OlsenBlog » General

Smoke and mirrors of Non Farm Payrolls and alike

richardo — Wed, 04 Nov 2009 09:53:45 +0000

In the last month, the economic news releases have been better than expected. Manufacturing numbers and property sales for the US have turned positive surprising the public. Investors and government decision makers ask themselves whether this trend will continue; little do they realize that these numbers are spurious. They depend on the point of reference; are they computed month-to-month, or relative to a year ago? The outcome depends on the starting point; if in the previous year the numbers were bad, then it is easy to report a positive performance now. The practice of reporting one number, such as the growth compared to a year ago, is misleading. Economic numbers should be made public in the appropriate context, ideally as part of a comprehensive weather map for the economy and its financial markets.

To reduce economic uncertainty, we need a global information system that aggregates on a continuous basis, the economic time series from all around the world. By putting the time series into their appropriate context and displaying them graphically it is possible to provide more concise and easy to interpret information than is the case today. The weather maps in meteorology are a template for such a service where simple pictures convey a lot of information. We have to learn how to come up with something similar for the economic and financial markets.

The global information system with the online updates of the macroeconomic data will replace the discrete news releases that today shake the markets where; for example, the Non Farm Payroll numbers can move the market by 2 and more percent. The discreteness of the news releases creates volatility because market participants in anticipation of the release close out their positions and as soon as the release hits the market, they try to jump on the bandwagon of the price move. With online updates, there is a gradual absorption of information without the market disruptions of today’s news releases.

Author: Richard B. Olsen, Founder and CEO of Olsen Ltd

Northern Rock: Good and bad bank discussion

richardo — Thu, 29 Oct 2009 16:26:25 +0000

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. The advantage of this approach is that risk models can be used to accurately model the true risk: today, this is not the case, important information is hidden in complex legal talk and obscure contract appendixes of Excel spread sheets.

Even today, two years after the onset of the sub prime crisis, banks do not know which assets are included in their loan portfolios. They cannot access a Google map with an overview of the locations of the properties in their loan portfolios.

Second, the fixed income markets are illiquid and their pricing is spurious, where minor events can cause major dislocations of price levels. We need to acknowledge this deficiency and take preemptive measures. Credit markets need to become highly liquid over the counter markets with real time delivery and second by second interest rate payments. Second by second interest payments will make it possible for markets to respond to the smallest disequilibrium. Furthermore, it is necessary to nurture investment strategies that are stabilizing, where professional fixed income managers operate quantitative investment strategies that provide intra-day liquidity: whenever there is a short-term imbalance, they will take the other side and help bring demand and supply back in line and stabilize prices.

Liquidity and price stability in the fixed income markets is the sine qua non for a market economy. We first have to understand this problem and raise awareness for the issue before we can hope for corrective measures.

Author: Richard B. Olsen, Founder and CEO of Olsen Ltd

The scale of market quakes

corinne — Wed, 09 Sep 2009 12:49:55 +0000

We define a methodology to quantify market activity on a 24 hour basis by defining a scale, the so-called scale of market quakes (SMQ). The SMQ is designed within a framework where we analyse the dynamics of excess price moves from one directional change of price to the next. We use the SMQ to quantify the FX market and evaluate the performance of the proposed methodology at major news announcements. The evolution of SMQ magnitudes from 2003 to 2009 is analysed across major currency pairs…

Clicking here will retrieve an Acrobat version.

Author: Richard B. Olsen, Founder and CEO of Olsen Ltd

How science can prevent the next bubble

corinne — Wed, 18 Feb 2009 06:59:29 +0000

Since the world became aware in the summer of 2007 of an imminent financial crisis, people have asked why so few experts saw it coming. There have been many calls for an early warning system for the world economy – but little has been said about how to build one.
To construct a global early warning system we have to overcome the predicament Alan Greenspan, the former US Federal Reserve chairman, highlighted 12 years ago. “How do we know when irrational exuberance has unduly escalated asset values?” he asked. “We should not underestimate … the complexity of the interactions of asset markets and the economy.”
Macroeconomic data alone cannot provide sufficient information to determine whether asset prices are inflated. We need to dig deeper and track the complexity of interactions in financial markets and the economy…

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Call for a global early warning system

anita — Tue, 16 Dec 2008 13:32:08 +0000

With the deepening economic crisis there have been repeated calls for an early warning system of the world economy. Little has been said, how such a system should be built.

To build a global early warning system we have to overcome the predicament that Alan Greenspan highlighted: ‘How do we know when international exuberance has unduly escalated asset values?….We should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy…

Clicking here will retrieve an Acrobat version.