Archive for the 'Finance' Category
If you have 10 bottles of water, and one bottle had poison in it, and you didn’t know which one, you probably wouldn’t drink out of any of the 10 bottles; that’s basically what we’ve got there.
Chris F. Masse March 29th, 2008
Paul O’Neil, about the subprime mortgage crisis.
Implied Probabilities
Chris F. Masse March 27th, 2008
Via Stan Jonas:
Sphere: Related ContentBORING PLUS ONE BET… FEAR OF TIGHTENING BY XMAS OF 2008????
FOMC Imagined Euro$ Euro$ Diff FUNDS
Dates Prob Contract Current Imagined ticks
04/30/08 -150% EDM8 97.730 97.726 0 1.88%
06/25/08 -65% EDU8 97.850 97.834 -2 1.71%
08/05/08 -10% EDZ8 97.765 97.784 2 1.69%
09/16/08 0% EDH9 97.720 97.694 -3 1.69%
10/29/08 0% EDM9 97.510 97.504 -1 1.69%
12/16/08 26% EDU9 97.280 97.265 -2 1.75%
01/30/09 26% EDZ9 97.010 96.996 -1 1.82%
03/16/09 26% EDH0 96.805 96.788 -2 1.88%
01/25/10 56% EDZ1 95.665 95.643 -2 2.36%
03/11/10 46% EDH2 95.575 95.552 -2 2.52%ONE POTENTIAL OUTCOME? ALL ELSE HELD CONSTANT.
FOMC Imagined Euro$ Euro$ Diff FUNDS
Dates Prob Contract Current Imagined ticks
04/30/08 -200% EDM8 97.735 97.851 12 1.75%
06/25/08 -65% EDU8 97.865 97.960 9 1.59%
08/05/08 -10% EDZ8 97.785 97.909 12 1.56%
09/16/08 0% EDH9 97.735 97.819 8 1.56%
10/29/08 0% EDM9 97.535 97.629 9 1.56%
12/16/08 26% EDU9 97.305 97.390 9 1.63%
01/30/09 26% EDZ9 97.030 97.122 9 1.69%
03/16/09 26% EDH0 96.830 96.914 8 1.76%
01/25/10 56% EDZ1 95.680 95.769 9 2.24%
03/11/10 46% EDH2 95.590 95.678 9 2.39%
09/07/10 35% EDH3 95.245 95.364 12 2.92%
03/06/11 29% EDH4 94.965 95.123 16 3.33%
09/02/11 24% EDH5 94.760 94.928 17 3.84%
10/17/11 24% EDM5 94.715 94.888 17 3.84%
The latest from the Fed’s prediction market…
Chris F. Masse March 26th, 2008
Via Stan Jonas:
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Stan Jonas in his own words:
Sphere: Related ContentWhat’s the BET post the March FOMC? The first rule of “betting” is that one must know what the current market odds are. As of today, there is no doubt as to what the “consensus” bet is. Popular press analogies to the Great Depression aside, there is really only one compound option that remains to be priced.1) When will the FED stop Easing? Currently close to 90% “probability” than one way or the other the FED will be done by June of 2008!!
2) Second: When will ‘everyone else’ believe that the FED will start tightening again. Currently 6 months post the conditioinal cessation by June. That is as the chart shows… high subjective probability that the market will be pricing a positive probability of tightenting at every FOMC meeting from 2009 on out.The chart above… is not just a derived calibration… but to a large extent as in a perfect Heath Jarrow Morton world… each of the forward “probabilities” trades simultaneously.
Thus one can and does “trade” the probability that the FED will be tightning again in September of 2009… just as easily as one can trade the probability that it will be easing or tightening in April of 2008. These “tradeable” bets are then aggregated to derive the value of any fixed income instrument over the corresponding time period.
Being “right” as an investor is exactly what one would expect in a Keynesian/DeFinetti world. Being “right” means that your current subjective “bet” as to the probabilities turns out to be “correct”… not by say September 2009… which is a lifetime away… but by next week!
In fact, this prediction market has acheived the sure sign of maturity. Conditional bets dominate. What will happen if…..
For those with a technical bent and who are familiar with what has been going on in the global fixed income marketplace… the only interesting question should be: How does one derive “the probabilities”?
That’s essentially what the “marketmaker” or oddsmaker in this case gets paid for. Deriving the “hedge” that can capture the conditional probabilities that are being bet on.
We will never have a perfect model of risk. — by Alan Greenspan
Chris F. Masse March 17th, 2008
The most credible explanation of why risk management based on state-of-the-art statistical models can perform so poorly is that the underlying data used to estimate a model’s structure are drawn generally from both periods of euphoria and periods of fear, that is, from regimes with importantly different dynamics.
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Sphere: Related ContentWhat Jim Cramer was saying about Bear Stearns one week ago on CNBC
Chris F. Masse March 17th, 2008
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Dear Jim: Should I be worried about Bear Stearns in terms of liquidity and get my money out of there? –Peter
Cramer says: “No! No! No! Bear Stearns is not in trouble. If anything, they’re more likely to be taken over. Don’t move your money from Bear.
UPDATE: In defense of Jim Cramer…
UPDATE: Barry Ritholtz says Jim Cramer’s TV show should be revamped totally.
UPDATE: Henry Blodget
UPDATE: Crossing Wall Street
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