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Economic Derivatives

I'm aware of the existence of interest rate and inflation derivatives and the accompanying literature, but do GDP derivatives exist? Unemployment rate derivatives? Etc.? If so, does anyone know any books or online journal articles on how to price these kinds of derivatives? Using Black Scholes wouldn't make much sense because GDP for example, isn't a tradable asset and it isn't continuous, since official GDP numbers are released only periodically.
 

Bastian Gross

German Mathquant
"Economist Robert Shiller suggests the creation of new financial instruments to hedge against the risk of falling house prices, dwindling salaries and inflation. At question is whether enough speculators would want to increase their exposure to a drop in GDP." The Economist (May 1994)

Would you really make a bet on such things like GDP, inflation or falling house prices?
 

alain

Older and Wiser
Would you really make a bet on such things like GDP, inflation or falling house prices?

Why not? if there are all sorts of derivatives products, I'm sure there will be somebody willing to buy a derivative based on the GDP of some country.
 

zanab

math enthusiast
another approach

I don't know of any OTC derivatives. Are you generally curious about their existence or are you trying to offset risk? If it's the latter, you could try cross-hedging. If you can find a derivative for an asset that correlates highly with the GDP, you can mitigate your exposure by taking a position in that. Hope that helps.
 

Bastian Gross

German Mathquant
Why not? if there are all sorts of derivatives products, I'm sure there will be somebody willing to buy a derivative based on the GDP of some country.

Okay Alain,

I'd understand some inflation option/swaps or barely some GDP instruments. Nevertheless "unemployment rate derivatives"... Whom does it affect? One should bet on the day of Obamas death, because this incidence is pertinent to US-economy.
Don't overdo things!
 

zanab

math enthusiast
"Economist Robert Shiller suggests the creation of new financial instruments to hedge against the risk of falling house prices, dwindling salaries and inflation. At question is whether enough speculators would want to increase their exposure to a drop in GDP." The Economist (May 1994)

Would you really make a bet on such things like GDP, inflation or falling house prices?

Robert Shiller would... By some strange machinations of chance, I met Shiller a few days ago and figured I might as well ask him about the contents of this post. First, I have to say that he was absolutely gracious and quite generous with his time. He was humble and engaging and I walked away from the experience feeling kindled.

I told him about this thread and asked him if he had written anything further on the subject of GDP derivatives because I had been unable to find anything. I told him I suggested cross hedging, and he asked me how I would do that, and I told him pretty much exactly what I posted. Then he asked me what I would use that most correlated with the GDP, and unfortunately I don't know of any one thing that does well. He then pointed out a somewhat analogous situation that exists with the housing market.

Many of you may be familiar with the Case Shiller index for home prices. It's a composite index based on 20 metropolitan areas and Shiller's company, MacroMarkets, recently began to offer an exchange-traded fund based on this index. It's an innovative idea, to say the least.
http://www.smartmoney.com/Investing/ETFs/Three-New-ETFs-Worth-Waiting-For/?hpadref=1

As it turns out, he's actually going to be publishing an article on GDP derivatives some time in the near future. First there will be one geared toward Canada, and then one on the U.S. after that. He said it was OK if I posted about that, and when the articles come out, I will post them as well.
 

zanab

math enthusiast
Okay Alain,

I'd understand some inflation option/swaps or barely some GDP instruments. Nevertheless "unemployment rate derivatives"... Whom does it affect? One should bet on the day of Obamas death, because this incidence is pertinent to US-economy.
Don't overdo things!

Also, this is more of a gambling thing, but it was quite popular a few years back. Have you heard of a death/dead pool? They usually follow the calendar year, and the participant chooses a set number of people s/he thinks will die in the next year. This is a pretty famous one:

http://www.stiffs.com/hello.html
 
Robert Shiller would... By some strange machinations of chance, I met Shiller a few days ago and figured I might as well ask him about the contents of this post. First, I have to say that he was absolutely gracious and quite generous with his time. He was humble and engaging and I walked away from the experience feeling kindled.

I told him about this thread and asked him if he had written anything further on the subject of GDP derivatives because I had been unable to find anything. I told him I suggested cross hedging, and he asked me how I would do that, and I told him pretty much exactly what I posted. Then he asked me what I would use that most correlated with the GDP, and unfortunately I don't know of any one thing that does well. He then pointed out a somewhat analogous situation that exists with the housing market.

Many of you may be familiar with the Case Shiller index for home prices. It's a composite index based on 20 metropolitan areas and Shiller's company, MacroMarkets, recently began to offer an exchange-traded fund based on this index. It's an innovative idea, to say the least.
http://www.smartmoney.com/Investing/ETFs/Three-New-ETFs-Worth-Waiting-For/?hpadref=1

As it turns out, he's actually going to be publishing an article on GDP derivatives some time in the near future. First there will be one geared toward Canada, and then one on the U.S. after that. He said it was OK if I posted about that, and when the articles come out, I will post them as well.

That's awesome. Looking forward to that.

Did you check out the two articles I posted a few posts back?
 
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