JP Morgan

Recently, JP Morgan reported rather biggish losses due to only a few trades/positions. According to rumors, hedgefunds and speculators already took a piece of the cake, since positions are not closed yet. It's not completely known which these are, but apparently they involve the the IG9, a credit default swap index including 125 american companies. You can find more information on it at markit CDX and their product description page. Basically, it's one of the largest and most liquid CDS products. You would want to buy these products to hedge risk on bonds issued by the companies included in the index. Conversely you sell it, if you want to bet on the solvency of the companies. In this case, you get some money up front for selling it and a continuous payments during the contract period (10 years). As soon as a company fails to meet its liabilities, the total loss on the company is calculated, e.g. if the company recovers at 30% after filing for bancrupcy, the 70% loss is mutliplied by the weight of the company in the index (all have 0.8%) gives the amount of money you need to pay to cover for the losses.
Moreover, these products create a leverage and thus opens the possiblity to hedge delta trades by buying on the index. Apparently, this kind of trade caused the problems at JP Morgan. As far as I know, there is no easy access to these products using your everyday discount broker.

List of links to news regarding JP Morgans trade:

http://online.wsj.com/article/SB10001424052702303879604577412613778263918.html

A bit of Computation, Math and Psychology

• Some statistics: Verbal intelligence by demographic: blog post
  
• An implementation of reversible computation gates using crabs: article and paper
• blog post on the optimal base for a number system w.r.t to number of digits in base and length of numbers
• High performance correlation techniques for time series (watch out, .ppt file)

On (implementation issues of) Virtual Stock Markets

After my recent post on prediction markets, I decided to implement a small auctioneer for virtual stock markets with two parties making deals, i.e. not a market maker mechanism but a (traditional) double auction. But, despite the simple idea behind a bid/ask driven market, the implementation has to take into account quite a number of details: can you buy/sell one unit or multiple units of a good at a time? Does trading occur at discrete events or is it continuous? Is pricing uniform (all trade at the same equilibirum price) or discriminatory (individual matching of bid/ask orders)? And, if one the two options is chosen, how is the price determined?

• Beside the double auction system, bidding can take other forms: Auctions and Bidding: A Guide for Computer Scientists
• Everything you wanted to know about double auctions, but were afraid to (bid or) ask
• And finally a paper on two multi unit k-double auction algorithms

Futarchy: applying prediction markets

R. Hanson suggests to use prediction markets to make better use of information to evaluate strategies in politics. He calls the combination of democracy and speculative market information processing futarchy. There is a short manifesto and a full paper (PDF).

The central idea is: Use democracy to express what you want, use prediction markets to evaluate how to reach these goals. People can give strategies which are traded after paying a small fee; when they seem to be efficient the get a payback, otherwise they loose the fee. Thus good strategies are rewarded, bad ones are not rewarded but cost an extra fee. Augmented GDP and other indicators give a measured value to the state of the country.

Resources on Prediction Markets

Prediction Markets might be useful in modern politics - gathering crowd information (expected outcomes) and filtering experts from the crowd (i.e. successful traders in the market).

Just a bunch of links to read on the matter:

• Prediction Markets im Journal of Economic Perspectives.
• Combinatorial Prediction Markets at oddhead blog. Overview about types of combinatorial markets and the problems with handling them
• Betting on Ideas in Communications of the ACM
• Internet-Based Virtual Stock Markets for Business Forecasting

CSR Rating Agencies: What is Their Global Impact?

At SpringerLink's JOURNAL OF BUSINESS ETHICS you'll find an interesting article on CSR Rating Agencies: What is Their Global Impact?

Some Commentaries on Politics

Project Syndicate features some interesting articles and commentaries about politics.

Project Syndicate: the world's pre-eminent source of original op-ed commentaries. A unique collaboration of distinguished opinion makers from every corner of the globe, Project Syndicate provides incisive perspectives on our changing world by those who are shaping its politics, economics, science, and culture. Exclusive, trenchant, unparalleled in scope and depth: Project Syndicate is truly A World of Ideas.

It includes authors like Ban Ki-moon, Christine Lagarde, Javier Solana, Dominique Strauss-Kahn, Martin Feldstein, Otmar Issing, Peter Singer and many more.

Black-Scholes equation

See http://terrytao.wordpress.com/2008/07/01/the-black-scholes-equation/ for some information on deriving the Black-Scholes equation for options.