Weekly Top 5 Papers – October 15, 2018

1. Unleashed by Cass Sunstein (Harvard Law School)

This paper grew out of a big puzzle: Sometimes social change happens very rapidly, and few people anticipated it. Think about the Arab spring, the rise of same-sex marriage, the fast fall of communism, and any number of recent events. How and why does that happen? There are two possibilities. The first is that a shift in social norms unleashes people’s underlying preferences. That can be inspiring, and it can be terrifying. The second is that a shift in social norms creates new preferences. That can be terrific (civil rights) and it can be horrific (Nazism). Of the two, I would give pride of place to unleashing, but both matter.

I have been focused on these issues for over 20 years, but I had not managed to see the crucial distinction between these two phenomena. This is one of those papers that seems to have a tiger by the tail – which means that it is inadequate and incomplete, but perhaps a start. – Cass Sunstein


2. A Brief Introduction to the Basics of Game Theory by Matthew O. Jackson (Stanford University – Department of Economics)


3. Pulling the Goalie: Hockey and Investment Implications by Clifford S. Asness (AQR Capital Management, LLC) and Aaron Brown (New York University (NYU) – Courant Institute of Mathematical Sciences)

4. 151 Trading Strategies by Zura Kakushadze (Quantigic Solutions LLC), and Juan A. Serur (University of CEMA)

This is a 257-page preview version of a brand new book “151 Trading Strategies”, which provides detailed descriptions, including more than 550 mathematical formulas, for more than 150 trading strategies across a host of asset classes and trading styles. These  include stocks, options, fixed income, futures, ETFs, indexes, commodities, foreign exchange, convertibles, structured assets, volatility, real estate, distressed assets, cash, cryptocurrencies, weather, energy, inflation , global macro, infrastructure, and tax arbitrage. Some strategies are based on machine learning algorithms such as artificial neural networks, Bayes, and k-nearest neighbors. The book also includes source code for illustrating out-of-sample backtesting, around  2,000 bibliographic references, and more than 900 glossary, acronym and math definitions. The presentation is intended to be descriptive and pedagogical and of particular interest to finance practitioners, traders, researchers, academics, and business school and finance program students. The book is being published by Palgrave Macmillan, an imprint of Springer Nature.

I got the idea and was inspired to write this book following the success of my paper “101 Formulaic Alphas”, which provides explicit formulas – that are also computer source code – for 101 real-life quantitative trading signals (alphas).  “151 Trading Strategies” takes this concept to the next level: instead of focusing on quant trading alphas or any particular asset class, it goes across essentially all asset classes and a number of trading styles, so it comes as no surprise that it took almost 9 months to write it.  — Zura Kakushadze

5. Initial Coin Offerings and the Value of Crypto Tokens by Christian Catalini (Massachusetts Institute of Technology (MIT) – Sloan School of Management) and Joshua S. Gans (University of Toronto – Rotman School of Management)

Initial coin offerings (ICOs) have emerged as a novel mechanism for financing entrepreneurial ventures. Through an ICO, a venture offers a stock of specialized crypto tokens for sale with the promise that those tokens will operate as the only medium of exchange when accessing the venture’s future products. The objective of the paper is to understand under what circumstances entrepreneurs can successfully use ICOs to fund venture start-up costs, and how this compares to traditional equity finance. We shows that the ICO mechanism allows entrepreneurs to generate buyer competition for the token, giving it value. We also find that venture returns are independent of any committed growth in the supply of tokens over time, but that initial funds raised are maximized by setting that growth to zero to encourage saving by early participants. Nonetheless, since the value of the tokens depends on a single period of demand, the ability to raise funds is more limited than in traditional equity finance, where entrepreneurs can raise capital based on the discounted sum of a startup’s expected returns over a longer time horizon. Furthermore, a lack of commitment in monetary policy undermines saving behavior, hence the cost of using tokens to fund start-up costs is inflexibility in future capital raises. Crypto tokens can also facilitate coordination among stakeholders within digital ecosystems when network effects are present, allowing new types of digital platforms to emerge. -Christian Catalini

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