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Are High Beta Stocks Like Call Options?

November 28, 2011 Comments (0)

Dave Cowan and Sam Wildeman at GMO have a new paper, Re-thinking Risk (check here or here if that doesn't work), that makes the argument that the poor performance of high beta stocks makes perfect sense. Their idea is that high beta stocks actually are leverage with a put option, because unlike a levered fund where you can lose 2 times your investment (200%), a beta=2 portfolio can only lose 100%. In their words:The point here is that the form of leverage offered by high beta is different in...

Why Movie Reviewers Turn Into Op-Ed Writers

November 28, 2011 Comments (0)

I was reading Joe Morganstern's review of George Clooney's latest movie, and was struck by this line:Mr. Clooney is a star at the peak of his powers, playing the sort of person we're seldom privileged to meet—a whole man, which is to say a flawed and foolish man who is basically good, and who gets a precious shot at being better.There's a lot of profundity in that little snippet. I've notice several big think commentators today started or do movie reviews (Steve Sailer, Frank Rich, John...

Have US Federal Revenues Hit Their Laffer Curve Limit?

November 28, 2011 Comments (0)

I was listening to Jeffrey Hummel's recent talk (see here, scroll down to his picture). He argues the US federal default is inevitable, using the following reasoning.Federal Tax revenues as a percent of GDP have consisntently been bumping up about 20% since 1951. Even in WW2, when federal taxes were highest as a percent of GDP, tax revenues never broke 25% of GDP.Meanwhile, top marginal tax rates, corporate rates, and capital gains tax rates have basically declined, though bouncing about quite...

Gary Gorton on Hedge Fund Dilemma

November 28, 2011 Comments (0)

I found this little aside in Gary Gorton's 2010 Journal of Economic Literature review of 2008 financial crisis books--The Big Short and The Greatest Trade Ever--pretty funny:Some of the most interesting material in the books concerns how hedge funds operate. Opening a hedge fund is problematic. The founder has a secret. Either the secret is that the founder has no new ideas. Or, the founder’s secret is a new idea. If the founder has no new idea, that cannot be revealed. If the founder has an...

How to Spot Overfitting

November 28, 2011 Comments (0)

FRBSF Economic Letter: Probability of a Recession vs. Actual Recession DatesYou can teach statistics, but unfortunately, you can't teach people not to overfit data. The problem is that it is too tempting to look at some data, keep applying different inputs and functional forms, until you fit the data. In some sense, that's what a good model does, so the objective, maximizing the R2, is encouraged.But there's no point fooling yourself, it just wastes time, and only the researcher really knows...

Margin Call the Movie

November 28, 2011 Comments (0)

Margin Call was an excellent movie, in terms of its direction and acting. The nightime scenes were emphatically in the darkness of night, even though every time I've worked after dark, we simply turned on all the lights (for some reason they would have meeting in the dark with ominous screens lit around them). Life isn't as simple and clear as in movies, which is why I like them when they are good. But, the key was in creating an event that provokes a crisis, one that engenders all sorts...

dos Santos's Knock Out

November 28, 2011 Comments (0)

I'm a big fan of Mixed Martial Arts, and take classes where I punch pads and bags, which is very cathartic. I would never actually spar with someone, taking punches to the head, however, because I don't think the brain takes such punishment well. In last Saturday's prime time UFC battle, two heavyweights were involved, and only 60 seconds into t he fight Brazilian Junior dos Santos connected right behind Velasquez's left ear (see above). It didn't look like much, but this part of the brain...

Mailer on Marx

November 28, 2011 Comments (0)

Norman Mailer was a famous American writer who died in 2007, who wrote with great forcefulness. People can still have interesting things to say (or in Mailer's case, say them in an interesting way), yet still be moon-bat crazy in many areas of their lives. So, listening to this video on Youtube, I was taken by this passage:Marx's Das Kapital is utter bullcrap, and makes Joseph Smith's Book of Mormon seem like Euclid's Elements. It was before the marginalist revolution, so did not understand...

What Happened to Momentum?

November 28, 2011 Comments (0)

The total return to Momentum was impressive for many decades. It's a simple strategy, basically going long past winners and short the losers, hoping they continue to win and lose. Interestingly, the past returns should go only up to the prior month, because there's slight mean-reversion at the one-month horizon, so most people use the returns from months t-12 through t-1. This highlights the non-fractal nature of stock returns, in that there's momentum in the data from 3-18 months, but...

Aspiring Politicians Learn to Dissemble

November 28, 2011 Comments (0)

Hayek' Road to Serfdom argued that a major problem with socialism was that it encouraged the most ruthless and illiberal to rise to the top. As they find their plans untenable, they will be forced to apply force to achieve their aims, so those willing to apply such force will tend to be most successful in such systems. A problem with modern politics is that as only dissembling narcissists can succeed, politicians at all levels become such pathetic losers.Recently my school board voted for...