Collector's Blog

Demand and Supply

Thu, 23 May 2013 15:23:00 --0100

The demand for my Option Pricing Formuals Collection is now higher than supply? or may be not. At least the price has gone up: New copies from $ 899.98 (Amazon May 23). Time will tell if a bubble or not! The price of my book is clearly following a jump process. $899.98 is still cheap, like less than $10 per formula.. There are rumours of a a short squeeze or buy back program, others will call it sector inflation !

Quantum Social Science

Sun, 24 Mar 2013 14:03:00 --0100

" Quantum Social Science " is the title of an interesting book published in 2013 by mathematics Professor Khrenikov and Professor Haven. "Aimed at researchers in economics and psychology, as well as physics, basic mathematical preliminaries and elementary concepts from quantum mechanics are defined in a self-contained way." The book covers such things as Brownian motion, completeness of quantum mechanics and the possibility to apply quantum mechanics outside physics. Martingales and fake probabilities and naturally a section on arbitrage and negative probabilities. Further such topics as price and superposition of values, q-calculus in finance, the Implications of the non-Hermiticity of a Black-Scholes Hamilton operator, what is that? This book clearly has some out of the box thinking!

Good, Bad or Ugly?

Tue, 18 Sep 2012 23:31:00 --0100

Derivatives: are they good, bad or Ugly? Well I think it mainly depend on the people using them. And yes people not understanding derivatives are often generalizing way too much. I walked into Foyles bookstore in London the other day, and there was a new book titled "Good Derivatives" by Richard L Sandor. ?Good Derivatives: A Story of Financial and Environmental Innovation tells the story of how financial innovation ? a concept that is misunderstood and under attack - has been a positive force in the last four decades.? Dose that include CDO-cubed? I have not read the book yet and have not made up my conclusion, is it good or bad? It looked interesting, and the cover was quite good so to say.

Hyper Velocity of Money ?Experiment?

Mon, 06 Aug 2012 14:38:00 --0100

During the great recession they experimented with giving out time stamped money (time stamped scripts), money one had to use within the expiration date. This naturally leads to increased velocity of money. I experienced something similar myself recently. I was ready to board a plain to New York. Then just before boarding they announced it would be 3 hours delayed due to a mechanical problem. Because of this everyone got food Vouchers. Within 15 minutes everyone had got food Vouchers. Then only 2 minutes later they announced the mechanical problem had been fixed and that it was boarding immediately. People now had food Vouchers with value of about $50 in their hands, and the Vouchers had a time stamp on it for the next day, and could only be used at this airport. People had no time to go to the restaurants, but there was a small kiosk near by. In reality their money (food Vouchers) would be worthless within 15 minutes. I went immediately to the kiosk and bought a few items that I not really needed (but better than a worth less money ? ), soon there was a long long line of people trying to spend their time stamped money in the kiosk. The velocity of money exploded, and people just bought something. The prices naturally did not go up, even if the kiosk was running out of a few items. But this still had some similarities to hyperinflation. When you know your money will fall dramatically in value or even get worthless (due to time stamped money or hyper inflation) you will spend it as quickly as possible almost no matter what you can get hold off.

The Velocity of Money

Mon, 02 Jul 2012 14:10:00 --0100

In The Velocity of Money published by FED 1969 it is concluded that the velocity of money naturally not is constant over time, as assumed in older version of the quantitative theory of money... Further "a major part of the postwar rise in velocity reflects technological changes in our payments mechanism." We are closing in on the technological possibilities of velocity of money, some milliseconds could be gained by going neutrino (the discussion is still going on on Neutrino Collectors :-) It looks like we still have a lot of deleverage ahead of us, in particular in Europe. To compensate for this governments will need to keep printing money if they want to keep todays monetary system intact. And they should think more about the distribution of their bail out packages. Next time the velocity of money shoots up, could take years from now, will the central banks be able to control it, are they even able to predict it? The velocity of money not related to technological development is very hard to predict, and big swings in the velocity of money can have big impacts. People seem to fear more the last milliseconds potential technological achievement in money and information transfers affect on trading rather than how mad crowd behaviour can change the velocity of money. Hyper velocity of money is one of many possible scenarios for the long term future. Do central banks also trust their macro models way too much? just like many on Wall Street trusted their VaR, Sharp, BSM, Gaussian copula models too much. What if people loose trust in central banks or some major currencies, then we could at some point get Hyper-Velocity of money triggered by mad crowds. But why worry? this is just a tail event scenario, not likely, but possible! Enjoy your summer!

Robbed by a Robot

Thu, 14 Jun 2012 15:51:00 --0100

I am not sure it qualify as Robot, but at least I was robbed by a machine this morning. No, not by High Frequency trading robot machines, but a silly ugly looking ATM machine. I was taking out $400 in a ATM machine. The problem was the machine only gave me one $20 bill, and yes a receipt for $400 withdraw. One feel a bit akward in such a situation. If it was a person in a armed robbery one would have the right to self defence, but I figured out no reason to beat up the machine as it would just put me into more trouble. Instead I walked across the street and filed a police report and called the bank that claimed they not could see the transaction and told me to call back later. I am now wondering if I should go back and beat up that machine? Or just wait and build strength before the big battle with the machines?

Bubble Face

Fri, 18 May 2012 15:51:00 --0100

Is Facebook a bubble or not? Face-bubbles are a little like tulip-bubbles, are they not? If Facebook even is a bubble, then clearly it is one of these bubbles that can remain irrational longer than you can remain solvent (if trying to short it, good timing helps ;). We have to have in mind there has been a lot of QE (money printing) going on around the world. When the "real" money supply is increasing (even if the broad money supply can be falling short term) the money is in no way distributed evenly, some people get the new money first, lots of it. With artificial low interest rates why not spend some of it on tulip-bubbles or face-bubbles? A face has highest face value in young age ?

Basel smashes VaR (May 2012)

Fri, 04 May 2012 14:00:00 --0100

Pablo Triana just sent me the latest basel report (May 2012). It literally smashes VaR. This is a big blow in the face of naive VaR followers. Since early 1900 we have known that one or two big price movements empirically make the distribution highly non-gaussian (Ignored by most academics and blind followers). Based on this we know that no matter how good mathematical model you have you cannot accurately predict the tail probabilities. And these tails have BIG IMPACT. The solution is to focus on robustness in your hedge, reduced leverage etc. (there is much more to this, time will tell) From the Basel (May 2012) report: "Moving from value-at-risk to expected shortfall A number of weaknesses have been identified with using value-at-risk (VaR) for determining regulatory capital requirements, including its inability to capture ?tail risk?. For this reason, the Committee has considered alternative risk metrics, in particular expected shortfall (ES). ES measures the riskiness of a position by considering both the size and the likelihood of losses above a certain confidence level. In other words, it is the expected value of those losses beyond a given confidence level. The Committee recognises that moving to ES could entail certain operational challenges; nonetheless it believes that these are outweighed by the benefits of replacing VaR with a measure that better captures tail risk. Accordingly, the Committee is proposing the use of ES for the internal models-based approach and also intends to determine risk weights for the standardised approach using an ES methodology." "Shortcomings of the models-based approach: The metric used to capitalise trading book exposures was the 10-day value-at-risk (VaR) computed at the 99th percentile, one-tailed confidence interval. By construction, this is a measure aimed at capturing the risk of short-term fluctuations in market prices. While a 10-day VaR might be useful for day-to-day internal risk management purposes, it is questionable whether it meets the objectives of prudential regulation which seeks to ensure that banks have sufficient capital to survive low probability, or ?tail?, events. Weaknesses identified with the 10-day VaR metric include: its inability to adequately capture credit risk; its inability to capture market liquidity risk; the provision of incentives for banks to take on tail risk; and, in some circumstances, the inadequate capture of basis risk. Perhaps more fundamentally, the models-based capital framework for market risk relied on a bank-specific perspective of risk, which might not be adequate from the perspective of the banking system as a whole. The pro-cyclicality of VaR-based capital charges based on recent historic data and the large number and size of backtesting exceptions observed during the crisis serve to highlight regulatory concerns with continued reliance on VaR." See also The Number That Killed Us: A Story of Modern Banking, Flawed Mathematics I have not met that many naive VaR followers at the trading floor, but yes around in different corporations there are in particular plenty of management removed from the trading floor (taking the big decisions) , often with lack of knowledge about trading and market behaviour that on their desk wants to have simple risk numbers, giving them the whole picture, rather than "scary" worst case scenario think thank discussions with their senior traders. I guess they prefer VaR as a flawed risk benchmark rather than have to tell to the share holders they could go bust in this and that extreme scenario that happen every 20, 50, 100 year (?) (rather than every 2000 years as predicted by their naive VaR models). Or even better reduce the firms over all risk exposure, stop giving loans without any equity behind it etc. And yes there are plenty of academics naively thinking it is just to have the right mathematical model and they can calculate the exact probability for extreme events. Think again!

Student win over Algorithm in Supreme court

Fri, 04 May 2012 12:37:00 --0100

A student and another private investor some time back independent figured out a pattern used by the algorithm of Timber Hill at Oslo Stock Exchange. They made some money by trading against the algorithm. For this they got sued for market manipulation. Not by Timber Hill, but by the government. They lost in the district court and were sentenced to prison and to pay back the money. Talk about going after the small fish for the wrong reasons. The case went all the way to the Supreme Court where the student and the other private investor won with lowest possible margin (3 against 2 in votes). I do not know the case in detail, but it sounded strange that someone should get imprisoned for making the markets more efficient by figuring out the pattern of a clearly not so smart algorithm. Should it not be the firm building the not so clever algorithm that simply should stop using it, or keep loosing money. I would think we need more such clever students, then yes may be the scary (?) HFT algorithm trading would slow down a bit. When human brain power pick money from the machines someone would possibly push the slow down bottom on their algorithm? Algorithms should be monitored by human brain power

When Will Wall Street go Neutrino ?

Mon, 30 Apr 2012 15:03:00 --0100

I think it is not a question about if, but about when Wall Street will go Neutrino (?). Every millisecond counts in high-velocity trading, in particular for High Frequency Trading HFT. To go from fiber optic communication around the surface of earth to Neutrino communication through the earth will give very significant time savings in information flow between financial centers. This even if Neutrinos not can move faster than light (in vaccum). Award winning science writer Bruce Dorminey just came out with a interesting article on this topic: Neutrinos to Give High-Frequency Traders the Millisecond Edge

Climate changes and the wild speculative History of the Vikings

Sun, 22 Apr 2012 00:01:00 --0100

Picture show the speculative history of the Vikings in relation to climate changes the last 400 thousand years. Past to the right, present to left.. Future unknown, will the history repeat itself?

NASA and FED goes together to build new Space Station

Sun, 01 Apr 2012 14:42:00 --0100

NASA just announced today that they will build a new high velocity space-staion that will orbit earth. From this they can test out many implications of physics like for example space-time finance. The problem was originally funding, but a recent close relationship between NASA and FED has solved this problem. FED has agreed to use quantitative easing to create whatever money is needed to build the high velocity space station. The current estimate is it will cost around 300 to 500 billion USD. Both NASA and FED agree this will create jobs where most needed. In particular the finance sector that has been hit hard by the credit crunch. Many rocket scientist that went to Wall Street during the credit boom that now are without jobs can finally head back to NASA. We have to think big and there is no lack of money the FED official told in a short press release.

Year Of The Dragon

Wed, 25 Jan 2012 15:00:00 --0100

We have entered the year of The Dragon. The word dragon possibly comes from Greek dráken that is related to "See clearly". Will this be the year some people start to see clearly?

I expect more helicopter money!

Wed, 13 Jul 2011 19:20:00 --0100

Under todays monetary system there is basically only one realistic choice, increase the money supply one way or the other. Todays monetary system (without a dramatic reform) can only survive if the money supply keep increasing over time. ?Danger Lies not in Gold but in Loans? Albert Einstein, February 1948, Atomic Scientist, Vol 4. No 2. And in the same issue of Atomic Scientist, Albert wrote: "It is, indeed, difficult to imagine how these loans will ever be repaid. For all practical purposes, therefore these loans must be considered gifts which may be used as weapons in the arena of power politics..... We all know that power politics, sooner or later, necessarily leads to war......" Loans has in the ongoing loan-crisis already lead friendly neighbor countries to use anti-terror laws against each other. Realistic and relativistic speaking, todays big loans can only be paid off by even bigger loans (or defaulting)! Everything is not relative, but yes loans under a fractional fiat money system are relative. Big loans in any other currency than your own is at least not wise!

The Seasons of Money

Thu, 12 May 2011 19:28:00 --0100

What monetary system should we have? Fractional Fiat, gold standard, sea shells, or barter ? This is like asking should we have summer, winter, fall or spring? Of course we will have them all! The only ever lasting money system is seasonal. In the end of a season you prepare for the next season. And remember not two summers are alike, and very seldom there are also Fimbulvetr.