Archive for January, 2011

31
Jan
11

Catarsis Quant

En un post de Zero Hedge se ofrece una interesante purga quant. Hay algunos condimentos de Rage Against The Models- pero entretenida de leer.

(…)

In 2008 Emanuel Derman and Paul Wilmott (two most famous names among quants) wrote the following in the article published in Business Week:

“Financial markets are alive. A model, however beautiful, is an artifice. To confuse the model with the world is to embrace a future disaster in the belief that humans obey mathematical principles.

How can we get our fellow modelers to give up their fantasy of perfection? We propose, not entirely in jest, a model makers’ Hippocratic Oath:

• I will remember that I didn’t make the world and that it doesn’t satisfy my equations.

• Though I will use models boldly to estimate value, I will not be overly impressed by mathematics.

• I will never sacrifice reality for elegance without explaining why I have done so. Nor will I give the people who use my model false comfort about its accuracy. Instead, I will make explicit its assumptions and oversights.

• I understand that my work may have enormous effects on society and the economy, many of them beyond my comprehension. “

(…)

 

27
Jan
11

Humor du Jour: Chiste matematico

2 plus 2 equals 5 for sufficiently large values of 2

24
Jan
11

Paper: Busquedas en Google y performance

In Search of Attention

Abstract

We propose a new and direct measure of investor attention using search frequency in Google(SVI). In a sample of Russell 3000 stocks from 2004 to 2008, we find that SVI (1) is correlated with but different from existing proxies of investor attention; (2) captures investor attention in a more timely fashion and (3) likely measures the attention of retail investors. An increase in SVI predicts higher stock prices in the next two weeks and an eventual price reversal within the year. It also contributes to the large first-day return and long-run underperformance of IPO stocks. Our results provide direct support for Barber and Odeanís (2008) price pressure hypothesis and highlight the usefulness of search data which can reveal investor interests.

Link al Paper

24
Jan
11

Recursos de Stata

Así se llama este excelente compendio de manuales (básicos y otros no tanto) de Stata que ofrece Marginal Revolution.

Here are some Stata resources that I have found useful. Statistics with Stata by Hamilton is good for beginners although it is overpriced. For the basics I like German Rodriguez’s free Stata tutorial best, good material can also be found at UCLA’s Stata starter kit and UNC’s Stata Tutorialtwo page Stata is good for getting started quickly.

Christopher Baum’s book An Introduction to Modern Econometrics using Stata is excellent and worth the price. The world is indebted to Baum for a number of Stata programs such as NBERCycles which shades in NBER recession dates on time series graphs–this was a big help in producing graphs for our textbooks!–so buy Baum’s book and support a public good.

I have found it hugely useful to peruse the proceedings of Stata meetings where you can find professional guides to using Stata to do advanced econometrics. For example, here is Austin Nichols on Regression Discontinuity and related methods, Robert Guitierrez on Recent Developments in Multilevel Modeling, Colin Cameron on Panel Data Methods and David Drukker on Dynamic Panel Models.

I found A Visual Guide to Stata Graphics very useful and then I lent it to someone who never returned it. I suppose they found it very useful as well. I haven’t bought another copy, since it is fairly easy to edit graphs in the newer versions of Stata. You can probably get by with this online guide.

German Rodriguez, mentioned earlier, has an attractively presented class on generalized linear models with lots of material. The LSE has a PhD class on Stata, here are the class notes: Introduction to Stata and Advanced Stata Topics.

Creating a map in Stata is painful since there are a host of incompatible file formats that have to be converted (I spent several hours yesterday working to convert a dBase IV to dBase III file just so I could convert the latter to dta). Still, when it works, it works well. Friedrich Huebler has some of the details.

The reshape command is often critical but difficult, here is a good guide.

Here are many more sources of links: Stata resourcesStata LinksResources for Learning Stata, and Gabriel Rossman’s blog Code and Culture.

 

19
Jan
11

Paper: Ruido de Microestructura

Modeling microstructure noise with mutually exciting point processes

Abstract

We introduce a new stochastic model for the variations of asset prices at the tick-by-tick level in dimension 1 (for a single asset) and 2(for a pair of assets). The construction is based on marked point processes and relies on linear self and mutually exciting stochastic intensities as introduced by Hawkes. We associate a counting process withthe positive and negative jumps of an asset price. By coupling suitably the stochastic intensities of upward and downward changes of prices for several assets simultaneously, we can reproduce microstructure noise (i.e. strong microscopic mean reversion at the level of seconds to a few minutes) and the Epps effect (i.e. the decorrelation of the increment sin microscopic scales) while preserving a standard Brownian diffusion behaviour on large scales.More effectively, we obtain analytical closed-form formulae for the mean signature plot and the correlation of two price increments that enable to track across scales the effect of the mean-reversion up to the diffusive limit of the model. We show that the theoretical results are consistent with empirical fits on futures Euro-Bund and Euro-Bobl in several situations.

Link al Paper

18
Jan
11

Gráfico du Jour: Nominal vs Real

(Fuente Visualizing Economics)

14
Jan
11

Gráfico du Jour: Bailout Europeo

(Fuente: Citigroup, via FT Alphaville)

13
Jan
11

Paper: Ramificaciones del ZLB

Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events?

Abstract

Before the recent recession, the consensus among researchers was that the zero lower bound (ZLB) probably would not pose a significant problem for monetary policy as long as a central bank aimed for an inflation rate of about 2 percent; some have even argued that an appreciably lower target inflation rate would pose no problems.  This paper reexamines this consensus in the wake of the financial crisis, which has seen policy rates at their effective lower bound for more than two years in the United States and Japan and near zero in many other countries.  We conduct our analysis using a set of structural and time series statistical models.  We find that the decline in economic activity and interest rates in the United States has generally been well outside forecast confidence bands of many empirical macroeconomic models.  In contrast, the decline in inflation has been less surprising.  We identify a number of factors that help to account for the degree to which models were surprised by recent events.  First, uncertainty about model parameters and latent variables, which were typically ignored in past research, significantly increases the probability of hitting the ZLB.  Second, models that are based primarily on the Great Moderation period severely understate the incidence and severity of ZLB events.  Third, the propagation mechanisms and shocks embedded in standard DSGE models appear to be insufficient to generate sustained periods of policy being stuck at the ZLB, such as we now observe.  We conclude that past estimates of the incidence and effects of the ZLB were too low and suggest a need for a general reexamination of the empirical adequacy of standard models.  In addition to this statistical analysis, we show that the ZLB probably had a first-order impact on macroeconomic outcomes in the United States.  Finally, we analyze the use of asset purchases as an alternative monetary policy tool when short-term interest rates are constrained by the ZLB, and find that the Federal Reserve’s asset purchases have been effective at mitigating the economic costs of the ZLB.  In particular, model simulations indicate that the past and projected expansion of the Federal Reserve’s securities holdings since late 2008 will lower the unemployment rate, relative to what it would have been absent the purchases, by 1½ percentage points by 2012.  In addition, we find that the asset purchases have probably prevented the U.S. economy from falling into deflation.

Link al Paper

13
Jan
11

Paper: Estimación no parametrica

MAXIMUM PENALIZED QUASI-LIKELIHOOD ESTIMATION OF THE DIFFUSION FUNCTION

Abstract

We develop a maximum penalized quasi-likelihood estimator for estimating in a non-parametric way the di ffusion function of a di ffusion process, as an alternative to more traditional kernel-based estimators. After developing a numerical scheme for computing the maximizer of the penalized maximum quasi-likelihood function, we study the asymptotic properties of our estimator by way of simulation. Under the assumption that overnight London Interbank O ffered Rates(LIBOR); the USD/EUR, USD/GBP, JPY/USD, and EUR/USD nominal exchange rates; and 1-month, 3-month, and 30-year Treasury bond yields are generated by di ffusion processes, we use our numerical scheme to estimate the di usion function.

Link al Paper

12
Jan
11

Finanzas 101: Quanto Spread

FT Alphaville tiene un buen post sobre la actualidad del mercado de CDS (soberanos). Ofrece gráficos interesantes y una respuesta a la pregunta: ¿Que es el Quanto Spread y por qué existe?

The difference between the USD CDS spread and EUR CDS spread is referred to as the Quanto spread.




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