Chapter 8 This covers the important topic of volatility and correlation modelling and forecasting . This chapter starts by discussing in general terms the issue of non-linearity in financial time series . The class of ARCH (AutoRegressive Conditionally Heteroscedastic) models and the motivation for this formulation are then discussed. Other models are also presented, including extensions of the basic model such as GARCH, GARCH-M, EGARCH and GJR formulations . Examples of the huge number of applications are discussed, with particular reference to stock returns. Multivariate GARCH models are described, and applications to the estimation of conditional betas and time-varying hedge ratios, and to financial risk measurement, are given. Chapter 9 This discusses testing for and modelling regime shifts or switches of behaviour in financial series that can arise from changes in government policy, market trading conditions or microstructure , among other causes. This chapter introduces the Markov switching approach to dealing with regime shifts. Threshold autoregression is also discussed, along with issues relating to the estimation of such models. Examples include the modelling of exchange rates within a managed floating environment, modelling and forecasting the gilt--equity yield ratio, and models of movements of the difference between spot and futures prices. Chapter 10 This new chapter focuses on how to deal appropriately with longitudinal data -- that is, data having both time series and cross-sectional dimensions. Fixed effect and random effect models are explained and illustrated by way of examples on banking competition in the UK and on credit stability in Central and Eastern Europe. Entity fixed and time-fixed effects models are elucidated and distinguished. Chapter 11 The second new chapter describes various models that are appropriate for situations where the dependent variable is not continuous. Readers will learn how to construct, estimate and interpret such models, and to distinguish and select between alternative specifications. Examples used include a test of the pecking order hypothesis in corporate finance and the modelling of unsolicited credit ratings. Chapter 12 This presents an introduction to the use of simulations in econometrics and finance . Motivations are given for the use of repeated sampling, and a distinction is drawn between Monte Carlo simulation and bootstrapping .The reader is shown how to set up a simulation, and examples are given in options pricing and financial risk management to demonstrate the usefulness of these techniques. Chapter 13 This offers suggestions related to conducting a project or dissertation in empirical finance. It introduces the sources of financial and economic data available on the Internet and elsewhere, and recommends relevant online information and literature on research in financial markets and financial time series. The chapter also suggests ideas for what might constitute a good structure for a dissertation on this subject, how to generate ideas for a suitable topic, what format the report could take, and some common pitfalls. Chapter 14 This summarises the book and concludes. Several recent developments in the field, which are not covered elsewhere in the book, are also mentioned. Some tentative suggestions for possible growth areas in the modelling of financial time series are also given.
(CNN) -- Satellite imagery that may show debris from Malaysia Airlines Flight 370 is raising hopes that investigators can narrow what has been a needle-in-a-haystack search operation. The images, obtained and analyzed by the Australian Geospatial-Intelligence Organisation as "a possible indication of debris south of the search area that has been the focus of the search operation," according to the Australian Maritime Safety Authority, were taken above a remote part of ocean thousands of kilometers south-east of Australia. Two objects, one of approximately 24 meters (78.7 ft) in length and another around five meters (16.4 ft) long have been spotted, leading to hopes that more information regarding the missing airliner has come to light.
"Survival Of The Fattest": It's A Fat, Fat World After All Submitted by Tyler Durden on 11/24/2012 16:21 -0500 Brazil China Corruption fixed Gross Domestic Product M2 McDonalds United Kingdom Back in March, we first presented a rather stunning finding: by 2020 75% of Americans will be obese or overweight. This was promptly followed up with a post showing just how it is transpired that America became the fattest nation in the world in less than 20 years. What however may not be known, is that America's fatness epidemic is not localized to the country that gave the world the McDonalds burger (and the McMansion): it really is a fat, fat world, after all. Behold - survival of the fattest : It is hardly surprising in this light, then, that the estimate for number of people living with diabetes has been increased, to 371 million - an increase of 11% over 2011. So with the sensitive issue of what one stuffs in their mouth becoming of paramount importance, primarily due to the avalanche in social costs as a result of escalating morbid obesity, here is a primer on the key facts and figures relating to obesity, domestic as well as foreign, and impacting not just the developed world but also emerging economies, from GS' Mick Ready and Keyur Parekh. Obesity is a unique phenomenon affecting almost all countries. It is defined as excessively high amount of body fat in relation to lean tissue, and individuals are generally considered overweight if their BMI is over 25, and clinically obese if their body mass index (BMI) is greater than 30. The 1980s saw a sharp acceleration in BMI in OECD countries. Before 1980, global obesity rates were generally below 10% but today, in almost half of OECD countries, 50% of the population is overweight. Interestingly, data suggests that obesity is a pandemic that is now impacting not just the developed western countries, but also the emerging economies. In BRIC economies, obesity rates are somewhat lower than in their OECD counterparts, but urbanisation and lifestyle changes are driving a significant increase in average BMI. In China, the proportion of the population considered overweight increased from 13.5% in 1991 to 26.7% in 2006; in Brazil between 1975 and 2003, the obesity rate tripled in men and doubled in women; and in Russia 25% of women and 10% of men are now considered obese. Data suggest that at levels of GDP below US$5,000 per capita there is a linear relationship between GDP and mean BMI, and that the only pre-condition for developing an obese population is the ability to afford food. In low income countries, obese individuals are typically middle-aged women from wealthy, urban settings. In countries with GDP of more than US$5,000 per capita pa, obesity is not characterized by gender, or age, but disadvantaged groups typically are at greater risk of becoming obese; 33% of US adults earning over US$15,000 pa are obese, compared with 25% of those earning over US$50,000 pa. 33% of adults who did not graduate high school were obese, compared with 21.5% who graduated from college. What’s causing this increase? Obesity is a complex problem, with multiple factors influencing its development within a population. These factors include systemic and environmental drivers, which provide an infrastructure to promote high growth, consumption of transport and recreational factors, which limit the physical activity within a population, and behavioral patterns, where individuals consume high-energy foods and lead sedentary lifestyles. For an individual, obesity is caused by an energy imbalance: simply put, obese individuals consume more energy than they use. Energy intake is a clear factor in the rise of obesity, and dietary intake is strongly influenced by the kinds of food we eat. Changes in the food system to more mass-produced, processed foods with added salt, fats and sugars, coupled with more effective marketing of these products, especially targeting young children has changed the kind of food we eat which contributes to this energy imbalance. To summarize, changes in the global food system, which produces readily available, inexpensive, highly processed and well marketed foods, coupled with changes in working patterns, has created an energy imbalance resulting in increased levels of obesity. Sugary drinks: The choice of a heavy generation There are multiple factors which are linked to the development of obesity globally, but sugar-sweetened drinks have attracted particular attention in the US. Sugar intake from sugar-sweetened drinks is thought to be the largest single caloric food source in the US, approaching 15% of the daily calorific intake in several population groups. High-sugar drinks are effectively marketed to children and young adults, and their consumption is often linked to fast food, which is likely to exacerbate the obesity problem. Many sugar-sweetened drinks contain high-fructose corn syrup, and there is evidence to suggest a link between high-fructose corn syrup and the development of insulin resistance (think diabetes). Multiple studies have shown that replacing a sugar-containing drink with a sugar-free equivalent significantly reduced weight gain and fat accumulation in normal weight children, prompting calls from the American Heart Association, the Institute of Medicine, and the Obesity society to reduce consumption of sugar-sweetened beverages. The consequences of being obese: Shorter, less healthy lives The life expectancy of a person with a BMI of 40-45 is reduced by around 8-10 years, which is similar to the reduction in life expectancy suffered by smokers. An overweight person of average height increases their risk of death by around 30% for every 15kg of weight. Obesity is a key risk factor in the development of multiple diseases, including diabetes, heart disease, osteoarthritis and cancer. The most direct and obvious impact of obesity is on incidence of diabetes - a severely obese person is around 60 times more likely to develop diabetes than someone with normal weight. High blood pressure and high cholesterol levels are also linked to high BMI. These combined risk factors make an obese individual more likely to die from heart disease or stroke. But perhaps a less intuitive link is the one between obesity, physical inactivity and cancer. Obesity and physical inactivity are also a key risk factor in the development of certain cancers; around 9% of colorectal cancers, and 11% of postmenopausal breast cancer in women is linked to obesity. An additional 5kg/m2 in BMI is thought to increase the risk of colorectal cancer by 24% in males, and to increase the risk of postmenopausal breast cancer in women by 12%. Obesity and cancer – the not so obvious link According to the American Cancer Society, one-third of cancer deaths are linked to obesity and/or lack of physical activity. Improvements in cancer diagnosis, treatment and prevention has seen an improvement in death rates for cancer in the US over recent years, but the obesity epidemic within the US puts this trend at risk. Obesity is a known risk factor for multiple different tumour types, including oesophageal, colorectal, endometrial, kidney and certain breast cancers. In addition to increasing the risk of developing certain cancers, obese individuals are less likely to survive their cancer diagnosis; individuals with a BMI above 40 had death rates 52% higher for men and 62% higher for women when compared to people of normal weigh. Obese men are at significantly higher risk of developing colorectal cancer; the distribution of body fat appears to be an important fact, with abdominal obesity measured by waist circumference demonstrating a strong correlation with colon cancer risk. Obesity also modestly increases the risk of women developing postmenopausal breast cancer. The costs of an obese population – direct, but also indirect Obese populations place greater stress upon healthcare systems already struggling to cope with rising expectation on what healthcare systems can deliver, more expensive medical interventions and an increasingly elderly population. The chronic nature of the condition means that obese people consume a greater share of healthcare resources, over a longer period of time. Medical costs for obese individuals are as much as 30% to 40% higher than those with normal weight. An obese individual will on average visit a physician 27% more frequently than someone with a normal weight, and the annual extra medical costs of obesity in the US were estimated to be US$75 bn in 2003 (BMJ Wang). If current demographic trends continue, obesity-related costs are set to double every ten years, and could account for 16%-18% of US Healthcare expenditure by 2030. In the UK, data point to a similar trend, with 650 mn increased annual costs by 2020, and 2 bn higher costs by 2030 (Wang). In addition to the direct medical costs for treating obesity, there are indirect costs to society and economies, which include early retirement and lost or lower productivity. US data suggest a direct correlation between obesity and missed work days in men, with males with a BMI above 40 taking almost six additional sick days each year. Swedish data suggest obese individuals are 1.5-1.9 times more likely to take sick leave than their peers with normal weight. Who provides the solutions? Before we get to the investing implication of this pandemic, we believe it’s worth spending a minute on the impact that reversal of current trends might have, and the role that various parties have played thus far to resolve this. Perhaps slightly depressingly, we believe that pharma companies alone are unlikely to be able to resolve this. Indeed we believe that a majority of this change message needs to come from government policy and social change (as we saw in the 1970s-80s with smoking). What are the benefits if trends reverse? Modest changes can have a dramatic impact on both an individual’s risk profile and society as a whole. A 1% reduction in BMI (approximately losing 1kg of body weight) is estimated to reduce cases of diabetes by around 2 million, and cases of cancer by around 100. However, implementation of these changes will require behavioural changes through health promotion campaigns and policy interventions to address healthy public sector food service policies. But policy and behavioural changes are not easy to implement and take time to take effect. Pharma industry response – encouraging, but not adequate Despite numerous attempts, the pharmaceutical industry has had limited success in addressing the primary cause of obesity (energy imbalance). Current treatments combat the consequences of obesity, e.g., through the management of hypertension, or diabetes. A large number of companies have tried to develop pharmaceuticals to target energy imbalance, but the vast majority have failed owing to serious toxic effects. For example, Sanofi’s Accomplia was abandoned for suicidal ideation, Fen-Phen was withdrawn for serious cardiovascular concerns, and sibutramine was recently withdrawn following cardiovascular safety concerns. 2012 has seen the FDA approval of two new treatments for obesity, when used in conjunction with reduced calorie diets. Both Belviq (Arena Pharmaceuticals) and Qsymia (Vivus) reduce appetite and in some people can induce a negative energy balance. Both products have demonstrated safety signals which are a cause for concern, and patients receiving these products will require careful monitoring by clinicians. But, the FDA’s willingness to approve agents with clear safety signals illustrates the need for effective intervention for obesity. One of the more serious efforts to this end was recently demonstrated by the Australian government, which evaluated several measures aimed at combating this epidemic (see exhibit below). Not surprisingly, nonpharmacological options were found to be more cost-effective in the long term, but are obviously more difficult to implement at a society level. * * * Another, even more dramatic health-related recent intervention was that on behalf of Mike Bloomberg and the city of New York banning sugary drinks in 16 oz containers or more. The problem with government intervention in individual and social level consumption, is that it never works without a proper incentive system. If instead of using negative reinforcement, the government were to use positive reinforcement techniques, and for example offer each American $100/year for every pound kept below the overweight threshold every year, the results would be far more encouraging, and the costs saved in the long run would more than offset initial outlays. Of course, this being the government, it is absolutely certain that corruption and "unintended side-effects" will intervene, that incentives will be perverted by special interests and lobby groups, and the final outcome would be a far worse one than the base case. Which is why, sadly, the obesity epidemic will not be "fixed" in any conventional sense, but like so many other aspects of the current unsustainable socio-economic system, will merely go away on its own once the "weakest links" are eliminated by the various forces of natural (and man-made) selection in play today. Average: 3.555555 Your rating: None Average: 3.6 ( 18 votes) Tweet Login or register to post comments 16668 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: This Is Your Country On Fat: Presenting 14 Years Of Exponential American Obesity "The Weight Of The Nation": Documenting America's Obesity Epidemic: Part 2 - Choices The REAL Cause of the Global Obesity Epidemic The Global Diabetes Tsunami... And Why America Actually Has It Good Guest Post: The American Diet: Self-Destruction Never Tasted So Good
W(h)ither China? "The End Of Extrapolation" By Tyler Durden Created 11/22/2012 - 22:55 Submitted by Tyler Durden on 11/22/2012 22:55 -0500 China Corporate Leverage Corruption default Eurozone fixed France Global Economy Gross Domestic Product Reality Sovereign Debt On November 5, just as the 18th Chinese Congress was about to elect a leadership that would merely perpetuate the status quo, in " The Chinese Credit Bubble - Full Frontal " we presented a little known fact: namely that while China's sovereign debt is whatever the country wishes it to be (which due to the SOE basis of its banks is really a hybrid of sovereign and financial debt), one bubble that the country can not hide is that of its corporate debt level, which has hit the highest relative to GDP level in the enitre world. Ten days later Businessweek followed up with " Corporate China's Black Hole of Debt ", which contained the following replica chart: And so the cat of China's real debt bubble is out of the bag and out for general consumption. Yet as promptly as it appeared, it was forgotten, as a desperate for any favorable economic news punditry has ignored the fact that economic data coming out of China is merely for propaganda purposes and consumption by the gullible (not our words, they belong to China's current Vice Premier and the man who will soon take the post of Premier, Li Keqiang, who 5 years ago said that " China's GDP figures are "man-made" and therefore unreliable ... figures, especially GDP statistics, are 'for reference only,' he said smiling. "), and has latched on to the prior month of modestly more favorable, "rebounding" economic statistics. As UBS George Magnus says, "Many people think the downswing has now ended, pointing to slightly feistier data in September and October for industrial production, fixed asset investment, retail sales, and exports, continued high levels of total social financing, and a renewed rise in corporate leverage." The trivial rebound will soon end but a far bigger problem will then reemerge: " the short-term outlook for growth pales into significance against the view that China will continue to grow at 7-8.5% for the foreseeable future ." And herein lies the rub: because while China is currently experiencing a brief dead cat bounce, a far greater question remains open: can China reverse its declining GDP growth rate and continue growing at what most realists now perceive as an unsustainable pace . Says Magnus in attempting to provide an answer: "This rests on three critical but questionable propositions: political will and capacity, the insensitivity of consumption to the investment outlook, and the nature of rebalancing, itself." Magnus then proceeds to share his vision of whether China can "rise above" the reality of an economy forced to transition from investment driven to one of consumption: a vision which is the topic of his latest paper titled " China: the end of extrapolation ." In short, his answer (which at 11 single-spaced pages is hardly short) is that the party in China has ended. Of course, he is far more diplomatic: After a decade or more of turbo-charged growth, the economic model that drove it has led to deep imbalances, especially as regards the investment and consumption shares of GDP, significant increases in both the investment- and credit-intensity of GDP growth, and the distribution of income between profits and wages. A host of institutional, monetary, financial, tax and other fiscal arrangements has been developed to support this economic model. As we will explain below, changing this model has become of paramount importance if China is to avoid a disruptive bust in investment in the next 1-2 years, and lapse into a middle income trap in the medium-term. A change is all the more important as China’s competitive advantages in the global economy are slowly being chipped away by rising wage and labour cost pressures at home, and the development of cheap energy and new lower-cost, advanced manufacturing technologies in the US, South Korea and other OECD countries. The biggest issue for a largely welfare safety-net free China has been balancing economic growth with broad prosperity. Focusing just on one, can and will promptly lead to social instability and "rising pressure": Social pressures have continued to build with respect to income inequality, corruption, living and working conditions of migrant workers, miscarriages of justice and ‘land grabs’ by local government officials, and air and water quality and environmental degradation. According to one Chinese sociologist, the number of incidents of unrest may have been of the order of 180,000 in 2010. So China has to keep growing at the required pace of 7%+ to keep the population mostly satisfied. But how, now that as noted above, the "turbo-charged" growth period is over. And how when the new Chinese Politburo leaders are even more conservative than the old ones, and even less willing to force the much required transition from an investment-driven to a consumption-led model. The first proposition, following on from the political economy issues discussed above, is that the government has the political will and capacity to introduce reforms that lead to both a sharp fall in the investment share of GDP, and a roughly equivalent rise in the consumption share by strengthening or introducing important adjustment mechanisms discussed earlier. But we don’t know yet how strong the climate for reform in China is, even though there is a popular feeling that things can’t carry on as before. Some initiatives of political reform, aimed at restoring trust in the Party by curbing corruption and ‘purifying’ the Party so as to prevent the abuse of power for personal gain, certainly seem likely. More radical political reform, though, doesn’t look likely. ... This raises questions about the wider significance of rebalancing, which means reforms that would abandon the key drivers of the ‘old model’, including wage rises significantly below productivity growth, repressed interest rates, a managed exchange rate, and other subdued factor prices, that is, of land, water, energy, and importantly, of capital. There is little question that, over a decade and more, a correction of repressed factor prices, money and capital especially, would help to generate the resource shift needed to drive a more household- and private enterprise-oriented economy, and strengthen resource allocation, efficiency, innovation and total factor productivity. We can be hopeful that China’s new leaders will reform gradually in this direction. But intent will count for little in the face of inertia or a concerted push-back or resistance from others in the Party and the state apparatus, and it may be prudent to remain cautious. Remember that fundamental economic reforms are all about politics that are highly controversial and could, in some respects perhaps, prove to be of existential significance to the Party. So while politics is certainly the primary consideration for what is still largely a centrally-planned economy, an even bigger concern may be simple math. The maths are problematic . If investment is 50% of GDP and the growth rate falls from 15% to say, 5% per annum, consumption growth has to accelerate from about 8% to an unprecedented 12% per annum or so if the underlying GDP growth rate is to stay at 7.5%. You can do the maths of alternative scenarios at leisure, but the bottom line is that rebalancing requires investment to grow more slowly than GDP, and consumption significantly faster over an extended period of time. Otherwise the model isn’t changing. The more structural reason is that the mechanisms that would allow consumer spending to strengthen further don’t yet exist, and would, in any event, compromise the legacy sources of economic growth that have generated structural imbalances in the first place. For example, higher wages dent corporate profits and investment; higher interest rates and a stronger exchange rate help consumers, but to the disadvantage of companies, whose debt-servicing capacity would be compromised; pro-household tax, income and social security reforms have to be financed, one way or another, by companies, or the government . The issue, specifically in China, is more about the speed of capital accumulation, and misallocation of capital, given that, uniquely, the investment share of GDP has been in a range of 40-50% for about a decade now. Roughly two-thirds of the stock of capital has been built in the last decade, and half of infrastructure investment since 2000, for example, has been in transportation projects, many of which serve the same objectives, and must, for a while at least, be redundant or not viable commercially.15 And while total factor productivity growth, which is a measure of the efficiency of capital and labour utilisation, did rise strongly during the 2000s to about 4% per annum as the pre-imbalances apex boom gathered momentum, it has fallen back to around 2% per annum since. But perhaps the biggest concern is the one that needs no introduction on this website, and is always summarized simply in what is the real four letter word: debt . It is well known that China has experienced strong credit expansion. The growth in regular RMB loans by banks may have slowed down from about 35% in 2009, to a more modest 15% since the middle of 2011, but these loans capture only half of China’s credit creation. Total social financing includes also a number of informal financing arrangements, including commercial bills, trust and entrusted loans, other trust assets and corporate bonds not held by banks. The last item, in particular has been growing rapidly, reaching a record RMB 300bn in October 2012. The different definitions of credit creation are shown in the following chart, which comes from a research note by UBS China economist, Tao Wang. The chart differentiates between regular bank loans, the total of bank credit and off-balance sheet credit, and total credit in the economy. As hown, the broadest credit share of GDP has grown from about 150% in 2007 to around 200% in the last 5 years, quite unprecedented for a country of China’s size. The rising credit intensity in the economy is also evident in the changes in the relationship between total social financing and GDP. Between 2002 when the former data start and 2007, credit outstanding grew by RMB17 trillion, compared with a rise in GDP of RMB14.5 trillion, a ratio of 1.2, but since then, credit has soared by nearly RMB61 trillion, compared to a rise in GDP of RMB25.5 trillion, or a ratio of 2.. The biggest expansion in debt financing has occurred in the corporate sector. Chinese companies’ debt ratios have risen to join some of the most indebted corporate sectors in major countries, according to Li Yang, vice-president of the Chinese Academy of Social Sciences.19 At 107%, the ratio is right up there with those of the US, Canada, France and the Eurozone, though the standardised OECD ratios may not accord to Li Yang’s definition. But he noted the recent BIS warning that corporate debt levels over 90% of GDP make companies increasingly sensitive to changes in income and interest rates, financial fragility and default risk. These things are liable to weigh on SOEs and other companies, as GDP growth slows, profits and cash flows weaken and in the wake of expected financial liberalisation. And, inevitably, tougher times for orrowers mean tougher times for banks. Most people doubt the officially estimated 0.97% is a realistic number, and higher loan losses are inevitable. China is better equipped financially than most to deal with banking sector loan loss or recapitalisation issues. The point, though, is that someone has to pay: the cost is almost bound to fall on the household sector, one way or another, and so where does that leave rebalancing? Most ominously, however, is the realization that China too is now engaging in the developed world's favorite pastime, simply known as "kicking the can". Unfortunately, it isn’t really possible for us, or more to the point, China’s government, to know precisely where the country stands in this process, any more than people were able to gauge where the West was in 2006, for example. A Chinese Minsky Moment, to coin another phrase, may not be imminent. In a highly managed economy with dominant state industrial and banking sectors, the state can deploy policies, and sources of finance to minimise cyclical fluctuations (as now), helping to sustain the status quo and lowering perceptions of risk. But this is the equivalent of ‘kicking the can’ at the risk of a harsher and more disruptive adjustment later Finally, Magnus on what happens if instead of the hoped for 8% trendline growth, China can at best muster half of the previous 10% growth rate: The incremental changes in economic rebalancing, and gradual deceleration in investment spending, which are implicit in the extrapolations of 7-8% GDP growth, don’t stack up for this scribe. A more significant fall to 5% over the coming decade – to pick a number – need not be the cataclysm that springs to mind, unless you’re a dyed-in-the-wool industrial commodities and commodity currency bull.... A halving of China’s superlative growth rate would still see GDP double by 2027, and continue to converge on the US. And since we can imagine China’s citizens care more about living standards than GDP, a change in the economic model and in its incentive systems need not be threatening, if the process is managed well and in a timely fashion. But there’s an unfortunate truth about changing your development model, which is that when you get to the point of having to do so, sustainable and stable growth and prosperity are about politics, institutions and legitimacy. You have reached the end of extrapolation. Much more in the full paper below, which is a perceptive analysis to be sure, but really one which puts into words what the simple chart at the very top of this article succinctly summarizes without a single word: that the age of credit-driven expansion is over, in the entire developed world, as well as in China, as China too succumbs to the tractor beam of peak consolidated (or is that fungible?) leverage . Because without the ability to create any more debt, and thus money, out of thin air without the threat of an ensuing debt delinquency, discharge and default avalanche, there is no more growth. Full George Magnus paper on China : Tweet
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