Whither Capitalism? Financial externalities and crisis

As with global warming, so with financial crises – externalities have a lot to answer for. We look at three of them. First the financial accelerator due to ‘fire sales’ of collateral assets -- a form of pecuniary externality that leads to liquidity being undervalued. Second the ‘risk- shifting’ behaviour of highly-levered financial institutions who keep the upside of risky investment while passing the downside to others thanks to limited liability. Finally, the network externality where the structure of the financial industry helps propagate shocks around the system unless this is checked by some form of circuit breaker, or ‘ring-fence’. The contrast between crisis-induced Great Recession and its aftermath of slow growth in the West and the rapid - and (so far) sustained - growth in the East suggests that successful economic progress may depend on how well these externalities are managed

From Rotating Atomic Rings to Quantum Hall States

Considerable efforts are currently devoted to the preparation of ultracold neutral atoms in the emblematic strongly correlated quantum Hall regime. The routes followed so far essentially rely on thermodynamics, i.e. imposing the proper Hamiltonian and cooling the system towards its ground state. In rapidly rotating 2D harmonic traps the role of the transverse magnetic field is played by the angular velocity. For particle numbers significantly larger than unity, the required angular momentum is very large and it can be obtained only for spinning frequencies extremely near to the deconfinement limit; consequently, the required control on experimental parameters turns out to be far too stringent. Here we propose to follow instead a dynamic path starting from the gas confined in a rotating ring. The large moment of inertia of the fluid facilitates the access to states with a large angular momentum, corresponding to a giant vortex. The initial ring-shaped trapping potential is then adiabatically transformed into a harmonic confinement, which brings the interacting atomic gas in the desired quantum Hall regime. We provide clear numerical evidence that for a relatively broad range of initial angular frequencies, the giant vortex state is adiabatically connected to the bosonic $\nu=1/2$ Laughlin state, and we discuss the scaling to many particles.Comment: 9 pages, 5 figure

Complex Derivatives

The intrinsic complexity of the financial derivatives market has emerged as both an incentive to engage in it, and a key source of its inherent instability. Regulators now faced with the challenge of taming this beast may find inspiration in the budding science of complex systems. When financial derivatives were cast in 2002 as latent 'weapons of mass destruction', one might have expected the world at large to sit up and listen — particularly in the wake of subsequent events that led to the financial crisis of 2008. Instead, the derivatives market continues to grow in size and complexity (Fig. 1), spawning a new generation of financial innovations, and raising concerns about its potential impact on the economy as a whole. A derivative instrument is a financial contract between two parties, in which the value of the payoff is derived from the value of another financial instrument or asset, called the underlying entity. In some cases, this contract acts as a kind of insurance: in a credit default swap, for example, a lender might buy protection from a third party to insure against the default of the borrower. However, unlike conventional insurance, in which a person necessarily owns the house she wants to insure, derivatives can be negotiated on any underlying entity — meaning anyone could take out insurance on the house in question. Speculation therefore emerges as another reason to trade in derivatives. By engaging in a speculative derivatives market, players can potentially amplify their gains, which is arguably the most plausible explanation for the proliferation of derivatives in recent years. Needless to say, losses are also amplified. Unlike bets on, say, dice — where the chances of the outcome are not affected by the bet itself — the more market players bet on the default of a country, the more likely the default becomes. Eventually the game becomes a self-fulfilling prophecy, as in a bank run, where if each party believes that others will withdraw their money from the bank, it pays each to do so. More perversely, in some cases parties have incentives (and opportunities) to precipitate these events, by spreading rumours or by manipulating the prices on which the derivatives are contingent — a situation seen most recently in the London Interbank Offered Rate (LIBOR) affair. Proponents of derivatives have long argued that these instruments help to stabilize markets by distributing risk, but it has been shown recently that in many situations risk sharing can also lead to instabilities

Quantifying trading behavior in financial markets using Google Trends

Crises in financial markets affect humans worldwide. Detailed market data on trading decisions reflect some of the complex human behavior that has led to these crises. We suggest that massive new data sources resulting from human interaction with the Internet may offer a new perspective on the behavior of market participants in periods of large market movements. By analyzing changes in Google query volumes for search terms related to finance, we find patterns that may be interpreted as “early warning signs” of stock market moves. Our results illustrate the potential that combining extensive behavioral data sets offers for a better understanding of collective human behavior

The Effects of Twitter Sentiment on Stock Price Returns

Social media are increasingly reflecting and influencing behavior of other complex systems. In this paper we investigate the relations between a well-know micro-blogging platform Twitter and financial markets. In particular, we consider, in a period of 15 months, the Twitter volume and sentiment about the 30 stock companies that form the Dow Jones Industrial Average (DJIA) index. We find a relatively low Pearson correlation and Granger causality between the corresponding time series over the entire time period. However, we find a significant dependence between the Twitter sentiment and abnormal returns during the peaks of Twitter volume. This is valid not only for the expected Twitter volume peaks (e.g., quarterly announcements), but also for peaks corresponding to less obvious events. We formalize the procedure by adapting the well-known "event study" from economics and finance to the analysis of Twitter data. The procedure allows to automatically identify events as Twitter volume peaks, to compute the prevailing sentiment (positive or negative) expressed in tweets at these peaks, and finally to apply the "event study" methodology to relate them to stock returns. We show that sentiment polarity of Twitter peaks implies the direction of cumulative abnormal returns. The amount of cumulative abnormal returns is relatively low (about 1-2%), but the dependence is statistically significant for several days after the events

Strategies used as spectroscopy of financial markets reveal new stylized facts

We propose a new set of stylized facts quantifying the structure of financial markets. The key idea is to study the combined structure of both investment strategies and prices in order to open a qualitatively new level of understanding of financial and economic markets. We study the detailed order flow on the Shenzhen Stock Exchange of China for the whole year of 2003. This enormous dataset allows us to compare (i) a closed national market (A-shares) with an international market (B-shares), (ii) individuals and institutions and (iii) real investors to random strategies with respect to timing that share otherwise all other characteristics. We find that more trading results in smaller net return due to trading frictions. We unveiled quantitative power laws with non-trivial exponents, that quantify the deterioration of performance with frequency and with holding period of the strategies used by investors. Random strategies are found to perform much better than real ones, both for winners and losers. Surprising large arbitrage opportunities exist, especially when using zero-intelligence strategies. This is a diagnostic of possible inefficiencies of these financial markets.Comment: 13 pages including 5 figures and 1 tabl

A quantitatively-modeled homozygosity mapping algorithm, qHomozygosityMapping, utilizing whole genome single nucleotide polymorphism genotyping data

Homozygosity mapping is a powerful procedure that is capable of detecting recessive disease-causing genes in a few patients from families with a history of inbreeding. We report here a homozygosity mapping algorithm for high-density single nucleotide polymorphism arrays that is able to (i) correct genotyping errors, (ii) search for autozygous segments genome-wide through regions with runs of homozygous SNPs, (iii) check the validity of the inbreeding history, and (iv) calculate the probability of the disease-causing gene being located in the regions identified. The genotyping error correction restored an average of 94.2% of the total length of all regions with run of homozygous SNPs, and 99.9% of the total length of them that were longer than 2 cM. At the end of the analysis, we would know the probability that regions identified contain a disease-causing gene, and we would be able to determine how much effort should be devoted to scrutinizing the regions. We confirmed the power of this algorithm using 6 patients with Siiyama-type α1-antitrypsin deficiency, a rare autosomal recessive disease in Japan. Our procedure will accelerate the identification of disease-causing genes using high-density SNP array data

Meta-review of the effectiveness of computerised CBT in treating depression

<p>Abstract</p> <p>Background</p> <p>Several computerised cognitive behaviour therapy (cCBT) packages are now available to treat mild to moderate depression with or without anxiety. These have been usually been reviewed alongside cCBT for a wide range of psychological problems. Here, we single out the results of these reviews for the most common mental disorder, mild to moderate depression. The aim of this paper is to evaluate the quality of existing reviews and to enable reliable comparisons of alternative computer packages for the same patient group.</p> <p>Methods</p> <p>A thorough search and analysis of reviews of efficacy of cCBT published between 1999 and February 2011.</p> <p>Results</p> <p>The search yielded twelve systematic reviews from ten studies covering depression. Their methodology is appraised and selected findings are presented here.</p> <p>Conclusions</p> <p>The meta-review supports the efficacy of cCBT for treatment of depression; however there is limited information on different approaches, whose relative cost-effectiveness remains to be demonstrated. Suggestions are made for future studies in the field.</p

Reduction of systemic risk by means of Pigouvian taxation

We analyze the possibility of reduction of systemic risk in financial markets through Pigouvian taxation of financial institutions, which is used to support the rescue fund. We introduce the concept of the cascade risk with a clear operational definition as a subclass and a network related measure of the systemic risk. Using financial networks constructed from real Italian money market data and using realistic parameters, we show that the cascade risk can be substantially reduced by a small rate of taxation and by means of a simple strategy of the money transfer from the rescue fund to interbanking market subjects. Furthermore, we show that while negative effects on the return on investment (ROI) are direct and certain, an overall positive effect on risk adjusted return on investments (ROIRA) is visible. Please note that the taxation is introduced as a monetary/regulatory, not as a _scal measure, as the term could suggest. The rescue fund is implemented in a form of a common reserve fund

Reciprocity as a foundation of financial economics

This paper argues that the subsistence of the fundamental theorem of contemporary financial mathematics is the ethical concept ‘reciprocity’. The argument is based on identifying an equivalence between the contemporary, and ostensibly ‘value neutral’, Fundamental Theory of Asset Pricing with theories of mathematical probability that emerged in the seventeenth century in the context of the ethical assessment of commercial contracts in a framework of Aristotelian ethics. This observation, the main claim of the paper, is justified on the basis of results from the Ultimatum Game and is analysed within a framework of Pragmatic philosophy. The analysis leads to the explanatory hypothesis that markets are centres of communicative action with reciprocity as a rule of discourse. The purpose of the paper is to reorientate financial economics to emphasise the objectives of cooperation and social cohesion and to this end, we offer specific policy advice