Fall 2004 Finance 4366 Weblog

Updated Lecture notes, new due date for problem set 6

Since we only covered the first 12 slides in the lecture note from Thursday, I have split this document up into parts 1 and 2; the lecture notes are now entitled "Introduction to Binomial Trees (Part 1)" and "Introduction to Binomial Trees (Part 2)".  We covered Part 1 on Thursday, and I plan to cover Part 2 this coming Tuesday (November 2 (election day)).  Problem set 6 is now due on Thursday, November 4, and the assigned reading for that day will be chapter 11 of the textbook.  I will post a lecture note for chapter 11 sometime prior to next Thursday.

Political entertainment

If you are interested in listening to the MP3 file which I played in class today, go to http://finance.baylor.edu/fin4366/johnkerr.mp3. 

Also, you'll want to be sure to view the Club for Growth's ad concerning the dangers of "changing one's mind" (Windows Media | Real Player | Quicktime).

New lecture note and information concerning problem sets

The new lecture note (entitled "Introduction to Binomial Trees"; based upon chapter 10 of the textbook) is now available.  Please download and print it out in preparation for tomorrow's lecture (also, be sure to read chapter 10 if you haven't already done this).

Also, Problem set 5 is due tomorrow, and a 6th problem set (based upon chapter 10) will be due next Tuesday (see the "Problem Sets" page for information on Problem set 6).

Some Canadian Flu Shot Alternatives

Earlier this month, I wrote about the impact of the tort system on flu vaccine availability in the United States.  Interestingly, travel companies are now bundling flu vaccination with vacation opportunities in Canada.  Fodor's has an interesting story about the "Flu-Shot Ferry", a round trip between Seattle and British Columbia selling for $105 with the flu shot included.  The same story also links to an interesting Boston Globe article entitled "Business brisk as Americans stream to Canada for flu shots" which talks about the Flu-Shot Ferry as well as other flu vaccination/vacation opportunities available throughout Canada, such as a weekend plane trip from New York to Montreal.

Prediction markets assessment of the Presidential Election

Today's Wall Street Journal article entitled "For Math Whizzes, The Election Means A Quadrillion Options" provides an overview of the various quantitative techniques being employed by geeks all over the country who typically are tenured college professors who probably have too much time on their hands.  Notwithstanding the barrage of criticism which has been leveled at the prediction markets (e.g., one commentator has described the Iowa Electronic Exchange Market as "college students playing with their lunch money", and others have offered even more unflattering comments which will not be repeated here), I remain a fan and am looking forward to how the realized election results line up with these markets' predictions.

Speaking of the prediction markets, the prices on the state-specific "Bush win" contracts offered on tradesports.com suggest that Bush currently (as of 10 a.m. on October 26) has a 19 electoral college vote advantage over Kerry; specifically, 253 to 234.  The basis for this assessment involved allocating electoral college votes to Bush in states with "Bush win" contract prices exceeding $60, and to Kerry in states with "Bush win" contract prices less than $40.  In my opinion, the states which are really in play are those with "Bush win" contract prices between $40 and $60.  There are five states which fit this criterion: Wisconsin, Ohio, New Mexico, New Hampshire, and Minnesota.  The following table lists the current prices for Bush contracts in these states, along with the number of electoral college votes which each state owns:

If Bush holds onto the states with contract prices exceeding $60, a win in Ohio would put him over the top.  If Bush does not win Ohio, he can still be reelected by taking Wisconsin, New Mexico, and New Hampshire.  Kerry on the other hand, will not likely win the election without taking Ohio.  Of course, various other permutations are possible.  The prediction markets data suggest the possibility of a 269-269 tie in the electoral college, which would happen if Kerry wins Ohio, New Hampshire and Minnesota, while losing Wisconsin and New Mexico to Bush.

Certainly the quantitative models are interesting, and as indicated by the Wall Street Journal article referenced above, suggest that the election may very well be somewhat of a toss-up.  However, there is probably no predictive indicator which has been as consistently accurate as the Weekly Reader poll.  Since 1956, Weekly Reader students in grades 1-12 have correctly picked the president.  As noted on the Weekly Reader website, "President Bush was a strong winner in the student poll; the only state Senator Kerry won was Maryland. Senator Kerry was also in a statistical dead heat with President Bush in New York, Massachusetts, Washington, D.C. and Vermont. President Bush won most grades, although Senator Kerry did win among tenth-graders."  Also, results by grade are shown on the Weekly Reader website, in case if you are interested.

Lecture notes for Tuesday, October 26 are now available!

The lecture notes for Tuesday, October 26 are now available!  The lecture is based upon chapter 9 of the textbook, and the title is "Trading Strategies Involving Options".

PBS Program about the Stock Market Crash of 1929

This evening on KWBU, a one hour PBS program entitled "The Crash of 1929" will be airing, starting at 8 p.m.  The PBS home page for this program is located at http://www.pbs.org/wgbh/amex/crash/gallery/index.html.  There, you can obtain much more detailed information about this program, including information such as a Film Description, Program Transcript, suggestions concerning Further Reading, etc.

Daily Times Series of Closing Prices for the PRESIDENT.GWBUSH2004 and PRESIDENT.KERRY2004 Futures Contracts

Today, the Tradesports website made high, low, and closing daily price data available for the PRESIDENT.GWBUSH2004 and PRESIDENT.KERRY2004 futures contracts.  Below, I provide the graph of daily closing prices for the period August 11, 2004 (which is the first day that the Kerry contract started trading) through October 20, 2004.

Updating of class website

I have updated the class website; note that problem set #4 is now due on Tuesday, October 26, and I plan to cover the rest of Chapter 8 on Thursday, October 21.  The reading for Tuesday, October 26 will be Chapter 9 of the textbook, and I plan to post my Chapter 9 lecture notes on the class website by sometime next Monday, October 25.

lecture notes and problem set assignment

During today's class, we will be covering chapter 8: Properties of Stock Options.  Furthermore, problem set #4 is due on Thursday, October 21, and it consists of questions 8.21-8.24 on page 183 of the textbook.

Who's Behind the Bush-Futures Attacks

Spencer Elliott brought an interesting article to my attention today about "attacks" on the Tradesports futures market over the past months, and speculation about who's doing it.  The article is entitled "Who's Behind the Bush-Futures Attacks?  Although you should not take this as "investment" advice, I do think that the author's idea of entering orders to purchase Bush futures contracts at absurdly low prices (near $0) does make some sense!

Important WSJ article about and video interviews with some of the leading academic thinkers in finance

I highly recommend a page 1 article from today's Wall Street Journal entitled "As Two Economists Debate Markets, the Tide Shifts".  This article provides a very clear explanation of the intellectual history of finance during the past forty years, and how academic scholarship has evolved to embrace a hybrid of the efficient market theory and behavioral finance theory.

I also highly recommend two video interviews featuring Eugene Fama (who is Robert R. McCormick Distinguished Service Professor of Finance, Graduate School of Business, University of Chicago and the founder of the efficient market hypothesis) and Ken French (who is Heidt Professor of Finance, Tuck School of Business, Dartmouth College and a frequent research collaborator with Fama).  In my opinion, it is not a question of if, but rather a question of when Fama will be awared the Nobel Prize in Economics.

"Infectious Politics" - article about the flu vaccine shortage in today's Wall Street Journal

In today's Wall Street Journal, there is a very interesting and insightful article entitled "Infectious Politics" that explains why flu vaccines in particular and vaccines for infectious diseases generally are in such short supply in the United States.  The contributing factors appear to involve a combination of price controls, regulation and tort lawyers.  Of course, I made the latter point (concerning tort) the other day in my blog entry entitled "Impact of the tort system on flu vaccine availability in the United States".

http://www.electoral-vote.com/

I recommend the website http://www.electoral-vote.com/.  It provides a state-by-state breakdown of electoral college vote allocations based upon current polling data, and as of this morning it has Bush leading Kerry 284 to 228, with Iowa (7 votes), New Jersey (15 votes) and New Hampshire (4 votes) too close to call.  This assessment lines up well with what the prediction markets have been saying, and it respresents the midpoint of my prediction market-based 95% confidence interval, which puts the minimum number of electoral votes for Bush at 278 and the maximum number at 289.  The state-by-state breakdown of electoral college vote allocations is also available as an Excel spreadsheet.

Update on Finance 4366

I am in the process of revising the lecture content and plans concerning chapters from Hull's textbook which I plan to cover.  Tomorrow's lecture, which I have entitled "Futures, Forwards, Options and Riskless Arbitrage", is loosely organized around parts of Chapters 1-3 of the textbook (I am not assigning these chapters as readings, but you are certainly welcome to look them over anyway if you like).   

I will update y'all via email by no later than next Monday (10/18) concerning the schedule for readings, lectures and problem sets for the remainder of the semester.  I plan to focus primarily upon option theory, so we will primarily be dealing with reading assignments and lecture content related to Chapters 8-12 in the textbook.  Our study of option theory will also involve going through my paper on the topic, entitled "Derivation and Comparative Statics of the Black-Scholes Call and Put Option Pricing Equations", and this paper also includes aspects of Chapter 14.

Midterm 1 Grades and Current Grade Distribution for FIN 4366

The first midterm scores are in.  Here are the descriptive statistics:

The course grade distribution after the first exam is as follows:

If letter grades had to be assigned today, based upon this distribution I would use the following curve (which would generate a class GPA of 2.70):

Prediction markets - who won the Nobel Prize?

In my entry this past Saturday afternoon entitled "Prediction markets - who will win the Nobel Prize?", I noted that the prediction market for economics scholarship had Edward Prescott (Minneapolis Fed/Arizona State University) in the lead, followed by Robert Barro (Harvard University/Hoover Institution) and Paul Krugman (Princeton).  It is interesting to note that while the prediction market was "right" about Prescott (the Royal Swedish Academy of Sciences announced today that Prescott is one of two winners of the 2004 Nobel Prize in Economic Science; see today's Bloomberg's article), the market was "wrong" about Norweigan scholar Finn E. Kydland, who was cited today as a co-recipient of the 2004 Prize along with Prescott.  Apparently, a contract had been offered on Kydland, but was never traded and consequently expired due to a result of lack of investor interest!

By the way, I highly recommend Dartmouth Professor Andrew Samwick's essay entitled "In Praise of Finn Kydland and Edward Prescott" which explains the significance of the research for which Kydland and Prescott were cited. 

Prediction markets - who will win the Nobel Prize?

Not only do we have prediction markets for politics; there are also prediction markets for economic scholarship; specifically, who will win the Nobel prize in economics (to be announced this coming Monday)?  The current leaders are Edward Prescott (Minneapolis Fed/Arizona State University), Robert Barro (Harvard University/Hoover Institution), and Paul Krugman (Princeton).  It will be interesting to see how accurately these markets predict outcomes!

Update on Flu Vaccination at Baylor...

Here's the latest information (sent today to all Baylor faculty and staff) from Dr. Mark Schwartze (Medical Director,  Baylor Health Services) concerning Baylor's flu vaccination policy:

==============

Due to the shortage of injectable flu vaccine, The Center for Disease Control has advised the vaccine to be prioritized for those individuals at high risk for severe complications to the influenza virus.

High risk individuals include:

• Adults 65 years of age or older
• Residents of long-term care facilities or nursing homes that house persons with chronic medical conditions
• Anyone with a long-term health problem such as, heart disease, kidney disease, asthma and diabetes
• Anyone with a weakened immune system due to HIV/AIDS, long-term treatment with drugs such as steroids and cancer treatments
• Anyone 6 months to 18 years of age on long-term aspirin treatment
• Pregnant women
• Children 6 to 23 months of age

The Baylor Health Center will follow these guidelines. The flu clinics will be held as previously scheduled. The Flu Clinic schedule for October is listed under Featured Events on the events calendar on the Baylor home page, or the Health Services website: http://www.baylor.edu/health_center/index.php?id=21347.

If there is flu vaccine left after the scheduled flu clinics, it will be made available for the Baylor community through the Baylor Health Center.

Mark Schwartze, M.D.
Medical Director
Baylor Health Services

Flu Clinics Schedule

Unlike the rest of the United States, Baylor does not face a shortage of flu vaccine (see my earlier entry entitled "Impact of the tort system on flu vaccine availability in the United States") which explains why this is the case.  Anyway, here's the schedule (by the way, the cost of the vaccine is $15):

Impact of the tort system on flu vaccine availability in the United States

It is well known that the U.S. tort system undermines incentives for U.S. pharmaceutical corporations to bring innovative, yet risky drugs to market.  This is particularly apparent in the case of vaccines against infectious diseases, where the "tort tax" is by far and away the most significant cost component in the manufacturing and distribution of vaccines.  With this in mind, it is interesting to consider the consequences for the United States of today's decision by the UK's Medicines and Healthcare Products Regulatory Agency (MHRA) to suspend Chiron Corporation's (NASDAQ:CHIR) license to manufacture influenza virus vaccine in its Liverpool facility, which in turn will prevent the company from releasing any of the product during the 2004-2005 influenza season.  This doesn't seem like it should be that big of a deal until one considers the fact that the United States was counting on U.S.-based Chiron Corporation to provide roughly 1/2 of its total flu vaccine for the upcoming flu season.  Now that Chiron is out of the picture, the only supply source for flu vaccine for the entire United States is a French company called Aventis Corporation (NYSE:AVE), and Aventis has made it quite clear that it cannot possibly scale its manufacturing to meet the needs of the United States during the upcoming flu season. (Fortunately for Baylor University students, faculty and staff, Baylor was prescient enough this past spring to contract with Aventis to provide an adequate vaccine supply this fall for the Baylor community).

Needless to say, it seems pathetic that only two (one U.S., the other French) corporations are willing to accept the risk of being sued for products liability by marketing flu vaccines in the United States.  Unfortunately, this situation has created a serious capacity constraint which in turn has given rise to a potentially serious public health problem for the United States which is now looming.  According to the Centers for Disease Control in Atlanta, GA, influenza typically accounts for as many as 140,000 hospitalizations and 40,000 deaths annually in the United States.  Since these are the statistics which obtain under more "normal" (adequately supplied) flu vaccine scenarios, one can only wonder how many more thousands of people will likely die during the upcoming flu season because the highly dysfunctional US tort liability system has persuaded most companies to not bother with trying to compete in the market for flu vaccines!

Midterm exam #1 and key

I have posted midterm exam #1 and key on the class website (go to the class home page, click on the problem sets button, then look under the Other Documents Section, part 3, first two bullet points).  The direct links to these documents are:
 
1. Exam #1: http://129.62.162.249/ofod/midterm1_fall2004.pdf
2. Exam #1 Key: http://129.62.162.249/ofod/midterm1_fall2004_solutions.pdf
 
Anyway, please look these over and I can answer any questions you might have about the exam (other than your exam grade, which won't be available until next Tuesday) at the beginning of class on Thursday.

Various housekeeping issues related to the first midterm exam on Tuesday, October 5

Here are some helpful hints concerning the first FIN 4366 midterm exam which will be given during class this coming Tuesday, October 5.

The exam consists of a total of 4 problems, and I only require that you complete 3 of the 4 problems.  The maximum points possible for each problem will be 32 points. (You get 4 points for showing up and writing your name on the exam booklet :)). At your option, you may also choose to complete all 4 problems, in which case I will count the 3 on which you produce the highest scores.  Here's what you can expect to see on Tuesday's exam:

• One problem that compares and contrasts the stochastic dominance, mean variance, and expected utility models.
• On asset allocation problem (conceptually similar to the third problem on problem set #3).
• Two problems on topics such as certainty equivalents, using Arrow-Pratt risk aversion measures to compare the degree of risk aversion for different consumers, the effect of changes in initial wealth upon the degree of risk aversion, etc.

Let me offer some practical "risk management advice" concerning taking the exam. The first thing you should do when you get the booklet is open it up, skim though the exam, and select the 3 problems which you feel you have the best chance of answering. It also makes sense to assess the level of difficulty of these 3 problems, and get off to a good start by really "nailing" the easiest problem. This strategy will help you build confidence for the remainder of the exam period.

I will not be at the exam on Tuesday, so office hours that day are canceled. In the meantime, if you have any questions or concerns feel free to either email me (at the address James_Garven@baylor.edu) or "IM" me (my AOL instant messenger screen name is "drgarven").

Best of luck on the exam, and I will look forward to seeing y'all next Thursday.

New career/internship opportunities website for the Department of Finance, Insurance and Real Estate

As of today, the Department of Finance, Insurance and Real Estate has a new website which lists career and internship opportunities for students majoring in Finance, Financial Services & Planning, Real Estate, and Risk Management & Insurance.  The address for this website is http://finance.baylor.edu/jobs.  Also, it can be accessed directly from the FIRE Department's home page, which is located at http://finance.baylor.edu.  If you are in the market for a career or internship opportunity, be sure to check this website out.  I have previously posted such information on the class weblog, but from this point on I will refrain from doing so; no sense in duplicating efforts!