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March 02, 2021


Paddy Carter

My favourite twitter heterodox economists often claim that econometrics is a waste of time and if you can't see it by eyeballing the data it isn't there, and also that capital stock data and TFP estimates are made up numbers with no substance. If I had the time I would like to write a similar defence of those too.

Jan Wiklund

Maths is a language. Economists are free to use languages other economists understand. But maths in economics go haywire sometimes.

My late friend the mathematician complained once that economists didn't understand what maths is. They used to ask him to put a mathematical formula of the idea in their theses - and when he had dome that, they believed that he had proved their ideas were correct.

Maths is however just a language. And you can tell a lie in any language.

The other trap is that maths is a very hermetic language. Many have deplored that Hyman Minsky's idea of financial crashes were not heeded until the crash had actually happened. But I tried once to read his book (Can it happen again) - and was taken aback by his mathematical language I didn't understand.

He would perhaps have been better understood if he had written in a language people - not least politicians - could read. Perhaps even the crash would have been averted.


Finance equations are not the same as "Economics" equations. Finance is not the same as "Economics", even if many "sell-side" Economists seem to think that Finance something like that.


Agree with Jan Wiklund and Blissex (on this one).

I wonder what the standard deviation of assets that measure volatility is? Options markets are larger in dollar volume than the underlying stock markets they derivatize. The idea behind options bets is that you can hedge and minimize the volatility of your returns. Is Cochrane even aware of tradable volatility products like VXX, SVXY, UVXY, and the options you can buy and sell on them?

It's also interesting that robinhood.com tries to make margin trading and fractional share purchases available for small retail investors, but regulators treat this as a threat ...


Maths sometimes reveals 'something funny going on'. A situation where the facts we think we know do not quite add up - think how Maxwell figured out electromagnetism or Einstein saw how time and space and gravity hung together. Looking around and recognising 'something funny going on' is the key to new discoveries and insights.

Perhaps there are plenty of practicing traders who never knew much formal economics or have forgotten it do notice 'something funny' or have a hunch about some market phenomenon. Linking them to someone who has the time and intuition and formal abilities - a formal learned society or the pub - which is more likely?


It strikes me that Cochrane's equation basically reduces to Expected Returns = Volatility. (The other terms are subjective, unobservable, or 1 if your job is trading.)

Volatility traders say everyone is trading volatility without necessarily knowing it, so why not trade VIX options directly? If you buy a S&P 500 ETF, you are short volatility so why not cut out the middle stock and just short the VIX?

Investopedia reports:

"VIX options are powerful instruments that traders can add to their arsenals. They isolate volatility, trade in a range, have high volatility of their own, and cannot go to zero. For those who are new to options trading, the VIX options are even more exciting. Most experienced professionals who focus on volatility trading are both buying and selling options. However, new traders often find that their brokerage firms do not allow them to sell options. By buying VIX calls, puts, or spreads, new traders gain access to a wider variety of volatility trades."

So Cochrane's equation reduces to something quite profound that I don't think he quite understands, because he doesn't trade options.

James Charles

“This paper has suggested a simple model that can account for the key anomalies of the traditional monetary approach. It disaggregates the quantity of credit into a 'real' and a financial circulation. In time periods, when the ratio of credit in the financial circulation to credit in the real circulation rises, the simple quantity theory must be expected to disappoint, as it is a special case of the more general quantity theorem of disaggregated credit. In such time periods, a financial boom is likely, as asset prices are driven up by speculative borrowing on the back of collateralised assets. This explains why the traditional monetary quantity theory was not popular in the 1920s and 1930s, and again in the late 1980s and early 1990s. Then the traditionally defined velocity of money declines and excess credit creation can 'spill over' as foreign investment. However, during time periods such as the 1950s, when in many countries credit was mainly channeled into the real economy, asset prices remained stable and the traditional quantity theory could be expected to hold. The fact that the model can account for the major anomalies observed in many countries over many time periods demonstrates generality and robustness.
The empirical results for the Japanese case have been unambiguously supportive. The Japanese asset bubble of the 1980s was due to excess credit creation by banks for speculative purposes, largely in the real estate market. The apparent velocity decline is shown to be due to a rise in credit money employed for financial transactions, while the correctly defined velocity of the real circulation is found to be very stable“

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