Category Archives: The Real World

Market Volatility Revisited (Coronavirus Edition)…

Not that anyone is counting, but market volatility today is comparable numerically to market volatility in the depths of the global financial crisis of 2007-2009. Today, the CBOE’s implied volatility index (ticker symbol VIX) closed at 54.46. Putting this into a historical perspective, this level is at the 99.43rd percentile for all 7,557 daily observations on VIX recorded daily during the 30-year period spanning 1/2/1990 – 12/27/2019. The last time that VIX closed at this high of a level occurred on November 5, 2008, when it closed at 54.56.

For more information about the (contemporaneous) relationship between VIX and the overall stock market (as measured by the S&P 500 index), see “On the relationship between the S&P 500 and the CBOE Volatility Index (VIX)“:

Coronavirus: Baylor Finance Expert Explains How Uncertainty is Driving Market Fears

Proud of my Baylor colleague David Dicks, whose recent Journal of Political Economy article entitled “Uncertainty Aversion and Systemic Risk” (cf. provides insights into how uncertainty unleashes waves of investor pessimism; such is the effect that COVID-19 is currently having on financial markets. Dr. Dicks’ advice for investors? “If you are nervous about the impact of coronavirus, do not call your broker. Get a flu shot and be careful about washing your hands.”

In the following Q&A, David Dicks, Ph.D, Baylor University assistant professor of finance, shares his thoughts on why this uncertainty has damaged the markets, puts the current situation in historic perspective and offers hope to investors.

Insurers could lose billions if Tokyo Olympics canceled

Fascinating article about the financial consequences of a hypothetical cancellation of the 2020 Olympics in Tokyo because of the coronavirus…

(Reuters) — Global insurers face a hefty bill if the coronavirus forces the cancellation of the Summer Olympics in Tokyo, with estimates of the cost of insuring the sporting showpiece running into billions of dollars.

The Olympics Were a Petri Dish Long Before the Coronavirus

Something that large scale public events (e.g., major sports events, music festivals, and religious pilgrimages) apparently have in common is the potential to act as de facto transmission hubs with asymptomatic people spreading viruses upon returning home.

The reason that epidemiologists love studying the Olympics: There are few places better at breeding illness. Now the Tokyo Games might be in trouble because of one.

Catastrophe Bonds Signal Coronavirus Nearing Pandemic Status

Fascinating article about how prices of catastrophe bonds issued back in 2017 by the World Bank now show that the coronavirus may very well be evolving into a global pandemic…

Catastrophe Bonds Signal Coronavirus Nearing Pandemic Status
The World Health Organization says the coronavirus isn’t yet a global pandemic. Bonds that insure against just such a catastrophe say that it probably is.

The Pursuit

“How can we lift up the world together, starting with those at the margins of society?” This question inspired former American Enterprise Institute President Arthur Brooks to travel around the world seeking answers. Released in Spring 2018, Dr. Brooks’ documentary reveals insights into not only alleviating poverty, but also achieving lasting happiness for all.

Now streaming on Netflix @

Prediction markets’ take on removal of POTUS from office

As of 2:15 p.m. central standard time today, the prediction market put the odds of President Trump being removed from office at 8%.  Specifically, currently offers for sale a “share” which pays $1 if the answer to the question, “Will the Senate convict Donald Trump in his first term?, turns out to be “yes”.

Allow me to provide further context for this “prediction”. is a New Zealand-based prediction market that offers “shares” on political and financial events.  The idea behind shares (technically, these are binary options, but I digress) is quite simple – you can buy and sell “yes” and “no” shares which pay off $1 if the answer to the contract question ends up being “yes” or “no”.  If you buy yes (no) but no (yes) is the answer, then your share expires worthless and you have lost the full value of your original “investment”.  However, if you sell yes (no) and no (yes) is the answer, then you don’t owe your counterparty any money and you get to pocket the price received (net of transactions costs) as profit.

Since the payoffs on shares feature binary payoffs (i.e., $1 if yes and $0 if no),  these shares are canonical examples of Arrow-Debreu, or “pure” securities.  Arrow-Debreu securities pay $1 if a particular state (in this case, either “yes” or “no”) occurs at a particular time in the future.  Thus, the current price for a given share is the “state price”,  which corresponds to the value today of $1 received when a particular future state of the world is realized.  Breaking the state price down further, its components include 1) the probability of a particular future state of the world, 2) the rate of interest (to compensate for the time value of money), and 3) a further discount (to compensate for risk averse behavior by the bettor) or premium (to compensate for risk loving behavior by the bettor).

Prediction market prices are frequently referred to in the news media as probabilities for future state-contingent events; if prediction market participants are risk neutral and interest rates are negligible, then this is technically appropriate and roughly correct.  What’s fascinating about prediction markets is that they showcase, in very pure form, how market prices reflect the statistical odds of some future event happening.  Similarly, prices of speculative assets generally (e.g., corporate securities such as stocks and bonds and derivative securities such as options and futures) also reflect probabilistic beliefs about future states of the world, albeit in more of an opaque fashion.

Also featured as one of “50 Things That Made the Modern Economy”: The Index Fund

Besides insurance, Tim Harford also features the index fund in his “Fifty Things That Made the Modern Economy” radio and podcast series. This 9 minute long podcast lays out the history of the development of the index fund in particular and the evolution of so-called of passive portfolio strategies in general. Much of the content of this podcast is sourced from Vanguard founder Jack Bogle’s September 2011 WSJ article entitled “How the Index Fund Was Born” (available at Here’s the description of this podcast:

“Warren Buffett is the world’s most successful investor. In a letter he wrote to his wife, advising her how to invest after he dies, he offers some clear advice: put almost everything into “a very low-cost S&P 500 index fund”. Index funds passively track the market as a whole by buying a little of everything, rather than trying to beat the market with clever stock picks – the kind of clever stock picks that Warren Buffett himself has been making for more than half a century. Index funds now seem completely natural. But as recently as 1976 they didn’t exist. And, as Tim Harford explains, they have become very important indeed – and not only to Mrs Buffett.”

Warren Buffett is one of the world’s great investors. His advice? Invest in an index fund