All posts by Jim Garven

My name is Jim Garven. I currently hold appointments at Baylor University as the Frank S. Groner Memorial Chair of Finance and Professor of Finance & Insurance. I also currently serve as an associate editor for Geneva Risk and Insurance Review. At Baylor, I teach courses in managerial economics, risk management, and financial engineering, and my research interests are in corporate risk management, insurance economics, and option pricing theory and applications. Please email your comments about this weblog to James_Garven@baylor.edu.
Financial Crisis

Understanding the Financial Crisis: A Panel Discussion

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Tomorrow afternoon, I will take part in a panel discussion at Baylor University entitled “Understanding the Financial Crisis”. Here’s the official press release from Baylor’s Hankamer School of Business. The event will be recorded tomorrow and available for viewing on the web by by no later than Oct. 20, 2008.

Anyway, here’s the line-up:

Moderator: Dr. Mark Dunn, Professor of Marketing and Associate Dean, Hankamer School of Business

Panel:

  • Dr. James Garven, Frank S. Groner Memorial Chair of Finance and Professor of Finance & Insurance
    “Moral Hazard and Financial Hazard”
  • Dr. Kent Gilbreath, E.M. and Thelma Stevens Chair of Private Enterprise and Entrepreneurship and Professor of Economics
    “The Perfect Economic Storm”
  • Dr. William Reichenstein, Pat and Thomas R. Powers Chair of Investment Management and Professor of Finance
    “Investment Advice in Credit Crisis”
  • Dr. David VanHoose, Herman W. Lay Chair of Private Enterprise and Professor of Economics
Prediction Markets

Prediction Markets Update (October 8, 2008)

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The 2008.PRES.OBAMA Intrade contract now trades at 73, whereas the 2008.PRES.McCAIN Intrade contract is currently trading at 27 (compared with 70.1 and 29.8 respectively as reported on yesterday’s update).

The state-by-state contracts continue to imply that Mr. Obama holds a 338-185 “lead” over Mr. McCain (based upon my cutoff price point of 55 for allocating Electoral College votes). While North Carolina (15 Electoral College votes) remains the only state still “qualifying” as a swing state according to my criterion on contract pricing and the allocation of Electoral College votes, Indiana (11 Electoral College votes) and Missouri (11 Electoral College votes) are very close to dropping out of the McCain column and into swing state status (note that the last price for INDIANA.REP was 57, and for MISSOURI.REP it was 56, whereas INDIANA.DEM and MISSOURI.DEM last traded for 45 and 44 respectively).

FiveThirtyEight.com currently gives Mr. Obama a 346.8 to 191.2 advantage over Mr. McCain.

Addendum: October 8, 2008 Electoral College Vote allocation

Barack Obama (338): California (55), Colorado (9), Connecticut (7), Delaware (3), District of Columbia (3), Florida (27), Hawaii (4), Illinois (21), Iowa (7), Maine (4), Maryland (10), Massachusetts (12), Michigan (17), Minnesota (10), Nevada (5), New Hampshire (4), New Jersey (15), New Mexico (5), New York (31), Ohio (20), Oregon (7), Pennsylvania (21), Rhode Island (4), Vermont (3), Virginia (13), Washington (11), and Wisconsin (10)

John McCain (185): Alabama (9), Alaska (3), Arizona (10), Arkansas (6), Georgia (15), Idaho (4), Indiana (11), Kansas (6), Kentucky (8), Louisiana (9), Mississippi (6), Missouri (11), Montana (3), Nebraska (5), North Dakota (3), Oklahoma (7), South Carolina (8), South Dakota (3), Tennessee (11), Texas (34), Utah (5), West Virginia (5), and Wyoming (3)

Financial Crisis

Volatility

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Here’s a time series graph of the CBOE volatility index (VIX) from January 2, 1990 through October 8, 2008:


Today, the VIX today hit an all-time high of 57.64 (after hitting all time highs of 52.05 on Monday and 53.68 on Tuesday). Since the mean of this series is 19.21 (based upon a total of 4,730 daily closing prices dating back to January 2, 1990), and its standard deviation is 6.47, today’s VIX is 5.94 standard deviations to the right of the mean. Obviously this is a very fat-tailed distribution, but it is nevertheless (morbidly) entertaining to point out that if the series were normally distributed, then one would expect to observe this extreme of an outcome once every 683,138,010 days that the financial markets are open. The number of trading days varies from year to year depending on what day of the week holidays fall on, but a rough guess is 52 weeks x 5 days per week = 260 less about 10 holidays = 250 trading days. So if we translate this into the implied number of years, the odds of this happening would come out to roughly once every 683,138,010/250 = 2,732,552 years.

Financial Crisis

Will the US Economy Suffer a Depression?

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Intrade yesterday announced a new binary futures contract, which pays off 100 Intrade points ($10) if the US economy suffers a depression sometime during 2009, and 0 Intrade points ($0) if it doesn’t. “Depression” for purposes of this contract is defined as a total decline in GDP equal to or greater than 10%. See http://www.intrade.com/news/news_288.html for specifics on the contract rules. The ticker symbol for this contract is US.DEPRESSION.09. The “good” news is that so far, no trades have occurred; there is a bid price of 5, and an ask price of 15.

Perhaps the more meaningful contracts are the US.RECESSION.08 and US.RECESSION.09 contracts, which represent (100,0) bets that the US economy suffers a recession sometime during 2008 or 2009. Both contracts define recession as two successive quarters of negative real GDP growth. The last trade for US.RECESSION.08 occurred at 50 and at 80 for US.RECESSION.09, but compared with the political contracts, trading volume is quite low and bid-ask spreads are very wide, which implies these contracts are relatively illiquid. For example, for US.RECESSION.09, there currently are bid prices ranging from 10 to 75, and ask prices ranging from 80-99.9.

Prediction Markets

Prediction Markets Update (October 7, 2008)

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The 2008.PRES.OBAMA Intrade contract now trades at 70.1, whereas the 2008.PRES.McCAIN Intrade contract is currently trading at 29.8 (compared with 69 and 31.4 respectively as reported on yesterday’s update).

The state-by-state contracts continue to imply that Mr. Obama holds a 338-185 “lead” over Mr. McCain (based upon my cutoff price point of 55 for allocating Electoral College votes). Only North Carolina (15 Electoral College votes) qualifies as a swing state according to my criterion on contract pricing and the allocation of Electoral College votes.

FiveThirtyEight.com currently gives Mr. Obama a 345.4 to 192.6 advantage over Mr. McCain.

Addendum: October 7, 2008 Electoral College Vote allocation

Barack Obama (338): California (55), Colorado (9), Connecticut (7), Delaware (3), District of Columbia (3), Florida (27), Hawaii (4), Illinois (21), Iowa (7), Maine (4), Maryland (10), Massachusetts (12), Michigan (17), Minnesota (10), Nevada (5), New Hampshire (4), New Jersey (15), New Mexico (5), New York (31), Ohio (20), Oregon (7), Pennsylvania (21), Rhode Island (4), Vermont (3), Virginia (13), Washington (11), and Wisconsin (10)

John McCain (185): Alabama (9), Alaska (3), Arizona (10), Arkansas (6), Georgia (15), Idaho (4), Indiana (11), Kansas (6), Kentucky (8), Louisiana (9), Mississippi (6), Missouri (11), Montana (3), Nebraska (5), North Dakota (3), Oklahoma (7), South Carolina (8), South Dakota (3), Tennessee (11), Texas (34), Utah (5), West Virginia (5), and Wyoming (3)

Prediction Markets

Prediction Markets Update (October 6, 2008)

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The 2008.PRES.OBAMA Intrade contract now trades at 69, whereas the 2008.PRES.McCAIN Intrade contract is currently trading at 31.4 (compared with 64.2 and 35.0 respectively as reported on yesterday’s update).

The state-by-state contracts continue to imply that Mr. Obama holds a 338-185 “lead” over Mr. McCain (based upon my cutoff price point of 55 for allocating Electoral College votes). Florida (27 Electoral College votes) and Virginia (13 Electoral College Votes) are back in Mr. Obama’s corner, leaving only North Carolina (15 Electoral College votes) as a swing state.

FiveThirtyEight.com currently gives Mr. Obama a 339.7 to 198.3 advantage over Mr. McCain.

Addendum: October 6, 2008 Electoral College Vote allocation

Barack Obama (338): California (55), Colorado (9), Connecticut (7), Delaware (3), District of Columbia (3), Florida (27), Hawaii (4), Illinois (21), Iowa (7), Maine (4), Maryland (10), Massachusetts (12), Michigan (17), Minnesota (10), Nevada (5), New Hampshire (4), New Jersey (15), New Mexico (5), New York (31), Ohio (20), Oregon (7), Pennsylvania (21), Rhode Island (4), Vermont (3), Virginia (13), Washington (11), and Wisconsin (10)

John McCain (185): Alabama (9), Alaska (3), Arizona (10), Arkansas (6), Georgia (15), Idaho (4), Indiana (11), Kansas (6), Kentucky (8), Louisiana (9), Mississippi (6), Missouri (11), Montana (3), Nebraska (5), North Dakota (3), Oklahoma (7), South Carolina (8), South Dakota (3), Tennessee (11), Texas (34), Utah (5), West Virginia (5), and Wyoming (3)

Financial Crisis

Panel of Experts to Discuss Financial and Mortgage Crisis

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Media Contact: Cynthia Jackson

254-710-7628 (office)

254-749-4055 (cell)

Cynthia_Jackson@baylor.edu

PANEL OF EXPERTS TO DISCUSS

FINANCIAL AND MORTGAGE CRISIS

WACO, Texas – Five professors from Baylor University’s Hankamer School of Business will provide perspectives and advice about the current financial and mortgage crisis facing the United States. The panel discussion will take place on Friday, October 9, from 3:30 to 5:00 pm in Kayser Auditorium.

“Several faculty felt that we could offer students some valuable perspective and analysis on the current economic situation,” said Dr. Tisha Emerson, associate professor and associate chair of the Economics department. Emerson is coordinating the event. “This will be an opportunity for them to hear analysis from the experts and get answers to their questions.”

Panelists include experts in various aspects of economics, finance, accounting and insurance. Each will speak to a different aspect of the crisis and then answer questions from the audience.

Dr. Gia Chevis, assistant professor of Accounting, will discuss “mark-to-market” accounting procedures. Mark-to-market accounting became widely adopted as a practice in the 1980s and 1990s and impacts how an asset’s value is calculated. Mark-to-market is a practice specifically addressed within the bailout legislation recently passed by Congress.

Dr. James Garven, professor of Finance and Insurance and holder of the Frank S. Groner Memorial Chair in Finance, will focus on moral hazard related to bailouts. He will discuss some obvious examples of the risk of unintended consequences, including Fannie Mae and Freddie Mac.

Dr. Kent Gilbreath, professor of Economics and the holder of the E.M. and Thelma Stevens Chair of Private Enterprise and Entrepreneurship, wrote presciently of the economic crisis more than a year ago. He will discuss the origins and causes of the crisis and its impact on the economy.

Dr. William Reichenstein, professor of Finance and holder of the Pat and Thomas R. Powers Chair of Investment Management, will provide commentary about what investors should do now and how the crisis might affect investor portfolios and savings plans.

Dr. David VanHoose, professor of Economics and holder of the Herman W. Lay Chair of Private Enterprise, will talk about the “blame game.” Does any one person, group or decision bear responsibility for the crisis?

The event is free and open to all Baylor students, regardless of major.

For more information, contact Dr. Tisha Emerson, Tisha_Nakao@baylor.edu, 710-4180.

About Baylor Business

The Hankamer School of Business holds to a visionary standard of excellence whereby integrity stands shoulder to shoulder with analytic and strategic strengths to build leaders, not simply careers. BusinessWeek ranks the program in 36th place. U.S.News & World Report ranks the undergraduate business program in 58th place. Baylor’s Entrepreneurship program is ranked 14th by U.S.News and its Accounting program is ranked 24th by Public Accounting Report. Visit www.baylor.edu/business for more information.

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Prediction Markets

Prediction Markets Update (October 5, 2008)

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The 2008.PRES.OBAMA Intrade contract now trades at 64.2, whereas the 2008.PRES.McCAIN Intrade contract is currently trading at 35.0 (compared with 67.9 and 32.0 respectively as reported on yesterday’s update).

The state-by-state contracts continue to imply that Mr. Obama holds a 298-185 “lead” over Mr. McCain (based upon my cutoff price point of 55 for allocating Electoral College votes). The “swing” states remain Florida (27 Electoral College votes), Virginia (13 Electoral College Votes), and North Carolina (15 Electoral College votes).

FiveThirtyEight.com currently gives Mr. Obama a 339.7 to 198.3 advantage over Mr. McCain.

Addendum: October 5, 2008 Electoral College Vote allocation

Barack Obama (298): California (55), Colorado (9), Connecticut (7), Delaware (3), District of Columbia (3), Hawaii (4), Illinois (21), Iowa (7), Maine (4), Maryland (10), Massachusetts (12), Michigan (17), Minnesota (10), Nevada (5), New Hampshire (4), New Jersey (15), New Mexico (5), New York (31), Ohio (20), Oregon (7), Pennsylvania (21), Rhode Island (4), Vermont (3), Washington (11), and Wisconsin (10)

John McCain (185): Alabama (9), Alaska (3), Arizona (10), Arkansas (6), Georgia (15), Idaho (4), Indiana (11), Kansas (6), Kentucky (8), Louisiana (9), Mississippi (6), Missouri (11), Montana (3), Nebraska (5), North Dakota (3), Oklahoma (7), South Carolina (8), South Dakota (3), Tennessee (11), Texas (34), Utah (5), West Virginia (5), and Wyoming (3)

Prediction Markets

Prediction Markets Update (October 4, 2008)

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The 2008.PRES.OBAMA Intrade contract now trades at 67.9 , whereas the 2008.PRES.McCAIN Intrade contract is currently trading at 32.0 (compared with 68.3 and 32.9 respectively as reported on yesterday’s update).

The state-by-state contracts now imply that Mr. Obama holds a 298-185 “lead” over Mr. McCain (based upon my cutoff price point of 55 for allocating Electoral College votes). Since yesterday, Florida (27 Electoral College votes) and Virginia (13 Electoral College Votes) have moved back into “swing” state status with North Carolina (15 Electoral College votes).

FiveThirtyEight.com currently gives Mr. Obama a 333.2 to 204.8 advantage over Mr. McCain.

Addendum: October 4, 2008 Electoral College Vote allocation

Barack Obama (298): California (55), Colorado (9), Connecticut (7), Delaware (3), District of Columbia (3), Hawaii (4), Illinois (21), Iowa (7), Maine (4), Maryland (10), Massachusetts (12), Michigan (17), Minnesota (10), Nevada (5), New Hampshire (4), New Jersey (15), New Mexico (5), New York (31), Ohio (20), Oregon (7), Pennsylvania (21), Rhode Island (4), Vermont (3), Washington (11), and Wisconsin (10)

John McCain (185): Alabama (9), Alaska (3), Arizona (10), Arkansas (6), Georgia (15), Idaho (4), Indiana (11), Kansas (6), Kentucky (8), Louisiana (9), Mississippi (6), Missouri (11), Montana (3), Nebraska (5), North Dakota (3), Oklahoma (7), South Carolina (8), South Dakota (3), Tennessee (11), Texas (34), Utah (5), West Virginia (5), and Wyoming (3)

Prediction Markets

Prediction Markets Update (October 3, 2008)

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The 2008.PRES.OBAMA Intrade contract now trades at 68.3, whereas the 2008.PRES.McCAIN Intrade contract is currently trading at 32.9 (compared with 67.4 and 32.6 respectively as reported on yesterday’s update).

The state-by-state contracts now imply that Mr. Obama holds a 338-185 “lead” over Mr. McCain (based upon my cutoff price point of 55 for allocating Electoral College votes). Since yesterday, Florida (27 Electoral College votes) has moved back into Obama’s column. At this point, the only “swing” state currently left is North Carolina (15 Electoral College votes).

FiveThirtyEight.com currently gives Mr. Obama a 333.2 to 204.8 advantage over Mr. McCain.

Addendum: October 3, 2008 Electoral College Vote allocation

Barack Obama (338): California (55), Colorado (9), Connecticut (7), Delaware (3), District of Columbia (3), Florida (27), Hawaii (4), Illinois (21), Iowa (7), Maine (4), Maryland (10), Massachusetts (12), Michigan (17), Minnesota (10), Nevada (5), New Hampshire (4), New Jersey (15), New Mexico (5), New York (31), Ohio (20), Oregon (7), Pennsylvania (21), Rhode Island (4), Vermont (3), Virginia (13), Washington (11), and Wisconsin (10)

John McCain (185): Alabama (9), Alaska (3), Arizona (10), Arkansas (6), Georgia (15), Idaho (4), Indiana (11), Kansas (6), Kentucky (8), Louisiana (9), Mississippi (6), Missouri (11), Montana (3), Nebraska (5), North Dakota (3), Oklahoma (7), South Carolina (8), South Dakota (3), Tennessee (11), Texas (34), Utah (5), West Virginia (5), and Wyoming (3)