic wealth, globalization, the environment...
-------------
PS: The following section made me scratch my head:"The theoretical model that finance economists developed by assuming that every investor rationally balances risk against reward — the so-called Capital Asset Pricing Model, or CAPM (pronounced cap-em) — is wonderfully elegant. And if you accept its premises it’s also extremely useful. CAPM not only tells you how to choose your portfolio — even more important from the financial industry’s point of view, it tells you how to put a price on financial derivatives, claims on claims."
Although the original vanilla call option was originally priced by Fischer Black using a CAPM based argument, derivatives pricing theory in all subsequent textbooks more the arbitrage arguments along Merton's Rational Pricing Theory. It is true that Merton makes a CAPM style argument to value derivatives in incomplete settings such as underlyings driven by jumps, but a robust and replicative pricing argument can still be made without reference to the CAPM and its outrageous assumptions, as I do with BICss.
OK, here let's just say the proposition on CAPM as the modern tool used to value derivatives is debatable. As far as I know, the CAPM is more commonly used in corporate finance for corporate valuation purposes where one uses the CAPM to obtain the required rate of return that is used to discount expected future earnings to deduce present value.
But what's really is a bit startling to me is the characterization of derivatives as "claims on claims"... Derivatives are contracts whose payout is is derived from(i.e. is a function of )the value of other observables(stocks, credit indices, temperature,...) at payout payment time(i.e. maturity).
Tuesday, September 1, 2009
Op-Ed Contributor - The Case Against a Super-Regulator - NYTimes.com
Op-Ed Contributor - The Case Against a Super-Regulator - NYTimes.com
This case does not seem to have been convincingly made.
While not voicing an opinion for or against a single regulator - It all depends on what they would be empowered to do- it seems to me the argument presented by Ms. Bair here, namely attention neglect that would threaten smaller community banks could be effectively addressed in a multi-layered supervisory system (layers being for example state-regional-federal) as advocated in our holistic theorem implementation recommendation for a single counterparty of reference on a subsidiarity principle See:http://www.authorstream.com/Presentation/kongtcheu-184552-UnityofPurpose3-Business-Finance-ppt-powerpoint/
See also the corresponding knol.
This case does not seem to have been convincingly made.
While not voicing an opinion for or against a single regulator - It all depends on what they would be empowered to do- it seems to me the argument presented by Ms. Bair here, namely attention neglect that would threaten smaller community banks could be effectively addressed in a multi-layered supervisory system (layers being for example state-regional-federal) as advocated in our holistic theorem implementation recommendation for a single counterparty of reference on a subsidiarity principle See:http://www.authorstream.com/Presentation/kongtcheu-184552-UnityofPurpose3-Business-Finance-ppt-powerpoint/
See also the corresponding knol.
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