[open-economics] Fwd: [okfn-discuss] Open Source Finance Meetup in San Francisco, February 20

Wed Feb 13 21:34:28 UTC 2013

Alex

Thanks for your thoughtful responses.  Maybe we can continue the debate off line, but I would like to offer two points for the benefit of the list.

1.       You could respond that we are experiencing the worst financial crisis in history, but I am glad you didn’t, because that would be inaccurate.  The 1930s were a lot worse, with several major European countries defaulting on debts incurred during the First World War.  We can mine Great Depression history for stress scenarios that can then be used in models.

2.       I think your concerns about gaming the model are overstated.  Imagine for a second we had a sovereign default probability model based on Debt/GDP ratio (I don’t advocate this parameter, but it is good for exposition).  Aside from outright lying about them, it is hard for a government to alter the level of debt or the level of GDP to game the model. So, if you choose parameters that are resistant to manipulation, the model is less likely to require frequent changes.

Regards,

Marc

From: alexander.praetorius at serapath.de [mailto:alexander.praetorius at serapath.de] On Behalf Of Alexander Praetorius
Sent: Wednesday, February 13, 2013 1:06 PM
To: Marc Joffe
Cc: Velichka Dimitrova; open-economics at lists.okfn.org
Subject: Re: [open-economics] Fwd: [okfn-discuss] Open Source Finance Meetup in San Francisco, February 20

On Wed, Feb 13, 2013 at 9:18 PM, Marc Joffe <marc at publicsectorcredit.org> wrote:

Alexander

Thanks for your response. You are welcome to dial in, although it will be 3:30am CET on 21 February when I start talking!

Several commercial models are available to estimate default probabilities for individual, corporate and structured finance credits. While no model is perfect, these technologies have enjoyed continuous use at banks and other financial institutions for decades. If they didn’t work, I am sure they would fall out of use.

[alex]
Hehehe :-)
This is a kind of reasoning that is not falsifiable, thus not a very scientific method of arguing.

I could respond by indicating that we are currently experiencing the biggest financial crisis of all time and perhaps a dysfunctional mechanism to handle risk, thus "ratings", might be one of the major reasons why the world is experiencing this financial crisis.... just saying :-)
[/alex]

Much of the difference in interest rates across different fixed income asset classes is due to differences in risk estimates by market participants. These investors are informally modeling default risk in their heads.  Since we know from the behavioral economics literature that people aren’t very good at estimating probabilities or weighting multiple factors, surely we can get better results by delegating these tasks to a computer system that incorporates our study of historical patterns and our theoretical understanding of default drivers.

[alex]
In the end it always boils down to heuristic methods. Heuristic methods might work as long as they are not transparent, but once they are, the subjects rated by the heuristics will anticipate the method and thus make it fail, because the very act of transparently measuring it will affect the behavior of the system itself.
[/alex]

For more on this please see my recent journal article at http://www.econjwatch.org/828.

The issue of “gaming” the model is a serious one.

[alex]
And the issues will be even bigger if the model is transparent, but please do not conclude that i argue for a continuation of intransparent ratings.
I think the method of "rating" will never solve the issue at all.
[/alex]

Once an open source community is established to support a given model, it needs to be able to adapt the model to changes in market conditions. Also, this concern is not unique to open source solutions. In the run up to the financial crisis, issuers adjusted their deal structures to meet published rating agency criteria.

[alex]
To me, this sounds like a "raise of arms" kind of proposal :-)
Issuers adjust -> Model adapts -> Issuers adjust -> Model adapts -> ...ad infinitum...->

I think a "raise of arms" solution is not a solution, but a waste of ressources on both sides. It's more a "cold war" than a real solution, so to speak.
[/alex]

Regards,

Marc

From: open-economics-bounces at lists.okfn.org [mailto:open-economics-bounces at lists.okfn.org] On Behalf Of Alexander Praetorius
Sent: Wednesday, February 13, 2013 11:52 AM
To: Velichka Dimitrova
Cc: open-economics at lists.okfn.org
Subject: Re: [open-economics] Fwd: [okfn-discuss] Open Source Finance Meetup in San Francisco, February 20

I'd like to attend.
I wonder why you think that a calculation could solve the problem.

What leads to the believe, that something as a "default probability" could be calculated at all?

If it is not transparent, then people wonder if they could trust in ratings.
If it is transparent, then people could perfectly anticipate the rating method, rendering the rating obsolete, because Sovereign Debt could be artificially engineered in a way that optimizes the rating, so that the actual rating will never reflect the "true probability of defaulting".

So people will start to interpret the "official open source rating" and the problem will start again :-)

On Wed, Feb 13, 2013 at 8:18 PM, Velichka Dimitrova <velichka.dimitrova at okfn.org> wrote:

---------- Forwarded message ----------
From: Marc Joffe <marc at publicsectorcredit.org>
Date: Wed, Feb 13, 2013 at 4:14 PM
Subject: [okfn-discuss] Open Source Finance Meetup in San Francisco, February 20
To: balug-talk at lists.balug.org, okfn-discuss at lists.okfn.org, bayarea.members at lists.the-hub.net

Last week’s Department of Justice lawsuit against S&P reminds that five years after the financial crisis, the global financial system is still broken and constructive solutions remain out of reach. We believe that open source tools can bring the transparency that this system needs, and have formed a Meetup group in San Francisco to discuss open source /open data finance concepts. 

Our next Meetup is Wednesday, February 20th at 6:00 PM at the offices of Kaggle, 188 King Street Unit 502, San Francisco, CA. To attend in person, please join the Open Source Finance Meetup <http://www.meetup.com/Open-Source-Finance>  group and RSVP. A description of this meeting follows:

Rating agency assessments of sovereign debt have been in the news for some time. In 2011, S&P faced enormous criticism for downgrading the US, while all agencies have been criticized for downgrading Greece too late and for discriminating against emerging market countries. Less is said about US state bond ratings, but interested observers might wonder why California is still rated lower than many toxic assets despite balancing its budget.

Instead of analyst discretion, sovereign and state credit ratings can and should be calculated with transparent, open source computer models. Last year, I introduced such a model - the  <http://www.publicsectorcredit.org/pscf.html> Public Sector Credit Framework - which I will demonstrate. The tool uses a combination of Excel and C to perform a multi-year fiscal simulation on the target government.

No food this time, but we are offering a virtual meeting alternative.  Up to 24 remote attendees can access the session using GoToMeeting. There is no charge for attending a GoToMeeting but you do have to download a small client app. Most major platforms are supported. Details are as follows:

Web Address:  <https://www3.gotomeeting.com/join/463426174> https://www3.gotomeeting.com/join/463426174

Telephone Number: +1 (619) 550-0000 <tel:%2B1%20%28619%29%20550-0000> 

Access Code: 463-426-174

Start Time:  6:30 PM Pacific Standard Time

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Alexander Praetorius

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[skype] alexander.praetorius

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Best Regards / Mit freundlichen Grüßen

***********************************************

Alexander Praetorius

Rappstraße 13

D - 60318 Frankfurt am Main

Germany

[skype] alexander.praetorius

[mail] citizen at serapath.de <mailto:alexander.praetorius at serapath.de> 

[web] http://wiki.piratenpartei.de/Benutzer:Serapath 

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