“The earliest known work in Arabic arithmetic was written by alKhowarizmi, a mathematician who lived around 825, some four hundred years before Fibonacci. Although few beneficiaries of his work are likely to have heard of him, most of us know of him indirectly. Try saying “alKhowarizmi” fast. That’s where we get the word “algorithm,” which means rules for computing.”
Note: The book cover shown above is a copy of a 1633 oil-on-canvas painting by the Dutch Golden Age painter Rembrandt van Rijn.
It is very important that you attend class every day. However, if you become sick, please do not come to class and expose others to your illness. Please use this form (at https://bit.ly/4335absencerequest) to request that an absence be excused for health/safety reasons and follow your request up with an email to Professor Garven at James_Garven@baylor.edu with appropriate documentation attached.
Throughout the pandemic, Baylor’s commitment has been to the health and safety of our family. Since the spring of 2020, the University has chosen to take actions that align with the most up-to-date health recommendations. Guidelines for the Fall 2021 semester include:
Everyone is required to wear a mask in classrooms and labs.
Everyone who is unvaccinated is required to be tested twice weekly throughout the semester. For more information about Baylor’s testing program, please visit Baylor’s COVID site at www.baylor.edu/coronavirus. To confirm your exemption from this testing, upload your vaccination record to www.baylor.edu/vaccine.
The symptoms for the Delta variant look very similar to the original COVID symptoms but include headaches, sinus congestion, sore throats, and a runny nose. If you feel sick, please contact the Baylor Health Center to be tested as soon as possible, at 254-710-1010 or https://www.baylor.edu/healthservices.
Please have a plan in place in case you get sick with COVID or are asked to isolate or quarantine. Baylor will provide limited assistance, but it is in your best interest to have your own plan in place.
We all want to return to a normal fall semester with more in-person events and traditions; vaccinations and face masks help the entire Baylor community to stay healthy.
“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.”
From November 2016 through October 2017, Financial Times writer Tim Harford presented an economic history documentary radio and podcast series called 50 Things That Made the Modern Economy. This same information is available in book form under the title “Fifty Inventions That Shaped the Modern Economy“. While I recommend listening to the entire series of podcasts (as well as reading the book), I would like to call your attention to Mr. Harford’s episode on the topic of insurance, which I link below. This 9-minute long podcast lays out the history of the development of the various institutions which exist today for the sharing and trading of risk, including markets for financial derivatives as well as for insurance.
“Legally and culturally, there’s a clear distinction between gambling and insurance. Economically, the difference is not so easy to see. Both the gambler and the insurer agree that money will change hands depending on what transpires in some unknowable future. Today the biggest insurance market of all – financial derivatives – blurs the line between insuring and gambling more than ever. Tim Harford tells the story of insurance; an idea as old as gambling but one which is fundamental to the way the modern economy works.”
At any point in time this semester, you can make sure that you are on track with Finance 4335 assignments by monitoring due dates on Canvas and on the course website. Links for future class meetings, quizzes, problem sets, and exams appear on the Canvas “To Do” list. Links for readings (along with their due dates) appear on http://fin4335.garven.com/readings/, and links for problem sets (along with their due dates) appear on http://fin4335.garven.com/problem-sets/. In the case of assigned readings, students are required to complete a short (10-minute) readings quiz prior to the start of class for each reading assignment due date; the window for completing this task begins 24 hours prior to the start of the class meeting for which the reading assignment is due.
Besides going over the course syllabus during the first day of class on Tuesday, August 24, we will also discuss a particularly important “real world” example of financial risk. Specifically, we will study the relationship between realized daily stock market returns (as measured by daily percentage changes in the SP500 stock market index) and changes in forward-looking investor expectations of stock market volatility (as indicated by daily percentage changes in the CBOE Volatility Index (VIX)):
As indicated by this graph (which also appears in the lecture note for the first day of class), daily percentage changes on closing prices for the SP500 (the y-axis variable) and for the VIX (the x-axis variable) are strongly negatively correlated with each other. The blue dots are based on 7,961 contemporaneous observations of daily returns for both variables, spanning the (more than 30-year) time period from January 2, 1990, through August 5, 2021. 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 (-0.11412) indicates that on average, daily realized SP500 returns during this time period were inversely related to contemporaneous daily returns on the VIX; i.e., when forward-looking investor expectations of stock market volatility fell (rose), then the stock market return as indicated by SP500 typically rose (fell). Nearly half of the variation in the stock market return during this time period (specifically, 48.68%) can be statistically “explained” by changes in volatility, and the correlation between and comes out to -0.698. While a correlation of -0.698 does not imply that and always move in opposite directions, it does suggest that this will be the case more often than not. Indeed, closing daily returns on and during this period moved inversely 78.66% of the time.