Thursday, December 30, 2010

What We Don't Know We Don't Know (Gregory J. Gordon, SSRN)

Abstract: Do you read everything in your field today? Do you even know what everything means any more? Readers of scholarly research are faced with an overabundance of information due to interdisciplinary subject areas, access to research at earlier and multiple stages, and simply more research from more scholars. My simple definition of innovation is the ability to create new things by being exposed to a broader and deeper set of existing things, but broader and deeper have their limits. There is no substitute for reading and truly comprehending a specific article, but there aren’t enough hours in the day to read everything. We need better tools to know what research we need to read. We need to know what we don’t know.

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Saturday, December 25, 2010

The dark side of financial innovation (SSRN)

By Brian J. Henderson and Neil D. Pearson

Abstract: The offering prices of 64 issues of a popular retail structured equity product were, on average, almost 8% greater than estimates of the products’ fair market values obtained using option pricing methods. Under reasonable assumptions about the underlying stocks’ expected returns, the mean expected return estimate on the structured products is slightly below zero. The products do not provide tax, liquidity, or other benefits, and it is difficult to rationalize their purchase by informed rational investors. Our findings are, however, consistent with the recent hypothesis that issuing firms might shroud some aspects of innovative securities or introduce complexity to exploit uninformed investors.

Published in the Journal of Financial Economics ($$) but the working paper version is available here:

Sunday, December 12, 2010

Derivatives in emerging markets (BIS)

by Dubravko Mihaljek and Frank Packer

Abstract: Turnover of derivatives has grown more rapidly in emerging markets than in developed countries. Foreign exchange derivatives are the most commonly traded of all risk categories, with increasingly frequent turnover in emerging market currencies and a growing share of cross-border transactions. As the global reach of the financial centres in emerging Asia has expanded, the offshore trading of many emerging market currency derivatives has risen as well. Growth in derivatives turnover is positively related to trade, financial activity and per capita income.

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User's guide to the Triennial Central Bank Survey of FX market activity (BIS)

by Michael R King and Carlos Mallo

Abstract: This article provides an overview of the foreign exchange components of the Triennial Central Bank Survey. It highlights key dimensions of this dataset and methodological issues that are important to interpret it correctly. It also compares the methodology of the Triennial Survey to that of more frequent surveys from regional foreign exchange committees.

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