Showing posts from July, 2009

It's CFA Level 1 Results Day!

Results for the CFA level 1 exam came out today. According to the CFA Institute, there was a 46% pass rate - the highest in years. I don't know if it was due to the move to 3-answer multiple choice questions or to a better-than-average candidate pool (there were probably a number of people out of work with extra time to study in there). Either way, congratulations to those who passed - you can now register for the Level 2 exam. If you didn't make it this time, you can take Level 1 again in December.

I have 3 former students (that I know of) who took the exam, and a couple more that were considering it. I expect the three I know of did well (hopefully, they'll let me know sometime today).

update: So far, two have reported in, and one passed - still waiting on the thrid.

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A Pretty Good Week (and Month) In the Markets

I try not to get too excited about short-term market movements. At the same time, I have to keep up since I'm the faculty advisor for Unknown University's St udent-managed fund. Even so, it's been a pretty good week (and month and year) so far - almost every equity index I can think of is in the green for the last month (and even year to date). As an aside, our fund is up 11.4% YTD (but I'm sure that'll change).

click for larger image (courtesy of

High Impact Research

Most of what I do is not "high impact." Ah well- I yam what I yam.

South Park On Risky Banks

This will end up in my classes this fall.

Annnd poof! It's gone.

Here I Go Again!

As many of you know, I'm in the midst of taking the CFA (Chartered Financial Analyst) exams. I had been registered for the Level 3 exam this last June, but dropped out because of the Unknown Son's health issues (and I'm glad I did, because the time was much better spent with him in his last days).

Well, I just re-upped and re-registered for the 2010 exam. So, I'm once again a Level 3 Candidate. At least this time I'm already familiar with well over half the material, so it shouldn't be nearly as stressful.

I might even start early and keep with it this time around. With luck, I might be done with my first pass through he material by January 1. While that seems early, if I shoot for January 1, I'll probably actually finish by March or so, and then I can focus on actually locking this stuff down. After all, the material is interesting, but I don;t want to take any more exams for a while after this.

Happy 40th Anniverary, Moon Landing

I remember watching/listening to the Apollo 11 moon landing as it happened on the television. Hard to believe, but it's been 40 years since .

And yet, some conspiracy theory whack jobs still doubt that it happened. One moonbat (sarcasm intended) named Bart Sibrel systematically harassed the Apollo crewmembers to see if they'd admit that the landing was a hoax. He made the mistake of calling Buzz Aldrin a liar. Click below to see what happened.

Man - I could easily keep clicking this all day like one of those experiments where they gave mice crack.

"Garbage Research" and The Equity Risk Premium

Instead of the CCAPM (Consumption CAPM), we now have the GCAPM (Garbage CAPM). Alexi Savov (graduate student at U of Chicago) finds that he can explain much more of the Equity Risk Premium using aggregate garbage production than he can using National Income and Product Account (NIPA) data. Here's the logic behind his research (from Friday's Wall Street Journal article titled "Using Garbage to Measure Consumption"):
In theory, one way to explain the premium would be to look at consumption, a broad measure of wealth. People should demand a premium from an investment that goes down when consumption goes down. That’s because the alternative — bonds — hold on to their value when consumption declines. Another way to put it: When you are making lots of garbage, you are rich. When you stop making garbage, you are poor. Unlike bonds, which continue to pay out whether you produce lots of garbage (and are rich) or not, stocks are likely to lose their value during bad time…

Asset Class Correlations Increase In Bad Times

It's a pretty well-known fact that correlations between asset classes increase in really bad markets. To get a sense of how much this effect matters in terms of portfolio diversification, read this Wall Street Journal piece (published Friday, 7/10) titled "Failure of a Fail-Safe Strategy Sends Investors Scrambling. Here's a snippet:
Correlation is a statistical measure of the degree to which investment returns move together. Between 1991 and 1994, the correlation between the S&P 500 index and high-yield bonds was low, at 0.2 or 0.3, according to Pimco statistics. (A correlation of 1 means returns move in perfect sync.) International stocks had a correlation with the S&P 500 of 0.3 or 0.4, and real-estate investment trusts had a correlation of 0.3, according to Pimco data. Commodities showed little correlation to U.S. stocks. By early 2008, investment categories of just about every stripe were moving significantly more in sync with the S&P 500. The correlation…

Getting Your Data Straight

I've made progress on the paper I'm working on. Unfortunately, this week has been a good illustration of a quote from McCloskey: I believe it went something like "90% of writing is getting your thoughts straight, and 90% of empirical work is getting your data straight."

Unfortunately, my data wasn't straight - I realized that I had used the wrong data code (a certain type of dividend distribution) from CRSP. So, my previous analysis was basically crap (that's a technical term for the unitiated) and had to be redone using the proper data set.

Luckily, it looks like my primary results after using the proper code, but with a few minor changes. For now, I'm still doing the preliminary descriptive stuff. Since I did the initial version of the paper in a hurry (hey - it was a conference deadline), I took a few shortcuts. This time, I'm going back to step 1 and going over every line of code, and (just as important), making sure I know how the sam…

The Limits of Models

Here's an excellent piece on the Psi-Fi Blog, titled "Quibbles With Quants." Here's a choice part:
What the models failed to capture was that humans don’t behave in simple, predictable and uncorrelated ways. It’s impossible to overstate the importance of the way these models cope with correlation of peoples’ psychology. To sum it up: they don’t. Let me know if that’s too complex an analysis for the mathematical masters of the universe.

Anyone who’s ever been to a nightclub, a football game or even a very loud party will know that there are situations where we don’t act as individuals, buzzing about doing our own thing. These are occasions when we all suddenly stop being individuals and start doing the same thing – usually involving large quantities of drugs and some very bad singing. Although these sorts of events are specifically designed to trigger this behaviour – which is probably a deep evolutionary adaptation to sponsor group behaviour, useful when it comes to r…

Momentum Effects and Firm Fundamentals

The more Long Chen's work I read, the more I like it. I recently mentioned one of his pieces on a new 3-factor model. Here's another, on the momentum effect, titled "Myopic Extrapolation, Price Momentum, and Price Reversal." In it, he links the well-known momentum effect to patterns in firm fundamentals. Here's the abstract:
The momentum profits are realized through price adjustments reflecting shocks to firm fundamentals after portfolio formation. In particular, there is a consistent cross - sectional trend, from short-term momentum to long-term reversal, that happens to earnings shocks, to revisions to expected future cash flows at all horizons, and to prices. The evidence suggests that investors myopically extrapolate current earnings shocks as if they were long lasting, which are then incorporated into prices and cash flow forecasts. Accordingly, the realized momentum profits can be completely explained by the cross - sectional variation of contempora…

Updating a Dataset Always Takes Longer Than Expected

I'm still working on updating my data. As usual, what I thought would be a "simple" three to four-day jobhas stretched out to almost two weeks of work. At least I'm not this person.

Happy 4th of July

We're just got back from a trip to Wal-Mart (what could be more American) to buy some clothes for the Unknown Daughter (she's grown enough that her old bathing suit no longer fits). The Unknown Wife and Unknown Daughter tried on clothes, while I wheeled the Unknown Baby Boy around the store until he went to sleep. Not surprisingly, the large-screen flat-panel TVs did the trick (based on initial indications, he's definitely a boy-child to the core).

Now we're getting ready to grill some critters, followed by fireworks. In the meanwhile, here are some links. They're from a previous year's post, but worth repeating (after all at Financial Rounds, we're all about the efficiency thing):
The Declaration of Independence most people have never read it through. So take a few minutes and do so before going about your day.

Our Sacred Honor - a piece that recounts what happened to the signers of the Declaration

The Pledge of Allegiance - 'nuffsaid.


A Quarter Million Hits

Shortly after 2 today, Financial Rounds had its 250,000th visitor. Man - I never imagined there were so many people out there with Internet connections and this much free time on their hands.

In all seriousness, thanks for reading. I'm humbled.

Profile of Paul Wilmott

Newsweek recently ran a profile of Paul Wilmott, one of the biggest names in the "quant" world. Here are the opening paragraphs
Imagine an aeronautics engineer designing a state-of-the-art jumbo jet. In order for it to fly, the engineer has to rely on the same aerodynamics equation devised by physicists 150 years ago, which is based on Newton's second law of motion: force equals mass times acceleration. Problem is, the engineer can't reconcile his elegant design with the equation. The plane has too much mass and not enough force. But rather than tweak the design to fit the equation, imagine if the engineer does the opposite, and tweaks the equation to fit the design. The plane still looks awesome, and on paper, it flies. The engineer gets paid, the plane gets built, and soon thousands just like it are packed full of people and sent out onto runways. They fly for a while, but eventually, because of that fatal tweak, they all end up crashing. In a way, this i…

Arrrrggghh! SAS is Evil!

Just another day (or two) of torturing data. Like I mentioned a couple of days ago, a week back I decided to update a data set to include the last year or so of data (the data sources I use were recently updated). Like most "simple" jobs, it's turned out to be much more of a hairball than I expected. Although the program I used was fairly simple to rewrite, I realized that I had to update not one, not tWo, but THREE datasets in order to bring everything up to the present.

Caution: SAS Geekspeak ahead

One of the data sets is pretty large (it was about 70 gigabytes, but with the updates and indexing I've done, it's almost 100 gig). So, adding the new data and checking it took quite a while (no matter how efficiently you code things, SAS simply takes a long time to read a 70 gigabyte file). I thought I had everything done except for the final step. Unfortunately, the program kept crashing due to "insufficient resources."

For the unitiated, when ma…