december 07, 2016

Venezuela: povertá e miseria straordinario!

Dagens Industri skrev igår att den reala löneutvecklingen i Venezuela 2016-2017 väntas bli deppiga -373.9%!

”I Venezuela är läget betydligt värre. Löneökningarna i reda pengar väntas bli hela 111 procent, men inflationen är samtidigt ofattbara 485 procent. Den reala löneutvecklingen blir således ytterst deppiga -373,9 procent.”

D.v.s. Venezuelanernas kommer nästa år få betala för att jobba! Och de får betala nästan tre ggr så mkt 2017 som de tjänade under 2016! Che poveracci! Hur är det möjligt?? Finns det inga gränser för den Bolivariska revolutionen?

Venezuelanerna kan dock andas ut. Detta är lyckligtvis siffror från fantasins värld! Idag har Dagens Industri ändrat siffrorna och helt korrekt angivit -63.9%. Det är den siffra man får om man antingen (i) använder sitt sunda förnuft och höftar lite eller (ii) använder formeln ovan. Man kan inte bara subtrahera bort inflationen från nominella ändringen om siffrorna är så stora som i Venezuela!


PS. DI är inte ensamma. Tidningen Affärsvärlden får siffran till 77%! Vet ej hur. Och konsultbolaget som räknat ut siffrorna verkar genomgående räkna fel i sitt 2015-dokument.....

oktober 24, 2016

The investor that predicts stock returns without even knowing it!

What are investors’ current stock return expectations? That is a question commonly found in the financial press. Typically, the type of investor one has in mind is the stock market investor. Not commodity investors, property investors or other investors. That makes sense since zinc investors or apartment block investors have other things to think about than whether the typical publically listed stock will go up or down in the future.

There is one other group of investors that actually care about the future valuation of public companies, however, and that is the credit market investor. Investors who buy corporate bonds (or credit default swaps) also care about the future wellbeing of the company. What’s more, these investors often take a long-term view of the company and its valuation.

In the paper Stock Return Expectations in the Credit Market (which you can find here) I suggest a way of extracting these investors’ expectations of future stock returns. To do this I compute long-term stock return expectations (across the business cycle) for individual stocks using information backed out from the credit derivatives market.

Empirically, the paper demonstrates a close relationship between these credit-implied stock return expectations and future realized stock returns. I also find stock portfolios selected based on credit-implied stock return forecasts to beat equally- and value-weighted portfolios of the same stocks out-of-sample. Basically, it seems that credit investors are good at predicting stock returns, without really even knowing it!

september 05, 2016

I have an Erdös# = 5 and an Einstein# = 7!

I only write about very important stuff on this blog! :) And here comes a particularly important entry.

What’s your number? If you ever got that question it probably was about how many millions you need to retire or something. I doubt it was about your degrees of separation from Albert Einstein or from the famous Hungarian mathematician Paul Erdös in the context of research collaborators!

Mathematicians love numbers, however, and they have come up with the so-called Erdös number. If someone called X co-authored work with Paul Erdös, then X has an Erdös number equal to one. If you co-authored with X you have an Erdös number equal to two etc. etc.

Now, using the web site of the American Mathematical Society I found out that even though I am not a mathematician I actually have an Erdös number myself! And even better, I have an Einstein number as well!! Erdös wrote a lot of papers but Einstein did not. And Einstein died many decades before the more productive Erdös, so I would expect, ceteris paribus, that I would have a smaller Einstein number.

OK, so my Erdös#=5 and my Einsten#=7. Not the smallest numbers, but at least they are finite... And I like to point out that I am an empirical finance researcher, not a theoretician or a mathematician! And I only have six co-authors in total!

If you do not understand how important this is, google “Erdös number”! And perhaps you better google “irony” as well before you remove me from your RSS feed... I promise to be back with more on the global markets!

juni 23, 2016


Well, we had a night with record thunder storms here in southern Sweden but the biggest thunders were evidently saved for this morning when we were served BREXIT with our breakfast! A big disappointment for an anglophile like me personally, and for 48% of the British population! And for the financial markets (USD/SEK +39öre, Gold +56 $/Oz, Nikkei -8% and counting....).

Let’s hope both the good things and the bad things that come out of this will turn out to be better than expected... It is not impossible!



Today it is June 23, 2016. And tonight we will know whether Britain stays in the EU or not....

Today, The Independent reports two different poll results where the first says 44% for Remain and 45% for Leave and the other one says 43% for Leave and 41% for Remain.

Today, The Telegraph reports 51% for Remain and 49% for Leave.

In other words, a close call! A most interesting day for all investors out there! My guess, however, is that many undecided voters will vote for the safer option and vote Remain! I also think media etc. are biased and thrive on polls being close to 50/50. Therefore, my bet is that Britain will stay in the EU!


mars 11, 2016

Blockchain – the New Kid on the Block?

Hands up everyone who thinks the blockchain is the new internet, the new finance disruptor, the new TCP/IP! Now, am I the only one with his hands in the air? Well, if so, even better! Then I can pick all the low-hanging fruit and you get the left-overs... OK, on a more serious note, of course, this is very early to start investing in firms focusing on blockchains. But, personally, I remember when I studied engineering in Berkeley in 1994 and followed a course on something I barely understood called The Internet. We used something called gopher to connect to something called the world wide web to read uninteresting things (texts only) on other computers in boring places like NASA and CERN. There were no browsers (Mosaic came the next year and Netscape after that) and few people even used email. I studied, got bored, studied, got confused and graduated.... Then, I went home to Sweden and no one knew what I was talking about when I mentioned internet, Arpanet etc. And, then, nothing! For a year or two! And then it took off! Big time! And I missed the train, completely! I moved to the most backwards country in the northern hemisphere (Italy) and then started working on my finance phd. Internet thrived and internet companies took over the business pages. I made no money. My friends made, and lost, millions just by being hired by internet firms. And the rest is history.

Now, the question is whether blockchains could play a similar role. In finance. Well, who knows? But, first, what is a blockchain? Most of the readers of this blog have of course heard of bitcoins, the virtual currency. Less, though, have probably heard of the blockchain, the technology behind the bitcoin. While, this far, the blockchain technology has been used primarily as the plumbing for the bitcoin, blockchains can also possibly be used for the infrastructure of traditional financial products such as debt contracts and financial derivatives. And in accounting, blockchains could potentially improve the quality of information reaching investors by making the accounting information both more trustworthy and by making the information more timely. If firms were to keep their financial records on blockchains, each and every transaction in a firm’s ledger would be instantaneously available and difficult to tinker with.

I have worked a lot in the field of credit risk and this is another area where blockchains could have a huge impact. I have written about this in a short paper called BLOCKCHAINS, REAL-TIME ACCOUNTING AND THE FUTURE OF CREDIT RISK MODELING. In that paper, my focus is on credit risk modeling and on how a possible future wide-spread use of blockchains could affect the way we model credit risk. It is well known that accounting information, such as balance sheet data and income statements suffers from being of quite low quality. Therefore, since most credit risk models rely on accounting data, the increased transparency, accuracy and timeliness of financial statements brought about by firms keeping their books on blockchains could significantly improve credit risk modeling. I think! Spread the word!

december 18, 2015

Emerging market stocks + currency mismatch

I am not too fond of the label ”Emerging Markets”, at least not in discussions about investment opportunities. I mean, what, exactly, is an emerging market? And which countries should count as emerging? Another thing that is often misused, or misunderstood, is buy/sell recommendations. Very often you hear someone recommending a buy or sell for this or that stock without adding a time horizon. I mean, isn’t it possible that a stock could be expected to fall more before it starts climbing? Yes, of course! Also emerging markets stocks…. I will come back to this particular issue in the last paragraph below.

Anyway, this entry is not about these naïve observations. Instead, what I want to highlight is a rather unknown (I think) negative (sell) observation that is applicable, first and foremost, to emerging country stocks. As of lately, many emerging market currencies have weakened dramatically against particularly the US dollar. Whether we are talking about BRICS or MINTS or any other group of up and coming countries, weaker commodity prices, the slowdown in China and the bizarre monetary policy in rich western economies have put a lot of pressure on their currencies. So far so good! Everyone knows this and everyone expects this to continue for some time with the trillions of dollars that flowed into these countries now possibly departing. Everyone also knows that this could be a problem since household plus company debt now roughly equals total GDP in these emerging markets. And, unfortunately, much of this debt is in US dollars! This amount is higher, even, than the amount of debt in the developed markets before the financial crisis.

Now, what my (very timely, indeed) research shows is that dramatic currency falls, of the size seen recently in many emerging markets, coupled with actual historically observed currency mismatches in company books in selected emerging markets, could lead investors (and banking regulators) to materially underestimate the actual company credit risk. While it is obvious that the default probability increases if the debt is issued in a foreign currency and the assets are in local currency, my research shows that the increase in default correlations due to the mismatch is very important as well. For more on the latter issue I refer to Byström (2014) The impact of currency movements on asset value correlations. Journal of International Financial Markets, Institutions and Money, Volume 31, July 2014, Pages 178–186. That paper looks at the asset correlation bias resulting from firms’ assets and liabilities being denominated in different currencies. It focuses on the time-variation in the bias and on the dependency of the bias on currency movements.

So, again, regardless of whether you are optimistic or pessimistic about emerging market stocks I think my research should be acknowledged. I do not think the increased credit risk is priced (fully) in the stock market, particularly for local EM banks, and it should therefore bias any stock market forecast downwards. Personally, referring to the first paragraph above, I believe in emerging markets stocks (whatever that means…..) in the longer run. Based on the discussion above on currency mismatch, however, I think (ceteris paribus) that it would be wise to wait some time before one increases the proportion of emerging market stocks in one´s portfolio. If I had to make a prediction it would be that 2017 or so could be a good time to enter the market. Earlier if the prices drop quicker than expected and later if they hold out. In other words, I am pessimistic in the short run and optimistic in the long run. It is obviously possible……

Caveat emptor!