december 10, 2017

Bitcoins gone wild!

You would need more than 20000 of the recently minted Swedish copper-alloy-coin in the picture to buy one bitcoin today! As for the old French gold-coin from 1874 you would need some 50 of them! In other words, a bitcoin is a very expensive bit of computer code right now! I think you all know that. The price has gone from $700 to $14000 in 12 months. That is, it has gone up 20 times! 2000% in one year. Meanwhile the stock market has gone up som 10%..... and the inflation and the interest rate is around 1% or 2%.

Bitcoin prices are also very volatile! An interesting development related to that is the introduction of bitcoin futures on two futures exchanges now in December 2017. Any day this or next week CME and CBOE will launch their products. I am looking forward to this for several reasons:

- First, of course, as an investor, is the possibility the launch will give anyone to bet on a falling bitcoin price, not only on a rising one. Also, for someone who likes the idea of the bitcoin but sees the danger from an ever rising price, the introduction of futures is likely to bring the benefit of putting some downward pressure on the bitcoin price. Maybe a lot of downward pressure!! There will be some interesting coming weeks in the bitcoin market.

- Second, as a researcher, the launch will be a nice example of how to choose (or not to choose...) margins in futures exchanges. That is, the collateral that the bourse demands from participants. Considering the extreme volatility of the bitcoin price I expect extreme margins as well. The initial margin required from investors at CME will be 35%. On CBOE the margin will be 33%. In other words, the allowed leverage will be a puny factor 3! For the Investor, it means, nonetheless, that a fall in the bitcoin price with one third will wipe out their entire position. Now, is that a likely scenario? Or put differently, what is the risk that CME or CBOE will suffer losses due to unexpected large price movements?

To answer these questions, let’s look at the price history of bitcoin. Over the last 12 months there are 17 daily price movements that are larger than +/-10%. The largest is 25%. Over the same periods there are 10 weekly price movements that are larger than +/-30%. The largest is 70%! This means that the margins would have been exceeded 10 times within a week over the last year. Luckily, though, the margin would never have been exceeded between two closing dates. Based on this I nonetheless think margins as high as 33% make sense. In fact, I would probably have demanded slightly higher ones if I were in charge. But, of course, for an exchange it is not only a matter of being safe, you also need customers. And I would guess that customers in this particular market like to fire up their stakes with as much leverage as possible! But do they, and their brokers, know that they are playing with fire when doing so...?


PS. As of lately, journalists, friends and colleagues have all asked me whether the bitcoin market is in a bubble. My answer has been the same every time: Yes, I think so, but I would not bet my house on it! As I see it, either there is a bubble or the bitcoin market knows something we don’t! Perhaps they have some insider information about an impending collapse of every currency in the world (one dollar buys 0.00007 bitcoins) plus Elon Musk already successfully mining huge amounts of gold on asteroids (one oz of gold buys 0.09 bitcoins).... It can happen :)

augusti 11, 2017

Gold is Gold is Gold is Gold! Or is it?

I have friends that are self-declared gold bugs! They think gold is good as a short-term investment as well as a hedge against disaster! They might have a point. I am not able to tell! However, in any case, I think my friends, as well as many others, seem to miss a couple of things:

Not all gold is created equal! If you buy coins or bars, then it is fairly easy. South African Krugerrands contain 1 oz of gold and even if it is not pure like in a Canadian Maple Leaf (the Krugerrand is only 22 karat) it is a well-known asset that is likely to be bought and sold by gold dealers all over the world. With jewellery it is worse! Most gold in Europe is 18 or 24 karat, I guess. However, in other places in the world, like in Asia, other levels of fineness is used. The gold in the picture, for instance, contains 96.5% gold, i.e. it is 23.16 karat (you can see that if you have good eyes…)! Have you ever heard of that fineness before?? OK, the point is this: we live in a global world and who knows where you will be located when the proverbial “disaster” strikes! If you are a gold bug and you are/live in Asia, then you need gold bought there and if you are in Europe, then you need gold bought there! At least if you do not want to lose too much in transaction costs.

In case of a disaster, the government might ban gold ownership outright! From 1933 to 1974, gold ownership was forbidden in the bastion of liberalism, the US! It was made illegal by President F.D. Roosevelt when he signed an executive order (no. 6102) almost exactly 84 years ago. We have a new president in the US and with him we have all learnt the importance of presidential executive orders... This means that big professional gold investors, and here I am talking about investors in physical gold, are likely to store their gold in jurisdictions that honor the private ownership of gold. Personally, if I had large amounts of gold, I would have put most of my gold in a safe in a bank in Singapore. The large (gold-loving) Chinese and Indian populations in the city-state are probably a guarantee that gold ownership will continue to be legal even in disaster situations.

Finally, of course, you have to diversify, even within your own little gold-universe! Even if you only invest in gold you should of course spread out your stash across jurisdictions, cities and bank vaults! You should also diversify by buying coins as well as bars and jewellery! And, as mentioned above, you should also diversify across fineness, country of issuance and item-size!

april 08, 2017

A terror attack through the mirror of the stock market

The graph shows the broad Swedish stock market index OMXS PI on April 7th, the day of a hideous and cowardly terror attack in the centre of Stockholm that killed and wounded dozens of random innocent friday shoppers/commuters.

The police was informed about the attack at 14.53 and after that the Swedish stock market was open for roughly two hours (see Picture). All public transpot in Stockholm (including the metro and buses) was closed down during these two hours and at 16.30 there were at least three confirmed deaths due to the “alleged” terror attack. Meanwhile the stock market reacted in the way shown in the attached picture! Except for one little blip the market steadily climbed throughout the turmoil. And it seems the market started climbing at 14.50, exactly when the attack seems to have taken place!

From the graph it seems that the market went up some 0.8% during the two hours the market remained open. Of course, this could just be random noise, and maybe the market had gone up even more without the attack.... Who knows?! But, at least, it seems that Sweden is standing strong in more ways than one!

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!