On Tuesday, I will be giving a mathematics tutorial, and this will be followed up with a statistics tutorial on Thursday. Although there are no assigned readings for this week, I highly recommend that you download, print, and read these materials prior to coming to class.
In the math tutorial, I will review elementary principles of calculus which you should have covered in your calculus course at Baylor. The calculus is needed because I will make use of differentiation on a number of occasions (for minimizing or maximizing functions), as well as Taylor series expansions (the latter concept plays a particularly important role in the theory of risk aversion). Similarly, the statistics tutorial will review a number of elementary statistical principles that are important in the study of derivative securities; e.g., concepts such as expected values, variances, standard deviations, covariances, correlations, discrete and continuous probability distributions, the Central Limit Theorem, and the Normal Distribution.
This past summer I read a number of interesting books, but one book in particular really stands out. This book is entitled "The Progress Paradox: How Life Gets Better While People Feel Worse", by New Republic senior editor Gregg Easterbrook. Easterbrook shows that by any measure of affluence; be it health care, leisure, or technology, the average American enjoys a quality of life beyond anyone's wildest dreams even a few decades ago. The "paradox" is that in spite of all this affluence, the percentage of Americans who characterize themselves as "happy" hasn't changed during the past 50 years, and the percentage of those who describe themselves as "very happy" is down and continues to decline. If you don't get around to reading this book, at least check out Chuck Colson's brief essays which elaborate upon Easterbook's finidngs: Essay 1 (published August 24, 2004), and Essay 2 (published August 26, 2004).
Dear class,
On September 30, 2004, from 12:00-5:00 pm, Baylor Career Services will present their Fall 2004 Career Fair at the Ferrell Center. If you are interested in finding out more about the firms which will be recruiting at this job fair, go to https://baylor-cfm.symplicity.com/events/students.php?cf=fall2004.
Dear class,
Here are some reminders about Thursday's class:
1. Read LTCM - Long-Term Capital Management Debacle, The Demonization of Derivatives, and The New Religion of Risk Management.
2. Prior to class, you need to submit a completed version of the student information form. Send this form to studinfo@rmi.baylor.edu as an email attachment. If you prefer, you may also submit a "hard copy" version of the form at the beginning of Thursday's class. This will be "graded" as a problem set, and I will not accept any late submissions, where "late" is defined as past 11:00 a.m.
3. Be sure to avail yourselves of the lecture notes for Thursday's class, which will provide an important context for the "Trillion Dollar Bet" video which we will be viewing in class that day. I also recommend that you peruse the Trillion Dollar Bet website.
Dear class,
The Hankamer School of Business will be hosting its annual Business Ethics Forum the week of November 1-5, 2004. I highly recommend that you try to take in some if not all of these public presentations:
1. Wednesday, November 3, 2004, 11:45 a.m. - 1:30 p.m. Lunch and Plenary Session I, featuring Dr. Gary Weaver, University of Delaware.
2. Wednesday, November 3, 2004, 3:30 p.m. - 5 p.m. Dr. Pepper Float reception and Plenary Session II, featuring Dr. Edward Petry, Executive Director of the Corporate Ethics Officer Association.
3. Friday, November 5, 2004, 1:30-3 p.m. Panel Discussion on Integrity of Financial Reporting.
I am attaching a copy of an email that I received on Thursday, August 19 from The Hartford (NYSE: HIG), which is one of the largest investment and insurance companies in the United States. I highly recommend The Hartford; they pay well and provide good opportunities for on-the-job training and advancement. They are very happy with the Baylor students they have hired in the past, and they are apparently very interested in hiring more.
Michele Marcinik, who serves as a staffing consultant for the Hartford, has told me that she plans to conduct on-campus interviews at Robinson Tower on Friday, October 8. I have posted a one page job ad which explains more about the position for which she will be recruiting. If you are interested in applying for an interview slot with The Hartford, you can do this online via Monstertrak.
If you have any further questions about this position, please contact Michele Marcinik (email: Michele.Marcinik@thehartford.com; phone: 210.732.9292 extension 4208).
August 19, 2004 Email from Ms. Marcinik:
===============================================
Dear Dr. Garven:
As you know, we have been very successful in recruiting top Baylor graduates. Last semester, we hired Jillian Jaynes, Justin Price and John Crawford. We would not have been able to do this without your support. Once again, we are looking for top talent to fill our Underwriter Trainee class which is scheduled to start in early 2005. I have attached a copy of the job ad for your review. Please feel free to pass this along.
Thank you so much for the long time support and committment!
Regards,
Michele Marcinik, PHR
Staffing Consultant
Western Division Field Staffing
210.732.9292 extension 4208
In the August 11, 2004 issue of the Wall Street Journal, an article by Eric Engen (resident scholar at the American Enterprise Institute) entitled "Kerry Up, Markets Down" appeared which makes the following claim: "...Sen. Kerry has promised to repeal a significant portion of (the Bush) tax cuts if elected, including the tax rate reductions on dividend and capital gain income. With the growth rate of the economy high but slowing somewhat, there are signs that this promise is rattling financial markets. The evidence suggests that when Sen.Kerry's political fortunes rise, the stock market tanks." Steve Forbes, editor in chief of Forbes and former (Republican) presidential candidate, weighed in with a similar opinion piece (entitled "The Rubinian Candidate") in today's Wall Street Journal.
Mr. Engen's analysis is based upon graphically comparing 5 day moving averages of the 2004 US Presidential "Winner Takes All" Kerry Futures Contract Prices with 5 day moving averages of the S&P 500 index. While it appears that the two time series move in opposite directions, a more convincing analysis requires determining whether what seems visually apparent is statistically significant. Experimental evidence shows that people tend to see order even when the charts they are looking at consist of randomly generated numbers. Therefore, I computed daily returns on the S&P 500 andthe Kerry Futures contract and regressed stock returns on Kerry Futures contract returns for the period June 2, 2004 through August 9, 2004. I selected this period because the datasource (the Iowa Electronic Markets database) has a continuous price history on the Kerry Futures contract which began on June 1, 2004.
The regression equation that I estimated is specified as follows:
r
where
The following table summarizes the regression statistics:
| Regression Statistics | | | | |
| R2 | 0.0680 | | | |
| Observations | 47 (June 2, 2004 through August 9, 2004) | | | |
| | | | | |
| | Coefficients | Standard Error | t Stat | P-value |
| a | -0.0010 | 0.0010 | -0.9972 | 0.3240 |
| b | -0.0389 | 0.0215 | -1.8122 | 0.0766 |
This regression equation has (as one would expect) a relatively low coefficient of determination, or R2 of only .068. In other words, there are other (probably much more) important determinants of stock market returns other than the odds of a Kerry presidency. Furthermore, since 1) the sign of the regression coefficient associated with returns on the Kerry Futures contract is negative, and 2) the correlation coefficient between the dependent and independent variable in a univariate regression equation equals the square root of the coefficient of determination, this implies that the correlation coefficient between returns on the Kerry Futures contract and the S&P500 index is -.26.
Two important questions remain: 1) is the effect statistically significant and 2) is the effect economically significant? The answers to these questions are 1) yes, and 2) no.
Let's look first at the question of statistical significance. Whether a particular independent variable is statistically significant depends upon the P-value associated with its regression coefficient. A regression coefficient's P-value indicates the probability of "Type 1" error. Type 1 error occurs whenever one concludes that a relationship exists when in fact it does not. Furthermore, one must differentiate between "1 tail" and "2 tail" tests. The P-values listed here are for 2 tail tests, meaning that the "null" hypotheses we are trying to reject are
Next, consider the economic significance of the effect. Even though it is statistically significant, the actual magnitude of the effect is quite small. Specifically, on average, a 1 percent change in the value of the Kerry Futures contract is associated with a -0.0389% change in the value of the S&P500 index. Based upon this result, I would have to conclude that Mr. Engen's basis thesis (that when Sen. Kerry's political fortunes rise, the stock market "tanks") does not represent a particularly fair characterization of this relationship. There is an inverse relationship, but the economic significance of the effect is rather negligible.
Dear students,
A very convenient way to keep up with the Options, Futures, and Other Derivatives (OFOD) blog is to receive it as a "news feed". There are several software options available for doing this, many of which are free. I personally prefer a free program called "Pluck". Pluck basically is a "plugin" which integrates itself into Internet Explorer and is therefore very easy to use. Besides Pluck, there are also other free and shareware "standalone" options. I have tried two free programs - "BlogExpress" and "Abilon", and both seem to work just fine. Go to http://www.snapfiles.com/freeware/misctools/fwrssreaders.html for links to these and other free/shareware news reader programs (aka "RSS readers").
Here are some instructions on how to set up your computer to use Pluck:
1. Download "Pluck" by clicking on this link.
2. This will bring up a "file download" dialog box, asking you whether to open or save setup.exe. I recommend that you open this file, which will cause the pluck setup program to be launched.
3. Install the program (by accepting all the defaults).
4. After Pluck is installed, a new Pluck icon will appear in various places; e.g., the Windows taskbar, possibly your desktop, and in the browser. Launch your Internet Explorer Browser, and then launch pluck.
5. You may have to give some private information away in order to get full use of Pluck - go ahead and do this - it is well worth the "price".
6. Go to the OFOD blog, look for the link on the bottom right hand side of the site that says "Syndicate this Site", and click on this link (alternatively, open your browser and go directly to http://129.62.162.212/weblogs/ofod/index.rdf
7. Congratulation! You now are subscribed to the OFOD blog as a "news feed". You can access your news feed any time by activating Pluck, and then clicking on "RSS Reader".
Dear students,
For your convenience, most class materials (except for the textbook) are available from the course website, located at http://129.62.162.212/fin4366. Since most of the links on this website require user authentication, you can authenticate yourself by using your Bear ID as your username and the last four digits of your social security number as your password.
Although I plan to distribute a paper syllabus on the first day of class, in the meantime you may obtain a copy of the syllabus from the class website by using either of the following addresses: http://129.62.162.212/fin4366/syllabus.asp (HTML version) or http://129.62.162.249/ofod/fall2004/fin4366syllabus.pdf (Adobe Acrobat (PDF) Version). Lecture notes for the entire semester are available in PowerPoint and Adobe Acrobat (PDF) file formats. Download whichever version you prefer. These notes can be accessed by clicking on the "Lecture Notes" button on the home page for the class website. I highly recommend that you download and print the lecture notes prior to coming to class, as they will make it much easier for you to follow my lectures. Although the class schedule is subject to change, the lecture notes page effectively serves as a class calendar, since it lists by date the sequencing of course material for the entire semester.
This is the first time that I have used a weblog for the purpose of communicating with my students outside of class. In my view, "blogging" is a better method for doing this than email. If you need to communicate with me via email, send your email to my Baylor address, which is James_Garven@baylor.edu.
Let me know if y'all have any questions. I am looking forward to our first class meeting on Tuesday, August 24.
Sincerely,
Dr. Garven