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  • Arbitrage Pricing Theory and Factor Investing
    Factor investing is becoming popular these days. It has its roots in Arbitrage Pricing Theory. According to Wikipedia Arbitrage pricing theory (APT) is a general theory of asset pricing that holds that the expected return of a financial asset can be modeled as a linear function of various macro-economic factors or theoretical market indices, where sensitivity to changes in each factor is represented by a factor-specific beta coefficient. The model-derived rate of return will then be used to [...]
  • Is Value at Risk a Good Risk Measure?
    Value at Risk (VaR) is an important risk measure that large financial institutions use for managing the risks and allocating capital. Wikipedia defines VaR as follows:Value at Risk (VaR) is a measure of the risk of investments. It estimates how much a set of investments might lose, given normal market conditions, in a set time period such as a day. VaR is typically used by firms and regulators in the financial industry to gauge the amount of assets needed to cover possible losses.For a given por [...]
  • Are Short Out-of-the-Money Put Options Risky? Part 2: Dynamic Case
    This post is the continuation of the previous one on the riskiness of OTM vs. ATM short put options and the effect of leverage on the risk measures. In this installment we’re going to perform similar studies with the only exception that from inception until maturity the short options are dynamically hedged. The simulation methodology and parameters are the same as in the previous study.As a reference, results for the static case are replicated here:ATM  (K=100) OTM (K=90)MarginReturn [...]
  • Exclusive: Baupost's Klarman resists calls to wipe out Puerto Rico debt
  • Kenneth Chenault to step down as AmEx CEO after nearly 17 years
  • New ETF has robots pick investments
  • ADP is already making changes Ackman wants: CEO
  • Lofty Align Tech shares may rise more on U.S. tax cut, index inclusion
  • Fund investors wary of greed amid U.S. stock rally
  • Deductibles hold the key to the best health plan picks
  • On NAFTA, America, Canada and Mexico are miles apart
    THESE are troubling times for Roberto Santana Flores, a Mexican maker of charro shirts, a modern take on the Mexican cowboy aesthetic. He recalls life before the North American Free-Trade Agreement (NAFTA), a trade deal linking Mexico with America and Canada. He remembers his shirts incurred a whopping 37.5% tariff if exported to America. Now they cross the border duty-free. But his dream of expanding his factory and his American customer base is under threat. He scours the newspapers daily for news of the NAFTA negotiations. They tell of conflict. Some even warn the deal may collapse. Since it covers trade worth more than $1trn a year, that is alarming for many more than Mr Flores.On October 17th trade representatives of the three countries gathered to mark the end of the fourth round of talks. A collapse does not seem imminent. Robert Lighthizer, the United States Trade Representative (pictured, centre), denied that abandoning the deal was even being discussed,...Continue reading
  • When the revolution eats itself
    WHEN a revolution happens, the consequences are not obvious straight away. The British referendum on EU membership in June 2016 was seen as a revolt of ordinary people against a globalised elite. The politicians who led the Leave campaign did not seem to expect to win. As wags remarked, they were like “the dog that caught the car”.This helps to explain the general chaos that has enveloped British policy since the result. The Leave campaign had contained two contradictions. The first was that Britain could have all the advantages of EU membership without the bother of actually belonging; the country could “have its cake and eat it” as Boris Johnson, Leave campaigner and now foreign secretary put it. The second was the split between the free market, Liberal brexiteers, who envisaged Britain as open to the world, and the nativist camp led by Nigel...Continue reading
  • Economic optimism drives stockmarket highs
    BARELY a day goes by at the moment without Wall Street hitting a new record high. The market has kept marching upwards despite all the headlines about the North Korean nuclear threat, a potential break-up of NAFTA, and natural disasters like hurricanes.If you want to know why the market keeps rising, just look at the latest poll of global fund managers by Bank of America Merrill Lynch. Almost half of all the managers now expect above-trend growth and below-trend inflation, what is dubbed the Goldilocks economy (she wanted porridge that was not too hot, or too cold, but just right). That is the highest proportion recorded in the history of the survey. Indeed, for the last six years, a plurality of managers have taken the view that both inflation and growth would be below trend.A net 41% of those managers think global growth will strengthen over the next 12 months. Putting their money behind those beliefs, a net 45% are overweight (have a higher holding than usual) in equities. A remarkable 85% of managers think bond...Continue reading
  • The internationalisation of China’s currency has stalled
    ON OCTOBER 18TH, President Xi Jinping will preside in Beijing over the most important political event in five years. At the Communist Party’s 19th congress much will be made of the triumphs achieved in nearly four decades of reform and opening up. So expect a glossing over of one part of that process where progress has largely stalled: the “internationalisation” of China’s currency, the yuan.This seems odd. Just a year ago, the yuan became the fifth currency in the basket that forms the IMF’s Special Drawing Right (SDR). This marked, in the words of Zhou Xiaochuan, China’s central-bank governor, in a recent interview with Caijing, a financial magazine, “historic progress”. Symbolically, China’s monetary system had been awarded the IMF’s seal of approval. A further boost to prestige was the announcement in June this year that some Chinese shares would be included in two stockmarket benchmarks from MSCI.Yet the yuan’s...Continue reading
  • BBVA, a Spanish bank, reinvents itself as a digital business
     OUTSIDE, a patch of grass affording a spectacular view of the Sierra de Guadarrama is littered with cartridge casings. Inside the Club de Tiro de Madrid (Madrid Shooting Club), on the city’s northern edge, over 400 people are fixing their sights for the next three months. Their business is not shooting but banking. Teams sit at 27 tables working on specific projects—to improve the global mobile platform, say, or to share information about job applicants. At another 12 tables are data specialists, in-house lawyers and others whose expertise the teams will need. The targets are on the walls: white boards that are soon covered in yellow and pink Post-it notes, listing tasks for the weeks ahead.BBVA, Spain’s second-largest bank, began quarterly planning sessions like this three years ago, in its Mexican subsidiary. This is the fourth global gathering. The idea, explains Derek White, head of global customer solutions, is to replicate the nimbleness of...Continue reading
  • The finance industry ten years after the crisis
    MANY people complain that the finance industry has barely suffered any adverse consequences from the crisis that it created, which began around ten years ago. But a report from New Financial, a think-tank, shows that is not completely true.The additional capital that regulators demanded banks should take on to their balance-sheets has had an effect. Between 2006 and 2016, the return on capital of the world’s biggest banks has fallen by a third (by more in Britain and Europe). The balance of power has shifted away from the developed world and towards China, which had four of the largest five banks by assets in 2016; that compares with just one of the biggest 20 in 2006.The swaggering beasts of the investment-banking industry have also been tamed. The industry’s revenues have dropped by 34% in real terms, with profits falling by 46%. Return on equity has declined by two-thirds. Staff are still lavishly remunerated, but pay is down by 52% in real terms. (Perhaps...Continue reading
  • Richard Thaler wins the Nobel prize for economic sciences
    THE credit-card bill arrives. You have enough money in a savings account to pay it off—the sensible thing to do, arithmetically speaking, since the interest rate on the credit-card balance far exceeds that earned on the savings. Yet you leave the savings untouched, and pay only as much of the bill as your current-account balance allows. What looks a daft choice to most economists makes perfect sense to Richard Thaler, who on October 9th was awarded the Nobel prize for economics for his work in behavioural economics. Mr Thaler helped demonstrate how human reasoning diverges from that of the perfectly rational homo economicus used in most economic modelling. The world, and the field of economics, is better for his contributions.Economists mostly recognise that normal people fall short of perfect rationality in day-to-day decision-making. Economic modelling requires simplification, however, and economists generally suppose that theories...Continue reading
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