Category: Economics

In Defense Of The Gaussian Copula

The Gaussian copula is not an economic model, but it has been similarly misused and is similarly demonised. In broad terms, the Gaussian copula is a formula to map the approximate correlation between two variables. In the financial world it was used to express the relationship between two assets in a simple form. This was foolish. Even the relationship between debt and equity changes with the market conditions. Often it has a negative correlation, but other times it can be positive.

That does not mean it was useless. The Gaussian copula provided a convienent way to describe a relationship that held under particular conditions. But it was fed data that reflected a period when housing prices were not correlated to the extent that they turned out to be when the housing bubble popped. You can have the most complicated and complete model in the world to explain asset correlation, but if you calibrate it assuming housing prices won’t fall on a national level, the model cannot hedge you against that happening.

→ The Economist

Leaving Europe Would Be A Leap Into The Light

Michael Gove :

The EU is an institution rooted in the past and is proving incapable of reforming to meet the big technological, demographic and economic challenges of our time. It was developed in the 1950s and 1960s and like other institutions which seemed modern then, from tower blocks to telexes, it is now hopelessly out of date. The EU tries to standardise and regulate rather than encourage diversity and innovation. It is an analogue union in a digital age.

→ The Times of London

Fintech: Search For A Super-Algo

The rise of the machine learning :

The quantitative investment world plays down the prospect of machines supplanting human fund managers, pointing out that the prospect of full artificial intelligence is still distant, and arguing that human ingenuity still plays a vital role. But the confident swagger of the money management nerds is unmistakable. Already there are quasi-AI trading strategies working their magic in financial markets, and the future belongs to them, they predict.

→ Financial Times

You Might Go Bankrupt If Your Next-Door Neighbor Wins the Lottery

Why would someone winning the jackpot cause someone living down the street to go bankrupt a year or two later? The economists argued that people who feel they are poorer than their peers may spend more in a conspicuous fashion, financing their purchases with debt. But that debt will need to be repaid, potentially leading to financial difficulties and even bankruptcy.

→ The Wall Street Journal

Why Not Just Print More Money?

The best alternative, Turner thinks, is his radical proposal—creating money and handing it out to entities that can spend it. He readily concedes that it wouldn’t matter much whether the newly minted money was forwarded to households in the form of bank credits, or used to finance tax cuts, or spent on building new roads and bridges. The key point is that the government would be stimulating the economy without issuing any new debt. It wouldn’t be accentuating the problem of debt overhang, or creating the conditions for yet another boom-and-bust cycle.

→ The New Yorker