"Des waerelds doen en doolen, is maar een mallemoolen,"

"Des waerelds doen en doolen, is maar een mallemoolen," engraving from Het Groote Tafereel der Dwaasheid, 1720.

"The actions and designs of the world go round as if in a mill." South Sea bubble financial crisis.

Sunday, July 31, 2011

Photographies of stock markets

Micheal Najjar's The Down Jones, from 1980 to 2009. Najjar drew an analogy between geologic structures and a social one, the stock market. As Mandelbrot have argued for a long time, financial markets movement are wild and cannot be captured by the Bell curve.  The fluctuations of markets, like the irregular shorelines of the English coast, are both better described by fractal geometry, which Mandelbrot invented.

As we have allegedly entered the anthropocene, and although is it a geological concept that signals that humans now shape the earth, is it interesting to note the parallel with financial math that were once extracted from markets, but which is now shaping it in the form of algorithms. For a 15 minutes talk about how algorithms influence our lives, listen to Kevin Slavin at TED.

Saturday, July 30, 2011

How to tame the Leviathan ?

In a fantastic personification of the Dodd-Frank Act, John Oliver from the Daily Show exposes the difficult road ahead of financial regulation bills. The Leviathan just f#&{@  it raw in the  a¶#...

Monday, July 25, 2011

Credit Rating Agencies and the added value of information

The market for credit rating is an oligopoly with the famous big three dominating the entire industry, which is once again under fire, but some are detecting what could be a departure from the status-quo, paving the way for newcomers to enter the market and moving the business model whereby issuers now pay the CRA's to one whereby investors would do it. In essence, one feels that the motivation behind is to lessen CRA's power grounded in the sheer amount of financial markets participant paying attention to them. From the FT:
"The more people paid attention to these ratings the more it skewed the whole system. They take up an importance that is disproportionate to their value,” says Barbara Ridpath of the International Centre for Financial Regulation and former S&P executive.
The fundamental problem is that regulatory authorities and especially the Basel Committee, built their recommendations and rule for capital adequacy requirements on these very ratings some want now to reform. A U-turn is thus very unlikely in the near future.  

Trust and the internet

A report from Pew links the use of internet to trust. Social Networking Sites users are more trusting than others. As it has social implication implications for financial sectors and (see Guiso, 2008 and Zack, 2000), would it be interesting to investigate if SNS users are more inclined to invest in stock markets ?

Saturday, July 23, 2011

Back to the future of lending

It sounds lovely. Bhidé is describing a world that once was:
Bank regulation, like lending, was once decentralized and judgment-based. Regulators relied mainly on examination of individual loans rather than capital-to-asset ratios. A typical bank exam would include scrutiny of every single business loan and a large proportion of consumer loans. Capital adequacy was a matter of judgment: examiners would figure out how large a buffer a bank ought to have, taking into account its specific risks.
But is he suggesting we should go back to the good old days of relationship lending ?
Smarter capital requirements – better Basel rules – aren’t the answer. Rigid, top-down uniformity is essential in the specification of weights and measures and the issuance of currency and coin. Bank lending and regulation, by contrast, must incorporate local knowledge, because, in a dynamic, unregimented economy, each borrower, loan, and bank is different (though some general guidelines can help). The seemingly objective top-down approach ignores the idiosyncratic nature of risk and assumes that one mortgage loan is like the next.
How do we ignore the financial revolution that took place supporting the use of "hard" over "soft" information? Incorporating local knowledge requires using soft information and is therefore costly. In contrast, hard information is easier to process. So the trend of information hardening that goes hand in hand with financial innovation and the use of mathematics in financial economics enhanced certain transaction based lending technologies, such as leasing or factoring, which benefited SMEs by raising credit availability. By the same token, this process is the cause of the increase in distance between small firms and their lender in the U.S. Consequently, distance is less an indicator of creditworthiness than before, which means that small firms at distance enjoy now a wider access to credit.

So this is a huge debate, which goes beyond regulatory issues. Too bad  Bidhé is not even mentioning it.