Finance & Markets Channel: Latest Posts
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Finance & Markets
Arbitrage in the foreign exchange market: Turning on the microscope
If markets are efficient, then there are no exploitable arbitrage opportunities. But if no one engages in arbitrage, then what eliminates such exploitable opportunities? This column puts international financial markets under the microscope and shows that arbitrage opportunities exist, but they are usually eliminated in less than five minutes. Such micro-arbitrage makes the assumption of no arbitrage safe for those looking at the bigger picture.
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Finance & Markets
Financial Stability and the Fed
Stephen Roach says the Fed needs to broaden its mandate:
Add ‘financial stability’ to the Fed’s mandate, by Stephen Roach, Commentary, NY Times: A regulatory backlash is under way as the US body politic comes to grips with the financial crisis. … As Washington creates a new system, it must also redefine the role of the Federal Reserve.
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Finance & Markets
Schroedinger’s cat revisited
“I do not know which makes a man more conservative – to know nothing but the present, or nothing but the past.” – John Maynard Keynes, ‘The End of Laissez-faire’.
It is sometimes useful and always amusing to look back at one’s earlier thoughts. The following piece was originally published two years ago (June 2, 2006 to be precise) – an altogether more innocent age, and from the vantage point of Autumn 2008, seemingly aeons ago. I have made no alterations (other than omissions for the sake of brevity) to the original and current, languidly ironic, commentary is added in parentheses in a jaunty orange.
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Finance & Markets
Retirement Planning in the Aftermath of the Crisis
Overview. An important issue facing investors as the economy emerges from the current financial crisis is what they should do with their retirement accounts. Going forward, investors should not drastically reduce the fractions of stock holdings (direct holdings plus holdings of U.S. equity mutual funds) in their retirement accounts. Typically, during periods of poor economic [...]
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Finance & Markets
Foreclosure Relief Now
Foreclosures are an economic root cause of the falling market prices for real estate and mortgage backed securities presently causing distress throughout the financial system. Foreclosures of homeowners depress the US housing market and lead to the deterioration of neighborhoods. This becomes a vicious cycle leading to further distress for the financial system and the economy, increasing unemployment, bringing about more foreclosures and a deeper recession which will trigger another systemic risk to the financial sector from credit default swaps.
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Finance & Markets
The Case for Public Sector Credit Rating Agencies
Roel Beetsma
University of Amsterdam, CEPR and CESifo
While the eyes of the world are now focused on the measures that the various governments have taken to protect their banking systems, attention to the causes of the current crisis seems to have shifted to the background. However, this crisis should be seized as an opportunity to provide the financial system with structural improvements, because once the crisis is over politicians will no longer perceive any need for improvements. Improvements concern financial supervision as well as the collaboration among countries in a situation of international financial unrest. They also concern, in my opinion, a change in the system of rating the creditworthiness of financial institutions.
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Finance & Markets
In the Fog of Volatility, the Notional Becomes Payable
Just for fun, we added one-year and 30-day stock price volatility calculations to the metrics displayed on some of our public website pages. Click here to see the demo profile for Ford Motor Co (NYSE:F) from The IRA Corporate Monitor. The one-year and one-month volatility metrics, along with the other benchmarks in The IRA Corporate Monitor, are calculated dynamically based on data provided by Morningstar.
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Finance & Markets
The other part of the bailout: Pricing and evaluating the US and UK loan guarantees
Apart from taking equity stakes in selected financial institutions, the recent attempts to thaw financial markets also involve government guarantees on newly-issued senior unsecured debt of banks, an aspect that has received considerably less attention than the recapitalization and part-nationalization of banks. The guarantee schemes announced by the US and the UK are strikingly different in terms of which banks are covered, the optionalities they offer to the banks concerning protection, and, not least, the fees charged for this protection. We describe the two schemes in detail, analyze their features and discuss the outcomes likely to arise under each. Among other things, we find that while the UK scheme will break even (or perhaps even net a small profit to the UK Treasury), the US scheme involves, on a fair value basis, a huge cost to the taxpayer of upto $50 billion over the three-year horizon of the scheme.
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Finance & Markets
Race to Call the Bottom
My friend Peter Boockvar has a nice quote in this morning’s NYT article, Forecasters Race to Call the Bottom to the Market.The article discusses various extreme forecasts of the past: Bears like Owen Lamont (Dow 1,000), Nouriel Roubini, Peter Schiff, and Bulls such as Kevin A. Hassett and James K. Glassman (Dow 36,000), and even Elaine Garzarelli (she’s now a permabull, but in 1987, forecasted a crash).Boockvar’s discussion of markets was mistook for a forecast of Dow 5,000, and caused some interesting mayhem around the office:
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Finance & Markets
The IMF as Global Fed
Is the world running out of balance sheets?
With banks “done”, investors terrified and corporates struggling to raise cash to keep business as usual, there was only one balance sheet left to (try to) resurrect the financial system: The government’s.
