MBA News

My recent inactivity...

2004-11-16T08:04:00.000-08:00

To those who have enjoyed reading what I'm reading: I'm sorry for not posting in quite a while. I have been interviewing for jobs and haven't had time to read as much news as I had been consuming previously. After next week, fingers crossed, I will be back and hopefully have an offer too.

Bad year for bonuses...

2004-10-06T09:11:00.000-07:00

The WSJ is reporting on a story that isn't exactly news as much as a restatement of the obvious: traders are not making as much this past quarter as they did in the first half of the year.

From the article:

Wall Street's bonus-conscious bankers and traders are preparing for a pallid payday, in sharp contrast to messages they got from superiors at the beginning of the year. "This is going to be an interesting year, because the firms didn't manage expectations well," says Gary Goldstein, chief executive of Whitney Group, an executive-recruiting firm in New York. "Business is looking much more tenuous now, and people are cautious about next year, too."

And while the blogsphere is attacking the MSM, the following sentence should be removed on grounds of being stupid:

Pay scales and bonuses vary widely, based on specialties, individual abilities and geography.

Tell me about Wednesdays

2004-09-29T20:35:00.000-07:00

Okay this comes via Chicago Boyz: The Chicago Sun Times has written a column about the University of Chicago’s undergraduate application which is famous for asking strange questions. I did not go here as an undergrad, only as a GSB student, so can’t speak to this directly. I did however have to answer Harvard’s exam questions and frankly find them easier that the question, “How do you fell about Wednesdays?”

JPMorgan to buy a Hedge Fund

2004-09-27T09:00:00.000-07:00

This article in today's WSJ discusses the purchase of Highbridge Capital by J.P. Morgan Chase & Co. The story says that the fund was valued at over $1 billion. That seems hard to imagine, but I guess possible. Figuring that their revenues are at least $140 (2% of funds under management) that's 5x revenues. But what are their costs? I would expect that they have to pay enormous bonuses to their PM's and analysts. In any case it is an interesting move...

Greenwich attacked in the courts again...

2004-09-25T10:58:00.000-07:00

Okay so this isn't over Todd's Point, but it is Greenwich Town Hall being taken to court again. This time the flap is over the GIS (geographic information system) that the town maintains, presumably with information about town geography. Why is this important to us? Well for one, we will be able to study how land and geography affects returns to Greenwich hedge funds. For example, does the distance to the water have an effect on returns (thinking through LTCM the answer is yes)?

I also would have to believe that if terrorists had access to this information they would be able to assess ho steep my parents' back yard is and then plant a large boulder on top of the hill capable of flattening the house. For that reason alone I say keep this information secret. But that's just my opinion.

How do we measure success?

2004-09-24T21:47:00.000-07:00

Here is an interesting article (WSJ Requires Subscription) on how we measure success in our 20's. As I'm about to turn 30, I'm starting to look back at what I've done with this past decade and thinking about all of the things that I've accomplished. I think that I rank okay according to their criteria. Everyone should check it out. However, it is probably best for your ego not to compare yourself with the 25 year old Yale law student with the perfect investment banking boyfriend mentioned.

Max Pain Theory Is True?

2004-09-23T11:47:00.000-07:00

According to Allen Poteshman, assistant professor of finance at the University of Illinois at Urbana-Champaign, there might be some truth to max pain theory. I'm not going to even try to explain max pain theory. But I will try to summarize his interest in equity options and their trading leading up to expiration.

Poteshman says that options writers (sellers) will buy and sell the underlying so that the options will expire out of the money. This makes sense because it can cost the writers of options less to try to manipulate the stock price than they would pay to options holders. Of course this would not work for highly liquid stocks like an Intel or an IBM, but it would work for less liquid issues. Max pain theory tries to take all of the mixed incentives of all of the options writers and determine at what price they collectively would like to have the stock close at expiration to minimize their costs or extract the "max pain" from options holders.

The article (PDF File), co-authored with Sophie Xioyan Ni and Neil Pearson and will be published in the Journal of Financial Economics.

(Note: This is the first post I'm doing from the new Hyde Park Center! The building is great, although I think that everyone is still getting used to it. It is very difficult to orient yourself downstairs, but still it should be a great new home for the GSB.)

Governments, increasing source of income not IPO's

2004-09-16T17:12:00.000-07:00

This article discusses, in some detail, how Goldman and JPMorgan have shifted to sales of government assets instead of traditional IPO's as sources of revenues. The article focuses on Europe were governments, like Italy and Germany, are selling off utilities. Not as exciting or as profitable as hot tech stocks, but then again Google wasn't really that profitable for the big i-banking houses anyway.

Oh... and this marks my return from vacation.

Anyone for a game of Monopoly?

2004-09-03T10:10:00.000-07:00

Aaron Brown has published a great two part article on the economics of Monopoly for Wilmott Magazine. I would post a better link, but the site requires registration (try here). Here are a couple of choice paragraphs to whet your appetite:

The key to Monopoly is property valuation. It is essential to know when to buy a property if you land on it, how much to bid at auction and how to buy from and trade with other players to assemble the portfolio of properties you need to win. In casual games, most players buy every property they land on, auctions are rare and a burst of suboptimal trading occurs only once in the middle of the game. In well-played games auctions are frequent and there is a continuous, active market in buying and trading properties.

And then later he discusses the statistics of various strategies of game play:

We can compute the distribution of the difference between a player's rent roll and the average assuming no trading, all players buy all properties from the Bank at the first opportunity and the game has progressed long enough that all properties have been purchased and all resulting monopolies have been developed to the limit. The mean of this distribution is of course zero, and the standard deviation is $28.63. It is not Normal, it is highly skewed to the right. The probability of a player ending up with a rent roll more than $7.60 below the average rent roll is about 40%. It is generally true that some players must trade to survive, which in turn generally means that all players must trade to have hopes of winning. Most home games are won and lost in the trading phase, but good players make trades that are close enough to even that property management skills determine the outcome. Luck has little to do with it.

I am Feta

2004-09-02T13:35:00.000-07:00

Cheese Test: What type of cheese are you?

The governator said so...

2004-09-02T12:32:00.000-07:00

Good time to be a Loan Trader

2004-09-02T10:04:00.000-07:00

Hedge funds pay well. I know that, I worked at one all summer. Turns out it is even better to be at a hedge fund that trades loans this year. In fact it is even better than last year. The AVERAGE compensation for loan pros at hedge funds increased to $778,000 in 2003 up from a more modest $652,000 in 2002. Think that would be good, it would unless you are a distressed debt portfolio manager, because they made $1,053,000 last year.

All this data is from Greenwich Associates who looks into these things. You can see the data in Loan Market Week here.

Sue Herera talked about Behavioral Finance

2004-09-02T09:14:00.000-07:00

UPDATED: CNBC talked about Behavioral Finance today on Power Lunch with Sue Herera. Her guest was John Nerserian of Nuveen Investments in Chicago.

They talked in general about traps the investors fall into when making investment decisions. They did not discuss the price anomalies that may result from these traps, so this wasn't a complete lesson on behavioral finance and the EMH debate. The four topics they did cover were:

Anchoring - Past behavior of stock prices cause you to be unable to sell because you bought it for more
Mental Accounting - If you get money from a tax refund, you treat it as found money and make poor investment decisions. So if you get a refund, don't put the whole thing into a highly risky stock just because it isn't real money.
Overconfidence - Investors are lured into a false sense of security by all of the information they receive and their recent performance. So if you traded every day last week, watched 60 hours of CNBC, and didn't lose money, you are not Superman. He cited an article by Terry O'Dean. (http://ssrn.com/abstract=94142)
Recency - Investors overweight information that came out today relative to information that came out yesterday. Say a long term news story prints today and brings a stock down, then next week a news article says the company closed one big account. If the stock ticks up past where it was last week, then something ain't right.

Employee Options Pricing

2004-09-01T15:09:00.000-07:00

FASB, the accounting rule writers just announced a vote to allow companies to be flexible in their pricing models when accounting for options given to employees. The ruling will allow companies to use either Black-Scholes or a binomial tree model. The options for binomial tree models are endless, so this is a good thing for companies.

Also most employees divest their shares as soon as the options can be exercised. Most economists believe that this is irrational, since the only time you would exercise a call option is when the stock pays a significant dividend. However, employee options also represent a large portion of a person's net worth, and no finance professor would ever suggest that people hold all of their capital in a single stock, especially when all of that person's human capital is placed in the same company's stock. A binomial tree model could be used to allow for complex modeling like the fact that if the stock is over the strike price, and the options are vested, then the employee will exercise at least some of them. That type of

There is considerable concern over the cost of administering these complex pricing models. But, hey that's why there are young MBA's. Seems like a good time to be re-reading your copy of Hull:

With Wednesday's meeting cleared, the FASB is expected soon to discuss the requests from many companies and auditors for a delay of the expensing rule. The board proposed that options expensing become mandatory starting in 2005.

The Wall St. Journal has coverage article.

The burden of tax cuts...

2004-08-30T05:45:00.000-07:00

According to this graphic in the Detroit News the effect of tax cuts is not to shift the burden of taxes to the middle class. In fact the top 20% of tax payers is paying a larger percentage of tax revenue.

Lenin would be proud...

2004-08-26T10:48:00.000-07:00

I saw this on ChicagoBoyz. It's just too funny not to post...

Got oil trading?

2004-08-26T06:11:00.000-07:00

Investment banks are falling over themselves trying to hire people to fill energy trading desks. Sure oil has almost doubled in the last year, but do we believe that the volatility is really going to stay this high? I agree with the author of this Wall Street Journal piece. The recent excitement is over blown, still I wouldn't mind an energy trading job...

Expansion doesn't come cheap. Commodity managers figure that a good trader with five years of experience costs an average $600,000 a year. And the price of seats on the Nymex, the largest oil-trading exchange, has shot up above that of seats on the New York Stock Exchange. Mr. Czepliewicz notes there always is the tendency to "get in after the easy pickings have been made."

Slow news day, so look at this cell phone

2004-08-24T14:41:00.000-07:00

Okay, so not much going on that would interest MBA types, so here is a link to a limited edition Motorola flip phone. I agree with Joel Johnson over at Gizmodo.com. The phone is ugly, but scarce. I think that the scarcity will out weigh the ugliness and the phone will sell out at high prices. Maybe I should just wait for the Volvo phone or something.

Here is the link to MobileBurn where it is also reviewed. And it also comes in red.

Sky is falling?

2004-08-23T12:44:00.000-07:00

Reuters is carrying a story about the sky falling. Well maybe not that bad but it doesn't sound good if you are a second year MBA looking for a job. Wait, that's me. The article quotes my classmate Michael Moyer.

Unfortunately, employment has been slow to rebound in the wake of the 2001 recession, and world politics, especially the war in Iraq, have only complicated the situation. That meant many part-time students lost their jobs. And many others had a hard time finding internships while in school and premium job offers when they finally had their degrees in hand, Martinelli said.

Also looks like Wharton is doing better at getting jobs for graduates than U. Chicago (86% vs 81%). Still it does not appear the sky is falling:

About 81 percent of the 2004 University of Chicago MBA graduating class walked away with a job offer, she said, up from 72 percent in 2002 and 2003.
And at Wharton, the percentage of graduates with offers rose to about 86 percent this year from 78 percent in 2003, according to Peter Degnan, the school's career management director.
"The job market has this year picked up quite nicely," he said, "but we are not back to the heyday that it was in late '99 or 2000."

Goldman Sachs in Fortune

2004-08-23T10:25:00.000-07:00

Yes, today is all about Goldman Sachs. Fortune has a rave review of the firm. Here is the opening paragraph:

There is little about Wall Street that still feels larger than life. The scandals of the last bull market have smudged much of the luster, and consolidation has dulled some of the history, making the mythic Street seem sordidly human. But if there's one place the old mystique lingers, it's Goldman Sachs. Its storied past is one reason. For years, to be a partner at Goldman was to be a prince on Wall Street; the firm's IPO five years ago was wealth creation on a magnificent scale. Goldman Sachs is the only one of the Street's giants to have survived for 135 years, untouched by megamerger or financial catastrophe. And today it is arguably more powerful than ever.

Goldman Sachs Political Contributions Outpace Rivals

2004-08-23T06:50:00.000-07:00

Today seems to be all about Goldman Sachs. The Wall Street Journal has an article on political giving by the employees of Goldman Sachs. They apparently care more about politics and give a lot more money than do employees of other firms. Then again if you look at revenue per employee, they make that much more...

From Barron's August 2 article on Bear Stearns:

Wall Street is voracious -- and often successful -- in its hunt for talent because few industries can pay as well. Goldman, for instance, is likely to pay $500,000, on average, in total compensation to each of its 19,000 employees this year. At many public companies, only the CEO earns more than that.

From the Dow Jones Newswire story:

In terms of money flowing to presidential candidates, the Center for Responsive Politics, which operates the opensecrets.org Web site, said that to date, Goldman staffers have given $348,875 to President Bush's re-election effort and $209,750 to Democratic candidate Sen. John Kerry's campaign. Steven Weiss, communications director for the center, said Goldman's employee donations are largely consistent with the banking and securities industry as a whole, which is "pragmatic in its giving. [The industry] hedges its bets" and seeks to spread the money widely to get the most benefit from it.

Goldman Sachs to build new building

2004-08-23T06:11:00.000-07:00

GS is building a new headquarters in lower Manhattan. The price tag for the 1.9 million-square-foot building is expected to be about $1.8 billion. About half of that is to come from a "Liberty" bond offering. The bonds will be tax exempt as part of the reconstruction and investment package passed after Sept. 11th. Bloomberg News also says the following about the offering:

Goldman plans to sell the 30-year bonds to one or more private institutional investors, Wetzel said. The bonds, guaranteed by Goldman, are expected to pay interest of 5.28 percent, Wetzel said. That's the equivalent of 8.8 percent yield for a taxable bond, according to Bloomberg data.

Jim Mahar of FinanceProfessor.com is also talking about this.

Anyone else see Michelle Caruso-Cabrera's Pin Report?

2004-08-20T12:46:00.000-07:00

For those CNBC Junkies, Michelle Caruso-Cabrera just did an interesting piece on Olympic Pins. Apparently NBC had too many of their pins made which has caused a devaluation of the pins so that it now costs 2 of those pins to get 1 pin from another journalist or Olympic spectator. She actually described the function of a central bank well. I guess CNBC anchors can do something other than pump stocks...

Good news if you are looking for a job...

2004-08-19T13:50:00.000-07:00

Institutional Investor has a story on how analyst bonuses are up at major i-banks.

I would pass out too...

2004-08-19T09:34:00.000-07:00

http://www.cnn.com/2004/US/West/08/18/bear.beer.reut/
The bear drank beer and passed out. At least he had good taste in beer...

CAPM Review

2004-08-19T08:20:00.000-07:00

For those who haven't taken finance or who just don't know what the CAPM is, here is a new article by an Australian researcher. The article doesn't cover anything new, but does present a good overview of both single factor models as well as multifactor models. He briefly discusses Fama-French and cites something I have not heard of before: Ferson and Harvey (1999) that claims most multi-factor models are rejected because they ignore conditioning information. I'll have to read that.

The paper continues with a literature review of CAPM models that take into account higher moments and then conditional asset pricing models. Finally the author moves onto his own work on CAPM with time varying volatility. Cho and Engle have used EGARCH models that allow volatility of the market and betas to respond to both market and portfolio returns. The author has used a conditional three-beta model. They modeled the market return volatility as a GARCH(1,1) process and defined three volatility regimes, one for each beta. This seems like an interesting approach, but as the author notes "most of the security/portfolio betas were not found to be significantly different in the three regimes."

Okay GOOG is about to start trading...

Sitting at a trading desk? Feeling nervous?

2004-08-19T06:40:00.000-07:00

This is an interesting article that blurs the lines between finance and medical research. The researchers look at the body's reactions to risk and loss. They examine 10 traders and can differentiate their responses based on their level of experience. So when I'm sitting at the trading desk and I feel my stomach tightening and my palms begin to sweat I can remember that it is normal.

A longstanding controversy in economics and finance is whether financial markets are governed by rational forces or by emotional responses. We study the importance of emotion in the decisionmaking process of professional securities traders by measuring their physiological characteristics, e.g., skin conductance, blood volume pulse, etc., during live trading sessions while simultaneously capturing real-time prices from which market events can be defined. In a sample of 10 traders, we find significant correlation between electrodermal responses and transient market events, and between changes in cardiovascular variables and market volatility. We also observe differences in these correlations among the 10 traders which may be systematically related to the traders' levels of experience.