Mimicking Soros, Dangers of Low Volatility, & Collusion in the Music Industry
In his/her column, Soros on the cheap (April 4, 2007), Buttonwood makes the case for currency trading as a valuable addition to an investment portfolio. In particular, currency trading based on exchange rate models that take into account the 'carry trade' (an arbitrage technique which is similar to short selling), momentum, and purchasing power parity, have shown themselves to be profitable.
In last week's column, Sting in the tail: Is low volatility making the world too complacent about risk? (April 12, 2007), Buttonwood makes an even more convincing argument that instruments, practices, and institutions in the financial markets that leads to a relatively low volatility environment most of the time may wind up increasing 'tail risk' (i.e., extreme risk). Low volatility may be a 'false dawn' -- or perhaps even a cruel joke being played by the forces of market randomness -- that lull investors and traders into a false sense of security ... suckering people along into making bad financial decisions until catastrophe strikes.
Finally, in the March 29, 2007, 'Economics Focus' column, Silent orchestration: Can record companies act in concert, even without agreeing to do so?, The Economist examines the possibility that there is tacit collusion in the music industry by applying the logic of game theory. This type of analysis is very important to monopolies, antitrust, and competition laws & regulations. As the column points out, it is difficult to hold a cartel together (tacit or explicit), but, using game theoretic methods, it isn't impossible.