- Joined
- 1/3/14
- Messages
- 11
- Points
- 13
Hi, folks. I'm new here.
So, here are a few observations:
http://www.richmondfed.org/banking/...nds/pdf/delinquency_and_foreclosure_rates.pdf
The maximum fixed subprime mortgage delinquency rate hit a little over 25% after the market crashed and caused the wonderful unemployment rates that we contend with today. That maximum is in roughly 2010 Q2. Wikipedia describes the Great Recession as beginning in December 2007, but there was a "sharp downturn" in September 2008.
I've read several stories from several different perspectives on the crisis that caused the Euro-American economies to melt... the terms that get thrown around are "leverage", "securities", "swaps", "CDS (Credit Default Swap)", etc...
Here's an investment banker's perspective:
http://video.mit.edu/watch/a-bankers-perspective-of-the-financial-crisis-5224/
Notable quote:
15:04 -- ""It's not that debt has become more expensive over the years; it has become cheaper!""
To this, I can only shake my head. I cannot think of anything sensible to say about this.
A nice little example:
The Black Schole's Equation is a model in the form of a PDE that calculates what the price of a derivative should be based on a kind of statistical equilibrium. It was a brilliant concept that was developed by Fischer Black, Myron Scholes, and Robert Merton. Scholes and Merton received the Nobel Prize for their efforts in 1997 , unfortunately; Black was no longer alive to be credited as a Laureate.
(disclaimer: please feel free to correct me where my descriptions are faulty; I have no MFE, but some of you do)
Their model could do something that nothing could ever do before... it allowed traders to create two portfolios sell the option to interested clients in the market, if the market behaves nicely and in a way that closely approximates the state within the market that is assumed by the model... then the traders can let their clients bet on a stock in the market going up, or going down and the balance on the portfolio should remain zero (as opposed to horribly, badly, negative... which is undesirable).
So, anyways, this is a cool trick. People were excited about it. The Nobel Laureates and a few other folks decided to start a business based on their nifty new theory in 1994 called LTCM. They were brilliant, all of them. They knew what they were doing; or at least, as much as anyone was likely to know at that time. Up through 1997, the appreciation in value of the investments looked a lot like an exponential curve. Perhaps it was over exuberance, maybe it was arrogance, was it gamblers ruin? In 1998 LTCM's profits disappeared like dynamite detonating on the back of an elephant, then LTCM was no more. If the Nobel Laureates who created the theory cannot manage the risk associated with it's practice, then ultimately who can?
See:
http://en.wikipedia.org/wiki/File:LTCM.png
Other interesting little beasties exist in our market these days. High frequency trading based on bets of short term gain. Flash crashes can occur. If trading can be done en bulk millions of times in a fraction of a second, does this destabilize the market? How does this alter liquidity and volatility for the average joe investor? A Fourier series analysis can be done on any stock curve that you are interested in, so you can get a sense of the frequencies of the different oscillations in the market; historically, people who have invested in the stock market have been financially better off, but has the character of the market changed? Is it going to continue to be wise for the average investor to invest in stocks and bonds anymore? If a microsecond flash crash occurs as soon as an investor tries to sell their bonds, and they lose their entire investment... if this becomes a frequent scenario, then it would no longer be wise to invest in the market. (What is the variance of a stock's value given a time delay of "k" when it is sold?)
How does one estimate the value of a security when it has mixed with it the cumulative risk of several derivatives from multiple equity markets where the stochastic characteristics and assumptions of each market are inherently different? How does one estimate the risk associated with derivatives mixed in and leveraged and mixed with other bonds which also came from derivatives many hundreds of times, bundle it with several equity security, leverage it again, and hope for your risk calculation to be accurate? How can you possibly calculate risk accurately for something like this when some of the securities came from proprietary models developed by private banks whose underlying assumptions you don't know?!
Do scenarios like what I've outlined above really happen in practice?
I look forward to hearing your thoughts. I hope you'll forgive the mistakes that I've made in the statements above, like I said; I am not an MFE.
If you made it this far, thanks for humoring me.
Tyndall off.
So, here are a few observations:
http://www.richmondfed.org/banking/...nds/pdf/delinquency_and_foreclosure_rates.pdf
The maximum fixed subprime mortgage delinquency rate hit a little over 25% after the market crashed and caused the wonderful unemployment rates that we contend with today. That maximum is in roughly 2010 Q2. Wikipedia describes the Great Recession as beginning in December 2007, but there was a "sharp downturn" in September 2008.
I've read several stories from several different perspectives on the crisis that caused the Euro-American economies to melt... the terms that get thrown around are "leverage", "securities", "swaps", "CDS (Credit Default Swap)", etc...
Here's an investment banker's perspective:
http://video.mit.edu/watch/a-bankers-perspective-of-the-financial-crisis-5224/
Notable quote:
15:04 -- ""It's not that debt has become more expensive over the years; it has become cheaper!""
To this, I can only shake my head. I cannot think of anything sensible to say about this.
A nice little example:
The Black Schole's Equation is a model in the form of a PDE that calculates what the price of a derivative should be based on a kind of statistical equilibrium. It was a brilliant concept that was developed by Fischer Black, Myron Scholes, and Robert Merton. Scholes and Merton received the Nobel Prize for their efforts in 1997 , unfortunately; Black was no longer alive to be credited as a Laureate.
(disclaimer: please feel free to correct me where my descriptions are faulty; I have no MFE, but some of you do)
Their model could do something that nothing could ever do before... it allowed traders to create two portfolios sell the option to interested clients in the market, if the market behaves nicely and in a way that closely approximates the state within the market that is assumed by the model... then the traders can let their clients bet on a stock in the market going up, or going down and the balance on the portfolio should remain zero (as opposed to horribly, badly, negative... which is undesirable).
So, anyways, this is a cool trick. People were excited about it. The Nobel Laureates and a few other folks decided to start a business based on their nifty new theory in 1994 called LTCM. They were brilliant, all of them. They knew what they were doing; or at least, as much as anyone was likely to know at that time. Up through 1997, the appreciation in value of the investments looked a lot like an exponential curve. Perhaps it was over exuberance, maybe it was arrogance, was it gamblers ruin? In 1998 LTCM's profits disappeared like dynamite detonating on the back of an elephant, then LTCM was no more. If the Nobel Laureates who created the theory cannot manage the risk associated with it's practice, then ultimately who can?
See:
http://en.wikipedia.org/wiki/File:LTCM.png
Other interesting little beasties exist in our market these days. High frequency trading based on bets of short term gain. Flash crashes can occur. If trading can be done en bulk millions of times in a fraction of a second, does this destabilize the market? How does this alter liquidity and volatility for the average joe investor? A Fourier series analysis can be done on any stock curve that you are interested in, so you can get a sense of the frequencies of the different oscillations in the market; historically, people who have invested in the stock market have been financially better off, but has the character of the market changed? Is it going to continue to be wise for the average investor to invest in stocks and bonds anymore? If a microsecond flash crash occurs as soon as an investor tries to sell their bonds, and they lose their entire investment... if this becomes a frequent scenario, then it would no longer be wise to invest in the market. (What is the variance of a stock's value given a time delay of "k" when it is sold?)
How does one estimate the value of a security when it has mixed with it the cumulative risk of several derivatives from multiple equity markets where the stochastic characteristics and assumptions of each market are inherently different? How does one estimate the risk associated with derivatives mixed in and leveraged and mixed with other bonds which also came from derivatives many hundreds of times, bundle it with several equity security, leverage it again, and hope for your risk calculation to be accurate? How can you possibly calculate risk accurately for something like this when some of the securities came from proprietary models developed by private banks whose underlying assumptions you don't know?!
Do scenarios like what I've outlined above really happen in practice?
I look forward to hearing your thoughts. I hope you'll forgive the mistakes that I've made in the statements above, like I said; I am not an MFE.
If you made it this far, thanks for humoring me.
Tyndall off.
