Financial Rounds

How Professors Spend Their Time

noreply@blogger.com (The Unknown Professor) — Fri, 29 Aug 2008 16:40:38 -0500

I'm in the midst of filling out my annual report (we do one every year to show the powers that be what we did over the previous year). I've got several attachments, to my report, but I'm debating adding this as one more:

Maybe after I'm tenured...

It's Time For Some Campaigning!

noreply@blogger.com (The Unknown Professor) — Tue, 02 Sep 2008 10:20:45 -0500

I always get a kick out of JibJab's political videos. Here's the latest.

Time for Some Campaignin'

"Then we spin you around and poke you in the rear"
That just about says it all.

Conference Presentations By the Numbers

noreply@blogger.com (The Unknown Professor) — Wed, 27 Aug 2008 07:56:50 -0500

Once you've gone to a half dozen academic presentations, you begin to notece the same comments appearing over and over. Along those lines, here's a classic piece from George Stigler's in the 1977 Journal of Political Economy — “The Conference Handbook.” Stigler suggested that econ seminar participants could speed things up by making objections to the speaker's presentation using the following numbered list:

Adam Smith said that.
Unfortunately, there is an identification problem which is not dealt with adequately in the paper.
The residuals are clearly non-normal, and the specification of the model is incorrect.
Theorizing is not fruitful at this stage; we need a series of case studies.
Case studies are a clue, but no real progress can be made until a model of the process is constructed.
The second-best consideration would, of course, vitiate the argument.
That is an index number problem (obs., except in Cambridge).
Have you tried two-stage least squares?
The conclusions change if you introduce uncertainty.
You didn’t use probit analysis?
I proved the main results in a paper published years ago.
The analysis is marred by a failure to distinguish transitory and permanent components.
The market cannot, of course, deal satisfactorily with that externality.
But what if transaction costs are not zero?
That follows from the Coase Theorem.
Of course, if you allow for the investment in human capital, the entire picture changes.
Of course, the demand function is quite inelastic.
Of course, the supply function is highly inelastic.
The author uses a sledgehammer to crack a peanut.
What empirical finding would contradict your theory?
The central argument is not only a tautology, it is false.
What happens when you extend the analysis to the later (or earlier) period?
The motivation of the agents in this theory is so narrowly egotistic that it cannot possibly explain the behavior of real people.
The flabby economic actor in this impressionistic model should be replaced by the utility-maximizing individual.
Did you have any trouble in inverting the singular matrix?
It is unfortunate that the wrong choice was made between M1 and M2.
That is alright in theory, but it doesn’t work out in practice (use sparingly).
The speaker apparently believes that there is still one free lunch.
The problem cannot be dealt with by partial equilibrium methods; it requires a general equilibrium formulation.
The paper is rigidly confined by the paradigm of neoclassical economics, so large parts of urgent reality are outside its comprehension.
The conclusion rests on the assumption of fixed tastes, but (of course) tastes have surely changed.
The trouble with the present situation is that the property rights have not been fully assigned.

HT: The Freakonomics blog.

Some of the commenters on the piece added more options. Here are some of the better ones:

How did you handle endogeneity problem?” (Note: this almost always works well at finance conferences, particularly for corporate finance pieces)
Your standard errors are too small because you failed to cluster (or clustered at the improper level).
At Fed banks, certainly one of the items for this list would be, “How is this of any relevance to monetary policy?”
The results are driven by unobserved heterogeneity.
Did you try using a Difference-in-Difference technique? Did you try using a non-parametric estimation?
Experiments conducted by Kahnmen and Tversky have clearly demonstrated that people do NOT choose rationally under those conditions.
Is there a weak instruments problem?
But what if the actors aren’t rational?
Isn’t this just Modigliani-Miller?
How is your model identified?
Have you included fixed effects?
That’s ok in practice, but it won’t work in theory.
This theory is only valid in the static case and won’t work in the dynamic one.
Why do we care about this? or “Why is this question important anyway?"
That’s true, but not very interesting
That’s not a large effect you’ve found, it’s a small effect.
That’s not a small effect you’ve dismissed, it’s a large effect.
Did you try first-differencing?
What happens if you estimate it by GMM?
You just ran a bunch of regressions. What have we learned from your analysis?
Here's a popular one, in the “I did this back in..” vein:“I was troubled that you didn’t cite my work in the field.”
Your empirical results are obviously biased by a troubling sample selection issue.
But what if we view this as a 2-stage game?.
‘In an efficient market, that type of arbitrage isn’t possible’.
I believe your correlation is a spurious one unless you convince me you checked for co-integration.

If you can think of others to add to the list, feel free to put them in the comments section.

Obama Gets RickRolled

noreply@blogger.com (The Unknown Professor) — Mon, 25 Aug 2008 15:50:19 -0500

I try to avoid politics on this blog, because it brings out the moonbats at both ends of the political spectrum. But this was pretty clever.

I wondered if someone could do a similar one for McCain, but I don't think he's got the moves...

HT: Ace of Spades

A Rare Sighting

noreply@blogger.com (The Unknown Professor) — Tue, 02 Sep 2008 10:21:19 -0500

The Unknown Son recently went to a day camp. While there, he got a little "work" done. T he following picture actually made the front page of the morning edition of our state's major newspaper.

My colleagues thought the clown makeup merely increased the resemblance to his father. Those who know me can judge for themselves. He's done with his chemotherapy, so his hair is starting to grow back. This means that the resemblance should rapidly fade over the next month or so.

Another Hit

noreply@blogger.com (The Unknown Professor) — Sat, 23 Aug 2008 13:59:03 -0500

Just got an email from a coauthor forwarding an acceptance letter for a journal on a small piece we've been working on for a while. It's in am p.k., but definitely second-tier journal, But since I'm not yet tenured, my attitude is that ANY publication is a good one (what's the old saying - "a Dean is someone who can't read but can count").

At Unknown University, we do our annual faculty productivity reports on a June-June basis. So this means I start the new year with a slap single already on the scpreboard.

Rocky Balboa and The CFA

noreply@blogger.com (The Unknown Professor) — Thu, 21 Aug 2008 15:44:02 -0500

I came across analystforum while studying for the Level 1 exam of the CFA. It's a fantastic resource - they have forums for all 3 level, people who pass the various levels continue to post in the forums long after they've passed. If you're taking the exams, sign up - it's free, and worth it's weight in gold.

Results for the CFA exams were just announced, and a number of people who seemed to be locks for passing ended up failing. For others, it was not the first time failing at the exam (I've heard that the average time to completion is 5 years, which means most people that complete the people fail 2+ exams along the way).

In any event, people on the forum were consoling and encouraging those who failed, and one of them linked to a bit of dialog on the movie Rocky Balboa (one of my all-time favorite pictures). It may be the best talk I've ever heard a father give his son:

"Let me tell you something you already know. The world ain't all sunshine and rainbows. It's a very mean and nasty place, and I don't care how tough you are. It will beat you to your knees and keep you there permanently if you let it. You, me or nobody is gonna hit as hard as life.

But it ain't about how hard you hit. It's about how hard you can get hit and keep movin forward. It's about how much you can take and keep movin forward.

That's how winning is done.

Now if you know what you're worth, then go out and get what you're worth. But you gotta be willing to take the hits and not be pointing fingers and saying 'it's because of him, or her, or anybody'. Cowards do that, and that ain't you. You're better than that. "

Of course, it's much better with a South Philly accent.

Now go rent the movie, and watch it with your kids.

What Do Incoming Freshmen Know?

noreply@blogger.com (The Unknown Professor) — Tue, 19 Aug 2008 11:29:03 -0500

Every year, Beloit College publishes "a look at the cultural touchstones that shape the lives of students entering college". They just published their 11th "Mindset List." Here are a few tidbits:

Harry Potter could be a classmate, playing on their Quidditch team
GPS satellite navigation systems have always been available.
Gas stations have never fixed flats, but most serve cappuccino.
All have had a relative--or known about a friend's relative--who died comfortably at home with Hospice.
WWW has never stood for World Wide Wrestling.
Clarence Thomas has always sat on the Supreme Court.
Schools have always been concerned about multiculturalism.
There have always been gay rabbis.
Roseanne Barr has never been invited to sing the National Anthem again. (a good thing, IMO)
Their parents may have watched The American Gladiators on TV the day they were born.
They never heard an attendant ask “Want me to check under the hood?”
They have never known life without Seinfeld references from a show about “nothing.”
There have always been charter schools.

Read the whole thing here.

CFA Level 2 Results

noreply@blogger.com (The Unknown Professor) — Tue, 19 Aug 2008 23:40:41 -0500

I finally got to the CFA Institute Website for my Level 2 results - of course, the server was overloaded for the first half hour after results were made available. Once again, it wasn't pretty, but I passed. CFAI only gives a very broad idea as to how candidates scored, but based on their report, I scored above 70% on approximately 60% of the material, between 50% and 70% on 25% of the material, and below 50% on the remaining 15% of the material.

But who cares? I passed.

So for now, it's back to research. Here's what's on my plate:

Finish two papers that are somewhere between initial results and finished manuscript. They WILL be done by mid-September to submit to a conference. On one, I'm the data guy. On the other, I'll probably do the initial draft.
Do the final edits on a paper that's previously been rejected and reworked. It should be done by next week to send out to yet another journal
Finish updating the data set to add another 5 years of data for another paper that was rejected, then redo all the analyses. I get to play "data monkey" on this one too, and my coauthor gets to do the rewrite.

I also have a syllabus to write for my new MBA class. I taught it once before, but that was years ago. This'll be the first time teaching MBA since 2001, so it should be fun.

Forecast For Blogging: Light

noreply@blogger.com (The Unknown Professor) — Fri, 15 Aug 2008 08:20:54 -0500

Been dealing with taxes the last few days (I took an extension, so I have to have it done by 8/15).

Someone PLEASE shoot me now!

Arghhh! A reader reminded me that (unlike in previous years), the extensions are now until October, not August. At least they're done now.

What Do You Give A Guy For His 50th Birthday?

noreply@blogger.com (The Unknown Professor) — Sun, 10 Aug 2008 21:06:17 -0500

I just turned 50 this weekend (insert codger joke here). So, Unknown Wife and I got a sitter and went out to eat some sushi and see The Dark Knight.

But after church today, we stopped by a Learning Express (basically a place with educational toys). Right there on the shelves was a Water Balloon slingshot (in case you're wondering, here's a link to a similar model). When we got home, I got my neighbor who lives three doors down to help me out and started launching balloons down the street and over the trees. We soon had the Unknown Daughter and the neighbor's three sons try to catch water balloons we launched from about 60-80 yards away.

Back in college we used to make a similar contraption called a "Funnellator" by attaching surgical rubber tubing to a funnel. We used it to launch water balloons (and other, far more disgusting things) almost 200 yards with our deluxe model. It surprising how many other contemporaries had similar experiences. In fact, a member of the advisory board for our student-managed investment fund once told me (after a few beers) that he's used a Funnellator to launch a sheep's brain (yes, you heard me right, a sheep's brain - he was a Biology major before he switched to Finance) almost 150 yards to land in at the front-door of one of the sororities' houses.

My neighbor and I are thinking about modifications to the store-bought model to see if we can bring it up to code. After all, you never know when the development down the street might try to attack us. We might bring the engineering professor down the street into the loop to see if we can make something more automated.

Preparedness is all.

Hospital Slang

noreply@blogger.com (The Unknown Professor) — Sat, 09 Aug 2008 11:50:08 -0500

A comprehensive list

Dogbert Knows Earnings Management.

noreply@blogger.com (The Unknown Professor) — Fri, 08 Aug 2008 12:53:15 -0500

The second one is pretty timely - particularly since pension assumptions are covered in Level 2 of the CFA curriculum.

The Day My Butt Went Psycho

noreply@blogger.com (The Unknown Professor) — Fri, 08 Aug 2008 12:47:55 -0500

No, this is not a post about gastrointestinal difficulties.

Today's Wall Street Journal has an interesting story about a new trend in books for boys. It turns out that they don't like to read as much as girls, unless it involves stuff that's gross or at least somewhat inappropriate (real news flash there, eh?). Hence the title of this post. It's the title of a new children's book by Zack Freeman. Here's the description from Amazon:

Zack Freeman is ready to tell his story...the story of a brave young boy and his crazy runaway butt. The story of a crack butt-fighting unit called the B-team, a legendary Butt Hunter's formidable daughter, and some of the ugliest and meanest butts ever to roam the face of the Earth. A story of endurance that takes Zack on an epic journey across the Great Windy Desert, through the Brown Forest, and over the Sea of Butts before descending into the heart of an explosive buttcano to confront the biggest, ugliest, and meanest butt of them all!It's a story you and your butt will never forget!

Another book the article mentions is "Sir Fartsalot Hunts the Booger" by Kevin Bolger.

So boys like off-kilter, gross, and tasteless stuff. Who could have known? Of course, when I brought up the article at the breakfast table, Unknown Wife thought it was inappropriate and tasteless. I, on the other hand, when right over to the computer and ordered the books from our library for the Unknown Son. He's pretty excited about themsince he's just about done with his latest in the Captain Underpants series.

Meanwhile, Unknown Daughter is reading Fairytopia. Thus speaks the chromosomal divide.

Rollin, Rollin, Rollin, Keep Them Doggies Rollin

noreply@blogger.com (The Unknown Professor) — Wed, 06 Aug 2008 23:40:07 -0500

I and a couple of fellow alums of the Unknown Alma Mater have been talking about a project for about the last 6 months. We finally started working on it in earnest about a month and a half ago. So far, we've got initial result (and kick-hiney ones, if I may say so), a literature review, some pretty good looking but simple charts, and (by the end of this week) a couple of tables. This might be the fastest initial progress on a project I've ever seen.

So far, it's been a good summer. I've almost finished reworking a paper that got rejected (it'll be sent out to a nearly-top-tier journal in the next week or two), started two new projects that we've already got interesting initial result on (they'll be done in time to submit to a conference in September), and moved a fourth project from the "vaporware" stage to the point where it could also possibly be conference ready by the end of September.

But I have to be careful what I say, because coauthors on two of the projects are regular readers of the blog. So, I can't gripe about them here. Not that I have to - they've all been (if for different reasons) pleasures to work with. Keep up the good work, y'all.

Could This Have anything To Do With My Blog Recently Being Flagged as a SpamBlog?

noreply@blogger.com (The Unknown Professor) — Tue, 05 Aug 2008 11:25:28 -0500

I try not to get too political on this blog - it really isn't my thing. But this caught my eye.

It's probably just the latest conspiracy theory.

Where Did The Scrap Steel From the WTC GO?

noreply@blogger.com (The Unknown Professor) — Tue, 05 Aug 2008 13:00:44 -0500

It turns out they made a warship out of it.

Junior Chavers, foundry operations manager, said that when the trade center steel first arrived, he touched it with his hand and the ‘hair on my neck stood up.’ ‘It had a big meaning to it for all of us,’ he said.

Read the whole thing here here:

Outstanding.

Eponymous Laws

noreply@blogger.com (The Unknown Professor) — Mon, 04 Aug 2008 08:10:27 -0500

Pretty much everyone knows Murphy's Law ("If anything can go wrong, it will"). But there are a number of other eponymous laws (i.e. laws named after someone). I just came across the Wikipedia page listing many, many more. Here are a few of my favorites:

Brook's Law - "adding manpower to a late software project only makes it later" (this also holds for academic initiatives)
The Dilbert Principle (coined by Scott Adams) - "the most ineffective people are promoted to the place wher they can do the least amount of damage: management"
Godwin's Law - "As an online discussion grows longer, the probability of a comparison involving Nazis or Hitler approaches one."
Hanlon's razor - "Never attribute to malice that which can be adequately explained by stupidity."
Muphry's law - "if you write anything criticizing editing or proofreading, there will be a fault of some kind in what you have written"
Parkinson's law - "work expands so as to fill the time available for its completion".
Peckham's Law - Beauty times brains equals a constant.
Peter principle - "In a hierarchy, every employee tends to rise to his level of incompetence"
Skitt's law - a corollary of Murphy's law, variously expressed as "any post correcting an error in another post will contain at least one error itself"
Wirth's law — Software gets slower faster than hardware gets faster.

There are quite a few others. Read the whole page here (and feel free to add your favorite in the comments section).

I Am Not a Spammer

noreply@blogger.com (The Unknown Professor) — Sat, 02 Aug 2008 12:08:22 -0500

I was locked out of my blog for a couple of days, because the folks at Blogger had flagged it as a possible "spam blog".

I guess they figured out that while it may be low quality, it's not spam.

We Produce Thecal Matter

noreply@blogger.com (The Unknown Professor) — Thu, 31 Jul 2008 11:06:18 -0500

Some are just better at piling it.

My Students Are Getting Their CFA Level 1 Results

noreply@blogger.com (The Unknown Professor) — Tue, 29 Jul 2008 10:42:18 -0500

For the first time, I have five students who sat for the CFA Level 1 Exam. Today's the day results are given out.

So far, three have reported in, and two of those passed. Well done, lads.

I have a bet with my Dean that three of the five will pass. So, I need one more out of the two remaining...

update: It's now three out of four (the 4th, who didn;t make it was in the top band of those that failed, so he should make it in December). I guess that means the Dean owes me dinner. Since the overall passing rate is 35%, our initial group of Level 1 test takers have done very well.

Note: if you want to calculate a rough estimate for your score, here's a link to a scoring calculator someone hacked together.
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Is There Predictive Power In The Option-Implied Volatility Smirk?

noreply@blogger.com (The Unknown Professor) — Mon, 28 Jul 2008 14:37:26 -0500

Apparently, the answer is yes. Xiaoyan Zhang (of Cornell), Rui Zhao (of Blackrock Inc.), and Yuhang Xing (of Rice University) recently conducted a study titled "What Does Individual Option Volatility Smirk Tell Us about Future Equity Returns?" Here's their abstract (emphasis mine):

The shape of the volatility smirks has significant cross-sectional predictive power for future equity returns. Stocks exhibiting the steepest smirks in their traded options underperform stocks with the least pronounced volatility smirks in their options by around 15% per year on a risk-adjusted basis. This predictability persists for at least six months, and firms with steepest volatility smirks are those experiencing the worst earnings shocks in the following quarter. The results are consistent with the notion that informed traders with negative news prefer to buy out-of-the-money put options, and that the equity market is slow in incorporating the information embedded in volatility smirks.

Basically, they calculate the "volatility smirk" (the difference between the implied volatility for At-The-Money (ATM) calls and Out-of-The-Money (OTM) puts) for individual stocks. They then sort firms into portfolios based on deciles of the smirk, and compare returns for the various portfolios (or for "hedge portfolios" constructed by shorting the "high smirk" decile and going long the "low smirk" decile) . The logic for this approach is the hypothesis that informed traders with negative news will choose to buy OTM puts, thereby causing a divergence in the IV of the puts vs for the call.

All in all, a pretty cool paper showing how information flows across markets. Given some work I'm doing with options data, I found it to be particularly timely.

Read the whole thing here.

HT: CXO Advisory Group

Dan Ariely - Predictably Irrational At Google Authors

noreply@blogger.com (The Unknown Professor) — Sat, 26 Jul 2008 07:58:28 -0500

Here's a video of Dan Ariely (author of "Predictably Irrational") in his recent talk for the Google Authors program. Ariely has written a fascinating book about some of the cognitive and behavioral biases that most of us exhibit. If you listen carefully, you'll find that he even gives a hint about how to increase your student evaluations.

Finance: 0% Politically Correct

noreply@blogger.com (The Unknown Professor) — Sun, 27 Jul 2008 12:53:01 -0500

Inside Higher Education just highlighted some research done by Neil Gross, a sociology professor at Harvard, and Solon Simmons, a sociology professor at George Mason University. Here's the "punch line" from the summary:

Humanities and social science fields tend to have higher politically correct rankings, while professional and science disciplines do not. The table that follows is in order of political correctness. Psychology is the only field where a majority of professors are politically correct. Four fields — finance, management information, mechanical engineering and electrical engineering — had no one who was politically correct (emphasis mine).

In addition, the five disciplines next least likely to be politically correct were Biology(2%), Computer Science (3%), Accounting (4%), Marketing (4.5%), and Economics (4.7%). All in all, these numbers aren't surprising: I can't imagine what a politically correct approach tom teaching finance would entail (maybe an NPV of a project that differs based on the race, gender, or class of the project manager?).

Read IHE's summary here, and get the original article here.

HT: Marginal Revolution, who I'm less politically correct than.

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Extension Risk and Mortgage Backed Securities

noreply@blogger.com (The Unknown Professor) — Thu, 24 Jul 2008 10:49:05 -0500

I'll probably be teaching Fixed Income class next year when a colleague goes on sabbatical. I'll try as much as possible to tie the class in with the CFA curriculum. One of the big topics in the Level 2 CFA Fixed Income material is the issue of extension and contraction risk for mortgage backed securities (MBS).

In case you're not familiar with the terms, contraction risk is the risk that repayments of principal on the mortgages underlying the MBS will be higher than expected, thereby resulting in a lower than expected maturity on the security. Extension risk is the opposite (lower than expected repayments, and a stretching of the MBS security's maturity.

Accrued Interest just put up a great piece on the topic. In short, it talks about how the problems in the mortgage markets will result in extension risk being higher than expected. The general drop in the real estate market has resulting in people having lower than expected equity in their homes (in some cases, they're "upside down", with home values lower than the outstanding balance). In addition, lenders have become very skittish about lending with less than 20% equity. So, there will be less refinancing activity than in predicted in most pricing models. As a result, there'll be a lengthening in the average maturity of the typical MBS (i.e. more extension risk).

Read the whole thing here.