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Showing posts from October, 2012

Option Trading

I have just read an interesting article by Epsen Haug and Nicholas Taleb in the Journal of Economic Behaviour and Organization. The working paper can be found here. They make the following somewhat controversial arguments in their paper: 1. Black, Scholes and Merton did not invent any formula - they just took an existing formula and made it compatible with neoclassical economics. 2. Option trading was a lot more developed and sophisticated prior to the development of the Black-Scholes-Merton model than we previously realised. 3. Option traders did not use the Black-Scholes-Merton formula after 1973. Instead, they continued to use their bottom-up heuristics which are more robust to high impact rare events. 4. The growth of the options market is not due to the Black-Scholes-Merton formula, but the development of computers with powerful processors. 5. Option traders use heuristics which are close to the Bachelier and Thorp approach to option valuation.

Philosophy and the Financial Crisis

John A. Allison is the president of the Cato Institute, a libertarian think tank based in Washington D.C.. Until 2008, he was also the CEO of one of America's leading banks (BB&T). Allison lays much of the blame for the financial crisis at the feet of the Federal Reserve and the government.  Ultimately, however, he suggest that the reasons behind the financial crisis are philosophical. Below is a video of Allison talking about the reasons for the financial crisis, which is interesting because he was an insider. Please note that this should not be viewed uncritically as Allison's ideological bent colours his analysis.

Apple vs Sony

Apple has just warned investors of a pre-Christmas profits fall. Competition in the tablet market is putting pressure on Apple's gross margins. Notably, Noah Smith has an interesting post which compares Sony and Apple. I like this comparison as I can remember Sony as the Apple of its day. Like Apple, Sony's rise to prominence was with a portable music device - the Sony Walkman (for my younger readers, the Sony Walkman played these things known as cassettes). Like Apple, Sony had an iconic and visionary founder in Akio Morita. Noah Smith suggests that Sony's decline was partially due to the death of Morita in 1999. Will post-Jobs Apple go the same way?

Returning to Growth

Nicholas Crafts has just posted a piece on Vox, which examines policy lessons from past severe recessions (click here). In particular, he looks at the recessions of 1930-32 and 1979-81. Among other things, he advocates stimulating private house-building as the stock of houses is estimated to be three million below the long-run equilibrium.  Tim Besley and Tim Leunig have some radical suggestions as to how this can be achieved - click here.  Of course, the impact of this policy will be to drive down house prices, and, in the process, raise defaults on mortgages, further damaging bank balance sheets.

Farewell Ceefax

After 38 years, the Ceefax service is coming to an end. In the era before the internet and 24-hour news channels, this was how many people stayed abreast of current news.  For many investors in the pre-internet era, it was the only source of relatively up-to-date security prices and market news. Farewell Ceefax!

Quotas for Women on Boards

The EU Commission is about to debate proposals that would force corporate boards to reserve 40% of their seats for women (click here for the story).  Earlier this month, I posted about a new study which found that gender diversity is good for corporate performance.  This study implies that it is in a company's interest to have women on boards and that quotas are unnecessary.  Nevertheless, quotas are becoming increasingly common in the EU.

Video Games

When I was a kid, the first computer game console which I ever saw was Grandstand.  The game consisted of two white vertical bars and a 'square' ball! The object of the game was to get the square ball past your opponent.  Needless to say, computer games have come a long way since then. Today, computer games can involve countless players from around the world. For example, Eve Online has some 400,000 players.  In this game, players engage in trading, form coalitions, create banks, and make spaceships. Eve Online mirrors the real economy as banks fail, economies enter recessions, and the price level can fluctuate wildly.  
Economists have taken to testing their theories using data from Eve Online - click here to read more (hat tip Chris Colvin). Famously, the Second Life game suffered bank collapses at the end of 2007 - an early warning of what was to come in the real economy!

Andrew Haldane's Speech

Andrew Haldane, Executive Director for Financial Stability at the Bank of England, gave an interesting speech at Queen's University today.  The speech can be accessed here and the press release is here.
In his speech, Haldane attempted to draw lessons from the Bank's history of reacting to crises and how the Bank can do a better job of fostering financial stability in the future. However, one has to seriously has to consider whether or not the Bank is part of the problem rather than the solution. 
Did banks and those who gave money to them take too much risk prior to 2007 because they knew that the Bank and the government were going to bail them out? Apparently, there will be more banks allowed to fail in the future, but this promise suffers from a time inconsistency problem i.e., when it comes to the crunch, banks will be bailed out. 
The Bank of England is partially culpable for the collapse of the UK banking system as they had and have a responsibility for the stability of…


Matthew Yglesias has an article over at Slate which looks at some of the concepts developed by Lloyd Shapley and Alvin Roth, the recipients of the 2012 Nobel prize in economics. Click here to read his article. 


This week's Economist has a really nice section on the growth of inequality (click here).   Many parts of the developed (and emergent) world have experienced growing wealth and income inequality over the past three decades. My own work on Ireland shows that wealth in the 19th century was concentrated in the hands of the top 1% of the population, but from 1900 onwards wealth became less concentrated.  However, since the 1980s, wealth has become much more concentrated. The big questions arising from this for economists and other social scientists are why has this happened and what can we do about it? 

EU Wins Nobel Peace Prize

The EU has just won the Nobel Peace Prize for its contribution to peace on Continental Europe.  There is no doubt that the EU has helped to bring some sort of stability to Europe after the ravages of World War II, fascist regimes, and totalitarianism. However, there is also a possible contradiction in awarding the prize to the EU at this time in that monetary union has created massive political and social tensions both within countries (e.g., Spain and Greece) and within Europe.
My prediction for the Nobel Economics Prize - it won't be the EU!

Milton Friedman

As an undergraduate, I took several monetary theory courses where I was introduced to the ideas of the influential Milton Friedman. Friedman was a major influence in the 1970s and 1980s as economies around the world tried to get inflation under control. He was also a leading advocate of personal freedom, particularly in the economic sphere of life - you can get his Free to Choose book or watch his entire PBS Free to Choose documentary here.
The Centre for Policy Studies held an event in July 2012 to mark the 100th anniversary of Friedman's birthday - click here.  Niall Ferguson's speech at this event is well worth watching.

Magna Carta

Boris Johnson's speech at the Tory conference yesterday poked fun at David Cameron not knowing what Magna Carta literally meant (see clip below where David Letterman exposes Cameron's lack of knowledge of British history). I found Cameron's lack of knowledge astounding for two reasons. First, as an Etonian, he would have studied the classical languages. Second, the signing of Magna Carta was one of the most important and defining events in England's history - we can trace our legal rights (such as the right to a trial by our peers) and checks on autocratic rule all the way back to the signing of Magna Carta.  
Cameron's lack of knowledge is maybe not that surprising. I've been to Runnymede (where Magna Carta was signed) and the only memorial to the event was erected by the American Bar Association (see photo below)! Magna Carta is much more important to Americans than to the British. However, our lack of knowledge of the past endangers the freedoms we enjoy in…

Marginal Revolution University

Tyler Cowen (Marginal Revolution blog), along with Alex Tabarrok, has just launched Marginal Revolution University (hat tip: Graham Brownlow). The first course they are offering is Development Economics.  This is probably the most important course any finance or economics students could take as it is all about why some economies have become wealthy whilst others have become poor.  The course is a series of short videos, which are well worth watching. The first lecture is below; all other lectures can be accessed at Marginal Revolution University.

1st Anniversary

This blog started one year ago today.  Thanks to all my subscribers and colleagues who have encouraged  me with this venture - your support is very much appreciated.  For those interested in statistics and facts, here are this blog's statistics:
234 posts or 0.89 per working day350 subscribers / followersAn average of 100 page views per dayMost viewed postPageviews by country - Sierra Leone at bottom and UK at topPageviews by browser - Explorer (26%), Firefox (22%), Chrome (19%), Apple (13%), Safari (11%)Pageviews by operating system - Windows (67%), Macintosh (17%), iPhone (4%), Linux (3%), Android (3%), iPad (2%)My favourite post

The Birth of the Secular State

Click here to read a paper by Noel Johnson and Mark Koyama, two economists at George Mason University, which attempts to explain the secularization of Western state institutions.  You can read Chris Colvin’s review of their paper here.  My main critique of the paper is that Johnson and Koyama greatly underplay the persecution of the Huguenots before and after the Revocation of the Edict of Nantes.  Fewer Huguenots were killed than Cathars because the former were able to emigrate all around the world, and c.400,000 did so.   
Here is the paper’s abstract: This paper investigates the relationship between the historical process of legal centralization and increased religious toleration by the state. We develop a model in which legal centralization leads to the criminalization of the religious beliefs of a large proportion of the population. This process initially leads to increased persecution, but, because these persecutions are costly, it eventually causes the state to broaden the standa…

Saving Capitalism from the Capitalists

The final episode of Masters of Money was broadcast this week. Karl Marx was the subject of this week's episode, and the perspective which Stephanie Flanders took was on saving capitalism from the capitalists. This was, in my estimation, the best of the three episodes. You can watch it on iPlayer.  
The three volumes of Marx's capital are difficult reading, but his Communist Manifesto, written with Friedrich Engels, is short and very readable. The Kindle version is free on Amazon.

Gender Diversity on Boards

Does the gender diversity of boards of directors matter? A recent research report from Credit Suisse (click here) suggests that the presence of women on boards is correlated with better firm performance. This raises an interesting economic question: why should the presence of women on boards matter?Are women more empathetic with employees and therefore better managers?Are women better at selecting successful firms?Are successful firms able to have the luxury of having more women on their boards?Are women better at multi-tasking (a key skill for modern corporate managers)?Are women on boards so good at their job because they have been toughened up by constant male chauvinism on their rise up the corporate ladder? This subject would be a great PhD topic for someone! Click here to read an older post on this issue.

Eric Hobsbawm

Eric Hobsbawm, the great intellectual and historian, died today, aged 95. You can read obits here and here and tributes here.  His three books, Age of Revolution, Age of Empire, and Age of Capital should be read by all who want an insight into how the world developed from 1789 to 1914.  His work has amazing breadth and is very readable.
Below is a Newsnight interview (January 2012) with Hobsbawm.