Speculations

Any system that uses only single asset price (and possibly prices of multiple assets, but this case is not completely clear) as input. The price is actually secondary and typically fluctuates few percent a day in contrast with liquidity flow, that fluctuates in orders of magnitude. This also allows to estimate maximal workable time scale: the scale on which execution flow fluctuates at least in an order of magnitude (in 10 times).

Any system that has a built-in fixed time scale (e.g. moving average type of system). The market has no specific time scale.

Any “symmetric” system with just two signals “buy” and “sell” cannot make money. Minimal number of signals is four: “buy”, “sell position”, “sell short”, “cover short”. The system where e.g. “buy” and “cover short” is the same signal will eventually catastrophically lose money on an event when market go against position held. Short covering is buying back borrowed securities in order to close an open short position. Short covering refers to the purchase of the exact same security that was initially sold short, since the short-sale process involved borrowing the security and selling it in the market. For example, assume you sold short 100 shares of XYZ at $20 per share, based on your view that the shares were headed lower. When XYZ declines to $15, you buy back 100 shares of XYZ in the market to cover your short position (and pocket a gross profit of $500 from your short trade).

Any system entering the position (does not matter long or short) during liquidity excess (e.g. I > I_IH) cannot make money. During liquidity excess price movement is typically large and “reverse to the moving average” type of system often use such event as position entering signal. The market after liquidity excess event bounces a little, then typically goes to the same direction. This give a risk of on what to bet: “little bounce” or “follow the market”. What one should do during liquidity excess event is to CLOSE existing position. This is very fundamental – if you have a position during market uncertainty – eventually you will lose money, you must have ZERO position during liquidity excess. This is very important element of the P&L trading strategy.

Any system not entering the position during liquidity deficit event (e.g. I < I_IL) typically lose money. Liquidity deficit periods are characterized by small price movements and difficult to identify by price-based trading systems. Liquidity deficit actually means that at current price buyers and sellers do not match well, and substantial price movement is expected. This is very well known by most traders: before large market movement volatility (and e.g. standard deviation as its crude measure) becomes very low. The direction (whether one should go long or short) during liquidity deficit event can, to some extent, be determined by the balance of supply–demand generalization.

An important issue is to discuss is: what would happen to the markets when this strategy (enter on liquidity deficit, exit on liquidity excess) is applied on mass scale by market participants. In contrast with other trading strategies, which reduce liquidity at current price when applied (when price is moved to the uncharted territory, the liquidity drains out because supply or demand drains ), this strategy actually increases market liquidity at current price. This insensitivity to price value is expected to lead not to the strategy stopping to work when applied on mass scale by market participants, but starting to work better and better and to markets’ destabilization in the end.

 

Advertisement

Delta Neutral Volatility Trading

Price prediction is extremely difficult because, price fluctuations are small and are secondary to liquidity fluctuation. A question arises whether liquidity deficit can be traded directly. If we accept that liquidity deficit is an entity of the same nature as volatility then the answer is yes, and liquidity deficit can be traded through some kind of derivative instruments. Let us illustrate the approach on a simple case – options trading. Whatever option model is used, the key element of it is implied volatility. Implied volatility trading strategy can be implemented through trading some delta–neutral “synthetic asset”, built e.g. as long–short pairs of a call on an asset and an asset itself, call–put pairs or similar “delta–neutral vehicles”. Delta neutral is a portfolio strategy consisting of multiple positions with offsetting positive and negative deltas so that the overall delta of the assets in questions totals zero. A delta-neutral portfolio balances the response to market movements for a certain range to bring the net change of the position to zero. Delta measures how much an option’s price changes when the underlying security’s price changes. Optimal implementation of such “synthetic asset” depends on commissions, liquidity available, exchange access, etc. and varies from fund to fund. Assume we have built such delta–neutral instrument, the price of which depend on volatility only. How to trade it? We have the same two requirements: 1) Avoid catastrophic P&L drain and 2) Predict future value of volatility (forward volatility). Now, when trading delta–neutral strategy, this matches exactly our theory and trading algorithm becomes this.

1. If for underlying asset we have (execution flow at time t = 0) I₀ < I_IL (liquidity deficit) then enter “long volatility” position for “delta–neutral” synthetic asset. This enter condition means that if current execution flow is low – future value of it will be high. If at current price,  the value of I₀ is low – the price would change to increase future I.
2. If for underlying asset we have (execution flow at time t = 0) I₀ > I_IH then close existing “long volatility” position for “delta–neutral” synthetic asset. At high I₀ future value of I cannot be determined, it can either go down (typically) or increase even more (much more seldom, but just few such events sufficient to incur catastrophic P&L drain). According to main concept of P&L trading strategy, one should have zero position during market uncertainty.

The reason why this strategy is expected to be profitable is that experiments show that implied volatility is very much price fluctuation–dependent, and execution flow spikes I₀ > I_IH in underlying asset typically lead to substantial price move of it and then implied volatility increase for “synthetic asset”. This strategy is a typical “buy low volatility”, then “sell high volatility”. The key difference from regular case is that, instead of price volatility, liquidity deficit is used as a proxy to forward volatility. The described strategy never goes short volatility, so catastrophic P&L drain is unlikely. In addition to that, actual trading implementation requires the use of “delta–neutral” synthetic asset, what incurs substantial costs on commissions and execution, and thus actual P&L is difficult to estimate without existing setup for high–frequency option trading.

Fiscal Responsibility and Budget Management (FRBM) Act

The Government appointed a five-member Committee in May 2016, to review the Fiscal Responsibility and Budget Management (FRBM) Act and to examine a changed format including flexible FRBM targets. The Committee formation was announced during the 2016-17 budget by FM Arun Jaitely. The Panel was headed by the former MP and former Revenue and Expenditure Secretary NK Singh and included four other members, CEA Arvind Subramanian, former Finance Secretary Sumit Bose, the then Deputy Governor and present governor of the RBI Urjit Patel and Nathin Roy. There was a difference of opinion about the need for adopting a fixed FRBM target like fiscal deficit, and the divisive opinion lay precisely in not following through such a fixity in times when the government had to spend high to fight recession and support economic growth. The other side of the camp argued it being necessary to inculcate a feeling of fiscal discipline. During Budget speech in 2016, Mr Jaitley expressed this debate:

There is now a school of thought which believes that instead of fixed numbers as fiscal deficit targets, it may be better to have a fiscal deficit range as the target, which would give necessary policy space to the government to deal with dynamic situations. There is also a suggestion that fiscal expansion or contraction should be aligned with credit contraction or expansion, respectively, in the economy.

The need for a flexible FRBM target that allowed higher fiscal deficit during difficult/recessionary years and low targets during comfortable years, gives the government a breathing space to borrow more during tight years. In it report submitted in late January this year, the committee did advocate for a range rather than a fixed fiscal deficit target. Especially, fiscal management becomes all the more important post-demonetisation and the resultant slump in consumption expenditure. The view is that the government could be tempted to increase public spending to boost consumption. but, here is the catch: while ratings agencies do look at the fiscal discipline of a country when considering them for a ratings upgrade, they also look at the context and the growth rate of the economy, so the decision will not be a myopic one based only on the fiscal and revenue deficits.

Fiscal responsibility is an economic concept that has various definitions, depending on the economic theory held by the person or organization offering the definition. Some say being fiscally responsible is just a matter of cutting debt, while others say it’s about completely eliminating debt. Still others might argue that it’s a matter of controlling the level of debt without completely reducing it. Perhaps the most basic definition of fiscal responsibility is the act of creating, optimizing and maintaining a balanced budget.

“Fiscal” refers to money and can include personal finances, though it most often is used in reference to public money or government spending. This can involve income from taxes, revenue, investments or treasuries. In a governmental context, a pledge of fiscal responsibility is a government’s assurance that it will judiciously spend, earn and generate funds without placing undue hardship on its citizens. Fiscal responsibility includes a moral contract to maintain a financially sound government for future generations, because a First World society is difficult to maintain without a financially secure government.

But, what exactly is fiscal responsibility, fiscal management and FRBM. So, here is an attempt to demystify these.

Fiscal responsibility often starts with a balanced budget, which is one with no deficits and no surpluses. The expectations of what might be spent and what is actually spent are equal. Many forms of government have different views and expectations for maintaining a balanced budget, with some preferring to have a budget deficit during certain economic times and a budget surplus during others. Other types of government view a budget deficit as being fiscally irresponsible at any time. Fiscal irresponsibility refers to a lack of effective financial planning by a person, business or government. This can include decreasing taxes in one crucial area while drastically increasing spending in another. This type of situation can cause a budget deficit in which the outgoing expenditures exceed the cash coming in. A government is a business in its own right, and no business — or private citizen — can thrive eternally while operating with a deficit.

When a government is fiscally irresponsible, its ability to function effectively is severely limited. Emergent situations arise unexpectedly, and a government needs to have quick access to reserve funds. A fiscally irresponsible government isn’t able to sustain programs designed to provide fast relief to its citizens.

A government, business or person can take steps to become more fiscally responsible. One useful method for government is to provide some financial transparency, which can reduce waste, expose fraud and highlight areas of financial inefficiency. Not all aspects of government budgets and spending can be brought into full public view because of various risks to security, but offering an inside look at government spending can offer a nation’s citizens a sense of well-being and keep leaders honest. Similarly, a private citizen who is honest with himself about where he is spending his money is better able to determine where he might be able to make cuts that would allow him to live within his means.

Fiscal Responsibility and Budget Management (FRBM) became an Act in 2003. The objective of the Act is to ensure inter-generational equity in fiscal management, long run macroeconomic stability, better coordination between fiscal and monetary policy, and transparency in fiscal operation of the Government.

The Government notified FRBM rules in July 2004 to specify the annual reduction targets for fiscal indicators. The FRBM rule specifies reduction of fiscal deficit to 3% of the GDP by 2008-09 with annual reduction target of 0.3% of GDP per year by the Central government. Similarly, revenue deficit has to be reduced by 0.5% of the GDP per year with complete elimination to be achieved by 2008-09. It is the responsibility of the government to adhere to these targets. The Finance Minister has to explain the reasons and suggest corrective actions to be taken, in case of breach.

FRBM Act provides a legal institutional framework for fiscal consolidation. It is now mandatory for the Central government to take measures to reduce fiscal deficit, to eliminate revenue deficit and to generate revenue surplus in the subsequent years. The Act binds not only the present government but also the future Government to adhere to the path of fiscal consolidation. The Government can move away from the path of fiscal consolidation only in case of natural calamity, national security and other exceptional grounds which Central Government may specify.

Further, the Act prohibits borrowing by the government from the Reserve Bank of India, thereby, making monetary policy independent of fiscal policy. The Act bans the purchase of primary issues of the Central Government securities by the RBI after 2006, preventing monetization of government deficit. The Act also requires the government to lay before the parliament three policy statements in each financial year namely Medium Term Fiscal Policy Statement; Fiscal Policy Strategy Statement and Macroeconomic Framework Policy Statement.

To impart fiscal discipline at the state level, the Twelfth Finance Commission gave incentives to states through conditional debt restructuring and interest rate relief for introducing Fiscal Responsibility Legislations (FRLs). All the states have implemented their own FRLs.

Indian economy faced with the problem of large fiscal deficit and its monetization spilled over to external sector in the late 1980s and early 1990s. The large borrowings of the government led to such a precarious situation that government was unable to pay even for two weeks of imports resulting in economic crisis of 1991. Consequently, Economic reforms were introduced in 1991 and fiscal consolidation emerged as one of the key areas of reforms. After a good start in the early nineties, the fiscal consolidation faltered after 1997-98. The fiscal deficit started rising after 1997-98. The Government introduced FRBM Act, 2003 to check the deteriorating fiscal situation.

The implementation of FRBM Act/FRLs improved the fiscal performance of both centre and states.

The States have achieved the targets much ahead the prescribed timeline. Government of India was on the path of achieving this objective right in time. However, due to the global financial crisis, this was suspended and the fiscal consolidation as mandated in the FRBM Act was put on hold in 2007- 08.The crisis period called for increase in expenditure by the government to boost demand in the economy. As a result of fiscal stimulus, the government has moved away from the path of fiscal consolidation. However, it should be noted that strict adherence to the path of fiscal consolidation during pre crisis period created enough fiscal space for pursuing counter cyclical fiscal policy.the main provisions of the Act are:

1. The government has to take appropriate measures to reduce the fiscal deficit and revenue deficit so as to eliminate revenue deficit by 2008-09 and thereafter, sizable revenue surplus has to be created.
2. Setting annual targets for reduction of fiscal deficit and revenue deficit, contingent liabilities and total liabilities.
3. The government shall end its borrowing from the RBI except for temporary advances.
4. The RBI not to subscribe to the primary issues of the central government securities after 2006.
5. The revenue deficit and fiscal deficit may exceed the targets specified in the rules only on grounds of national security, calamity etc.

Though the Act aims to achieve deficit reductions prima facie, an important objective is to achieve inter-generational equity in fiscal management. This is because when there are high borrowings today, it should be repaid by the future generation. But the benefit from high expenditure and debt today goes to the present generation. Achieving FRBM targets thus ensures inter-generation equity by reducing the debt burden of the future generation. Other objectives include: long run macroeconomic stability, better coordination between fiscal and monetary policy, and transparency in fiscal operation of the Government.

The Act had said that the fiscal deficit should be brought down to 3% of the gross domestic product (GDP) and revenue deficit should drop down to nil, both by March 2009. Fiscal deficit is the excess of government’s total expenditure over its total income. The government incurs revenue and capital expenses and receives income on the revenue and capital account. Further, the excess of revenue expenses over revenue income leads to a revenue deficit. The FRBM Act wants the revenue deficit to be nil as the revenue expenditure is day-to-day expenses and does not create a capital asset. Usually, the liabilities should not be carried forward, else the government ends up borrowing to repay its current liabilities.

However, these targets were not achieved because the global credit crisis hit the markets in 2008. The government had to roll out a fiscal stimulus to revive the economy and this increased the deficits.

In the 2011 budget, the finance minister said that the FRBM Act would be modified and new targets would be fixed and flexibility will be built in to have a cushion for unforeseen circumstances. According to the 13th Finance Commission, fiscal deficit will be brought down to 3.5% in 2013-14. Likewise, revenue deficit is expected to be cut to 2.1% in 2013-14.

In the 2012 Budget speech, the finance minister announced an amendment to the FRBM Act. He also announced that instead of the FRBM targeting the revenue deficit, the government will now target the effective revenue deficit. His budget speech defines effective revenue deficit as the difference between revenue deficit and grants for creation of capital assets. In other words, capital expenditure will now be removed from the revenue deficit and whatever remains (effective revenue deficit) will now be the new goalpost of the fiscal consolidation. Here’s what effective revenue deficit means.

Every year the government incurs expenditure and simultaneously earns income. Some expenses are planned (that it includes in its five-year plans) and other are non-planned. However, both planned and non-planned expenditure consists of capital and revenue expenditure. For instance, if the government sets up a power plant as part of its non-planned expenditure, then costs incurred towards maintaining it will now not be called revenue deficit because it is towards maintaining a “capital asset”. Experts say that revenue deficit could become a little distorted because by reclassifying revenue deficit, it is simplifying its target.

 

access to reserve funds. A fiscally irresponsible government isn’t able to sustain programs designed to provide fast relief to its citizens.

Third Space Theory of Postcoloniality. Note Quote.

Writers, such as Homi Bhabha and Salman Rushdie, who proceed from a consideration of the nature of postcolonial societies and the types of hybridization these various cultures have produced, proposed a radical rethinking—an appropriation of the European thinking by a different discourse. Whereas in European thinking, history and the past are the reference point for epistemology, in postcolonial thought space annihilates time. History is rewritten and realigned from the standpoint of the victims of the destructive progress.  Hybridity replaces a temporal linearity with a spatial plurality. Salman Rushdie  makes this obvious when commenting on the message of his controversial novel, The Satanic Verses, in an essay called “In Good Faith” as follows:

The Satanic Verses celebrates hybridity, impurity, intermingling, the transformation that comes of new and unexpected combinations of human beings, cultures, ideas, politics, movies, songs. It rejoices in mongrelization and fears the absolutism of the Pure. Melange, hotchpotch, a bit of this and a bit of that is how newness enters the world. It is the great possibility that mass migration gives the world, and I have tried to embrace it. The Satanic Verses is for change-by-fusion, change-by-conjoining. It is a love-song to our mongrel selves.

Even though on the surface postcolonial texts may contain race divisions and cultural differences, they all contain germs of community which, as they grow in the mind of the reader, they detach from the apparently inescapable dialectic of history. Thus, postcolonial literatures have begun to deal  with problems of transmuting time into space and of attempting to construct a future. It highlights the acceptance of difference on equal terms. Now both literary critics and historians are recognizing cross-culturality as the possible ending point of an apparent endless human history of conquest and occupations.  They recognize that the myth of purity or essence, the Eurocentric viewpoint must be challenged. The recent approaches show that the power of postcolonial theory lies in its comparative methodology and the hybridized and syncretic view of the modern world which it implies.

Of the various points in which postcolonial texts intersect, place has a paramount importance. In his dialogism thesis, Mikhail Bakhtin emphasizes a space of enunciation where negotiation of discursive doubleness gives birth to a new speech act:

The  hybrid is not only double-voiced and double-accented . . . but is also double-languaged; for in it there are not only (and not even so much) two individual consciounesses, two voices, two accents, as there are [doublings of] socio-linguistic consciousnesses, two epochs . . . that come together and consciously fight it out on the territory of the utterance.

Also, Homi Bhabha talks about a third space of enunciation, a hybrid space or a new position in which communication is possible. Third Space theory emerges from the sociocultural tradition in psychology identified with Lev Vygotsky. Sociocultural approaches are concerned with the “… constitutive role of culture in mind, i.e., on how mind develops by incorporating the community’s shared artifacts accumulated over generations”. Bhabha applies socioculturalism directly to the postcolonial condition, where there are, “… unequal and uneven forces of cultural representation”. For Bhabha, such negotiation is neither assimilation nor collaboration as it makes possible the emergence of an “interstitial” agency that refuses the binary representation of social antagonism. The “interstitial perspective” as Bhabha calls it replaces the “polarity of a prefigurative self-generating nation ‘in-itself’ and extrinsic other nations” with the notion of cultural liminality within the nation. the liminal figure of the nation-space would ensure that no political ideologies could claim transcendent or metaphysical authority for themselves. this is because the subject of cultural discourse – the agency of a people – is spilt in the discursive ambivalence that emerges in the contest of narrative authority between the pedagogical and the performative, which is to say, between the peoples’ status as historical objects of a nationalist pedagogy and their ability to perform themselves as subjects of a process of signification that must erase any prior or originally national presence. Hybrid agencies find their voice in a dialectic that does not seek cultural supremacy or sovereignty. They deploy the partial culture from which they emerge to construct visions of community, and versions of historic memory, that give narrative form to the minority positions they occupy: “the outside of the inside; the part in the whole”.

This “new position” Bhabha proposes is closely related to the “homeless” existence of post-colonial persons. It certainly cannot be assumed to be an independent third space already there, a “no-man’s-land” between the nations. Instead, a way of cultural syncretization, i.e. a medium of negotiating cultural antagonisms, has to be created. Cultural difference has to be acknowledged: “Culture does imply difference, but the differences now are no longer, if you wish, taxonomical; they are interactive and refractive”. This position emphasizes, contrary to the too facile assumption of world literature and world culture as the stages of a multicultural cosmopolitanism already in existence, that the “intellectual trade” takes place mostly on the borders and in the border crossings between cultures where meanings and values are not codified but misunderstood, misrepresented, even falsely adopted. Bhabha explains how beyond fixed cultural (ethnic, gender- and class-related) identities, so-called “hybrid” identities are formed by discontinuous translation and negotiation. Hybridity, liminality, “interrogatory, interstitial space” – these are the positive values Bhabha opposes to a retrograde historicism that continues to dominate Western critical thinking, a “linear narrative of the nation,” with its claims for the “holism of culture and community” and a “fixed horizontal nation-space”. We must, he argues eloquently, undo such thinking with its facile binary oppositions. Rather than emphasizing the opposition between First World and Third World nations, between colonizer and colonized, men and women, black and white, straight and gay, Bhabha would have it, we might more profitably focus on the faultlines themselves, on border situations and thresholds as the sites where identities are performed and contested. Bhabha says, “hybridity to me is the ‘third space’ which enables other positions to emerge”.