The Size of the Greek Problem Over Time

The image says it all:

Back to the Future

Today I was looking at some research papers on macro data to prepare for a live TV interview with the BBC and found this report by the IMF that was published this month.

It's interesting to see the predictions they made in 2009 and what has really happened.

In any case, good reading.

What if Charlie Sheen Was a Trader?

Very funny article on the FT about Charlie Sheen being a star-trader and negotiating his compensation package:

http://www.ft.com/cms/s/0/509be01a-4b0f-11e0-911b-00144feab49a.html#axzz1GOnY6YhE

Here is an excerpt:

"The committee then considered objective measures of Mr Sheen’s performance. These were impressive: Mr Sheen’s trading had contributed tens of millions of pounds to the bank’s bottom line over the previous year.

At this point the committee was minded to view Mr Sheen’s transgressions as a private matter, and not one over which it behoved HotShots Bank to take an excessively paternalistic line.
It was also noted that Mr Sheen, a self-pronounced “total freakin’ rock star from Mars” appeared to regard himself as very mobile. If not paid a bonus in line with his compensation expectations, he would surely quit."

Somali Pirates, Goldman Sachs and "Doing God's Work"

A colleague sent me this funny spoof story on a group of Somali's pirates being on trial and claiming that they were in fact working for Goldman.

I hope nobody believes it :)

The Economist - Christmas Issue - Lucky to be in Business School

One of my favorite past-times during the Holidays season is to read the Christmas issue of The Economist. There are lots of "not-so-serious" articles on a wide range of topics that makes for an excellent reading.

In the next three posts I'll talk a bit about three of them that drew my attention.

The first ones is about life in academia and the unmatched expectations of doing a PhD (specially in humanities).

It must be really difficult to finish your PhD in Literature and have no place that would have paid you no more than 40k USD / year anyway. Not mention the fact that currently it takes about 7-8 years to get a PhD in those fields. A newly minted Finance PhD in the US gets around 170-220k / year. European salaries are much lower than that (apart from LBS and INSEAD) but still much better than what a humanities PhD would get.

I've been very lucky to be in a field where PhDs are highly paid (thank you Wall Street and the City for raising our outside option value) and that it is something that I love. At least in my case, the expectations I formed over the five years seemed close to what I ended up getting.

Man vs. Machine

Since the "flash crash" in May, there has been lots of talk about how computer trading algorithms  (i.e. algo trading) can crash the market by overwhelming the market with sell orders triggered after some event-based signal takes place.

Using computers to trade in the milisecond frequency makes it almost impossible for human beings to beat machines because there is no way to match their trading speed.

The FT last week had a very interesting story on how two (independent) Norwegian traders exploited a flaw in the algorithm of a U.S. firm to make money out of illiquid Norwegian stocks. So far so good, but the traders have been handed suspended prison sentences for market manipulation and a fine equal to their trading profits.

I find these charges a little odd. How come a computer that has a built in set of rules is not "manipulating" the markets when it places their orders? Two investors, doing a careful research job, find a flaw in the strategy and placed their bets, taking up the risk along with it. What's wrong with that? T

he U.S. firm is to blame for having a poor algorithm in the first place.Unfortunately this reminds me of that story saying that financial firms enjoy the profits but ask someone to bail them out in case of losses.

It's alive!

Those things don't happen often (at least not as often as I hoped!), but here is the link to my latest paper. It is joint work with Reena Aggarwal and Jason Sturgess (from Georgetown University)

To those of you interested in knowing a bit more about my research, this is it. Any comments are highly welcome!

Does Proxy Voting Affect the Supply and/or Demand for Securities Lending? 

We use a comprehensive proprietary data set consisting of shares available to lend (supply), shares borrowed (demand), and loan fee to study the securities lending market in the United States. We provide a better understanding of the securities lending market; examine the role of institutional investors in the voting process by analyzing the supply of lendable shares around the time of a proxy vote; and to address some of the issues related to empty voting we examine the changes in borrowing demand around the time of a proxy vote. On average, 19.57 percent of a firm’s market capitalization is available for lending, 3.3 percent is actually borrowed, and the annualized loan fee is 42 basis points. During our sample period, 2005-2009, there are 105,143 proxy agenda items. At the time of a proxy vote, there is a significant reduction in the supply of shares available to lend because institutions restrict or recall their loaned shares prior to a vote. The reduction in the supply of lendable shares is most pronounced in cases associated with significant events such as mergers, and with agenda items for which ISS recommends voting AGAINST the proposal. Our findings are consistent with institutional investors responsibly recalling shares, hence reducing supply ahead of material proposals. Most of the increase in loan fee around the time of a vote is associated with the reduction in supply which is related to the desire of institutions to vote their shares. We find statistically significant evidence of increase in demand however this increase in demand is economically small relative to the reduction in supply. In contrast, we find that the large increase in loan fee around the time of the ex-dividend date is driven by an increase in borrowing demand for cash flow reasons, with no change in the supply of lendable shares.

Behavioral FInance

Wow. Summer is busy even after classes are over! I thought I'd have more time to post but, as usual, we can't get what we want... Anyway, this is an interesting article that appeared in the FT about a hedge fund that uses behavioral finance techniques to invest.

Personally, I believe that behavioral finance brings essential insights on how financial models should strive to incorporate the idiosyncracies of human behavior rather than to take the easy way out and assume that investors are perfectly rational. However, up to now at least, I think that behavioral finance is still at a point in which is more like a collection of results challenging the current paradigm ("mainstream" finance) but still not able to come up with a good alternative theory. I'm not sure it ever will given how "strange" human beings can be whenever money is involved (or generally).

Altogether the article is very interesting and contains a useful introduction to behavioral finance. The trading strategy looks interesting too! Here is the beginning:

Before you even started reading this article, it had already been electronically scanned and its language examined by dozens of computers at hedge funds and investment banks.

At MarketPsy Capital in Santa Monica, California, remote servers will have rated how positive or negative it is on the economy and checked for emotional content on thousands of companies. Finding nothing useful, the computers will then move on.