Graph of the day – daily volatility of Bitcoin (BTC) vis-à-vis other asset classes (WTI (oil), silver, gold, US stocks (SP500), Euro/Dollar exchange rate, 10 year T-bond, 1 year T-bill, and 1 month T-bill). Source: WSJ Daily Shot, 11-January-2018.
I have decided to offer the following extra credit opportunity for Finance 4335. You can earn extra credit by attending and reporting on Dr. Richard Vedder’s upcoming lecture entitled “Can Markets Improve College Education and Make it More Affordable”:
Thursday, January 18
Foster 250 @ 4:00 pm
Richard Vedder: Distinguished Professor of Economics at Ohio University // Adjunct Scholar at American Enterprise Institute
Talk Title: “Can Markets Improve College Education and Make it More Affordable”
If you decide to take advantage of this opportunity, I will use the grade you earn to replace your lowest quiz grade in Finance 4335 (assuming that your grade on the extra credit is higher than your lowest quiz grade). The report should be in the form of a 1-2 page executive summary in which you provide a critical analysis of Dr. Vedder’s lecture. In order to receive credit, the report must be submitted via email to email@example.com in either Word or PDF formats by no later than Monday, January 22 at 5 p.m.
At any given point in time during the upcoming semester, you can ensure that you are on track with Finance 4335 assignments by monitoring due dates which are published on the course website. See http://fin4335.garven.com/readings/ for due dates pertaining to reading assignments, and http://fin4335.garven.com/problem-sets/ for due dates pertaining to problem sets. Also keep in mind that short quizzes will be administered in class on each of the dates indicated for required readings. As a case in point, since the required readings entitled “Optimization” and ” How long does it take to double (triple/quadruple/n-tuple) your money?” are listed for Thursday, January 11, this means that a quiz based upon these readings will be given in class on that day.
Important assignments due on the second class meeting of Finance 4335 (scheduled for Thursday, January 11) include: 1) filling out and emailing the student information form as a file attachment to firstname.lastname@example.org, 2) subscribing to the Wall Street Journal, and 3) subscribing to the course blog. A completed Student information form is graded as a problem set and receives 100 points; if you don’t turn in a Student information form, then you will receive a 0 for this “problem set”. Furthermore, tasks 2 and 3 listed above count toward your class participation grade in Finance 4335.
Allow me to introduce you to the graduate assistant for Finance 4335. Alexander Law is an MSECO student, and his email address is Alexander_Law@baylor.edu.
In the April 2017 issue of Economics of Education Review, an article entitled “Computers and productivity: Evidence from laptop use in the college classroom” provides convincing empirical evidence against allowing laptop use in the classroom (which is why laptops are generally not allowed in Finance 4335 – see the first bullet point under section 8.2 of the course syllabus). Anyway, here are the highlights from this article:
- Computer use in college classrooms is commonplace.
- We use a quasi-experimental design to identify the effects of laptop use in college classrooms.
- We find that computer use has a significant negative effect on student grades.
- The negative effects of computer use are concentrated among males and low performing students.
Equations (2), (3), and (7) play particularly important roles in Finance 4335!
The Wall Street Journal recently published an important article (linked below) which documents the (unprecedented) synchronized compression of implied volatility across multiple asset classes; specifically, US equities, oil, gold, and US interest rates.
Besides going over the syllabus during the first day of class on Tuesday, January 9, we will also discuss a “real world” example of financial risk. Specifically, we will look at the relationship between short-term stock market volatility (as indicated by the CBOE Volatility Index (VIX)) and returns (as indicated by the SP500 stock market index).
As indicated by this graph from page 25 of next Tuesday’s lecture note, daily percentage changes on closing prices for VIX and the SP500 are strongly negatively correlated. In the graph above, the y-axis variable is the daily return on the SP500, whereas the x-axis variable is the daily return on the VIX. The blue points represent 7,056 daily observations on these two variables, spanning the time period from January 2, 1990 through December 29, 2017. When we fit a regression line through this scatter diagram, we obtain the following equation:
where corresponds to the daily return on the SP500 index and corresponds to the daily return on the VIX index. The slope of this line (-0.1187) indicates that on average, daily VIX returns during this time period were inversely related to the daily return on the SP500; i.e., when volatility as measured by VIX went down (up), then the stock market return as indicated by SP500 typically went up (down). Nearly half of the variation in the stock market return during this time period (specifically, 49.2%) can be statistically “explained” by changes in volatility, and the correlation between and comes out to -0.7014. While a correlation of -0.7014 does not imply that and will always move in opposite directions, it does indicate that this will be the case more often than not. Indeed, closing daily returns on and during this period moved inversely 78% of the time.
You can see how the relationship between the SP500 and VIX evolves prospectively by entering http://finance.yahoo.com/quotes/^GSPC,^VIX into your web browser’s address field.
A course blog has been established for Finance 4335 at the address http://risk.garven.com; it is also linked from the “Course Blog” button located on the course website. I recommend that you follow the risk management course blog regularly via email, RSS, Facebook, and/or Twitter.
The risk management course blog provides me with a convenient means for distributing important announcements to the class. Topics covered on the course blog typically include things like changes in the course schedule, clarifications and hints concerning problem sets, information about upcoming exams, announcements concerning extra credit opportunities, and short blurbs showing how current events relate to many of the topics which we cover in Finance 4335.
If you already are familiar with RSS, this is a great way to subscribe to the options, futures, and other derivatives course blog. By going to the http://risk.garven.com/feed webpage, you can subscribe by using Firefox’s Live Bookmarks feature, Internet Explorer’s RSS feed subscription feature, or an RSS reader. If you are either a Facebook or Twitter user, everything that is posted on the options, futures, and other derivatives course blog is automatically posted to Facebook and “tweeted”, so you can also subscribe by “liking” the Finance 4335 Facebook page or by “following” @fin4335 on Twitter. Finally, you can also subscribe via email. The remainder of this blog entry explains how to subscribe to the options, futures, and other derivatives course blog via email.
Email Subscription Instructions:
Email Subscription Instructions: If you would like to receive the risk management course blog via email, you can do this by going to http://risk.garven.com and entering your email address in the form provided on the left hand side of that webpage:
From that point forward, whenever I post to the course blog, you will immediately receive a nicely formatted version of the blog posting via email. Also, you can opt to change your delivery preferences, or even cancel your subscription.
A subscription to the Wall Street Journal is required for Finance 4335. In order to subscribe to the Wall Street Journal (WSJ) for the Spring 2018 semester, go to http://r.wsj.net/j73NM. Your WSJ subscription includes access to print, online, tablet and mobile editions, and only costs $1 for a 15 week subscription. At your option, you may choose to receive both the digital and paper versions of WSJ or only the WSJ digital version.
Throughout the semester, I will often reference specific WSJ articles in class and on the course blog. Finance 4335 topics (as well as topics in many of your other business school courses) come to life in the world outside the Baylor bubble when you read make a habit of reading the WSJ on a regular basis. Furthermore, if you expect to interview for jobs or internships anytime soon, reading the WSJ will give you a leg up on the competition, since you will be better informed and have more compelling ideas and insights to share with recruiters.
In closing, the following (2 minute) video provides a helpful introduction to the WSJ, providing time-saving tips to help you get the most from WSJ and succeed not only in Finance 4335, but also your other courses and careers: