Category: A Rationale
Posted by: Admin
Much of BWL's work involves my fascination with and belief in the power of financial transactions and the capital markets they take place in.
Typically, standard economics deals with trades where a product or service is exchanged for some form of money. Financial economics deals with trades where money sits on both sides of the trade.
Typically, standard economics deals with trades where a product or service is exchanged for some form of money. Financial economics deals with trades where money sits on both sides of the trade.
Category: Regulation
Posted by: Admin
I wrote the following summary of problems with present approaches in N.Z.......
Regulatory Design Failure in Capital Market Reform in New Zealand
1. The contention of this submission is that attempts to improve the performance of the regulatory regimes for capital markets in New Zealand suffer from an inadequate consideration of regulatory design options and thus new initiatives, as they are currently conceived, are likely to prove costly and ineffective if reform efforts do not address this flaw.
Regulatory Design Failure in Capital Market Reform in New Zealand
1. The contention of this submission is that attempts to improve the performance of the regulatory regimes for capital markets in New Zealand suffer from an inadequate consideration of regulatory design options and thus new initiatives, as they are currently conceived, are likely to prove costly and ineffective if reform efforts do not address this flaw.
08/04: Current Bond Risk
Category: capital asset pricing
Posted by: Admin
A very smart little assessment of bond risk.
abnormalreturns March 29th, 2010
Sometimes it takes a good old fashioned spat to remind you what really matters. The Henry Blodget-Felix Salmon argument over the proper form (and function) financial journalism should take reminds us that there is a significant gap between what happens in the realm of financial journalism and its offshoot punditry and what happens in actual portfolios.*
Of more interest was a piece this weekend at Ultimi Barbarorum that takes a look this gap between financial journalism and actual market participants. (We recommend you read it in its entirety.) Baruch’s point being that the incentives for the media are very different from some one running money. Member of the media need to “look smart” no matter the market outcome. While noting the important role financial journalists play, Baruch notes:
But in the end journalists are explainers, commentators. They are dependent on market participants to provide them with things to write about. They review what others do. They work with the huge advantage of hindsight. And when it comes to giving advice about what what should be done, most media commentators are no better than the rest of us. Probably worse; they don’t get as much practice at it.
Even when market participants are in the media they have another handicap as well. As we have discussed before they are likely “talking their book.” That is they are discussing investments in which they already have some economic interest. This makes their advice should be taken with a grain of salt.
The bottom is that you and you alone are responsible for your investments. This includes any fiduciary you may hire to run your money as well. This point is noted again by Baruch at Ultimi Barbarorum where he writes:
Much more than philosophy, investing should be a solitary activity. A group of people or colleagues you can check your ideas with is a good thing, but you must take responsibility for your investments yourself. You will receive conflicting advice, all of which will sound plausible but most of which is wrong.
For most individual investors he thinks that the hurdles to investment competence are too high and recommends that most people would be better off with a paid professional to handle their investments. While not absolving of your responsibility to your portfolio it does have the beneficial side effect of freeing up some of your time to actually enjoy your life.
There is a broad range of information and commentary available in the econoblogosphere and mainstream media. It ranges from the vague and unhelpful all the way to specific trade advice. Some of it is informative and useful. Some of it is downright dangerous. The challenge for the investor is to take advantage of what is out there without being caught up in the noise and contradictory advice.
There is only so much we can control in our portfolios. The markets are in a certain sense going to do what they are going to do. What you can control is how you consume financial media and how you use it in managing your own portfolio. Because you, and you alone, are ultimately responsible for its performance.
*See also this piece by Damien Hoffman on whether long form financial journalism is dying over at Wall St. Cheat Sheet.
Sometimes it takes a good old fashioned spat to remind you what really matters. The Henry Blodget-Felix Salmon argument over the proper form (and function) financial journalism should take reminds us that there is a significant gap between what happens in the realm of financial journalism and its offshoot punditry and what happens in actual portfolios.*
Of more interest was a piece this weekend at Ultimi Barbarorum that takes a look this gap between financial journalism and actual market participants. (We recommend you read it in its entirety.) Baruch’s point being that the incentives for the media are very different from some one running money. Member of the media need to “look smart” no matter the market outcome. While noting the important role financial journalists play, Baruch notes:
But in the end journalists are explainers, commentators. They are dependent on market participants to provide them with things to write about. They review what others do. They work with the huge advantage of hindsight. And when it comes to giving advice about what what should be done, most media commentators are no better than the rest of us. Probably worse; they don’t get as much practice at it.
Even when market participants are in the media they have another handicap as well. As we have discussed before they are likely “talking their book.” That is they are discussing investments in which they already have some economic interest. This makes their advice should be taken with a grain of salt.
The bottom is that you and you alone are responsible for your investments. This includes any fiduciary you may hire to run your money as well. This point is noted again by Baruch at Ultimi Barbarorum where he writes:
Much more than philosophy, investing should be a solitary activity. A group of people or colleagues you can check your ideas with is a good thing, but you must take responsibility for your investments yourself. You will receive conflicting advice, all of which will sound plausible but most of which is wrong.
For most individual investors he thinks that the hurdles to investment competence are too high and recommends that most people would be better off with a paid professional to handle their investments. While not absolving of your responsibility to your portfolio it does have the beneficial side effect of freeing up some of your time to actually enjoy your life.
There is a broad range of information and commentary available in the econoblogosphere and mainstream media. It ranges from the vague and unhelpful all the way to specific trade advice. Some of it is informative and useful. Some of it is downright dangerous. The challenge for the investor is to take advantage of what is out there without being caught up in the noise and contradictory advice.
There is only so much we can control in our portfolios. The markets are in a certain sense going to do what they are going to do. What you can control is how you consume financial media and how you use it in managing your own portfolio. Because you, and you alone, are ultimately responsible for its performance.
*See also this piece by Damien Hoffman on whether long form financial journalism is dying over at Wall St. Cheat Sheet.
22/03: The ERP and Fear....
Category: capital asset pricing
Posted by: Admin
Professor Aswath Damodaran has had a long interest in and done a good deal of research on the ERP. His thoughts here are worth considering...
Equity Risk Premiums and the Fear of Catastrophe
As many of you already know, I am a little fixated on the equity risk premium. More than any variable, it explains what happens in equity markets both in the short term and the long term. In fact, I have at least a dozen posts over the last year and a half on the evolution of the equity risk premium in the US and globally.
The equity risk premium measures what investors collectively demand as a premium over and above the riskfree rate to invest in equities as a class. In practice, many analysts use historical data to estimate this premium. Thus, if investors have earned 9% on stocks over the last 80 years and 4% on treasury bonds over that same period, the historical premium is 5% and it is also used as the equity risk premium in valuation. My problem with this approach is that it is not only backward looking (you want a premium for the next decade, not the last 8 decades) but yields extremely noisy estimates. On my website, for instance, I estimate the historical risk premium for stocks over treasury bonds from 1928 - 2009 to be 4.29% but I also estimate the standard error in this number to 2.40%.
Equity Risk Premiums and the Fear of Catastrophe
As many of you already know, I am a little fixated on the equity risk premium. More than any variable, it explains what happens in equity markets both in the short term and the long term. In fact, I have at least a dozen posts over the last year and a half on the evolution of the equity risk premium in the US and globally.
The equity risk premium measures what investors collectively demand as a premium over and above the riskfree rate to invest in equities as a class. In practice, many analysts use historical data to estimate this premium. Thus, if investors have earned 9% on stocks over the last 80 years and 4% on treasury bonds over that same period, the historical premium is 5% and it is also used as the equity risk premium in valuation. My problem with this approach is that it is not only backward looking (you want a premium for the next decade, not the last 8 decades) but yields extremely noisy estimates. On my website, for instance, I estimate the historical risk premium for stocks over treasury bonds from 1928 - 2009 to be 4.29% but I also estimate the standard error in this number to 2.40%.
A clear statement of why the "stimulus approach" is flawed... at a fundamental level
by EUGENE F. FAMA
There has been lots of response to my little essay on bailouts and stimulus plans. I will only comment on the negative ones that I think have merit and are overlooked in my original paper.
First, however, I want to restate my argument in simple terms.
1. Bailouts and stimulus plans must be financed.
2. If the financing takes the form of additional government debt, the added debt displaces other uses of the funds.
3. Thus, stimulus plans only enhance incomes when they move resources from less productive to more productive uses.
Are any of these statements incorrect?
The size of the stimulus plan increases every day, currently to more than $800 billion (which president-elect Obama calls a down payment). Finding productive uses becomes an ever more daunting challenge.
To date there is just one valid negative comment on my essay, from J. Bradford DeLong (Fama's Fallacy, Take I: Eugene Fama Rederives the "Treasury View"), and I think his point is actually consistent with my argument.
He accuses me of not understanding that private investment includes inventory investment, and some inventory investment may be involuntary, the result of a general decline in demand. I am aware of the point, and I think he is right that government expenditures can, in whole or in part, reverse this bad investment by giving people funds to buy up the unwanted inventories. I think possibilities like this are covered by a statement that appears a couple of times in my essay,
"And bailouts and stimulus plans only enhance future incomes when the activities they favor are more productive than the activities they displace."
Inventory investments that turn bad are just an example of an unproductive private use of resources, and perhaps I should have used this example in my essay. I just didn't think it's a big enough deal. The relevant numbers are provided by the Department of Commerce.
Inventories rise during 2008, but if I'm reading the numbers correctly, the total increase from November 2007 to November 2008 is only about $47 billion. There is, of course, no guarantee that all of this is a bad investment. Even if it is, and even in the unlikely case that a dollar of stimulus reduces unwanted inventories by a dollar, we would have to find $753 billion of other unproductive private activities to justify an $800 billion stimulus.
by EUGENE F. FAMA
There has been lots of response to my little essay on bailouts and stimulus plans. I will only comment on the negative ones that I think have merit and are overlooked in my original paper.
First, however, I want to restate my argument in simple terms.
1. Bailouts and stimulus plans must be financed.
2. If the financing takes the form of additional government debt, the added debt displaces other uses of the funds.
3. Thus, stimulus plans only enhance incomes when they move resources from less productive to more productive uses.
Are any of these statements incorrect?
The size of the stimulus plan increases every day, currently to more than $800 billion (which president-elect Obama calls a down payment). Finding productive uses becomes an ever more daunting challenge.
To date there is just one valid negative comment on my essay, from J. Bradford DeLong (Fama's Fallacy, Take I: Eugene Fama Rederives the "Treasury View"), and I think his point is actually consistent with my argument.
He accuses me of not understanding that private investment includes inventory investment, and some inventory investment may be involuntary, the result of a general decline in demand. I am aware of the point, and I think he is right that government expenditures can, in whole or in part, reverse this bad investment by giving people funds to buy up the unwanted inventories. I think possibilities like this are covered by a statement that appears a couple of times in my essay,
"And bailouts and stimulus plans only enhance future incomes when the activities they favor are more productive than the activities they displace."
Inventory investments that turn bad are just an example of an unproductive private use of resources, and perhaps I should have used this example in my essay. I just didn't think it's a big enough deal. The relevant numbers are provided by the Department of Commerce.
Inventories rise during 2008, but if I'm reading the numbers correctly, the total increase from November 2007 to November 2008 is only about $47 billion. There is, of course, no guarantee that all of this is a bad investment. Even if it is, and even in the unlikely case that a dollar of stimulus reduces unwanted inventories by a dollar, we would have to find $753 billion of other unproductive private activities to justify an $800 billion stimulus.
Category: Market Functionning
Posted by: Admin
The New Yorker 's John Cassidy has a conducted a series of seven interviews with the famous in finance at the University of Chicago.... in the light of recent events and what they mean for the main thrust of the economics and finance professions. They represent the state of debate amongst the world's top thinkers as of January 2010.
This is an extraordinary treasure trove - Fama, Posner, Becker, Cochrane and the bankers Rajan, Murphy et al. I have gathered all these together and shall post as one paper here then six discussions.
These debates are not for the faint hearted - but they are central to much of what we do. They also represent about three years right up to date financial economics thinking in a concentrated form - as close as it gets to listening in at the Chicago tea room debates.
First: Richard Posner
This is an extraordinary treasure trove - Fama, Posner, Becker, Cochrane and the bankers Rajan, Murphy et al. I have gathered all these together and shall post as one paper here then six discussions.
These debates are not for the faint hearted - but they are central to much of what we do. They also represent about three years right up to date financial economics thinking in a concentrated form - as close as it gets to listening in at the Chicago tea room debates.
First: Richard Posner
Category: Market Functionning
Posted by: Admin
Second: Eugene Fama
I met Eugene Fama in his office at the Booth School of Business. I began by pointing out that the efficient markets hypothesis, which he promulgated in the nineteen-sixties and nineteen-seventies, had come in for a lot of criticism since the financial crisis began in 1987, and I asked Fama how he thought the theory, which says prices of financial assets accurately reflect all of the available information about economic fundamentals, had fared.
I met Eugene Fama in his office at the Booth School of Business. I began by pointing out that the efficient markets hypothesis, which he promulgated in the nineteen-sixties and nineteen-seventies, had come in for a lot of criticism since the financial crisis began in 1987, and I asked Fama how he thought the theory, which says prices of financial assets accurately reflect all of the available information about economic fundamentals, had fared.
Category: Market Functionning
Posted by: Admin
Third: John Cochrane
I interviewed John Cochrane in his office at the Booth School of Business, and I began by asking him about the economics of today’s Chicago, and how it differed from the strident free-market school of a bygone era—the Chicago of Milton Friedman and George Stigler.
I interviewed John Cochrane in his office at the Booth School of Business, and I began by asking him about the economics of today’s Chicago, and how it differed from the strident free-market school of a bygone era—the Chicago of Milton Friedman and George Stigler.
Category: Market Functionning
Posted by: Admin
Interview Four:Gary Becker
I met Becker in his office at the economics department. I began by telling him I had been speaking with his friend and co-blogger Richard Posner, and I asked whether he agreed with Posner that the events of the past two years had called Chicago School economics into question.
I met Becker in his office at the economics department. I began by telling him I had been speaking with his friend and co-blogger Richard Posner, and I asked whether he agreed with Posner that the events of the past two years had called Chicago School economics into question.
