Watch My Hands, Find the Asset.

Recently I spent some time learning about the ABX-HE index, a financial index that tracks the performance of mortgage-backed securities. It is designed, among other things, to improve "transparency" in the market of mortgage backed-securities.

So how is this transparency-improving index calculated? Although the legal contract is available on the website of Markit, the company that calculates and compiles the index, they don't seem to provide a clear and concise description on their website of how this is actually done. So with that caveat, as far as I can gather the index works like this:

- Take a lot of home loans to subprime borrowers
- Package them into bundles, each bundle with its own definition of what a loss on the bundle of mortgages means
- Select twenty such bundles through a voting process by index participants
- Divide each bundle into tranches (with one tranche bearing the first, say, 5% of the losses, the next tranche bearing the next 10%, etc.)
- Take credit default swaps (CDS) on the tranches (that is, a par value contractual obligation to pay in the event of a loss in exchange for a fixed coupon payment)
- Bundle these credit default swaps together to form tranches of the index
- Take the remaining principle weighted average payments on these credit default swap contracts as a floating leg and pay a fixed leg based on the coupon payments at the start of the index
- The index will be 100 minus the amount you would pay to acquire the floating leg of such an average.

So the index is a price-based index of a basket of CDS options on tranches of a bundle of contractually defined losses on subprime mortgages. A long way from the ol' Dow Jones, aren't we?

I Am My Own Little Hoodrat Friend.

It has recently come to my attention that the building I live in consists predominantly of council flats, which is to say, in British parlance, that I live in the Projects. Fortuitously, my friend Matt Zanon has recently sent me a parcel containing, among other things, a copy of N.W.A.'s seminal LP "Straight Outta Compton" featuring Dr. Dre's, Easy E's, Ice Cube's &ct's reminiscences of locales such as mine. Straight out of Compton, are you Doctor? Well, I am straight out of Stockwell.

I have recently made a point when walking around my "hood" (neighborhood) to "bang" (play on my ipod) this album, in case I should have to quickly indicate to any of my "homies" (neighbors) that I too am "ghetto" (live here). To further "drive home" (demonstrate) this point, tonight Sofia, Gertje, Nina, and I will be attending the local Roller Disco, which I understand to be our nexus of "Urban Culture" (city culture). Perhaps while I'm there they will "bang" something by Ghostface Killa and I will grin a knowing grin, for I too am now from the "Projects".

What Is Next.

Of all the jobs that might have been available after finishing LSE, I've been offered one of the best imaginable -- statistician at Google. My future coworkers are great, the work will be a combination of research and practicalities (all undertaken with one of the largest data sets in the history of mankind), and my salary will be at a grown-up level for the first time in four years. I'll be moving to Mountain View the first week of February.

Although I couldn't have hoped for a better job offer, I'm very sorry to be leaving London, which is the coolest place I've ever lived. And of course, it's going to be very hard living away from Sofia. I've asked to delay my start until February in order to have a couple months with her here (her visa runs out at the end of January), and in the mean time I'm working at Macquarie on a temporary contract. With luck, she'll at least be able to come help me move, and I can take a vacation to Buenos Aires next year.

So pretty soon, I'll be putting those old flowers in my hair and heading out to San Fransisco...

What Is Going On.

On the very unlikely chance that you read this but don't communicate directly with me, here is what is going on.

The bad news first: due to my own stupid scheduling error, I missed an exam. In the US, this would mean a resit a week later and possibly a small penalty in the exam grade. In the UK, it means you fail all your courses by default. Fortunately, the school has taken pity on me and will allow me to resit -- in a year's time -- without further censure. As a consequence, I will not officially graduate until next year.

The good news is that all my other marks were distinctions, meaning after I pass my remaining half-credit in 2009, I will have finished the econometrics MSc at the LSE with top marks.

In the meantime, I am working at Macquarie in London as a summer intern, learning about banking and thinking about what to do next.

A New Business.

Sofia tells me that the Argentinian proverb goes "A bird in hand is worth a thousand in the sky".

I think it's time to start a bird-in-hand export business.

An Econometrician Joke.

Thanks to Abby Samp:

"Three econometricians went out hunting, and came across a large deer. The first econometrician fired, but missed, by a meter to the left. The second econometrician fired, but also missed, by a meter to the right. The third econometrician didn't fire, but shouted in triumph, 'We got it! We got it!'"

My Paper Is Done.

LSE Econometrics students don't write a thesis. Instead they write an "extended essay" that counts for half of the grade for one of their four courses. I submitted my paper on Monday with the weighty title of "Matching CEX Consumption Moments With Bayesian Learning of Heterogeneous Income Profiles". Read it if you dare.

I have mixed feelings about it. On the plus side, it was the first time I brought a research idea that was all my own from conception to fruition. I think it was ambitious for a six week project, and I managed to get results with my own code and data. I did go beyond simply replicating someone else's results, which can be difficult to do at the Master's level. I think overcame significant obstacles on the computation side. (Which is to say that managing to do anything computationally intensive with LSE resources is an accomplishment in itself.) And, finally, this is my first ever economics course, so maybe the world will be lenient with me.

On the negative side, this is exactly the kind of economics research that I dislike. I am essentially studying a mathematical model rather than the real world. The assumptions of the model I chose are excessively removed from reality (it is a very similar model to the one I complained about in an earlier post, "Do You Make Your Consumption Decisions This Way?"). And my conclusions are particular to this model in this configuration, without any clear way of relating it to similar problems.

I guess the lesson is that it's easy to complain about the way economics research is done but hard to do better, at least not the first time you try, anyway.

Now that I'm going to start working after graduation, I won't have time to take this further. But if anyone else is inclined, I have available a very nice, modular, thoroughly commented matlab code base to do all the stuff in this paper...

Макинтошпен қақақ әріптерін жазу мүмкін!

At last! Multilingual Mac provides a Kazakh language keyboard for the Macintosh!