Got to grade the exam that I administered last week to freshmen…It is already 3AM..have been postponing the activity since 2 weeks….conducting an exam is easy, the grading is the boring part !!.. I always find something that takes priority over grading..and here I am now facing the deadline after all..I have to grade it by today
and
I have absolutely no energy to do it..Partly because, the activity itself is meaningless..How does it matter if a student is able to calculate difference quotient or not ? Limits, Continuity, Reimann Calculus is good and good for classroom..Once one steps in to the real world, the world is characterized by nonlinearity, stochastics , random jumps etc…One thing that this teaching experience has done to me…It has been made me far more patient than I really think I am !! I wish I could take some time out and give the real importance of reimann calculus to all the students,which is - TO IGNORE IT !!! and persuade them to explore randomness !

Notional in $B

Market Value in $B

Paul Graham in his new essay says good economy/bad economy is like rounding off error when compared to the people who are involved in the startup. However bad economy might just be a shade better than a good one!

Link

Via Maulik :

Taleb said the “use of probabilistic methods for the estimation of risks did just blow up the banking system.”

Risk Expert Calls For LTCM Pair To Lose Nobel Prize

Via: Trader News

Sell side needs to develop tools now if one has to exploit arb!

Looks like there is a tremendous opportunity for building sell side tools!

Via EMII:

A new over-the-counter option has been launched that allows users to hedge against hurricanes making landfall in specific U.S. Atlantic and Gulf coast regions.

Weather Risk Solutions’ Hurricane Risk Landfall Options or HuRLOs is be sold via Chicago Mercantile Exchange brokers. Rather than using direct counterparties, the options are cleared via the CME’s Clearing360 platform, which clears over-the-counter transactions. So far, users include reinsurance companies, insurance companies and power companies.

This is a book which is guaranteed to make you laugh!!! Yes , it is a book on derivatives but it is written in a great humorous style that it WILL MAKE YOU LAUGH. I bet!

I picked up this book almost 10 months back. Speed read it . Had lent it to one of my friends and hence could not write a summary in time. Now that this book is back with me, Let me try to summarize a couple of interesting things from the book.

The day I read “Innumeracy”, I began appreciating numbers. Even though I was dealing with numbers prior to that day, that book clearly showed me that I was innumerate .That coupled with my love of life( the book which I have fallen in love and my romance continues till this day) , “The Art of Profitability " , made me realize that I was total crap in numeracy skills. From that day, I have constantly strived to improved my numeracy skills.

The trading algo that I was working on for the last one week has finally shown some alpha..The tweak was a simple tweak..Need to make it more intelligent..but sometimes I guess simple things work like charm as compared to complicated stuff! In any case will try to engineer it a bit and see whether I can extract more alpha!

This book traces the key events in the US political and economy history that have supposedly led to the current crisis. Books such as these attempt to try to make a good narrative of the events around us. As they say , connecting dots backwards is easy ..and so this book in that sense does a better job.

Usually crisis is associated with a specific asset class. Junk bonds, CMO’s, Real estate, etc. However the current financial crisis is a different one . It is a credit crisis which permeates across all asset classes. It is like poisoning air and there is no respite for any living being in the environment. Credit crisis permeates across all assets as it is the lifeblood of finance and that makes this crisis VERY dangerous. The asset classes which are going to get impacted are not just the dodgy mortgages but Commercial Mortgages, Credit Card debts, High yield bonds, Leverage Loans, Complex bond structures, all in total, according to the author’s estimate is ONE TRILLION DOLLARS!!! That’s equivalent to the GDP of India!! scary to think of it.
LTCM was just 100 billion in positions and 10 million assets at risk. This time , the numbers are scary and bailout means unbelievable sum of money.

This book traces the key events in the US political and economy history that have supposedly led to the current crisis. Books such as these attempt to try to make a good narrative of the events around us. As they say , connecting dots backwards is easy ..and so this book in that sense does a better job.

Usually crisis is associated with a specific asset class. Junk bonds, CMO’s, Real estate, etc. However the current financial crisis is a different one . It is a credit crisis which permeates across all asset classes. It is like poisoning air and there is no respite for any living being in the environment. Credit crisis permeates across all assets as it is the lifeblood of finance and that makes this crisis VERY dangerous. The asset classes which are going to get impacted are not just the dodgy mortgages but Commercial Mortgages, Credit Card debts, High yield bonds, Leverage Loans, Complex bond structures, all in total, according to the author’s estimate is ONE TRILLION DOLLARS!!! That’s equivalent to the GDP of India!! scary to think of it.
LTCM was just 100 billion in positions and 10 million assets at risk. This time , the numbers are scary and bailout means unbelievable sum of money.

Last 5 day chart of VIX summarizes the crisis on wallstreet.

It is currently at 73!!

In one year 55% GDP of US is wiped out by the market !

AND Dow keeps falling like there is no tomorrow

600 point drop

Where are we heading? !!!

Via Steven Shreve :
To prevent a recurrence of financial crises, some call for a return to a simpler time, before derivative securities and the quants who analyze them–a time when investors bought stocks and bonds and little else.

Such complaints miss the point. When a bridge collapses, no one demands the abolition of civil engineering. One first determines if faulty engineering or shoddy construction caused the collapse. If engineering is to blame, the solution is better–not less–engineering. Furthermore, it would be preposterous to replace the bridge with a slower, less efficient ferry rather than to rebuild the bridge and overcome the obstacle.

Dow says : Don’t fool me by Rate cut !!
The opera continues :)

The Fed lowered its fed funds rate by half of a percentage point to 1.5%. The central bank’s statement said the move was necessary because of the worsening crisis in global financial markets. Link : Rate Cut

We are back to 2002 levels of Fed Fund Rate.This is going to be a prolonged period of recovery till 2009 /2010/2011/god knows!!

I shudder to think that it is a vice-presidential candidate speaking!. God save america!

If you have a portfolio of 1000 stocks, there are 5 key decisions that one needs to take:

Buy to Open
Sell to Open
Buy to Close
Sell to Close
Do Nothing

In a quant based strategy like the one I have been working for the past few months , the signals help me get on to the position. However, there is a catch. As you get on to the position based on external asset price movements, you have to look at something relating to the portfolio, which is RISK. Risk based quant investing is something that is of key importance to stat arb based strategies.

House approves the $700 billion package!!

Link : Approved

Link : House again

Will the bail out package be approved this time ? I bet that it would be passed this time in the House..Why ? May be trying to be a bit optimistic i guess..It will be fun to track VIX in this week.Today there was a record volume of puts traded .

Whats in store for this week ? well, it is drama time NOW!! :)

They say this is the worst year for anybody to graduate out of a program…I say, it is fun to be in such uncertain periods and watch closely the markets..This is best time I guess to just be a spectator and watch the drama as it unfolds :)

Looking at the chart of 1 day DOW movement, it would be hard to say that we are in one of worst financial crisis. The significant feature of this crisis, when people write about it , would be that of a volatility based crisis where vol is created by government regulations, panic etc..

~500 point increase in DOW on a single day…and we are in a financial crisis!!!! Who says markets are predictable ?

A list of hedge Funds which blew up in the subprime crisis, the big ones..Small ones are too many to fit a list I guess.

Link: http://hf-implode.com/

Ever heard of the term Norm Entrepreneurship !! Business that fills the gap of social norms!
Here is an example …

Via Tyler Cowen :

One of the hottest bars in the Chinese city of Nanjing sports only a sofa, a few tables, and tissue paper - a lot of tissue paper. The AFP news service reports that the city’s first “cry bar,” where customers can sit and cry for $6 per hour, is growing in popularity. Owner Luo Jun says he opened the bar when clients of his last business said they often wanted to cry but didn’t know when or where it would be appropriate to do so.

Are we living in a matrix ?

Link 1 , Link 2 , Link 3 , Link 4

Via Suneet :)

Link : Short Sellers Get Squashed

Shorting, the basic stuff that one takes for granted in various models , when banned , make the models useless.

Shorting which is underlying assumption of BlackScholes, Several math models, Long-Short Stat arb strategies !! has been banned on 799 US- Stocks. This is the time to throw all the models aside and trend follow!!

In a sour mood!!

“Education is the path from cocky ignorance to miserable uncertainty”

Link : http://www.thebigview.com/pastlife/index.html
:)
Apparently, this is how my past life was :

I don’t know how you feel about it, but you were male in your last earthly incarnation.You were born somewhere in the territory of modern North Japan around the year 1025. Your profession was that of a monk (nun), bee-keeper or lone gunman.

Your brief psychological profile in your past life:
Such people are always involved with all new. You have always loved changes, especially in art, music, cooking.

Lehman is to be liquidated, Bank of Am is rumoured to buy Merill, ING is being lent funds by Russia…All these big developments over a weekend. How is the market going to react tomorrow ? Will it be a black monday ? God knows!!!

In the study of any subject , one starts with understanding basic principles / Laws. If it Physics, may be one starts off with basic laws governing universe, If it is Math, one starts with axioms , lemmas , theorems etc.
What about Finance and Economics, which are more of a social science than hard sciences ? Well, the first one is obviously, Demand and Supply Law..and then….most economists and folks from finance BELIEVE in “Law of One Price”, which says that identical goods must be priced the same. This is the law on which the mighty edifice of M-M capital structure is built, the BS Option pricing formula and Arbitrage pricing theory is built. However in the recent times, there have been a lot of anomalies to this law, a few examples are :

One can predict the course of a comet more easily than one can predict the course of Citigroup’s stock. The attractiveness of course, is that you can make more successfully predicting a stock than you can a comet.

- Jim Simons

**“For an interest to be rewarding, one must pay in discipline and dedication, especially though the difficult or boring stages which are inevitably encountered”
**
- Mira Komarovsky

Any freshman will know that integral of (1/x) between 0 and 1 doesn’t converge. But integral of (1/x^2) between 0 and 1 does converge.But WHY ? Questions often , even as simple as this , are not given time and the outcome is - we spend most of our lives on answering somebody else’s questions rather than posing questions.

A particularly nice way of looking at this convergence cropped up when Anupam gave this insight, while discussing Fourier Transforms. This is a popular technique , a 10,000 ft view of this technique is this : It reduces the tails so that you can calculate the integral easily.That is exactly the reason why (1/x^2) converges …we are reducing the tail area! ..Wow!! never ever thought about it in this way!!

If you train hard, you’ll not only be hard, you’ll be hard to beat.
- Herschel Walker

Via Googleblog:

Marissa Meyer on the future of search

It was a pretty tiring day with teaching and research all going in one day…Added to that, the new class that I am teaching are freshmen …. Keeping their attention for 100 minutes on “calculus " is a challenge and obviously as in any class, the class comprises characters of all types !!! Inspite of teaching for over an year, this new class is a big challenge…Perhaps, that’s what makes people stick to acads in the sense that every year ,every batch is a new animal.!!!

C++ is a language that requires sustained effort of programming for a years , say, the gurus of the language. May be that is the case..Personally , the language is fascinating in terms of design. Just by looking at why some things are done the way they are in C++, the learning can be immense.

For example - Postfix and Prefix operators – i++ and ++i . How do you think such a thing is implemented? As you know that a function is overloaded based on the input parameter types. Did you realize that there is no input parameter , at least, on the surface of it ? Then how does it work ? How does compiler know the difference between ++() prefix and postfix..Well, here is something that one can understand and appreciate how things are done. In the case of postfix, compiler silently passes int 0 as an input and in the case of prefix, no parameter is passed.

“Hard work has made it easy. That is my secret. That is why I win.” - Nadia Comaneci

Link : How a college sophomore put Alaska’s governor on the map

A lucid explanation of why VIX is important in the context of Asset Allocation

via : Seeking Alpha

Do you think Java is a type-safe language ? Read Upenn’s professor’s take on it

“The real problem of leisure time is how to keep others from using yours.” - Arthur Lacey

It is 4:00 am on saturday morning and it is raining outside. Wonderful setting to write something. So, here I go.

This book was referred by Prof Stefanica, the director of Baruch MFE program . I stacked this book in my inventory under the assumption that I will read it at some point of time soon. Few backs , I had to go to Boston to visit Anoop, my childhood friend. I love long journey for it gives me a chance to be away from comp and just read, reflect and think about various things….I managed to go over this book in the journey. Let me attempt to summarize this book :

One reason to track Put/Call ratio is to judge the market bearishness or bullishness. However, if one juxtaposes VIX indicators along with P/C ratio, one gets a better sense of trend too. Here is more gyan on it.

Link : Put/Call ratio Vs Vol Indices