How do the Parameters Change, and What Could it Mean?

In the previous post we exhibited regressions of the returns of various banking companies onto the dynamic trading risk factor. Two distinct regression periods we used, and we made general comments about how the parameter estimates had changed.

In this post we're going to try to delve a little more into those changes. We're going to assume that the changes represent an actual change of behaviour on behalf of the institution concerned rather than that they represent statistical fluctuations about a common "true" value. With such a small sample, and such large errors relative to the estimates, this is a dubious exercise, but we will press on as it is entertaining.

These changes are represented by the vector flows on the "tadpole" chart below. The vector is from the "thin end" to the "head" (and is represented as such because Excel can't draw arrows).

So, overinterpreting to the best of our abilities, we see that: MS and GS have moved towards eachother - adopting similar behavioural profiles; JPM has essentially abandoned its hedge fund like trading business; MER (which were "rescued" by BAC), BAC, and C have started winding down their trading businesses at considerable expense; and LEH and BSC traded more desperately as they failed.

The above is, of course, entirely unrigourous and barely supported by the data. Don't place too much faith in it.