The Rules, Part XX
In the end, economic systems work, and judicial systems modify to accommodate that. The only exception to that is when a culture is dying. I have been scratching my head over all the problems in the residential mortgage market. How can foreclosure take place, when there is no note, properly endorsed, to display? How can...
The Rules, Part XIX
There is room for a new risk model based on the idea that risk is unique among individuals, and inversely related to the price paid for an asset. If a risk control model has an asset becoming more risky when prices fall, it is wrong. After doing my talk for the Society of Actuaries last...
The Rules, Part XVIII
When rules become known and acted upon, the system changes to incorporate them, making them temporarily useless, until they are forgotten again. When a single strategy becomes dominant, it can become temporarily self-reinforcing. Eventually, it will become self-reinforcing on the negative side. A healthy market ecology has multiple strategies that are working in separate areas...
The Rules, Part XVII
In a panic, only two attributes of a financial instrument get priced — liquidity and quality/survivability. In a panic, all risky assets become highly positively correlated with each other. Given that correlations tend to rise in a panic, a reasonable measure of sentiment is to measure the average absolute value of 10-day correlations. Markets cannot...
