A Dissertation based on the FX Market

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Old May 23, 2008, 9:36pm   #16
Joined Jun 2006
Chris,

Beta and correlation is an interesting area. My dissertation was on the concept of Eros and desire in the Socratic dialogues, not a million miles from yours.

Sod tests and interviews, I’d give you a job on the strength of your summary – this is really impressive, mate.
I look forward to reading it.

Perhaps for your Masters you could do the same but reconstruct the FTSE index by using equally-weighted constituents (or price weighted, or both for a comparative study).

You’ve probably had enough of CAPM for the time being but for future reference look here re Eugene Fama, specifically the pdf’s in the bibliography:

Eugene Fama - Wikipedia, the free encyclopedia

From my memories the rugby players’ behaviour was a cover for a fear of women, or they were closet fags in denial. Of course, Mr Gecko is an exception to these rules (I said “exception”, not “exceptional”, Mr Gecko).

“WHACK OFF!!!!”. God help us.

Grant.
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Old May 23, 2008, 9:41pm   #17
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Chris.

6000 words? Mine was over 12,000. Don't students have it easy today?

Grant.
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Old May 23, 2008, 10:08pm   #18
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From my memories the rugby players’ behaviour was a cover for a fear of women, or they were closet fags in denial. Of course, Mr Gecko is an exception to these rules (I said “exception”, not “exceptional”, Mr Gecko).

Grant.
It is not the first time that I have been labeled the exception; some have argued that my behaviour was due to a fear of women, and accused me of being a closet fag in denial.

good banter.
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Old May 23, 2008, 10:46pm   #19
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Originally Posted by grantx View Post
Chris,

Beta and correlation is an interesting area. My dissertation was on the concept of Eros and desire in the Socratic dialogues, not a million miles from yours.

Sod tests and interviews, I’d give you a job on the strength of your summary – this is really impressive, mate.
I look forward to reading it.

Perhaps for your Masters you could do the same but reconstruct the FTSE index by using equally-weighted constituents (or price weighted, or both for a comparative study).

You’ve probably had enough of CAPM for the time being but for future reference look here re Eugene Fama, specifically the pdf’s in the bibliography:

Eugene Fama - Wikipedia, the free encyclopedia

From my memories the rugby players’ behaviour was a cover for a fear of women, or they were closet fags in denial. Of course, Mr Gecko is an exception to these rules (I said “exception”, not “exceptional”, Mr Gecko).

“WHACK OFF!!!!”. God help us.

Grant.
You're right, it is interesting. One of the things I was amazed to see was how the covariance matrix between shares shifted when the credit crunch hit. All of a sudden the correlations virtually doubled. I was so lucky to have a time period like that to look at; it added so much to the results. Cheers for the link, I have been an admirer of Fama's work for a while now. It was people like him that made me want to become an academic. (Back when I wanted to go down that path)

Quote:
Chris.

6000 words? Mine was over 12,000. Don't students have it easy today?

Grant.
You're probably right, it is easy being a student these days; I was having 8 hours of teaching a week for most of this year!! Most of my friends do little more than get up for deal or no deal before eating their one meal for the day and getting ready to go out!!

Quote:
From my memories the rugby players’ behaviour was a cover for a fear of women, or they were closet fags in denial. Of course, Mr Gecko is an exception to these rules (I said “exception”, not “exceptional”, Mr Gecko).
Most of the rugby team cant talk to a girl until the 8th pint of snakebite black has gone down (and sometimes back up). But there is a window between the eigth and the tenth when they're unstoppable. I however am different, I can sometimes talk to them after only 6 Still get through more skirts than the footballers though, now they really are all talk and no trousers.
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Old May 23, 2008, 11:30pm   #20
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Mr Gecko,

And possibly exceptional to boot.

Grant.
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Old May 23, 2008, 11:50pm   #21
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Quote:
Originally Posted by CHRISTO9HER View Post
You're right, it is interesting. One of the things I was amazed to see was how the covariance matrix between shares shifted when the credit crunch hit. All of a sudden the correlations virtually doubled. I was so lucky to have a time period like that to look at; it added so much to the results. Cheers for the link, I have been an admirer of Fama's work for a while now. It was people like him that made me want to become an academic. (Back when I wanted to go down that path)
If this interests you, look up something called CrashMetrics (nothing to do with JPM). It is used to better approximate the VAR of a portfolio in "fire sale" conditions like we saw during the crunch; where all assets fall, and so become perfectly correlated (well, nearly, but you get the idea).

Quote:

Most of the rugby team cant talk to a girl until the 8th pint of snakebite black has gone down (and sometimes back up). But there is a window between the eigth and the tenth when they're unstoppable. I however am different, I can sometimes talk to them after only 6 Still get through more skirts than the footballers though, now they really are all talk and no trousers.
Perhaps, but did you ever swatch us in action on the lash?
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Old May 23, 2008, 11:55pm   #22
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Chris,

covariance matrix between shares shifted when the credit crunch hit. All of a sudden the correlations virtually doubled”.

Your ahead of me here, mate re the items underlined. Could you give a simplified explanation?

Interesting isn’t it that academics get a lot of flack for perceived failures in theories but the majority of the financial instruments and developments owe a debt to academics. But who carries the greatest credibility – the academic whose motive is scholarship (or at worse, ego) or the MBS/CDO salesman trying to offload a sh1tload of sh1t?

6000 vs 12,000 was an unfair and inappropriate comparison in that yours was essentially quantitative (if that is the correct term) whereas mine was interpretation of metaphysical concepts. We’re all familiar with the Black-Scholes equation but it would take around 5000 words to explain the underlying principles in entirety to a novice.

“Most of the rugby team cant talk to a girl until the 8th pint” with support from the rest of the team.

“there is a window between the eighth and the tenth when they're unstoppable.” Excellent.

Grant.

Last edited by grantx; May 23, 2008 at 11:57pm. Reason: None of you business
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Old May 24, 2008, 12:37am   #23
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Originally Posted by grantx View Post
Chris,

covariance matrix between shares shifted when the credit crunch hit. All of a sudden the correlations virtually doubled”.

Your ahead of me here, mate re the items underlined. Could you give a simplified explanation?
Any two shares will have some correlation - that is, they behave in the same manner to some extent. High correlation stocks often fall within the same sector - e.g. Rio Tinto and BHP Billiton being mining stocks (r^2 -> 1); shares that show no discernable pattern have 0 correlation (e.g. BHP and Vodafone), and assets that move in opposite directions have r^2 -> -1 (e.g. equities and bonds).

All these are are measured in normal market conditions. In a crash, everything drops - so, for example in the FTSE100, shares that have previously behaved in opposition to each other (r^2 -> -1) start to exhibit the same price movements (R^2 -> +1).

It basically means that the ebbs and flows of different assets are wiped out; everything falls, ergo their correlations increase. In a "perfect storm" crash, all assets will drop together, despite their correlations during normal market conditions. It is of interest for hedging; there is something known as a "platinum hedge", which IIRC is the only way to prevent a portfolio being wiped out.

Quote:

“there is a window between the eighth and the tenth when they're unstoppable.” Excellent.
In my day there was actually a specific time and place for these cheeky few; every social (read circle) had a set timetable, with slots allocated for playing games and vomiting, singing songs, chatting up the filth, before more drinking, dancing, and getting your c0ck out.

It has been known for certain individuals to open, close, and seal the deal in between the singing and the dancing. Attached is the only newspaper cut out I can show my mum.
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mysterons.jpg  
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Old May 24, 2008, 3:49am   #24
Joined Jun 2006
Mr Gecko,

Thank you for the excellent clarification. Presumably, by extension, hedging a portfolio via futures will be subject to a massive mis-match. But wouldn't this present a potential oportunity arbitrage - long one, short the other (depending which side is out of line)?

Grant.
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Old May 24, 2008, 10:15pm   #25
Joined Mar 2008
Quote:
Originally Posted by grantx View Post
Chris,

covariance matrix between shares shifted when the credit crunch hit. All of a sudden the correlations virtually doubled”.

Your ahead of me here, mate re the items underlined. Could you give a simplified explanation?

Interesting isn’t it that academics get a lot of flack for perceived failures in theories but the majority of the financial instruments and developments owe a debt to academics. But who carries the greatest credibility – the academic whose motive is scholarship (or at worse, ego) or the MBS/CDO salesman trying to offload a sh1tload of sh1t?

6000 vs 12,000 was an unfair and inappropriate comparison in that yours was essentially quantitative (if that is the correct term) whereas mine was interpretation of metaphysical concepts. We’re all familiar with the Black-Scholes equation but it would take around 5000 words to explain the underlying principles in entirety to a novice.

“Most of the rugby team cant talk to a girl until the 8th pint” with support from the rest of the team.

“there is a window between the eighth and the tenth when they're unstoppable.” Excellent.

Grant.
I really think that the academics get a hard time from traders, always going on about how academics are wrong about the EMH etc etc. We should be giving the academics credit for all the wonderful tools that they have brought to the financial arena i.e. things like the BS formula, as well as forming the techniques to value pretty much every kind of exotic option that anyone can think of. We should let them have their fun with the EMH, if you can only make a trading profit from luck, then great, all pro traders are very lucky people!!

But you're right about the academics motives not necessarily being purer or more noble than some guy trying to sell a load of crap; one of the things that has put me off going down that road is that it seems that they spend their entire careers trying to seek validation from their peers. I think that they all dream about having an equation named after them every single night!!

In a way, traders and academics are polar opposites; traders (for the most part anyway) dont give a damn about getting the validation, they only want the profit, and academics dont concern themselves with money too much and spend their lives seeking the validation.....I actually think that the traders priorities may be the healthier of the two!!

Last edited by CHRISTO9HER; May 24, 2008 at 10:17pm. Reason: Need to stop swearing
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Old May 25, 2008, 2:04am   #26
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Chris,

Traders, academics - never the twain shall meet.

Grant.
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Old May 27, 2008, 7:13pm   #27
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Originally Posted by GammaJammer View Post
Pretty much what did for LTCM in the end....
Indeed. I just finished the book about LTCM, "When genius failed". I think that they were actually too clever for their own good....so clever that they couldnt see how unclever they were being. Meddling in things like merger arbitrage without doing the research etc
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Old Sep 24, 2008, 11:37am   #28
 
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Curious

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Originally Posted by nine View Post
Adding to the news idea: does the market regularly move in the direction of the news before the news (or in fact do the opposite)? What does this imply?

What does it imply ?

thank you for your reply
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Old Oct 8, 2008, 12:17am   #29
Joined Aug 2008
If you are doing something economics/fx related, I think this website has lots of useful data for you.

Real-Time Data Set for Macroeconomists - Philadelphia Fed.

How about forecasting FX with economic fundamentals? There's been alot of work on this area already, but there are still unsolved puzzles. If you can figure out the solution to the foreign exchange disconnect puzzle or something.

A good forecast for FX would make you very very popular with MNCs when they decide expenditure in overseas subsidiaries etc. Who knows, you might get some backing if you have a good idea going.

Just some articles I've read recently that I thought you'd might find interesting
Chinn, Menzie David, Cheung, Yin-Wong and Garcia Pascual, Antonio I.,Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?(July 2005). UC Santa Cruz Economics Working Paper No. 521; UC Santa Cruz International Economics Working Paper No. 02-16 Available at SSRN: SSRN-Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive? by Menzie Chinn, Yin-Wong Cheung, Antonio Garcia Pascual

Abhyankar, A., Sarno, L., Valente, G., 2005. Exchange rates and fundamentals: evidence on the economic value of predictability. Journal of International Economics 66, 325e348.

All the best in your dissertation. Hope I helped start you on your brainstorming inspiration ...
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Old Nov 1, 2008, 5:21pm   #30
 
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Originally Posted by GammaJammer View Post
Two things undid them imho.

All in all it's a fantastic salutory tale, and if I were employing trainee portfolio managers I would actually make it compulsory reading.

GJ
imho LTCM failed more because of bad money management, than from bad theory. If they didn't overexpose themselves they would had survived.
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