Wednesday, August 28, 2013

Nasdaq freeze

An anonymous correspondent explained last week's Nasdaq freeze thus.
The truth about what happened Aug 22 to the Nasdaq is that new limit-up/limit-down rules took effect in derivatives (exchange-traded products) listed at Arca at the same time that new options began trading marketwide that day. Since the market is full of complex, multi-leg trades, bad data propagated, affecting Goldman’s options-trading algorithms Tuesday, spawning hundreds of derivatives trading halts by VIX expirations Wednesday, and producing bad data in the consolidated tape by Thur, halting Nasdaq trading. So the real culprit was the SEC. But it’s bad form to say publicly that the regulator is responsible for jeopardizing the market.
I can't vouch for the story, or even for understanding it all. But I'm interested in several emerging stories that some trading pathologies are in part unintended consequences of SEC regulation. It's also not the first time I hear of financial market participants afraid to speak out and earn the disfavor of their regulator.

Monday, August 26, 2013

Macro-prudential policy

Source: Wall Street Journal
Not a fan. A Wall Street Journal Op-Ed. Link to WSJLink to pdf on my website. Director's cut follows:

Interest rates make the headlines, but the Federal Reserve's most important role is going to be the gargantuan systemic financial regulator. The really big question is whether and how the Fed will pursue a "macroprudential" policy. This is the emerging notion that central banks should intensively monitor the whole financial system and actively intervene in a broad range of markets toward a wide range of goals including financial and economic stability.

Sunday, August 25, 2013

Taylor Jackson Hole Blog

John Taylor is blogging from Jackson Hole

Day 1: Skepticism of unconventional policy  Academics say quantitative easing does't do much. I happen to agree

Forward guidance Is "forward guidance" clarification of a rule, i.e. here is what we think we'll feel like doing in the future, or a precommitment? To the Bank of England and ECB, the former.

This looks like an interesting series to watch.

Friday, August 23, 2013


I will be running a MOOC (massively online) class this fall. Follow the link for information. The class will roughly parallel my PhD asset pricing class. We'll run through most of the "Asset Pricing" textbook. The videos are all shot, now I'm putting together quizzes... which accounts for some of my recent blog silence.

So, if you're interested in the theory of academic asset pricing, or you've wanted to work through the book, here's your chance. It's designed for PhD students, aspiring PhD students, advanced MBAs, financial engineers, people who are working in industry who might like to study PhD level finance but don't have the time, and so on. It's not easy, we start with a stochastic calculus review!  But I'm emphasizing the intuition, what the models mean, why we use them, and so on, over the mathematics.

Wednesday, August 7, 2013

Litterman on carbon finance

I just read a very nice article by Bob Litterman in CATO's "Regulation" on the finance of carbon taxes. It includes a review of some of the recent academic calculations.

(Related, Ronald Bailey at takes on the Administration's latest cost of carbon estimates, and reviews Robert Pindyk's recent NBER working paper "What do the models tell us?" also covered by Bob.)

Like just about every economist, Bob favors a carbon tax or tradeable emissions right over the vast network of regulatory controls on which we are now embarked. I might add that getting rid of the large subsidies for carbon emissions implicit in many country's policies would help before we start taxing.

But let's get to business, how big should the carbon tax be?

Tuesday, August 6, 2013

Rajan to run the central bank of India

My colleague Raghu Rajan has just been appointed governor of the central bank of India. See Financial Times and Reuters. Congratulations Raghu!

Let me add two little notes to the songs of praise for this decision.

Traditionally, academic central bank governors come from the world of monetary policy, people who think about interest rates and inflation and all that. Raghu comes from the academic world that studies finance and banking. Look at his vita and you'll see great article after great article thinking about how banks work.

Just in time. Central banks are now all scrambling to understand banking and financial markets, regulating the financial system, avoiding crises, and so on. This is their central new task. (Or you might say, a return to their age-old task after a short interlude.) You can't ask for a person on the planet who has thought more clearly and productively about these issues.

His popular book “Saving capitalism from the capitalists” with Luigi Zingales is also revealing. Yes, he sees how over regulation and corruption are at the heart of India’s problems (and many of our own). But he also sees the strong political forces that keep the dysfunctional system in place. If anyone can understand and resist the political pressures that central bank governors face, it will be Raghu. And he won’t be tempted to think that any monetary magic or financial dirigisme from a central bank can fix all of India's problems.

He is also about the most polite person I know, while never shying away from standing for what's right. That means he will be far more effective than typical bull-in-a-china-shop academics like myself would ever be in steering a ponderous bureacracy.

Good luck, Raghu. I think you'll need it.

Reuters already expreses the view that it's too bad he's out of the running for the US Fed job.

The Republic of Paperwork

Mark Steyn, while writing on other matters, came up with this gem:
40 percent of Americans perform minimal-skilled service jobs about to be rendered obsolete by technology, and almost as many pass their productive years shuffling paperwork from one corner of the land to another in various “professional services” jobs that exist to in order to facilitate compliance with the unceasing demands of the microregulatory state. The daily Obamacare fixes — which are nothing to do with “health” “care” but only with navigating an impenetrable bureaucracy — are the perfect embodiment of the Republic of Paperwork.

Thursday, August 1, 2013


WSJ Op-Ed on immigration, with extra comments.  Original here.

Think Government Is Intrusive Now? Wait Until E-Verify Kicks In

Source: Wall Street Journal
Massive border security and E-Verify are central provisions of the Senate immigration bill, and they are supported by many in the House. Both provisions signal how wrong-headed much of the immigration-reform effort has become.

E-Verify is the real monster. If this part of the bill passes, all employers will be forced to use the government-run, Web-based system that checks potential employees' immigration status. That means, every American will have to obtain the federal government's prior approval in order to earn a living.

Et tu, Brute?

Politico's Byron Tau has a hilarious story:
Pot legalization activists are running into an unexpected and ironic opponent in their efforts to make cannabis legal: Big Marijuana...