When I first found out about Case-Shiller futures, I was pretty excited at the possibility of buying a house, enjoying the cheap loan and tax benefits, and hedging out most of the risk.

Alas, the futures have no volume. As of today the open interest on the Feb 2010 New York Case-Shiller futures (NYMG10) is 2 (as in the first integer greater than 1).

It's difficult to make markets when the underlying and the instrument differ so much in liquidity? Granted, SP500 futures are more liquid than the basket of stocks too, but that gap is bridgeable. What differentiates a bridgeable from an unbridgeable gap? What implications does this have for the existence of noise traders?

Money is a medium of exchange. When exchanging A for B, we prefer to exchange A for money and then money  for B.

Money is a store of value. On top of holding money temporarily while exchanging A for B, we also hold money when we haven't determined what B we want yet. Holding money is preferable to holding A because A might be bothersome to store (e.g., a truckload of sand) or it might become less valuable with time (e.g., a truckload of apples).

The usefulness of money gives rise to a liquidity preference. Keynes enumerated three ways in which money is useful: as a buffer to smooth out short-term volatility (known unknowns) in income and expenditure, for use as emergency reserves (unknown unknowns), and for use in speculation, i.e., using knowledge of prices to buy assets at low prices and sell them at high prices. The first two forms of liquidity preference tend to grow with income, whilst the last is more affected by the interest rate and expectations of future interest rates.

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When the economy is in a state of equilibrium, each party holds a constant amount of money, and it is possible to think of the flow of money as consisting of many cases of multiparty barter, i.e., every dollar flows in a circle, with goods and services flowing in the opposite direction. This money flux is the GDP, and is a measure of economic activity.

Some goods are not directly consumed, and instead are used to produce other goods and services - these are called investment goods. The accumulation of investment goods increases production.

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When stimulating the economy by printing money, one dumps money into certain regions, and that money proceeds to flow outwards from the introduction points. Iff that flow results in the accumulation of investment goods, the economy is successfully stimulated.

Income from an asset, $X$, depends on manager decision $A$ and random factor $s$, so $X = f(A,s)$. Assume that managers are motivated by personal income $I(X)$, such that the action taken $A(I) = \arg\max_A{E_s(U(I(f(A,s)))}$ where $U$ is the manager's utility function and $I$ is the incentive-compensation scheme.

The problem in incentive compensation (principle-agent theory) is that of finding $\arg\max_I{E_s(f(A(I),s)-I(X))}$, the incentive compensation scheme under which payoff to the owners is maximized. The inputs considered are the utility (including risk adversity) of the manager, $U$, and the relationship of effort to outcome, $f$.

By designing $I$, you want to maximize the incentive (the responsiveness of compensation to managerial effort) while minimizing the actual payoff, all while sharing risk so that the manager is not crippled by the risk involved.

Net-net, it seems to suggest that we don't want managers that are too rich, since the manager needs to have a significant proportion of his wealth vested in the company (to align risk interests and prevent moral hazard) at the same time the owners are trying not to pay him too much, and hence limit his ownership of the company. In fact, it seems to me that an equitable arrangement always results in the manager's percentage ownership of the company growing with time, an effect only partially offset by the growth in asset value as a whole. After all, what good reason can a manager give for not wanting to own more of the company they have control of?

The possibility of separating ownership from management is made possible by knowledge of responsiveness of managerial effort to reward (motivation, $A(I)$) and the responsiveness of asset income to managerial effort ($f$). This knowledge cannot be guaranteed to always be of a form that makes the separation possible.