Let's be humans

I don't even know where to begin talking about the incident. They both were just regular people, like you and me, doing something completely regular, watching a movie, on a very regular day. Little did they know what the night held for them. Every moment from there on they, in fact I and the whole of India, would have wished for them to change any one decision they made - maybe a different day for the movie, a different theater, a different time - but sadly they didn't. As I try to recall even the description of their trauma in the media my brain fails to comprehend, even in its wildest of imaginations, the inhuman treatment that was vetted out to them. How could a human forego their entire value system and loose their senses to such an extent that, forget treating another human with respect and courtesy or even indifference, they not only get insensitive to the pain and suffering of another person but they actually participate in the barbaric act that causes such pain? Even as I write this I feel my body contracting as I imagine the excruciating pain she suffered. And what breaks my heart is to think that she isn't the only one. Not even the tip of the iceberg. Hers was the story that caught widespread attention and united the whole nation for a common cause but sadly her story mirrors the atrocities that many innocent girls face throughout the nation.

The incident happened on Dec 16th, New Delhi - the unsafest metropolitan in India. She was with her friend and they finished watching a late night movie. The scarcity of public buses and probably the harassment by Delhi autos, who would charge astronomical amounts to exploit the situation, prompted them to take one of the private buses to go back home. The bus had tinted windows and, as they recount, they were lured onto the bus. What ensued in the next two hours can not be imagined as a part of even the most horrible scene behind the reels. Six men, all intoxicated, illiterate, shameless and wicked with lewd minds indulged in the most abhorrent act, treating the girl worse than an object, an object you were about to throw. The driver of the bus paid no heed to the imploring cries of the girl as he sped past stipulated stops and circled some deserted stretches to avoid catching attention. The men, six in number, overpowered the guy, stripped him off his clothes and beat him, making him incapable to even move a muscle in an attempt to salvage the situation. Then they stripped the girl and used an iron rod to conduct such deplorable acts that no one can classify them as, not only humans but, any creature capable of showing any respect towards one of their own. It is beyond my comprehension that how one can be so involved in revelry at the cost of someone else's life that they lose the emotional connect and a sense of sympathy to the resisting shrieks and struggle of the another person. And after two hours of extracting all the life out of the girl they disposed her and her friend's body off on the road in the biting cold. To even find a metaphor to describe this act fills my brain with muck and any anger or hatred expressed towards this brutal act can never compensate for what those two people suffered. The girl was transported to a hospital in Singapore on grounds of treatment where she succumbed to her injuries. From the testimony of the guy, he wasn't even offered any treatment and he took his own care while being besides her friend and helping the authorities investigate and ensure justice.

I feel that there are three fronts on which we need to work to at least begin eradicating this evil act our off our society. Of course modifying our laws to ensure a strict and swift verdict for the accused is an important milestone but more importantly I think there is a huge obstacle in what transpires between the incident itself and the lodging and investigation of the complaint. In this particular case the victims cried for help from the roadside and no one was ready to help until the police arrived about half an hour later. Personally, it's hard to blame the passerby. Imagine yourself walking, riding or driving on a road stretch and finding a profusely bleeding naked person on the side crying for help in the darkness of the night! How likely would you be to stop and take them to the hospital? It's tough! Even after the police came, the victims were suffering in the biting cold pleading for clothes, the officers were concerned about the jurisdiction under which the case should fall. I strongly think that it's more important for the law to change to focus on advocating immediate and unconditional help to those in need. To support the "Right to Live" above all else and to avoid trapping the helper in such legal intricacies that they hesitate to make somebody's fatal problem as their own. At the time when her body was bleeding and her internal organs were dislocated, had she been administered medical help without any bureaucracy the results might have been different. But it is the fear of getting caught in the legal web as a witness trying to help a crime victim that withholds the common man from stepping forward and helping someone in dire need.

Another obstacle that would come in the way of reporting such crimes is the mentality of our society. How can we progress to uproot this crime when our spiritual and political leaders blame the victim and the lifestyle of those protesting. Even though they are individuals presenting their viewpoint, the fact that they represent thousands of people who follow their ideology reflects the mentality of a big section of our society. Chetan Bhagat writes very well about working towards an inclusive growth to address this vast disparity. Globalization is impacting some regions more rapidly than others and there is still a large section in India that forbids a boy and girl to roam together in their youth. Quite understandably so, a case in such a society would be suppressed to avoid the "stigma" associated with the victim. But even the typical middle class parents would be concerned of their standing in the community if, God forbid, such an incident about their daughter is revealed in public. As we progress and integrate ourselves with the rest of the world it is the duty of our leaders to oversee the cultural transition that is bound to increase the interaction of women with the society and grant them the freedom that was earlier repressed. Our legal and judicial systems need to respect and support such transitions and not point at the resulting lifestyle as the reason for such mishaps. This is a BIG change and apart from needing a strong law to avoid harassment due to lifestyle I think it needs cooperation within the educated section to talk about such incidents rather than shun them.

But, most importantly, I think we need to get into the root of the atrocious crime. We can have all the laws we want but no person, in their rightest of minds, will be able to, even remotely, justify the brutal act. It's inhuman. So why would somebody engage in it? I think the reason when a gang is involved is different from one when just a person is accused. In the case of one person statistics reveal that many a times it's someone close. But in the case of a gang it would be worthy to assess their history. In this particular case all six accused hailed from a slum, were illiterate and used to drink, abuse and create a chaos in their slums. In their intoxicated state they had lost their reasoning to such an extent that satisfying their innate desires was more important than anything in the world. ANYTHING. They were, probably, not in a position to comprehend the consequences of this act. And they are not alone. In this case I think education and employment might have helped bring stability and the discipline to avoid them from entering a state in which they are blinded of the repercussions of their own actions.
But is it possible for someone to be aware of the consequences and still indulge in this act? Yes, when they think they are beyond the reach of the legal system. There have been cases where the rich and powerful have exploited their position either with a direct intention or to uphold their ego when challenged. With the rampant corruption and the power exercised by the higher echelons of the society many such cases are subdued by hook or crook and the few that emerge create a large outcry. Easily said than done, of late there have been many movements against corruption in India and a lot of emphasis is laid on a completely independent and speedy judicial system. Though we have a long way to go I think that painting a sharper picture of the consequences and ensuring proper execution might help in curtailing even the thought that could lead to such an inhuman act.

May God give courage to her family and others like her's. I hope we just don't get resilient but pay her a tribute with some concrete actions.

How much money do you need?

Very recently the United States government averted the Fiscal Cliff, allegedly the biggest catastrophe that would have drawn its economy back into a recession. Now, you may ask, how would that have happened?It's simple - Bush, during his tenure, had passed on a bill for a tax reduction that was going to expire on 31st Dec 2012 after which the taxes would have gone up. In parallel, the government had raised the debt ceiling in July 2011 that came with a clause to implement a series of discretionary spending cuts beginning 2013 if the Congress is unable to bring down the deficit, which it couldn't. When these two forces combine together it would have caused an increase in the tax rates and at the same time would have lowered government spending that would have threatened to stall economic growth even before it could begin.

In simple terms, the government needs money to function and implement it's policies. That capital comes from income which are largely composed of tax revenue. With the financial crisis and the multiple wars that the Congress had to battle its reserves have been drying up faster than they could have been replenished that led US to borrow consistently. The tax cuts have further reduced its income stream while the unaltered spending has kept its appetite at its peak. Now the debt ceiling is a self proclaimed limit imposed by the Congress on the amount they can borrow which can only be changed by a majority ruling. Although politically complex, economically if US borrows over it's ceiling then it is considered a technical default that can results in a chaos about which I'll talk in a while. To avoid the ensuing chaos and for the government to be able to carry out its activities the debt ceiling was raised in July 2011. Just as it was raised US was deemed a slightly incredible entity to lend money to by one of the rating agencies which is not really surprising since the move is just an artificial measure to increase its borrowing capacity. But what is also surprising is that there was demand for such debt because in the middle of the Euro Crisis it was still considered a safe haven and US sold about $240bn of debt in one day, the largest such sale ever. This also helped keen the interest rates to a very low level.

During 2012 US managed to stay under the modified debt ceiling even after the QE rounds by Fed and the interest rates remained extremely low. The intent was to stimulate the economy and bring it on the path of growth and as we see it did manage to provide the markets with one of the best years that they had seen. But the future of such growth now remains uncertain as with the mismanaged deficit US seems to be drawing close to a debt crisis that could threaten the financial powerhouse of the world.

As for the tax cuts, Bush had enacted the law in 2003 when no crisis was looming and then Obama had a choice of either extending them or letting them expire in Dec 2010. After careful deliberation and analysis it was computed that an increase in rates would lead to an annual increase of about $3000 in middle class income taxes. At the time when the middle class was already grappling with the after effects of the crisis it would certainly have been a challenge, more political than economic, to thrust the public with a larger tax bill. And now, two years later, the same situation looked at the Congress in the face again and this time with an added sword of fiscal deficit hanging on its neck.

As the tax increases are coupled with a fiscal deficit, this time the Congress heeded to Obama's proposal of letting the taxes stay low for the middle class while allowing the tax increase to go into affect for the rich. It indeed seems to help bring in much needed income over the next couple of years while still not taking away any disposable income from the middle class. But the Congress did not get to any agreement on the debt ceiling and it only has two months before it can take a decision on its limit. Now it can be debated whether the increase in taxes would serve the purpose it is meant to as some studies show that the rich were more inclined to pay taxes when the rates were lower than when they are up. But the markets still haven't digested the brunt of the news and are aware of the looming danger of the debt in the coming months. This has led to a drop in the prices of US bonds as investors express their fear in US debt.

I think that this can have an enormous impact on the economy. US debt has been blatantly increasing since the turn of the previous decade without any focus on increasing the revenue. A weak economy led it to ease the burden on the troubled households by lowering the taxes which it was forced to increase a few days ago.  The effects of such actions are not felt in a day or two but they pile up only to explode at some stage. How can the country which cannot pay its obligations assure me of my bank's obligations towards me in the form of deposits? Bank deposits are insured by FDIC and so it might lead to a bank run which would further threaten the entire financial system.

The US debt has been enjoying a stable position with high prices and high demands, especially because of $ being the reserve currency but it seems like that notion is in its reversal. I think that in the next couple of years US treasuries will drop in value and with economic growth yet to come the true value will only be seen in real assets. Gold and other commodities and growth in developing nations would probably be the next target on investors' radar. I think US has started to realize that it needs to tighten it's reign and we should see some contraction in its spending in the coming few months. It's hard to balance that with an ailing economy but it's even hard to lose the faith and trust of being a financial powerhouse.

It is debatable as to what would happen. It's not easy to lose faith in US. As China works to keep US bonds in its reserves and investors around the world don't find a safe asset to invest in, US would continue to enjoy the position of being a safe haven.


[Update]
An interesting read: http://www.bloomberg.com/news/2013-01-02/ten-things-you-should-know-about-the-cliff-deal-so-far-.html

Statistical Arbitrage!

With my experience in statistical analysis and after further gaining information on equity markets I was curious to explore the possibility of generating alpha by combining the two skills. I got an opportunity where I worked on a similar idea and then I extended it on the data I had downloaded from yahoo.
In this strategy I try to find a statistical equivalent of pairs trading and try to extract inefficiencies in price movements.

Abstract

The objective of this analysis is to obtain an alpha that is based on statistically exploring ineffi ciencies in stock prices. The strategy involves decomposing stock prices in each industry into principal components that explain the most variance and then regress the stock prices on those components to obtain the stock's  dependence on them. Next the components are forecasted using GARCH model and hence the forecasted evolution of the stocks is also obtained based on the regression results. Based on these forecasts I will create a long-short neutral arbitrage strategy with the aim of achieving high risk adjusted returns.

Statistical Arbitrage on US Equity
https://github.com/kunalrajani/statistical-arbitrage

Disclaimer: Please read
Please note that this is my independent work where I have used data from yahoo finance to explore statistical concepts from a course I took in statistics. It may inadvertently have an overlap with a work that somebody else has already done and I have no intentions of replicating it. I would be glad to know of any such clash and post a clarification on this post.
I am open to having my work being redistributed or used but only after due credit and a reference has been made. Feel free to contact me to avoid any misunderstandings or if you need more details from this paper. 

*The analysis is still underway and the conclusions are under review

President's TheBait

It was the first time that I saw the incumbent and an aspirer to the most powerful position in the world battling out each other in a 'people's court' to gain confidence and hence the vote to be the next President of the United States. Being from a nation with multi-party politics this seems somewhat infeasible in India but there are many other reasons that I think hinder such an event. There is a lot that can be said about these debates, their pros and cons, modifications that can lend more credibility to their outcomes, their inheritance to other democracies, etc. and I will try to touch briefly on each of them.

I think that there are many shortcomings that such a debate faces that go unnoticed in the sequence of events.   The biggest drawback I think of this format is the inability to verify the facts. I remember very vividly how Obama kept on insisting about the $7 Trillion increase in deficit that Romney's policies would lead to while Romney consistently kept on denying any such proposal from his end. Had there been a team on both the sides well equipped to verify and crunch out the details of any statement it would have been an expedient revelation of the accuracy of the debate. I'm not questioning the feasibility of such a setup but lack of such checks allows the candidates to revolve around the truth with their confidence lending credibility to their statements. The common man who doesn't have the resources or the capability to analyze the debate and connect it with the facts from the campaign is liable to fall prey to such falacies and create an incorrect opinion based on them. For eg. it seems a no brainer to vote to have your taxes cut, but, that leading to more jobs and hence, on the contrary, an overall increase in tax revenue is a hypothetical assumption and one that is prone to the dynamics of the economy. Of course Obama must have computed the impact of such a move based on which he came up with the $2 Trillion figure but, at the moment of Romney's repudiation, had there been a team that could have presented their findings and hence challenged Romney, it would have once and for all exposed the impact of his policies. These statements can lead to an incorrect assessment of the manifesto of the candidates especially by those who don't go deeper into their analysis. In another case during the debate on foreign policies when Romney brought up the controversy over the Benghazi attack and how inefficient the white house was in investigating the situation and make statements his entire accusation was responded by a confident "Get the transcripts governor." And it is this confidence that can mislead a big electorate who care about such issues to align with Obama and trust him with their vote.

We know that its all politics and the truth, even if told, will be presented in a manner that would benefit the speaker. An excellent example of this was when Romney accused Obama of visiting the middle east region and leaving out Israel that he considers as the most important American Ally in the area. This was dramatically turned around by Obama who stressed that the importance of such tours was not centered around publicity and election campaigns but more so to be on the ground and learn from the hardships that people face. He highlighted that he had indeed visited Israel earlier during the Lebanon War and had offered his condolence and help to the families affected by the war. In another situation where Romney pointed to the inability of Obama administration to contain the rise in oil prices and vowed to bring them down to 'pre-Obama' levels, Obama struck back cleverly pointing to the low prices being reflective of the failed Republican policies that brought the entire economy to a halt. It seemed Obama learnt really well from the first debate on how to turn around the reason for a shortfall in any economic indicator to his predecessor.

Both the parties have the goodwill of the Americans in their heart and, striking out misuse of power by corruption for personal gains, both the leaders would aim to uplift the standards of the Americans if elected. (The striking out of corruption is a very critical factor that separates the politics in developing countries like India where numerous scams result from exploitation of power and personal motives play a big role in candidates vying to be elected.) In that scenario it is difficult to imagine any disparities in their policies and its the inability to identify that that can lead an average Joe swing in one direction or the other simply by the confidence and the gut factor. But inspite of these shortcomings I think that these debates provide a crucial platform to witness the vision and its depth that the candidates have for the future. Especially interesting are the issues where both the candidates take strikingly opposite views and then debate to defend their stances. Two key issues to report in this aspect are the taxes and medicare. When you truly have opposing views it makes it easier to get closer to the vision of the candidate and question their thinking. In the case of taxes it makes it easy to distinguish that Romney wishes to lower tax rates while Obama doesn't show any actionable inclination in that regard. For medicare Romney proposes the insurance to be in the hands of the private players without any hindrance from the state and relies on competition as the platform to provide different products while Obama proposes a government enforced program to ensure that everybody has insurance. These two facets seem to point to deregulation and capitalism as being reflective of a Republican and to the liberal and progressive nature of a Democrat and even though both the parties have the best intentions at heart their radically different means can lead to quite different outcomes.

For the well informed and educated these debates provide a good insight into the minds of the leaders themselves among whom one would be voted. It is this insight of a concise agenda of the parties and the knowledge about the leadership that I think is missing in Indian politics. Hence the political parties are able to take advantage of the unaware masses who cannot think and analyze, beyond their short term needs, about the economy, jobs, growth and income. They are contented with the promises of factories that would provide them employment, irrigation measures for their farms, development of roads, hospitals, etc. Although that these are essential measures to promote growth and well being of citizens it would be helpful if they promote their manifestos and highlight their vision than the next project. Agreed that with such a huge electorate, a diverse set of cultures, different geographies and varied needs, add on top the multi-lingual regions, it makes it extremely difficult for a common debate to make sense for a majority of those watching. I think before talking about the debate political parties also needs to put a face to their campaign than install puppets managed by family run politics. A strong leader needs to be able to instill confidence into the people about his ability to take the country forward and be available to answer to people. Once the parties have a leader who is also a contender for the Prime post I think it is possible to have them present their views on the key problems being faced by the country which can probably be dubbed or have subtitles and be telecasted across the nation.

Without such leaders and their visions it would be hard to uproot dirty politics out of government and any discussions or debates would act as the baits to attract the people based on their immediate needs.

Understanding Factor models and Cone programming

This was a very interesting project we undertook. Not because its result was any enormous value addition but because it helped in grasping concepts and procedures critical to function in practice. It helped in going through the rigorous process of data cleaning and implementing factor models and checking their significance to predict stock returns. Further on we explored optimization using cone programming, which is a special case of interior point methods, to maximize the sharpe ratio and obtain a market beating portfolio.

Here is the Abstract:

The goal of our project is to utilize factor models to explain returns and optimize the Sharpe ratio to create a portfolio that outperforms the S&P 500. After re fining our data we have a universe of 335 stock in which we can invest. We re-balance our portfolio quarterly and incorporate factor models and Sharpe ratio optimization through cone programming to form the portfolio. The rest of the paper is organized as follows: Section 1 is a short introduction of our paper, Section 2 gives a brief idea of the data available and what kind of choices we made to reach the final universe of stocks, Section 3 gives an idea of the general methodology used in the paper, Section 4 describes the results that we have reached, Section 5 presents the significance test we performed, Section 6 presents the results of different sensitivity analysis and Section 7 summarizes the project and gives suggestions for further research.

Investment Allocation using Factor models and Cone programming optimization

Let's get on the street - Part II

Furthering my experimentation with the real world data, I delved into the minds and psychology of investors. I had taken a course on Behavioral Finance that explains certain irrational phenomena that governs the nature of humans when then invest. This nature has certain shortcomings that are overcome by what has emerged to be known as systematic investing where a computer algorithm makes the decisions rather than a human who can be misguided by emotions.

The following Abstract gives a brief overview of the analysis:

There are many instances when a stock price experiences a sudden jump or a decline and, besides the financial crisis, it has to do with a fundamental change in the business of the stock. Eg. the consumer reaction to netflix's fee structure or a revelation of the revenue reporting mechanism of Groupon or the billions of dollars of trading losses by a bank or the passing of a law that gives huge tax incentives to renewable energy. These events cause almost an immediate reaction by the market reflected by the stock price changes and then as these events are studied in depth and their true impact is understood, the stocks migrate towards their true valuation. The relationship between a surge or a drop and the later migration is something that interacts with human nature and, if understood well, can be leveraged to generate investment idea. In this paper I shall explore such drastic movements and try to understand what their impact is on the stock prices. This is more complicated than it seems because of a change in investors' perceptions after the financial crisis and because of different nature of information dissemination for firms in different segments.

Investing on Behavioral bias

Disclaimer: Please read
Please note that this is my independent work where I have used data from yahoo finance to explore time series concepts from a course I took in statistics. It may inadvertently have an overlap with a work that somebody else has already done and I have no intentions of replicating it. I would be glad to know of any such clash and post a clarification on this post.
I am open to having my work being redistributed or used but only after due credit and a reference has been made. Feel free to contact me to avoid any misunderstandings or if you need more details from this paper.

*The analysis is still underway and the conclusions are under review

Let's get on the street - Part I

Now that I'm in my third semester of my program I've started to apply a few concepts that I learnt in my earlier courses to see if they actually make sense in the real world. It's hard to digest the fact that even doing an "a+b" in the real world is not that easy - acquiring data, ensuring that it is exactly what you want, cleaning it, checking if it makes sense and clipping out those that don't and still be left with enough meaningful numbers  involve a series of massive challenges that only a practitioner would comprehend. And that is exactly why I ventured on this endeavor, to map classroom coaching to real world implementation.

I would have actually wanted to branch off from this blog since it has mostly been about life at Cornell but for now I think I would include all my analysis here until I figure out the best way to split the two different topics. In this post I attempt to implement ARMA time series model on large cap stock returns in an attempt to predict their future returns. It's a first attempt but nevertheless gives an excellent idea about the issues I described above and if the time series concepts work by a brute force methodology.

ARMA model for large cap stocks returns

Disclaimer: Please read
Please note that this is my independent work where I have used data from yahoo finance to explore time series concepts from a course I took in statistics. It may inadvertently have an overlap with a work that somebody else has already done and I have no intentions of replicating it. I would be glad to know of any such clash and post a clarification on this post.
I am open to having my work being redistributed or used but only after due credit and a reference has been made. Feel free to contact me to avoid any misunderstandings or if you need more details from this paper.