The following VB libraries are very useful for numerical computing, mathematical modeling and customized financial algorithm development. All the functions were designed to make computations on arrays (i.e., vectors or matrices) simply and quickly. I have shared comprehensive and robust optimization routines that enable calibration of financial models. My students had provided extensive text processing examples for wrapping and visualizing financial data in seconds.

Mathematical Algorithms
Math Codes
Standard Modules: 126
Function Procedures: 1029
Total Lines of Code: 44725
Math Project Details

Horror Matrics and Other Mathematical Poetry

Quantitative Financial Algorithms
Quant Codes
Standard Modules: 56
Function Procedures: 269
Total Lines of Code: 15671
Quant Project Details

Poems about Numerical Methods

This year I was working on a Data Visualization Technology to aggregate, and visualize fundamental data using different valuation techniques. In this post I am sharing the fundamental models that were used as the initial building blocks for creating and implementing the framework in C#. I attempted to be as comprehensive as possible in the codes; covering the range of comps that Dr. Damodaran offers in the Updated Data section.

Fundamental Models

VBA Codes

ADVFN Data Feeder (received positive feedback from major financial institutions)

I have to thank Dr. Aswath Damodaran from the Stern School of Business at New York University. His books and teachings notes helped to develop the algorithms for valuation scenarios. I also have to thank Professor George Athanassakos for providing the opportunity to work for the Ben Graham Centre of Value Investing and for introducing me to Mr. Warren Buffett.

I still remember when I was an HBA student taking the first Ivey course on Value Investing. I really enjoyed the class and the constructive conversations I had with Dr. George. His invaluable insights allowed me to fully explore the opportunities offered by financial markets. Hunting out bargains where there is a solid margin of safety between the price paid for a stock and its true value.

Finally, I have to thank my student Christopher Gilpin for his outstanding programming and math skills.

nico

This weekend I had the opportunity to attend an interdisciplinary conference at the Perimeter Institute. The goal of the conference was to bring together leading economists, biologists, mathematicians, physicists, programmers, and financial professionals to explore the opportunities for bringing economic theory into closer contact with the more traditional sciences as the basis for ongoing work, partnership, and collaboration.

Invited speakers
Richard Alexander, University of Michigan
Emanuel Derman, Columbia University and Prisma Capital Partners
Andrew Lo, MIT
Nouriel Roubini, New York University
Nassim Taleb, Distinguished Professor of Risk Engineering, NYU-Poly Institute and Principal, Universa Investments
Eric Weinstein, Natron Group

The excellent presentation of Dr. Andrew Lo on “The Adaptive Markets Hypothesis and Financial Crisis” reminds me of the butterfly effect and Jules Henri Poincaré in Science et methode, in 1909:

“A very small cause which escapes our notice determines a considerable effect that we cannot fail to see, and then we then say the effect is due to chance. If we exactly knew the laws of nature and the situation of the universe at the initial moment, we could predict exactly the situation of that same universe at a succeeding moment. But even if it were the case that the natural laws had no longer any secrets for us, we could still know the situation approxiamative. If that enabled us to predict the succeeding situation with the same grade of approximation, that is all we require, and we sould say that the phenomenon had been predicted, that it is governed by the laws. But it is not always so; It may happen that small differences in the initial conditions produces very great ones in the final phenomena. A small error in the former will produce an enormous error in the latter. Predictions become impossible, we stand before a random phenomenon.”

For the panel discussions and presentations click here.

|See how J. Doyne Farmer, of the Santa Fe Institute and Prediction Company, described how Physicists attempt to scale the ivorytowers of finance.

August 6, 2009: J. Doyne Farmer and Duncan Foley published an article in Nature titled The economy needs agent-based modelling.

The Math Libraries provide an excellent foundation for understanding the computational intricacies involved in financial modeling. By integrating financial modeling with the algorithms in the math libraries, one will actually achieve two goals at once: users find it easier to understand math theories/concepts and become more employable as they pick up real-world financial skills.

Based on my experience, there will be great demand for Quants as the financial world looks for people who “can do the job”. This will further strengthen the role of computational finance in teaching business students. To overcome the problem of programming, the instructor in advance can choose the functions that will be used to teach the lecture. This will allow the school to deliver creative solutions for the Financial Engineering class, and prepare the students to deliver new valuation models based on loss aversion and extreme value.

Do not destroy the essential catalyst of risk. By Lloyd Blankfein.

The Short and Simple Story of the Credit Crisis. By Jonathan Jarvis.

A graphic showing how the USD7.8 Trillion Total Bailout Commitment is broken down

23 Oct 2008 – Quote from Greenspan Calls Financial Crisis A Credit Tsunami:
“It was the failure to properly price such risky assets that precipitated the crisis”

When systemic effects are amplifying correlations and limit violations arise day after day over weeks and weeks, losses tend to spread across financial institutions, and practitioners lost faith in the valuation models as well.

But how can we know what to buy or sell without explicit information about the co-dependence of risk. I have spent many years building mathematical, statistical, and financial models, and it is now clear to me that two problems are at the heart of the crisis: (1) valuation models were so limited in scope that they couldn’t link market prices to the value of securities with mortgages as underlying collateral; (2) an institutionalized lack of disclosure that prevented practitioners from achieving the necessary standard of accuracy.

A wise man once said: “in modeling you make a toy-like version of how the market behaves, or how a particular product in the market behaves. You have to be as precise as possible because someone is going to buy or sell something on the basis of the model”.

One important common feature of the financial algorithms I have shared is the neglect or any implicit consideration of contagion effects.

Click here for the Financial Algorithms

As you verify the pricing algorithms you will notice that the complexity could be severe and even the most careful person could put a wide bid-offered spread on any of these types of transaction’s model. Measuring value accurately is at the very heart of successful investing and risk management. The ultimate result would be an end to Gaussian models that don’t explicitly capture such risk spillovers. We could expect new valuation models based on loss aversion and extreme value.

A Must Read: Recipe for Disaster: The Formula That Killed Wall Street

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
Former Citigroup CEO Charles Prince, July 2007

The Carnoustie effect is defined as the degree of mental and psychic shock experienced on collision with reality by those whose expectations are founded on false assumptions. This also sounds familiar with the lax interest policy that ignores bubbles, demonstrating a classic reality check for Citigroup.

Citigroup had been acquiring more short-term funding and rolling over short-term liquidity daily. Imagine you have to refinance 20% of your mortgage every day. “But when the music stops, in terms of liquidity, things are complicated”, especially if bursting of bubble affects banking sector triggering a credit crunch.

This week the margins eroded the capital base of Citigroup and equity shrank, and if they cannot get a capital infusion they will be forced to sell assets at fire sale prices. This loss spiral will eventually drive Citigroup hanging on to others, and taking positions that may drag others down. It is important to understand that the capital and leverage ratios do not capture the aspect of overnight borrowing.

Making matters worse, Citigroup announced that it would reclassify $80 billion in assets into categories that are not marked to market. The evident hitch here is that it gives the impression that the board is trying to mask how dire the books are, playing the role of Leonardo Di Caprio in the movie “Catch Me if You Can”.

Unfortunately, any other financial institution will be cautious about making a deal with Citigroup until it can be assured that the bank’s books are done exploding, focusing on maturity mismatch and market liquidity of assets. That ultimately means providing clarity to those Level 2 and Level 3 assets. Until it does so, Citigroup just looks like a ticking time bomb that has a detonating mechanism that can be set to go off any time soon.

US confidence is at its lowest ever, the DOW shoots up into double digits, the long tails get fat, and volatility is impossible to ride. Now we have some investors claiming that it is time to buy – “stocks are cheap, and people who buy today will be glad that they did”.

Given that stock bargains exists when stock prices are below book value (NAV); cash on the balance sheet is higher than the stock value; price to earnings are low…that sort of thing…..the question is timing:

• What will the stock price be this time next year?
o Will sales/earnings be falling?
• Will debtors be unable to pay?
o Will bad debts be on the increase?
o Will there be cash flow issues because they cannot service their debts or refinance?
• Do they enjoy high or low currency rates?

For those who can make these judgements in this market let me remind you the following:

1.TREASURY PREDICTS HUGE GOVERNMENT BORROWING NEEDS

a. The financial rescue operation will force the federal government to borrow an unprecedented amount of money as the budget deficit climbs to record heights, a top Treasury Department official said Tuesday.
b. Anthony Ryan, Treasury’s acting undersecretary for domestic finance, said the administration back in July was forecasting that the deficit for the current budget year, which began on Oct. 1, would hit a record $482 billion. He said that forecast did not include all the government’s efforts since then to deal with the worst financial crisis since the 1930s. “This year’s financing needs will be unprecedented,” with all the rescue programs now in place, Ryan said.
c. Ryan said those borrowing efforts will need the address numerous government initiatives: The $700 billion rescue program passed by Congress on Oct. 3; efforts by the Federal Reserve to bolster banks’ balance sheets which have required it to utilize Treasury’s borrowing resources; and the need of the Federal Deposit Insurance Corp. for resources deal with a rising number of bank failures.

2. US CONFERENCE BOARD CONSUMER CONFIDENCE INDEX PLUNGES TO LOWEST IN AT LEAST 41 YEARS IN OCTOBER

a. The US Conference Board Consumer Confidence Index, which had improved moderately in September, fell to an all-time low in October. The Index now stands at 38.0 (1985=100), down from 61.4 in September. The Present Situation Index decreased to 41.9 from 61.1 last month. The Expectations Index declined to 35.5 from 61.5 in September. The Index is the lowest in 41 years when the series began

3. CONSUMERS FEEL THE NEXT CRISIS: CREDIT CARDS

a. First came the mortgage crisis. Now comes the credit card crisis.
b. After years of flooding Americans with credit card offers and sky-high credit lines, lenders are sharply curtailing both, just as an eroding economy squeezes consumers

4. WORLD ACCORDING TO TARP NO LAUGHING MATTER FOR U.S. TAXPAYERS

a. The financial crisis exacerbated by credit derivatives is costing so much to fix that speculators are now using those same instruments to bet on governments as the price tag for bailing out banks approaches $3 trillion.
b. The cost to hedge against losses on $10 million of Treasuries is about $39,000 annually for 10 years, up from $1,000 in the first half of 2008, based on CMA Datavision prices. The equivalent for German bunds has risen to $37,000 from $2,000, while it has jumped to $66,000 from $3,000 for U.K. gilts

5. MATURING BONDS WORTH $111 BILLION RAISE DEFAULT CONCERNS

a. The large number of emerging market bonds that are due to mature over the next five quarters raises the prospect of high-profile defaults.
b. The threat of defaults and company closures in emerging markets in the final quarter of 2008 and in 2009 may become a reality, according to a research report by ING Wholesale Banking.
c. The report warns that over the next five quarters there is $111 billion worth of bonds that need to be refinanced in the emerging market economies and cautioned that some high-profile companies may default as they face shrinking markets and difficulties in rolling over maturing debt

6. A £516 TRILLION DERIVATIVES ‘TIME-BOMB’

a. The market is worth more than $516 trillion, (£303 trillion), roughly 10 times the value of the entire world’s output: it’s been called the “ticking time-bomb”.
b. It’s a market in which the lead protagonists – typically aggressive, highly educated, and now wealthy young men – have flourished in the derivatives boom. But it’s a market that is set to come to a crashing halt – the Great Unwind has begun.
c. Last week the beginning of the end started for many hedge funds with the combination of diving market values and worried investors pulling out their cash for safer climes

7. SOROS SAY TWO-THIRDS OF HEDGE FUNDS WILL SINK

a. Speaking at the Massachusetts Institute of Technology, the Soros Fund Management chief said that the hedge fund industry could shrink by as much as two-thirds, one of the more pessimistic appraisals of an industry in crisis.
b. “The hedge fund industry is going to move through a shakeout,” Soros said. “In my estimation, it will be reduced in size by anywhere between half and two-thirds.”

An exclusive conversation with Warren Buffett about the economy. October 1st. 2008

A panel discussion with Princeton economists, who will review recent events on Wall Street and assess their implications for the economy and public policy.

Slides presented by Hyun Shin – Crisis on Wall Street
Slides presented by Markus Brunnermeier – Thoughts on a New Financial Architecture
Slides presented by Harrison Hong – How We Got Here and Some Lessons?
Slides presented by Paul Krugman – Notes on the bailout