Archives of “positive feedback” tag

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Feedback in Real Life

  
  Education
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FEEDBACKIf market or individual stock a has a positive predictive correlation with market b, and b had a positive predictive correlation with market a, then there is positive feedback, and an explosive growth when a is up would occur. Similarly, if there is a positive predictive correlation, i.e. the serial correlation of a with b say one day forward is 0.2, then market a goes down. If there is a negative predictive correlation of market a with market b, then when a goes up, b will tend to go down, and vice versa, and there will be a stable equilibrium between the two with each pulling the other in opposite directions.

The situation is very similar to what occurs in all feedback circuits in electronics, including what you seen in any kind of amplifiers where there is negative feedback to maintain stability.

What are the markets that have positive predictive correlation with each other, i.e. when a is up today, b tends to go up tomorrow, and when b is up today, a tends to go up tomorrow? There aren’t many. And when such occurs, it is only for a limited time. So you have to be on your toes if you wish to use positive feedback. All this can be quantified with varying degrees of reality and rigor.

Bank Exposure To Bulgarian And Romanian Sovereign Risk

  
Analysis, Economy, Education
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There’s been a lot of talk recently about Hungary following in Greece’s footsteps and potentially defaulting on its debt. Bulgaria and Romania are two other weak economies in Eastern Europe, and the chart below shows bank exposure by country to Bulgaria, Romania, Hungary and Greece (source):

It’s interesting to note the exposure that Greece has to Bulgaria and Romania. Romanian and Bulgarian debt comprise more than 25% of the foreign debt that Greek banks hold. Austria also has a high concentration of risk in these four countries, at 29% of total foreign claims outstanding.  When investors talk about contagion, what they are really referring to is positive feedback loops.  We can see from the chart above how trouble at one country can quickly develop into a concern for other countries.  The situation in Greece could make it difficult for Bulgaria and Romania to roll over their debt, an event which would in itself reduce the value of Greece’s assets, creating further difficulty for Bulgaria and Romania.

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