Is financial econometrics different from ‘economic econometrics’? As previously stated, the tools commonly used in financial applications are fundamentally the same as those used in economic applications, although the emphasis and the sets of problems that are likely to be encountered when analysing the two sets of data are somewhat different. Financial data often differ from macroeconomic data in terms of their frequency, accuracy, seasonality and other properties. In economics, a serious problem is often a lack of data at hand for testing the theory or hypothesis of interest -- this is often called a ‘small samples problem’. It might be, for example, that data are required on government budget deficits, or population figures, which are measured only on an annual basis. If the methods used to measure these quantities changed a quarter of a century ago, then only at most twenty-five of these annual observations are usefully available. Two other problems that are often encountered in conducting applied econometric work in the arena of economics are those of measurement error and data revisions. These difficulties are simply that the data may be estimated, or measured with error, and will often be subject to several vintages of subsequent revisions. For example, a researcher may estimate an economic model of the effect on national output of investment in computer technology using a set of published data, only to find that the data for the last two years have been revised substantially in the next, updated publication. These issues are rarely of concern in finance. Financial data come in many shapes and forms, but in general the prices and other entities that are recorded are those at which trades actually took place, or which were quoted on the screens of information providers. There exists, of course, the possibility for typos and possibility for the data measurement method to change (for example, owing to stock index re-balancing or re-basing). But in general the measurement error and revisions problems are far less serious in the financial context. Similarly, some sets of financial data are observed at much higher frequencies than macroeconomic data. Asset prices or yields are often available at daily, hourly, or minute-by-minute frequencies. Thus the number of observations available for analysis can potentially be very large -- perhaps thousands or even millions, making financial data the envy of macroeconometricians! The implication is that more powerful techniques can often be applied to financial than economic data, and that researchers may also have more confidence in the results. Furthermore, the analysis of financial data also brings with it a number of new problems. While the difficulties associated with handling and processing such a large amount of data are not usually an issue given recent and continuing advances in computer power, financial data often have a number of additional characteristics. For example, financial data are often considered very ‘noisy’, which means that it is more difficult to separate underlying trends or patterns from random and uninteresting features. Financial data are also almost always not normally distributed in spite of the fact that most techniques in econometrics assume that they are. High frequency data often contain additional ‘patterns’ which are the result of the way that the market works, or the way that prices are recorded. These features need to be considered in the model-building process, even if they are not directly of interest to the researcher.
Just What Is Going On With The Gold In JPMorgan's Vault? Submitted by Tyler Durden on 04/24/2013 21:34 -0400 New York Fed We know that back in early October 2010 , when gold closed at a then record high of $1,320, JPM decided to reopen its previously mothballed precious metal vault due to soaring demand for metal vaulting, thus becoming only the fifth official Comex private gold depository in New York in addition to HSBC, Bank of Nova Scotia, Brinks and MTB (and of course the New York Fed). We also know, courtesy of a Zero Hedge exclusive , that the JPM vault - the largest private gold vault in the world - is located at 1 Chase Manhattan Plaza, and is literally adjacent to the vault of the New York Fed 80 feet, and 5 sublevels, below street level. We know that for a long time the vault held around 2.5 million ounces of eligible ( commercial ) gold, a number which declined only gradually until very recently. We know that the total amount of registered ( investment ) gold has been steady for the past 4 years (after peaking in early 2006). Finally, everyone knows that in the past month gold has experienced a very severe move lower which is still largely unexplained. What many may not know , is that while registered Comex gold has been flat, the amount of eligible gold in Comex warehouses (the distinction between eligible and registered gold can be found here ) in the past several weeks has plunged from nearly 9 million ounces, to just 6.1 million ounces as of today- the lowest since mid-2009. What nobody knows, is why virtually the entire move in warehoused eligible gold is driven exclusively by one firm: JPMorgan, whose eligible gold has collapse from just under 2 million ounces as of the end of 2012 to a nearly record low 402,374 ounces as of today , a drop of 20% in one day, though slightly higher compared to the recent record low hit on April 5 when JPM warehoused commercial gold touched a post-vault reopening low of just over 4 tons, or 142,700 ounces. This happened just days ahead of the biggest ever one-day gold slam down in history. Some questions we would like answers to: What happened to the commercial gold vaulted with JPM, and what was the reason for the historic drawdown? Gold, unlike fiat, is not created out of thin air, nor can it be shred or deleted. Where did the gold leaving the JPM warehouse end up (especially since registered JPM and total Comex gold has been relatively flat over the same period)? Did any of this gold make its way across the street, and end up at the vault of the building located at 33 Liberty street? What happens if and/or when the JPM vault is empty of commercial gold, and JPM receives a delivery notice? Inquiring minds want to know... Average: 5 Your rating: None Average: 5 ( 14 votes) Tweet
"What The Left Hand Giveth, The Right Hand Taketh Away" Submitted by Tyler Durden on 10/08/2012 16:43 -0400 One of the most insidious side-effects of the centrally-planned New Normal has been the artificial role switch of the two main asset classes, equities and bonds, which as David Rosenberg explained previously , can be characterized as follows: stocks for the yield, bonds for the price. The trouble with this is that it is contrary to everything inherent in investor and trader psychology. This in turn touches on another topic: as a result of collapsing interest rates, interest income from debt has plunged by a whopping $450 billion/year in nominal terms , forcing public corporations to shelve out dividends, as Dividend income takes the place of Interest Income, merely to keep some investor interest in capital markets awake. There is a two-fold problem with the surge in equity dividends: i) it forces management teams to reallocate cash away from projects which generate higher IRR in the longer term, such as CapEx, RD, and innovation, or even simple MA, and ii) the dividend spike is simply not enough to offset the lost interest income. This precisely is one the points of UBS' George Magnus in his newsletter in which he asks Cui Bono from global uncoordinated easing. His observations: "In the US household interest income from assets has dropped to below $1 trillion, compared to $1.4 trillion in 2008. That $400 billion drop is equivalent to a fall from 11.5% to below 7.5% as share of personal income, and, in passing, to the size of President Obama’s stimulus programme in 2009." Of particular note: if interest income as a percentage of total personal income had remained at its 2008 level, the total would now be over $1.5 trillion. It is this $550 billion annual delta that the Fed has directly, though its policies, taken away from US consumers in terms of purchasing power. So while the Fed has taken away the bond market as a venue in which to generate current income, it is the structural failures of equities in a post-HFT world (stories of mini, amd maxi, Flash Crashes are now a daily occurrence) that prevent investors from having the same confidence about current income in a market in which terminal and fatal capital loss are all too real fears. And there are those who still wonder why the US consumer is withering away, and absent such crutches as soaring Federal non-revolving debt, used for anything but its designated purposes, would have less purchasing power now than before the crisis as a result of the Fed's failed policies. As George Magnus so poetically summarizes it " What the left hand giveth, the right hand taketh away ." And yet, it is not true that everyone loses equally from the Fed's policies. Bernanke does benefit one group of people: the ultra-wealthy, aka the "1%", which owns the bulk of its assets in America's $52 trillion in financial assets and which is the most direct beneficiary of QEternity. Magnus' conclusion: it is time Bernanke woke up and smelled the coffee, because what he is effectively doing via Monetary policy could be the most socially disruptive phenomenon seen in developed Western society in ages: Central banks don’t have a social welfare function in their remit. But it can’t make economic sense for them to pursue policies, ad nauseam, that drain interest income from the economy, threaten the solvency of pension plans, and redistribute wealth and income, in effect, to richer households with a low marginal propensity to consume . And it could result in a political backlash when the call for radical economic policy changes and innovative political thinking requires a high level of social cohesion. The flipside to this argument is to just let Bernanke continue with his catastrophic policy, and hope he accelerates the advent of the inevitable end even more, as the final outcome is merely one which ends with the tearing down of the Marriner Eccles building. Sadly at this point, that particular outcome is no longer a question of if, but when. Average: 5 Your rating: None Average: 5 ( 10 votes) Tweet Login or register to post comments 4881 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: How The Fed's Visible Hand Is Forcing Corporate Cash Mismanagement $450 Billion In ZIRPorized Purchasing Power: Two Charts That Explain The Baby Boomer Dilemma Next: The Great Recoupling The New Normal Of Investing: Bonds For The Price, Equities For The Yield David Rosenberg: "RIP Wealth Effect"
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