Monthly Archives: March 2014

Rebranding TCD

I have to say that I have mixed feelings about this rebranding. Part of me says great, look at things with a fresh eye. A greater part of me says that its a monstrous waste of time and money (about €100k we are told).

TCD, Trinity College Dublin, is a brand. Its one that has stood the test of time for literal centuries. It is, along with a very few others, one of the few global brands we have for Ireland. We are told that we have to change the name to Trinity College, The University of Dublin, as people in Chindia get confused. Hmmm. Do they get confused as to what MIT is ? Or Caltech? I doubt it. They may be momentarily confused as to whether it is an independent university or not but is that reason enough to meddle with something that is time proven? I have not seen any evidence adduced, mere assertion, that this is a problem in recruiting Chindian students.  Call me old fashioned but I would like evidence.

Its worse. Leavign rankings aside its useful for people who wish to find research to know where you are working. Bibliographic databases, such as Web of Science and Scopus and so on work on institutional affiliations. Now about 75% of all TCD work is labelled Trinity College Dublin. So that will remain as it is for all outward facing activity. But out in Chindia we will be Trinity College the University of Dublin. Presumably the confusion as to what exactly TCD is and was will now be replaced by confusion as to why nobody from TCDTUD is publishing (but gosh them lads in TCD seem very active).

And then theres the crest. We are to go from a longstanding (but with no certainty as to when it actually formalised) crest to a new one. John Scattergood presented to the Fellows a long, detailed, arcane and fascinating presentation on the various arms, crests and armorials of the college and the university.  We are now to move from this longstanding, widely used and ancient looking crest to one that frankly looks like it was created in MS Paint. Theres a bizarre argument from the brand consultants that we need to move from yellow and blue as it represents “value” (as if that was bad) brands such as Ryanair and Ikea. If TCD were as successful in its field as they are in theirs then I would be a happy camper…
This is the present shield…. doesn’t it just scream CHEAP !! CHEAP!!!! So easily confused with Maxol…. (yes, that was also an argument).

Screenshot 2014-03-30 09.42.52








This is the proposed new shield. Much classier eh…

Screenshot 2014-03-30 09.42.37







There is a good argument to look again at brands. And theres  a good argument that we should have one consistent logotype (we have at present dozens, and thats confusing). What’s concerning to me is that we seem in this exercise to have taken absolutely no cognizance of the heraldic elements – TCD is an essentially medieval conception, and thats part of its strength.  We can for instance recognize the essential religious nature of the original foundation with a bible without having to accept the literal truth therein or to say that TCD is now a religious institution. We have spend the equivalent of 20 PhD fees or the cost of two postdocs  on a casual rebranding. The evidence from internal surveys is that the academic staff (those much vaunted frontline workers) were in the majority (50-80% depending on the question) happy with the visual identity of the college. One wonders why that was ignored?   One also wonders when we have marketing and design professors why they were not consulted.

College is broke. We have spend c 100k on this so far. We will spend how much more on this? . Frankly, a cent would be too much. This does nothing to advance the core mission of the college.

We need a holistic approach to regulating risk

This is a version of my column published in the Irish Examiner 29 March 2014. One thing we know from even a cursory study of economics and finance is that there are cycles. This time is rarely different. Sometimes the cycles are short, sometimes longer. But they are there.  Regulators and officials contracted to mitigate the effects of cycles need to first be aware of them and then to understand them in a holistic fashion. Understanding them requires more than just advanced quantitative techniques.

This week I hosted a  one day symposium on people risk in finance. We had a good audience composed of academics, bankers, Central Bankers (but not, as far as I am aware, from the Department of Finance) and researchers.  The general consensus at the conclusion was that we have, in modern finance regulation and oversight, lost sight of the centrality of people. And that is a problem

Consider for example the data from the Operational Riskdata eXchange Association , a non profit body which looks at financial services risk and losses. Losses are very skewed – the vast majority of losses rise from a small number of issues. These issues tend to be concentrated in areas where the ultimate control is a person. The greatest part of these losses are not down to fraud; they are down to issues such as poor business practices and poor execution of these practices.  A particular challenge for finance is that many of the problems that it faces are systemic. While in a healthcare or automotive context individuals can and do take responsibility for ameliorating risk (not leaving surgical tools in body cavities, not forgetting to reconnect brake cables) this is not the case in finance.  There we find a significant disconnect.  Take LIBOR – if an individual were to have not cooperated in the rigging scandal they would in all probability been sanctioned, and the system would have continued. Rogue traders are almost never driven by personal greed and a fraudulent aim. Therefore exemplary punishment and condign treatment of one will have no great effect on others – they fall prey to and then become trapped in system failure, and it is at the level of systems that regulation needs to work as well.

A key weakness of the modern financial regulatory system architecture is that it is not systemic. Nobody is looking at large parts (FX in particular) of the system; other regulators are nationally, industry or product bounded. As a consequence, the coupling of parts of the system to other parts can become looser or tighter without anyone being able to intervene or even perhaps notice.

A further key weakness is that it is focused on quantitative approaches. Quantification of risk is funny thing. It relies on failure – to know how often we will have a large market drawdown or a rogue trader or a systemic crisis we require a baseline of a number of these events.  In the Irish context we have financial regulator and central bank that has been very strongly hiring quantitatively skilled persons. These are ideal at looking at the probability of a mortgage default given lender demographics, or at the role of SME finance etc However, they are limited to the data which they have. This data is typically partial- nobody is looking at the system as a whole, domestically or internationally.  What is more, an over reliance on quantitative techniques alone misses the crucial human element.  Systems fail either because they are poorly designed or because people find a way around them. The best designed system will not survive contact with someone inept or determined enough to circumvent it. Chernobyl comes to mind… This raises the question – where are the holistic risk managers?

The vast majority of risk management approaches in finance, as seen in the professional risk manager programs and certification, are rigorously quantitative. But they are almost bereft of even behavioural economics or finance. They contain little if any around economic or financial history. They are not people cantered. This is a major weakness. Our regulatory bodies need  to take on board a much more holistic approach . On one level this means that we need to see a push for greater scope of regulation on areas such as the Repo or FX or commodity markets where existing regulations are weaker. At another more fundamental level it requires hiring psychologists, behavioural finance and economic specialists, anthropologists, sociologists and historians. Cross disciplinary teams need to be more than accountants and economists.  For so long as we do not regulate finance in a human cantered systemic manner we give an implicit nod that these issues are not important. They are and we should begin to signal that clearly and unambiguously.

We need more regulation and better (more holistic) regulation. We need finance to learn from other areas such as surgery or engineering, where safety and risk mitigation are inherent. We need to change culture – this can happen as we have seen in airlines- where individuals are not only empowered but required to halt the system when it is in their opinion going awry. And we need to recenter and deglamorize finance – it needs to be seen as a boring utility.


Lets not focus on construction to get us out of this recession

This is  a version of my Irish Examiner Column of 8 March 2014 . Spring is in the air and the economic sap is rising. Or is it that economic saps are rising? Anyhow, the other thing that spring brings is growth and it does look as though finally those long hearalded green shoots are showing in the Irish economy.

Green shoots are tender however and a blast of frost can seriously damage them. The world is unpredictable – who last month would have foreseen the invasion by Russia of another country and the lurching back to the cold war rhetoric that we have seen. Geopolitical scares aside, the notion that we are out of the woods is scarcely believable when one looks at the hard data in toto. The labour market looks good – more on this anon. But we are celebrating the recovery of the two pillar banks in a week when they announced that between them they had lost an aggregate  €2.2b in 2013. Even the minister for finance, while lauding the return to normal banking (huh?) did opine that perhaps we needed a third banking force in the state. Normal banking is not one in which an effective duopoly, two main competitors, exist for all bar the largest companies, where these two are lumbered with losses and unable to fully engage in credit creation and where shadow banking entities take their place. That’s wholly abnormal.

But at least unemployment is falling. Much was made of the fact that the headline figures for unemployment fell below 12% and 400,000 persons, important psychological barriers. Indeed, much was made that we are now below Euro area averages for unemployment. But 12% overall masks the reality – we have seen the renewal of mass emigration and we have 85,000 people on jobbridge and related schemes. We have in other words again and again failed to provide meaningful employment opportunities for our citizens.

The hope of the government is, seemingly, pinned on high-tech , start-ups and construction. Lets think this through. While in the last while there has been a boom in entrepreneurship, the reality is that this is not going to solve the problem. The bulk of job creation comes not from startups but from small companies becoming medium sized. We need to switch our focus from the S to the M in SME. We need to create an Irish middlestadt sector. In Germany these companies are the backbone of the economy and of the export engine. We need to determine what it is that we are good at doing and focus on growing indigenous companies to go from 5-10 jobs to 50-100. In terms of construction we need to be careful for what we wish. All the straws in the wind point to a deep seated desire on the part of the powers that be to reignite a property led growth strategy. This is folly of the rankest kind.

And then there’s the high-tech sector. Looking at the most recent data, Q4 2013, we get a pretty good picture of how the Irish employment situation has changed over the last decade. The EU have a classification of employment in to high tech etc.  It makes for sobering analysis. In 2004 employment in what the EU classify as High-tech manufacturing accounted for 3.4% of the labour force  or 71,000 persons. By end 2013 this had fallen both as a proportion, to 3% and in absolute terms to 57,000 persons. High-tech manufacturing is he pharm, chemical and computer industry areas that are neither job nor tax creators for Ireland. The high-tech financial services industry has while shedding 5000 posts since 2004 from 93000 to 88000 persons increased its share of the employment cake from 4.4% to 4.6%. The largest rise in any hi-tech area comes in what is classified as Knowledge Intensive Other services, rising from 481,000 persons to 541,000, from 22.9% to 28.4% of the labour force. This is dominated by the health, education and arts/culture sector.

Then as now the bulk of those employed are in the “other” sector, other by reference to knowledge intensity/high tech. The others are dominated by the retail, construction and distribution/logistics sector. Of these only one seems to be in the forefront of the governments mind. Retail employs just under 10% of the workforce.  It is in fact the largest employer percentage wise. Combined with the hotel and catering industry this accounts for 15% of employment. That is where we can create large numbers of posts. Despite the noise, retail sales are still very impaired. recent upticks in retail sales are driven mainly by the motor trade (which accounts for less than 2% employment). Excluding this we see a <3% rise in volume of sales and less than a 1% rise in value on a year on year basis.  Until aggregate demand increases we will not see a recovery here.

Focusing on construction may be understandable. Looking at the live register 83000 craft and related and 65000 plant and machinery workers constitute the bulk of the register. Most of these are over 25, and the reality is that in the vast majority of cases do not possess the skillsets to thrive in the modern economy.  This does not mean that we abandon them but it does mean that continued long-term unemployment is a real likelihood. That is not an excuse however for a focus on construction. We do not need to see a situation such that we have persons drawn from school or training at an early stage into a cyclical sector. But that is what we run a danger of doing with this focus.

ESRC Seminar People Risk in Financial Services – Slides

The people risk symposium held yesterday was well attended, with about 75 delegates from a variety of financial and regulatory bodies. A general consensus was evident that financial services needs to be much more concerned about systems and their interlinkages, and to take on board more insights from anthropology, sociology, psychology etc.

The proceedings were recorded and will be made available later. Meanwhile below see slides where available.

1030-1115 Framing effects in reasoning about the moral acceptability of risky choices (Ruth Byrne, TCD School of Psychology) No slides available

1115-1200 – From Hubris to Nemesis ; Irish Banks, behavioral biases and the crisis (Michael Dowling, DCU Business School) Dowling- Lucey Slides

1200-1245 – The meaning of leadership integrity (Mary Keating, TCD Business School) Keating Slides

1330-1415 – Board Directors – What can we expect from them? (Blanaid Clarke, TCD Law School) Clark Slides

1415-1515 – KEYNOTE  – Systemic People Risk : The Final Frontier? (Dr Pat McConnell, Macquarie School of Management) McConnell Slides




ESRC Seminar on People Risk in Financial Services – Final Running Order

The ESRC seminar series on people risk (being organized by this motley crew)  rolls into Dublin next Wednesday. The final running order is as below.

For more details and to register see here: REGISTER

The seminar is free, and coffee/tea and a light lunch will be provided. Venue is Institute of Bankers, IFSC.

0945-1015 Registration

1015-1030 Welcome and Introduction : Brian Lucey

1030-1115 Framing effects in reasoning about the moral acceptability of risky choices (Ruth Byrne, TCD School of Psychology)

1115-1200 – From Hubris to Nemesis ; Irish Banks, behavioral biases and the crisis (Michael Dowling, DCU Business School)

1200-1245 – The meaning of leadership integrity (Mary Keating, TCD Business School)

1245-1330 – Light lunch

1330-1415 – Board Directors – What can we expect from them? (Blanaid Clarke, TCD Law School)

1415-1515 – KEYNOTE  – Systemic People Risk : The Final Frontier? (Dr Pat McConnell, Macquarie School of Management)

1515-1600 – Roundtable discussion on future research and policy directions (Moderator, Brian Lucey)


Europe’s InDeflation problems

The FT has today weighed in with the argument that there is a danger of deflation in the Eurozone. And there is. We are at low and declining rates of inflation.  Deflation is for a whole bunch of reasons more scary than (mild) inflation. The IMF have warned against it. Olivier Blanchard the IMF chief economist notes that for countries experiencing deflation

“On the one hand it would certainly improve their competitiveness and help exports but on the other hand it would increase the real interest rate and the real value of debt and so reduce domestic demand.”

And he concludes that the second effect will dominate.

However, it is quite possible to have the phenomena of “indeflation” – where certain sectors or regions or both experience inflation while others experience deflation.

The common measure for inflation in Europe is the HICP – harmonized index of consumer prices, published monthly by Eurostat. Below are some tables showing number of months we have seen falling prices, (measured on a moving average 12m rate of change) over the last 6 years (actually last 73 months). Look at where deflation has been happening and when. The weights of the sectors vary – but a general trend is food then housing then transport.

So for inflation as a whole we see not a huge problem…apart from Ireland where in 1 month in 3 we have seen overall consumer prices fall, and this has now reversed. Mind you Greece seems to be falling into deflation , quelle surprise

So, some tables. Feel free to interpret.

All-items HICP
Since  1/08 Since 1/13
EU (de jure) 0 0
Euro Area (de jure) 0 0
Belgium 3 0
Bulgaria 0 0
Czech Republic 0 0
Denmark 0 0
Germany 0 0
Estonia 5 0
Ireland 21 0
Greece 6 6
Spain 4 0
France 0 0
Croatia 0 0
Italy 0 0
Cyprus 0 0
Latvia 10 0
Lithuania 0 0
Luxembourg 2 0
Hungary 0 0
Malta 0 0
Netherlands 0 0
Austria 0 0
Poland 0 0
Portugal 10 0
Romania 0 0
Slovenia 0 0
Slovakia 0 0
Finland 0 0
Sweden 1 0
United Kingdom 0 0

When we dig a little deeper however this pattern masks a lot of variation. Take Food and drink for example. With the notable exception of Ireland almost  no deflation in drinks prices and that some time ago. Similarly in food – no recent deflation.  As food transport and household are the things people spend most money on if we do not see deflation here people will not feel that there is deflation, and where it matters to them there wont be.

Food and non-alcoholic beverages Alcoholic beverages, tobacco and narcotics
Since  1/08 Since 1/13 Since  1/08 Since 1/13
EU (de jure) 4 0 0 0
Euro Area (de jure) 10 0 0 0
Belgium 0 0 0 0
Bulgaria 14 0 5 0
Czech Republic 14 0 0 0
Denmark 12 0 0 0
Germany 12 0 0 0
Estonia 13 0 0 0
Ireland 22 0 17 0
Greece 7 0 0 0
Spain 16 0 0 0
France 6 0 0 0
Croatia 12 0 0 0
Italy 0 0 0 0
Cyprus 3 0 1 0
Latvia 13 0 0 0
Lithuania 11 0 0 0
Luxembourg 0 0 0 0
Hungary 0 0 0 0
Malta 0 0 0 0
Netherlands 10 0 0 0
Austria 10 0 0 0
Poland 0 0 0 0
Portugal 17 0 0 0
Romania 0 0 0 0
Slovenia 6 0 0 0
Slovakia 15 0 0 0
Finland 14 0 0 0
Sweden 0 0 0 0
United Kingdom 0 0 0 0

Clothing and footwear by comparison has been hammered – and bear in mind that a lot of these come now from outside the EU.  The union, it seems, should be on the plane to Prague or Warsaw or better yet coming here for their spring collections.. A pattern emerges in clothing and footware, where we have peripheral countries in persistent deflation. That bodes ill for the high street drapers in every Irish or Czech or Portugese small town. Housing remains mostly inflationary.

Clothing and footwear Housing, water, electricity, gas and other fuels
Since  1/08 Since 1/13 Since  1/08 Since 1/13
EU (de jure) 30 0 0 0
Euro Area (de jure) 0 0 6 0
Belgium 0 0 17 6
Bulgaria 20 9 6 2
Czech Republic 73 13 0 0
Denmark 24 0 0 0
Germany 0 0 8 0
Estonia 0 0 9 0
Ireland 73 13 19 0
Greece 14 0 9 0
Spain 14 0 0 0
France 6 0 1 0
Croatia 50 13 0 0
Italy 6 0 9 0
Cyprus 59 13 15 5
Latvia 48 12 13 2
Lithuania 58 0 0 0
Luxembourg 9 0 10 0
Hungary 11 3 7 7
Malta 40 3 2 0
Netherlands 30 0 13 0
Austria 0 0 0 0
Poland 73 13 0 0
Portugal 54 13 0 0
Romania 0 0 0 0
Slovenia 41 4 7 0
Slovakia 20 0 7 0
Finland 6 6 0 0
Sweden 9 1 0 0
United Kingdom 40 2 3 0

In household furniture and white goods Ireland stands alone – persistent deep rooted deflation. Not only will the drapers be gone bust but the small electrical retailer and the local homestore will follow. The future of Irish white goods retail is, horrific as it may seem, Harvey Norman… Greece seems set to follow tipping into deflation in this area in the last year.

Furnishings, household goods etc Miscellaneous goods and services
Since  1/08 Since 1/13 Since  1/08 Since 1/13
EU (de jure) 0 0 0 0
Euro Area (de jure) 0 0 0 0
Belgium 0 0 0 0
Bulgaria 24 1 0 0
Czech Republic 56 13 0 0
Denmark 2 2 1 1
Germany 0 0 3 3
Estonia 13 0 0 0
Ireland 73 13 9 2
Greece 20 13 13 13
Spain 0 0 0 0
France 0 0 0 0
Croatia 4 0 0 0
Italy 0 0 0 0
Cyprus 16 13 0 0
Latvia 49 13 17 0
Lithuania 22 0 0 0
Luxembourg 0 0 0 0
Hungary 5 0 0 0
Malta 0 0 0 0
Netherlands 0 0 0 0
Austria 0 0 0 0
Poland 0 0 0 0
Portugal 16 13 6 6
Romania 0 0 0 0
Slovenia 12 12 0 0
Slovakia 39 1 0 0
Finland 0 0 0 0
Sweden 31 13 0 0
United Kingdom 0 0 0 0

What can one say about communications, except what on earth is going on in Cyprus and Romania?

Transport Communications
Since  1/08 Since 1/13 Since  1/08 Since 1/13
EU (de jure) 8 0 63 13
Euro Area (de jure) 10 0 73 13
Belgium 15 3 61 13
Bulgaria 14 4 72 13
Czech Republic 21 5 72 13
Denmark 14 5 50 13
Germany 12 2 70 13
Estonia 17 6 54 13
Ireland 19 5 17 13
Greece 13 6 48 13
Spain 12 0 61 13
France 10 0 62 13
Croatia 17 4 73 13
Italy 10 0 65 13
Cyprus 14 0 2 0
Latvia 17 8 73 13
Lithuania 11 3 73 13
Luxembourg 15 3 59 13
Hungary 8 3 22 0
Malta 21 3 51 13
Netherlands 9 0 40 9
Austria 14 2 41 4
Poland 14 5 54 10
Portugal 19 5 40 0
Romania 0 0 7 3
Slovenia 13 0 44 13
Slovakia 28 4 16 1
Finland 12 0 63 13
Sweden 10 5 73 13
United Kingdom 2 0 21 0

Having had a torrid time, suffering the longest run of deflation in their sector in Europe, Irish restauranteurs have now begun to recoup with price rises.  It is startling that in the face of a massive slump in disposable income we have not seen until recently deflation in Greece in this area and in culture etc

Recreation and culture Restaurants and hotels
Since  1/08 Since 1/13 Since  1/08 Since 1/13
EU (de jure) 8 0 0 0
Euro Area (de jure) 11 0 0 0
Belgium 10 0 0 0
Bulgaria 34 13 0 0
Czech Republic 37 0 0 0
Denmark 15 1 0 0
Germany 3 0 0 0
Estonia 11 0 15 0
Ireland 47 9 33 0
Greece 23 13 9 9
Spain 41 0 0 0
France 63 6 0 0
Croatia 12 0 10 5
Italy 0 0 0 0
Cyprus 13 4 0 0
Latvia 32 4 21 0
Lithuania 26 0 15 0
Luxembourg 0 0 0 0
Hungary 0 0 0 0
Malta 44 0 5 4
Netherlands 34 0 0 0
Austria 0 0 0 0
Poland 26 0 0 0
Portugal 21 0 0 0
Romania 0 0 0 0
Slovenia 24 7 16 0
Slovakia 8 0 0 0
Finland 12 1 2 0
Sweden 48 13 0 0
United Kingdom 26 0 0 0

Finally in education and health Greece and Spain lead the pack. Despite the constant refrain that Irish healthcare costs are skyhigh the sector is resistant to change. Greece continues its slip into deflation

Education Health
Since  1/08 Since 1/13 Since  1/08 Since 1/13
EU (de jure) 0 0 0 0
Euro Area (de jure) 0 0 2 2
Belgium 3 0 33 0
Bulgaria 0 0 6 6
Czech Republic 0 0 9 0
Denmark 0 0 6 0
Germany 40 5 9 9
Estonia 3 3 5 2
Ireland 5 0 0 0
Greece 30 13 21 13
Spain 0 0 47 0
France 0 0 6 6
Croatia 32 5 0 0
Italy 0 0 0 0
Cyprus 3 3 10 10
Latvia 25 13 21 0
Lithuania 0 0 0 0
Luxembourg 0 0 15 0
Hungary 8 0 8 0
Malta 0 0 0 0
Netherlands 0 0 11 0
Austria 25 0 0 0
Poland 0 0 0 0
Portugal 0 0 30 8
Romania 0 0 14 0
Slovenia 0 0 10 10
Slovakia 0 0 0 0
Finland 0 0 2 0
Sweden 0 0 12 0
United Kingdom 0 0 0 0

Is there a fix in the gold fix? We simply don’t know…

Auric-Goldfinger-Goldfinger-1964There has been a lot of media chatter over the last week regarding the possibility of the London gold price having been rigged, with Bloomberg leading the pack and with a lawsuit now having been filed. Shades of Auric Goldfinger haunt the trading desks. The way that this has been presented is that a set of researchers have found, using a tool that previously found manipulation in LIBOR, evidence of a fix in the gold fix.  There may or may not be a market cartel rigging the gold market but my reading of what we have so far suggests that the evidence simply does not permit this determination to be made. Extraordinary claims require extraordinary evidence. What we have is …nothing much.  Let me explain

The issue arose last week when Bloomberg published a piece that stated that evidence existed of a decade long price manipulation. But, the first problem we have is that they, and only they, have seen the paper. I understand that they are refusing, on the request of the authors, to release the paper until a draft is complete. This is shoddy academic practice of the first water. Publication by press release is not how good science is done. How good science is  typically done is for a paper to be circulated in draft form to people knowledgeable of the area. They critique the paper and the authors incorporate these issues. Then a paper is perhaps presented to a conference, or placed on an open access repository of research papers such as More comments, more critique, more iterations of the paper. Then it is sent to a journal or an edited book and yet more reviews are made and incorporated.  If you have something really really exciting then when the paper is accepted you maybe release a press notice. Occasionally a paper that has gone through many rounds of review and rewrite will be press released or attract media attention when it hits a repository or a conference. It seems that the paper here is not even a complete draft.  If the authors didn’t give it to Bloomberg then they have been remiss in noting loudly and constantly that they are not able to stand over the findings; if they did they are equally remiss in short-circuiting the usual process which is designed to catch errors and to spare all our blushes.

The paper that is alluded to as having “helped uncover the rigging of the London interbank offered rate” appears to be at the heart of this. In so far as we can tell, and remember we haven’t seen the paper, the methodology used is a variant of it. That paper is found in its 2008 draft form here and was published in Journal of Banking and Finance (of which I am an associate editor, but I had no involvement in the paper) in 2012.  It takes about thirty seconds to read the abstracts. The 2008 paper abstract concludes “while there are some apparent anomalies within the individual quotes, the evidence found is inconsistent with an effective manipulation of the level of the Libor” and the 2012 final version states “We find some anomalous individual quotes, but the evidence is inconsistent with a material manipulation of the US dollar 1-month Libor rate.”.  So, far from uncovering the LIBOR scandal they claimed there was none. There was.  This doesn’t seem a very powerful test,  with a Type 2 error returning a false negative . A more powerful and simpler test, but one that is not possible to be applied here as we do not have the quotes of the fix participants, was that of  Snider and Youle, which DID suggest that there was a problem.

To properly analyze the fix in the manner which they analyzed the LIBOR fix they would need to have details on the positions and quotes taken in the fix by the fix members. This they do not have, and I am not aware that this is even collected. Thus they are (it seems) looking at the events around the period of the PM fix. Herein lies a problem. It is not clear what window they use, that is to say the frequency of the data they are analyzing. This is really important in the context of a market which may have upwards of 50% of its trading now coming from algorithmic trading positions. A tick-by-tick or better yet quote-by-quote analysis would be needed to see what was happening. A proper analysis would need to examine the timestamp of when the fix is released and the trades/bids immediately thereafter. It would need to see if the fix banks were able in fact to take consistent superior profits. To see how machines and people interact on information releases, which is what the fix is in essence, see here

The collusion test they use is in essence the following: where there is collusion there should be no real difference in average returns (as opposed to a non collusive market) but there should be lower variance.  An immediate problem arises in that lower cross sectional variance is a hallmark not only of possible collusion but of herding. And we know that gold market participants herd (see McAleer , and a number of papers by Pierdzioch . Herding is a feature, at some stage, of nearly all markets. A test that can conflate herding with collusion might be one that would give us pause to think before we leap to a conclusion of one or the other being present.

Even leaving aside this, a further issue is how the authors calculate the intraday variance of trades. From their LIBOR paper they seem to use the coefficient of variation. This is very simplistic and when one is dealing with intraday variance it is really not at all clear that this is what one should do. Particularly when dealing with higher frequency data, and bear in mind we do not know what the data frequency they are using is in fact, there are microstructural issues to deal with in the estimation of volatility. Personally, I prefer to use range based estimators such as the Parkinson or Garman-Klass estimators of variance at intraday frequencies. Theres a very highly cited paper by Alizadhe (available in a working paper form here) on the superiority of these and other range based estimators. Some limited work on ultra high frequency gold suggests that volatility measurement needs to be taken very seriously

Even if we were to agree that the volatility measure used was adequate, if we know one thing it is that volatility is not constant. Engle even got a Nobel prize for a whole family of measures (ARCH and its many offshoots) to estimate and counter this. Looking over a 15 year period as they seem to do it is abundantly clear that volatility changes. Thus any statistical test that looks at the likelihood of a particular outcome as being within normal ranges (as the paper seems to do we are told) absolutely has to take into account the shifting nature of how likely likely is at any given time over any given window. Does it do this? We don’t know. Do the tests take account of the non normality of the data? Are they non parametric perhaps? We don’t know

A further issue is that we do not know what was going on on the days that this anomalous behavior was detected. Gold acts as a safe haven against extreme stock and bond movements (see here for the original paper and here for an extension to oil and currencies) A full investigation of how other markets were evolving on those days and why, whether it be in reaction to news or macro releases or whatever would be most useful. The PM fix is at 10am New York. Is the market in London reacting to New York market issues? We know that the locus of price determination shifts from London to New York and back again. See here.  Is that what is happening? Models of the gold price routinely incorporate a range of real and financial variables, which themselves change and which have announcement dates. These need to be taken account of. We simply do not know if the detected changes were explicable by other , non collusive, market reaction.

The paper, we are told, because we don’t know what is in it, finds a break in the behavior of the fix in 2004.  This again needs to be looked at. First 2004 represents the first real takeoff of gold from the doldrums of having been stuck in the $200-$400 for the previous 20 years. As markets accelerate the behavior of people changes. Second, we have in mid 2003 the first gold ETF. The market changed fundamentally in 2004-5 and merely finding a break in its behavior there doesn’t indicate anything other than that the market changed.

Bottom line – without seeing the paper its hard to tell what’s going on in it (duh…). However, I would be astonished if there were not a fairly reasonable set of explanations at least potentially available for anomalous (if they be so) changes around the fix in certain days. Extraordinary claims need extraordinary proof. We don’t have any, yet.