Archive for October, 2009

Northern Rock: Good and bad bank discussion

Northern Rock is back in the press. The EU commission has given the green light to restructure Northern Rock and remove the impaired assets from its balance sheet. This is window dressing: if impaired assets are marked to market and losses are realized, then the assets are on par with all the other assets. They then have a fair chance to perform better or worse than the other assets. If losses are realized, there is no good or bad bank and a combined bank is just as good as two separate banks.

The regulators should focus on the real issues:

Credit agreements, loans, etc. are highly complex legal agreements. The in-transparency of 200 page legal contracts does not gibe as well with quantitative modeling as we would expect it to in the 21st century. We need a computer language to code legal agreements. (more…)

October 29th, 2009 | General, News | | No Comments »

Scaling Laws as powerful tools of economics

Analyzing tick data of currency markets we have discovered 12 new scaling laws in the foreign exchange markets that complement the two scaling laws that we uncovered in the 90s. A scaling law exists when two quantities maintain the same proportions over a certain range. For the scaling laws that we have discovered the range of proportionality is big, a factor of 1000, from the purely intraday domain to inter-day and longer. Scaling laws play an increasingly important role in natural sciences from biology to physics and complex systems for the calibration of models. In economics, this has so far not happened. I believe that this could change in view of the many new scaling laws. (more…)

October 27th, 2009 | High frequency finance, News | | No Comments »

How should central banks intervene in currency markets?

The pressure is increasing in the currency markets as the USD approaches new lows. The central banks with strong currencies, such as Australia, Canada and Europe, will have to decide whether or not to adopt the policy of the SNB and intervene to weaken the EURO.

The SNB has intervened for the past 6 months and has temporarily blocked the Swiss Franc from appreciating. The cost of doing so is, however, higher than most people appreciate. There are more and more traders, who are shorting the CHF and rely on the SNB to intervene in the market. The SNB interventions have the effect of subsidizing these speculators and are becoming increasingly costly. (more…)

October 27th, 2009 | Market, News | | 2 Comments »

What does high frequency finance contribute to economics?

In the late 80s, we at Olsen coined the term high frequency finance to describe our scientific approach to finance and economics. We later published a book, Introduction to High Frequency Finance, that describes the new field. High frequency finance firstly deals with collecting as much information as possible; in particular storing all tick by tick market data, then in a second step studying the detailed statistical properties of the data; describing the economic processes and later based on these observations develop models to explain the observed phenomena. In biology, this approach has a long tradition. Biologists in the field of systematics have literally for centuries specialized in carefully describing the plants and only after completing this step have they moved on to introduce a systematic approach to categorize the species. (more…)

October 7th, 2009 | High frequency finance, News | | No Comments »