The Credit Default Swap Basis: Illustrating Positive and Negative Basis Trades

The Credit Default Swap Basis: Illustrating Positive and Negative Basis Trades

Choudhry_Credit Default SWAPs 2006

Inflation derivatives house of the year: Deutsche Bank - Fairfax in 2010

Inflation derivatives house of the year: Deutsche Bank - Risk.net

One particular zero-coupon option trade has done much to spur client activity – and Deutsche Bank was one of the banks involved. During the first six months of 2010, Toronto-based insurer Fairfax Financial purchased deflation protection worth $21.539 billion in notional, paying $173.7 million in premium, according to the firm’s second-quarter financial statements. The 10-year zero-coupon 0% options were denominated in dollars, euros and sterling, and were executed by Deutsche Bank and Citi.

The other side of the trade was largely taken by California-based fixed-income manager Pimco, which reported it had sold more than $8 billion of 10-year zero-coupon 0% inflation floors in a filing dated August 27. The floors were sold in return for more than $70 million in premium, with Deutsche and Citi again involved as counterparties.

The transaction made perfect sense for both participants, says Daragh McDevitt, London-based global head of inflation-linked structuring at Deutsche Bank. For Fairfax, the 0% floors act as a hedge against deflation and the impact that would have on its equity portfolio. At the same time, Pimco was able to cash in on 0% inflation floors embedded in its sizable portfolio of Treasury inflation-protected securities (Tips).

Read more: http://www.risk.net/risk-magazine/feature/1934011/inflation-derivatives-house-deutsche-bank#ixzz1BjVpe8mk
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US Mortgage Metrics - 2010 and defaulting.....

mortgage-metrics-q3-2010 US Department of Teasury

Credit Default SWAPs 2008 portfolio of Fairfax maturing now

Fairfax - Scotia Institutional Investors Sept 2008

International Association of Financial Engineers - Wikipedia, the free encyclopedia

International Association of Financial Engineers - Wikipedia, the free encyclopedia: "Financial Engineer of the Year (FEOY)

Commencing in 1993, this award has been presented annually to an individual who has made a significant contribution in the development and creative application of financial engineering. Past award recipients include: Robert Merton, the late Fischer Black, Mark Rubinstein, Stephen Ross, Robert Jarrow, John Cox, John Hull, Emanuel Derman, Andrew Lo, Jonathan Ingersoll, Darrell Duffie, Oldrich Vasicek, Phelim Boyle, James Simons, Jack L. Treynor. Myron Scholes received a lifetime achievement award in 2001. An award dinner is held annually to honor the achievements of Financial Engineer of the Year. All listed recipients are IAFE Senior Fellows:
Robert C. Merton 1993
Fischer Black 1994
Mark Rubinstein 1995
Stephen A. Ross 1996
Robert A. Jarrow 1997
John C. Cox 1998
John C. Hull 1999
Emanuel Derman 2000
Andrew Lo 2001
Jonathan E. Ingersoll, Jr. 2002
J. Darrell Duffie 2003
Oldrich A. Vasicek 2004
Phelim Boyle 2005
James H. Simons 2006
Jack L. Treynor 2007
Myron S. Scholes Lifetime Achievement
Robert Litterman 2008
Richard Roll 2009
Peter P. Carr 2010"

Radio Interview with Ed Thorp 2010

Fresh Air radio interview with Edward Thorp:

February 1, 2010 - TERRY GROSS, host:

This is FRESH AIR. I'm Terry Gross.

The guy who basically invented card counting to beat the house in blackjack, Ed Thorp, took his math skills to Wall Street in the 1960s, started a hedge fund, and paved the way for a new breed of mathematical traders who became known as quants.....

Friends: Edward Thorp and Bill Gross

From 2006 MedicalNews: 
"Over the last few years, Sue and Bill Gross have developed a keen interest in health care and advances in stem cell research. Aware of their interest, the couple was invited to tour UCI's Reeve-Irvine Research Center last fall by their friends Edward Thorp, a founding UCI faculty member and pioneer in the field of quantitative finance, and attorney Paul Marx and his wife, Monica. The Grosses later became aware of Hans S. Keirstead, an associate professor of anatomy and neurobiology at UCI and one of the nation's pioneers in human embryonic stem cell research, after his work was featured on "60 Minutes" in February. The television news magazine described his use of a treatment derived from human embryonic stem cells to improve mobility in laboratory animals with spinal cord injuries."

"His (Bill Gross) roots, it turns out, are in Canada. Mr. Gross is a first-generation American, born in Ohio to parents originally from Winnipeg. His mother’s family farmed wheat in Manitoba; his father, an executive with a steel company, played hockey.

The path toward finance began with a near-death experience. A bad car accident in his final year in college sliced off much of his scalp. As he recuperated, he read a book which became a cult favourite among investors: Beat the Dealer by Edward Thorp, then a math professor.

The book detailed how to win at blackjack by using a system for counting cards. After Mr. Gross recovered, he hopped a freight train to Las Vegas. Over the next four months, playing 16 hours a day, he turned $200 into $10,000."
On Edward THorp:

"There are, however, a couple of hitches. Thorp opens his fund only once a year. Next opening will be in January, 1989. Secondly, he requires a minimum investment of $2 million, which obviously keeps out the paperhangers. ("To invest $2 million," he said, "requires a net worth of $10 million, which means about 4,000 people in this country.") Finally, even the $2 million isn't guaranteed to get you in the club. "If you bang on the door with that money next January," said Thorp matter-of-factly, "I'll be happy to wait-list you." Thorp comes across precisely the same whether he is talking about playing blackjack, running a marathon, investing multimillions in the stock market or winning a Tangletowns contest. Not just sincere, which would do him a disservice, but distressingly, dispassionately rational. Thorp's rather ordinary appearance-wiry, modest stature, offhand mien-makes the quicksilver elasticity of his mind even more startling, and, in an odd sort of way, warming.

His fascination with blackjack-which his associates had figured out was the commercial gambling game in which the house held the smallest edge over the player-started when he was a graduate student. He found that by using the system described in the statistical journal he could play all day on just a few dollars. That wasn't good enough, so when Thorp began teaching at Massachusetts Institute of Technology, he taught himself to program a computer and poured into it several years of research relating to blackjack possibilities and probabilities. From that came a system that Thorp was convinced couldn't lose.

About this time, he met a New York City stockbroker named Jay Regan who was bored selling stock and wanted some of the action himself. So he and Thorp pooled their money and plunged. They haven't looked back since. They discovered that they could multiply their assets more quickly with a larger kitty, so they opened a limited partnership and began attracting outside money. Thorp quit his job at UCI and did the research and programmed the computers in Newport Beach. Regan-who, according to Thorp, "was a philosophy major at Dartmouth and has a good, intuitive understanding of things"-handles the accounting and trading out of Princeton, N.J."

Hedge Funds Head for Mediocrity? - 2007 Time

Hedge Funds Head for Mediocrity
"In 1962, a government study of mutual funds revealed that they were, on average, average, or worse. This was an affront to many on Wall Street who assumed that, of course, professional investors beat the market. It was left to legendary investor Benjamin Graham to explain in a speech to securities analysts that "neither the financial analysts as a whole nor the investment funds as a whole can expect to 'beat the market,' because in a significant sense they (or you) are the market."
In red, G. Soros's similar view expressed in his "The Alchemy of Finance" book

Read more: http://www.time.com/time/magazine/article/0,9171,1584783,00.html#ixzz1BQluE9tO
and to continue, article quotes Mr. Thorp's e-mail:
"Thorp, who at 74 no longer runs a hedge fund but still invests in a few, doesn't worry too much about a meltdown. "My opinion is that the most likely scenario is not a blowup but rather that hedge funds as a group will gradually and continuously lose their edge (if they haven't already) over other asset classes," he writes in an e-mail. "Then they will 'top out'--like mutual funds, real estate, etc.--and then just be a fluctuating fraction of total financial assets--part of the financial landscape."

Kelly Principle through the "Fortune's Formula" and Beyond

Author's page about Kelly
Fortune's Formula - Book Review from SIAM News Magazine
JE Kelly original Paper "A New Interpretation of Information Rate"
Kelly followers: Buffett, Munger, Legg Mason Capital Management CEO Bill Miller, per Peter Lindmark 2007 article at gurufocus.com; Bill Gross as per Wikipedia article stating that "taking more risk increases the probability of both very good and very bad outcomes. One of the most important ideas in Kelly is that betting more than the Kelly amount decreases the probability of very good results, while still increasing the probability of very bad results. Since in reality we seldom know the precise probabilities and payoffs, and since overbetting is worse than underbetting, it makes sense to err on the side of caution and bet less than the Kelly amount".
As one blogger simply put it:
"The formula is 2p - 1 = x

Where p is the probability of success, x is the portion of your bankroll (or portfolio) that should be allocated to this bet. If an event has a 40% chance of paying off, don't bet. If a bet has a 55% chance of winning, only put in 10% of your money. If the chance of winning is 95%, invest 90% of your money.

A Kelly bet is the most aggressive bet you should ever take. Bets larger than Kelly are inefficient money management and will cause you to lose your money. The Kelly bet size does not ensure the highest probability of making a gain, it ensures the highest profitability for a set of games, or trades. It is also known as "tear your hair out" trading, as in practice they are actually quite big bets for many games and your equity curve will be extremely volatile.

P.S. Peter Lindmark's return:

Lindmark Capital 2008

Peter Lindmark's Contrarian Book Recommendations

In an exclusive interview with Downside Protection Report, Peter Lindmark recommended the following books, which he has read or re-read recently:

• Changing Fortunes by Paul Volcker and Toyoo Gyohten

• Speculative Contagion by Frank Martin

• A Demon of Our Own Design by Richard Bookstaber

• The Power of Gold: The History of an Obsession by Peter Bernstein

• Simple But Not Easy by Richard Oldfield

Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds and an Evolution of Investor Sophistication, 2010 papers

Abstract (original paper is here)

"We evaluate why individuals invest in high-fee index funds. In our experiments, subjects each allocate $10,000 across four S&P 500 index funds and are rewarded for their portfolio's subsequent return. Subjects overwhelmingly fail to minimize fees. We reject the hypothesis that subjects buy high-fee index funds because of bundled nonportfolio services. Search costs for fees matter, but even when we eliminate these costs, fees are not minimized. Instead, subjects place high weight on annualized returns since inception. Fees paid decrease with financial literacy. Interestingly, subjects who choose high-fee funds sense they are making a mistake."

Why Law of One Price Does Not Work With Index Mutual Funds, 2010 Paper

Evolution of Investor Sophistication MIT Paper

The Quants, interview with an author of the book Scott Patterson

The Big Picture » A Conversation with Scott Patterson, The Quants » Print

Quants: The Alchemists of Wall Street

YouTube - Quants: The Alchemists of Wall Street (Marije Meerman, VPRO Backlight 2010): ""
Book:
Paul Wilmott Introduces Quantitative Finance 

The Kelly Capital Growth Investment Criterion

The Kelly Capital Growth Investment Criterion

Related Paper 2010: Medium Term Simulations of The Full Kelly and Fractional
Kelly Investment Strategies
January 18, 2010

Ed Thorp, Statistical Arbitrage Article, WILMOTT Magazine

Easy read on Thorp's website in addition to below Scribd sources.Stat Arb 1 Thorp

Stat Arb 2 Thorp

Stat Arb III Thorp


Statistical Arbitrage 4

Statistical Arbitrage by Andrew Pole, 2007
Statistical Arbitrage 4

Ed Thorp's "The Mathematics of Gambling" book

The Mathematics Of Gambling (Edward O. Thorpe)

Does the Practice of Quantitative Finance Need to Be Changed?

Columbia Business School - Does the Practice of Quantitative Finance Need to Be Changed?: ""

Emanuel Derman : Valuation and Its Discontents

Emanuel Derman : Valuation and Its Discontents: ""

YouTube - James Simons and C.N. Yang: Stony Brook Masters Series

James Simons and C.N. Yang: Stony Brook Masters Series: ""

Soros's Institute for New Economic Thinking's Johnson Interview - Video - Bloomberg

Soros's Institute for New Economic Thinking's Johnson Interview - Video - Bloomberg: ""

Accounting for Value, new book from Penman, Columbia University

University and Independent Publisher Blogs  - collection of blogs from non-profit and university publishers.
Stephen Penman's 2007 presentation at International Symposium on Valuation in Spain, 2007 and an interview for his new book "Accounting for Value" in 2010.