Economic Darwinism

Minsky Model: Initial Thoughts

Posted in Financial Models, Krugman, Minsky by Economic Darwinism on June 15, 2009

For a while now, Paul Krugman has been tinkering with a model to simulate a Minsky moment. See, for example,

This sounds like a fun project, so I think I’ll do some brainstorming and see what happens. Comments welcome.

Finite Equity Market

One aspect I’d like to incorporate that is motivated by my experience at large asset management firms is to model the equity market as finite. Most models assume the market is infinite so that you can purchase and sell as much of any security as you like. In practice, we have size constraints. For example, when you own 10% of the outstanding market cap of any security, you cannot sell it without moving the market. Modeling a finite market will introduce liquidity. This will be important for modeling a Minsky moment.

Positions can be expressed as a fraction of the outstanding market cap.

Continuous Leverage

I think we should model agents with continuous leverage, i.e. the amount of leverage is inversely proportional to market volatility.

L \propto \frac{1}{\sigma}

This is motivated by both theory and recent experience. Clients expect stable or increasing returns. However, returns are commensurate with risk. Prior to the crisis, we were experiencing a period of decreasing market volatility with corresponding decreasing returns. To maintain high (and unsustainable) returns, investors began to increase leverage. This is also consistent with bank’s capital requirement being determined by value-at-risk (VaR).

Debt Market

To be continued…

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Hey Paul Krugman, where the hell are you man?

Posted in Comic, Geithner, Krugman by Economic Darwinism on March 23, 2009

I love this guy. A little indignant, but Bravo!

[HT: Calculated Risk]

It is extremely unfortunately for this to go viral right before Geithner’s big announcement.

Hey, Paul Krugman

Why aren’t you in the administration?

Is there some kind of politic’n that I don’t understand?

I mean, Timothy Geithner is like some little weasle

Wasn’t he in a position of power when all this s#@t went down in the first place?

When I listen to you, things seem to make sense

When I listen to him, all I hear is “blah blah blah”

Hey, Paul Krugman. Where the hell are you man?

Cause we need you on the front line

Not just writin’ for the New York Times

I’d feel better if you were calling some shots

Instead of writing your blog and probably thinkin’ a lot

I mean, don’t you have some influence?

Why aren’t YOU Secretary of the Treasury?

For God’s sake man, you won the Nobel Prize

Timoth Geithner uses TurboTax!

When I listen to you, things seem to make sense

When I listen to him, all I hear is “blah blah blah”

Hey, Paul Krugman. Where the hell are you man?

Obama breakdown

When I listen to you, things seem to make sense

When I listen to him, all I hear is “blah blah blah”

Hey, Paul Krugman. Where the hell are you man?

Your country needs you now.

Our country needs more people like this guy. I actually feel the same way. I’d feel better if Krugman was calling some shots.

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