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10 posts from February 2014


Book Review: The Little Book

The-little-bookGrowth and Investment Portfolios (Little Books. Big Profits)

The title of the book may be The Little Book of Venture Capital Investing: Empowering Economic, but Louis Gerken delivered quite a large amount of venture capital (VC) coverage. The dramatic success companies like Google, Facebook, and Apple have given venture capital an aura of glamour and huge profits. The reality of VC and business start-ups is more complex and challenging. The role of companies coming out of this process has been transforming our lives. It fits in with the increasing popularity of entrepreneurship, which is now an important alternative career path. Entrepreneurship and business start-ups have moved from the creative fringes into the mainstream of what financial professionals need to learn about.

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Recent Research: Highlights from February 2014

"Contribution of Pension and Retirement Savings to Retirement Income Security: More Than Meets the Eye"
The Journal of Retirement (Winter 2014)
Billie Jean Miller and Sylvester J. Schieber

Recently, much concern has been expressed about the U.S. retirement system. Social Security is underfunded, while supplemental plans reportedly provide benefits half only that of Social Security and have gained little ground over the last 40 years. The shift to defined contribution plans is often seen as problematic. Some analysts suggest scrapping tax preferences for retirement plans and expanding Social Security. Much evidence that supplemental plans are coming up short on enhancing retirement security comes from the Current Population Survey (CPS). The analysis here shows that most income from retirement plans is not captured by the CPS or the Social Security reports developed using it. Ignoring retirees’ growing private retirement savings and income distorts the role played by private pensions, resulting in inaccurate assessments of retirees’ economic status. This error may bias policymakers’ judgment as to the right policies for an aging population and underfunded pensions.

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Is Bitcoin a Real Currency?

Dyermack Yermack examines Bitcoin’s historical trading behavior to determine whether or not it behaves like a traditional sovereign currency. He finds that Bitcoin’s exchange rate volatility is greater than the volatilities of widely used currencies, undermining Bitcoin’s usefulness as a unit of account or a store of value. Additionally, he finds that Bitcoin’s daily exchange rates exhibit virtually no correlation with bona fide currencies, which he argues makes Bitcoin useless for risk management purposes and difficult for its owners to hedge. Bitcoin also lacks access to a banking system with deposit insurance, and is not used to denominate consumer credit or loan contracts. Overall, he concludes that Bitcoin appears to behave more like a speculative investment than like a currency.

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Two Real-life Examples of What to Expect in a Goldman Sachs Case Study Interview


Want to work for Goldman Sachs? Wondering what you’ll encounter in your entry-level interview? We have a selection of Goldman Sachs’ graduate interview questions, herehere, and here.

However, if you’ve made it through to the final round and are participating in a Goldman Sachs assessment centre or ‘Superday’, you can expect something altogether more complex. At this stage, you’ll probably encounter a case study based upon a real-life business situation. You’ll typically be expected to discuss this case study in a small team with other applicants, and to make a presentation based upon your findings.

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Transcending the Tension between Climate Change and Inequality

This year’s gathering of the World Economic Forum at Davos was kicked off with the reading of a letter from Pope Francis, which ends: “I ask you to ensure that humanity is served by wealth and not ruled by it.” One can almost feel the squirming.

I recently participated in a roundtable among leading thinkers, activists, and social entrepreneurs on the need to put "system change" not just problem-solving on the agenda in places like Davos. This discussion is not about capitalism versus socialism. No existing system, not social democracies nor communist states, operate sustainably. As is often the case in these discussions, the inevitable and emotion-packed debate on priorities emerged.

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Looking for a New Finance Job in London or on Wall Street? Here’s Who You’re Up against


Now’s the time to find a new job in financial services. According to recruitment firm Astbury Marsden, things are looking up. According to one Morgan Stanley MD this is a great moment to be starting out in M&A. Leverage requirements for European banks are being relaxed. People are calling an end to the great recruitment hiatus of 2008.

What does it take to get a financial services job nowadays though? We’ve examined the many thousands of résumés uploaded into our CV database over the past three months and looked at the sorts of people who say they’re available to work in the City of London or on Wall Street.

The stats below should give you some idea of the calibre of the financial services professionals you’re up against. If you want to work on Wall Street, it clearly helps to study at an Ivy League University. Wherever you are, our figures suggest that the big proficiency of people working in the financial services industry globally is…a mastery of Excel.

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Inflation Risk Premium Implied by Options


One of the commonly used estimates of expected inflation is the yield differential between nominal bonds and inflation-indexed bonds (breakeven inflation). Breakeven inflation is however a biased estimate of expected inflation because it includes an inflation risk premium (IRP). The novelty of our approach is that we estimate the IRP using the volatility implied from foreign exchange (FX) option prices combined with a price of risk extracted from stock prices. Purchasing Power Parity theory provides the linkage between inflation and the foreign exchange rate. Using data from the Israeli government bond market, which has a long history of liquid markets in inflation-linked and nominal bonds as well as an active FX options market, we find a statistically and economically significant positive inflation risk premium.

 JEL Classification: E31, E32, E51

Key words: Inflation expectations, inflation-indexed (linked) bonds, Inflation risk premium, foreign exchange options



Inflation expectations are a key variable for investors in capital markets and also play an important role in determining monetary policy in many countries, especially in countries with strong and independent central banks. In this paper we derive a market-based measure of unbiased inflation expectations, net of inflation risk premium (IRP), using data on inflation indexed government bonds, nominal government bonds and options on foreign exchange (FX) in lieu of options on inflation which are not available. A number of approaches are used to forecast inflation. Most models are econometric models, both structural and purely statistical. These models, however, rely on historic data and are not forward looking. Another source of inflation forecasts are surveys of professional analysts and economists. 1 Surveys are, however, based on samples that are usually small and therefore might not be representative of market expectations. In economies where inflation-indexed government bonds have been issued (e.g. TIPS in the U.S.) inflation expectations are derived from the yield differential between nominal bonds and inflation – indexed (real) government bonds. This estimate is referred to as breakeven inflation (BEI). 2 Inflation indexed bonds exist now in many countries.3 The BEI as a measure of inflation expectations is used by central banks in a number of countries (e.g., the Federal Reserve, the Bank of England, Bank of Canada and the Bank of Israel) 4 . The advantages of these estimates are that they are market based, forward looking, can be computed continuously and can provide the entire term structure of inflation expectations. Numerous papers have estimated inflation expectations in different countries from nominal and inflation indexed bonds. 5

–Eddy Azoulay, Bank of Israel; Menachem Brenner* Stern School of Business, New York University; Yoram Landskroner, College for Academic Studies Or Yehuda And School of Business dministration The Hebrew University of Jerusalem; Roy Stein, Bank of Israel

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We would like to thank Meir Sokoler, Michael Beenstock, Ami Barnea, Alex Ilek, Bill Silber, Paul Wachtel and participants of the Bank of Israel Reaserch Department seminar for their helpful comments. Thanks also to Helena Pompushko and Angela Barenholtz for their assistance.


Book Review: In Bed With Wall Street


In his book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy, Larry Doyle is analyzing the relationship between Wall Street, the regulators, and Washington. Using his experience in Wall Street, Larry’s goal in writing this book was the pursuit of “truth” and “desire to help people.”  These are noble goals and Larry was brave enough to ask questions many people were afraid to ask.  Who regulates the regulators? How do we know that regulators didn’t collude with Wall Street firms?

However, Larry wasn’t clear about what type of truth he was looking for or how was he going to help people who were victimized by the crisis.  He wanted to expose the corrupt relationship between Wall Street and Washington even though we knew all along that this type of relationship existed before: revolving doors from Wall Street to Washington, or Wall Street to regulators and vice-versa.  We also know the role of lobbying from Wall Street to Washington. This is the structure of capitalism and the way we function here in the US.

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Why You Should (or Shouldn't) Take a CFA Review Class

CFA Exam Prep

Most candidates do not get through all three exams studying on their own. But is a live review class right for you? Only you know if you can commit to a weekly schedule or whether a live class appeals to you, but there is another factor you should consider. CFA Institute states, “The progressive nature of the three different levels means that the questions at Levels II and III require higher-order thinking than the questions at Level I.”  So I suggest thinking about this based on your exam level.

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When Markets Fail—Part I

“The only function of economic forecasting is to make astrology look respectable.” J. K. Galbraith

The reputation of financial economics as a “dismal science” (a phrase that Thomas Carlyle coined in relation to economics) was richly deserved during the 2008–2009 financial crisis and its aftermath. Although many scholars, including Robert Shiller, Paul Krugman, and Raghuram Rajan, rightly viewed the impending situation as a crisis (see also Lerner 2008), the perceived failure of economic scientists and high-level Wall Street practitioners to predict the meltdown reinforced this low reputation.

Several well-educated and skilled financial regulators were corrupt, as the documentary Inside Job points out. Yet I must remind readers that the handling of the crisis as it unfolded was highly competent, thanks mostly to Ben Bernanke, chairman of the Federal Reserve, and Tim Geithner, then president of the Federal Reserve Bank of New York. Economic knowledge, then, still stands for something. Below I discuss what contemporary economics has learned about cases in which markets fail and the state has to intervene.

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