Pearson-Wong Diffusions

The data give the ratio of "forehead" breadth to body length for 1000 crabs sampled at Naples by Professor W.F.R. Weldon. Source:  R mixdist package (http://goo.gl/CaGkt).

1. Introduction I introduce the concept of Pearson-Wong diffusions and then show how this mathematical object can be put to use in macro-finance. Roughly speaking, Pearson-Wong diffusions link properties of stochastic processes to properties of … [Continue reading]

Correct Prices Are Not Free

Financial industry share of US GDP. Source: Philippon (2007). Estimation based on U.S. Annual Industry Accounts, Kuznet (1941), Martin (1939), U.S. Census, and Historical Statistics of the U.S. (2006).

1. Introduction It takes hard work to maintain prices at their fundamental values. Accurate, responsive and informative prices do not occur by magic. Analysts have to diligently monitor firms prospects and security prices. Market makers have to … [Continue reading]