I aitn't dead

Yet. But I have been slacking off mightily. The new term is swimming along. Finance is currently a bit of a bore and if it reaches the same level of syllabus coverage and depth as CT2 is supposed to, I will frankly be surprised.

In the meantime, an interesting article from the BBC on questioning your assumptions.

Edit: Dur-boy here forgot to include the href to the above link, and cannot now remember what it referred to. Oh well. Tiddly pom.

Happy New Year: catchup time

Celebration and the resultant recovery has taken up much of my time recently, to the detriment of blog posting. Time, then, for a brief round-up of interesting things that have come my way recently.

• Being an actuary still one of the best jobs around.
• The EU will probably never have a rational system of government.
• Bond yields at the moment are closely correlated with the relative probabilities of who will win the General Election, and what their approach to deficit reduction will be. Today's auction of £4bn of short dated bonds went well and was oversubscribed by some way.
• Derivatives are supposed to make it safer to invest in an asset by parcelling out the risk. However, this paper from Princeton demonstrates that it is fairly easy to construct a seemingly simple derivative whose behaviour requires unattainable amounts of computation to model. In short, you can booby-trap a derivative.
• A solid analysis of operational risk management in the light of the economic experience of the last few years. It was commissioned by the main North American actuarial bodies, and is a solid and not overly technical read.
• Whatever your problem, the chances are it's been solved before. Take note, TSA.
• And of course, some 2010 predictions.

Pricing immortality

By way of the excellent economics clearing house that is The Economist's Free Exchange comes an interesting piece of research.

One of the big talking points of the financial crisis has been the idea that institutions can be too big to be allowed to fail - and hence, must be rescued whenever they encounter difficulty. This has some very straightforward consequences. If I know that I will never be bankrupted, I can borrow more cheaply, as there is less risk that I will default compared to a normal institution. In turn, I will have higher profits and in the long run take an even larger market share. This is often called the moral hazard problem, although the term is more commonly used in relation to whole-of-market regulation.

So, given that being too big to fail is an attractive status to have, it must be worth something. That's where the American economists Elijah Brewer and Julapa Jagtiani have stepped in. Their paper examines mergers from 1991-2004, and calculates the extra price paid in order to create companies that were newly too big to fail. On average, getting over the threshold costs around $1.75bn a time. In exchange for corporate immortality, that's quite a cheap insurance policy.