Wednesday, June 30, 2010

Protect your entire portfolio with one trade Lawrence G. McMillan - MarketWatch

We have been trying to get these approved for the Student Managed Portfolio for about three years now.

It should be noted (and is below) that the trades are not fail proof and do come with a cost, but have teh benefit of reducing "catastrophic" risk.

Protect your entire portfolio with one trade Lawrence G. McMillan - MarketWatch:
"There are several ways that an investor can hedge a large portfolio of stocks with derivatives, but there are really only two ways that make much sense. 'Macro' protection means that you buy broad-based index options as a hedge to your long stock portfolio. You can thus protect your entire portfolio with just one option trade. The biggest risk in this approach is 'tracking error' -- that your portfolio might not perform the same as the index does.

Sometimes, simplest is best, and that is probably the case here. There are two approaches that one could take: either buy puts on the Standard & Poor's 500 Index or buy calls on the volatility (VIX)."

Tuesday, June 29, 2010

SSRN-The Pecking Order, Trade-Off, Signaling, and Market-Timing Theories of Capital Structure: A Review by Anton Miglo

It might be summarized as: Finance Professors have a long ways to go before fully understanding capital structure!

SSRN-The Pecking Order, Trade-Off, Signaling, and Market-Timing Theories of Capital Structure: A Review by Anton Miglo:
This paper surveys 4 major capital structure theories: trade-off, pecking order, signaling and market timing. For each theory, a basic model and its major implications are presented. These implications are compared to the available evidence. This is followed by an overview of pros and cons for each theory. A discussion of major recent papers and suggestions for future research are provided."

Good for a primer on capital structure for class!

Diversification: Does Your Portfolio Have It? - Yahoo! Finance

Remember that in bad times, correlations go up (and hence the benefits of diversification go down).

Diversification: Does Your Portfolio Have It? - Yahoo! Finance:
"Even though diversification is a good strategy for most investors, let's clear up a few things about it; diversification won't necessarily protect your investments from declining in value. In other words, diversification is a hedge against market risk, not a guarantee against it. "

SEC Halts Alleged $34M Ponzi Scheme - TIME

SEC Halts Alleged $34M Ponzi Scheme - TIME:
"McLeod, who was 48 and lived in Jacksonville, died Tuesday. His body reportedly was found in a Jacksonville park with an apparent self-inflicted gunshot wound. Following his death, it is unclear who, if anyone, is in control of the two firms, the SEC said.

The SEC alleged that McLeod lured many of the active and retired federal employees through retirement planning seminars he put on at government agencies around the country. The agencies paid Federal Employee Benefits Group as much as $15,000 for each seminar. McLeod promoted the security of the government bond fund but in fact never bought any bonds and used the money to run a Ponzi scheme, using new investors' money to pay earlier investors, according to the SEC."

Tesla IPO has investors giddy but auto experts wary - Jun. 29, 2010

Update on the TESLA IPO

Tesla IPO has investors giddy but auto experts wary - Jun. 29, 2010:
"Tesla, which will trade on Nasdaq under the symbol 'TSLA,' priced its shares late Monday at $17 each, above the target range of $14 to $16. That allowed Tesla to raise more than $226 million in the IPO."
"PayPal founder Elon Musk's seven-year old auto company lost $55.7 million last year and $260.7 million since its inception. The company has performed so poorly from a financial standpoint that Musk recently said he lost his entire personal fortune on Tesla. But investors are giddy about the Palo Alto, Calif.-based automaker's initial public offering, prompting Tesla on Monday to increase the number of shares it plans to offer by nearly a fifth to 13.3 million."

Monday, June 28, 2010

SSRN-Doing Good Deeds in Times of Need: A Strategic Perspective on Corporate Disaster Donations by Alan Muller, Roman Kraeussl

SSRN-Doing Good Deeds in Times of Need: A Strategic Perspective on Corporate Disaster Donations by Alan Muller, Roman Kraeussl

Basic idea: acting in a socially responsible is more valuable to those firms with bad reputations. Therefore, following a disaster, these are the firms that are more likely to give (since they have the most to gain).

From the paper:

"We find Hurricane Katrina had a significant negative impact on firms’ stock prices. Further, we find that the more a firm was known for bad deeds, the greater the drop in its market value during Katrina, and the greater the likelihood of engaging in corporate philanthropic disaster response (hereafter ―CPDR‖) after Katrina."

Will dividend increase be short-lived?

First of all, we should note that dividend yields are still quiet low from a historical perspective (i.e. long term).  That said, they have come back somewhat and are more prevalent now than a decade ago (when even Fama and French were writing on the Demise of the Dividend) and this year we are seeing more firms both initiate as well as increase dividends.

So what happened? Several things. The Internet bubble burst and investors (at least temporarily) remembered that stocks do not just go up. Then came Enron and the governance crisis of the early 2000s. As investors were painfully reminded that accounting numbers could not always be trusted, the signaling aspect of dividends came to the forefront (it is harder to play games with cash than it is with accounting numbers). And in the last, but definitely not least, in the US there was a reduction of taxes on dividends (remember dividends come out of corporate earnings and hence the double taxation problem).

In the following piece, the WSJ points out that this year firms are paying more than last year (when they conserved more cash during the "great recession". But the article also reminds us that the lower tax rate on dividends is up next year. It will be interesting to see whether it is reapproved.

Dividends Are Back -
"Corporate balance sheets, which were squeezed during the recession, are once again brimming with cash. S&P 500 nonfinancial companies had a record $837 billion in cash at the end of the first quarter, up from $665 billion a year earlier, according to S&P.

Of course, there are plenty of headwinds. The tax rate on qualified dividend payments, capped in 2003 at 15%, is set to expire at the end of this year along with some other Bush-era tax cuts. Absent congressional action, the top dividend tax rate will jump to 39.6% next year."
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Friday, June 25, 2010

SSRN-'Doing Good by Investing Well' - Pension Funds and Socially Responsible Investment: Results of an Expert Survey by Alexander Boersch

SSRN-'Doing Good by Investing Well' - Pension Funds and Socially Responsible Investment: Results of an Expert Survey by Alexander Boersch:
"A survey conducted by Allianz Global Investors and the Centre for European Economic Research (ZEW) among pension experts in France, Germany, Italy, the Netherlands, Switzerland and the United Kingdom on the future of socially responsible investment in pension fund portfolios showed... most ...believe that... SRI criteria will play an increasingly important role in how pension funds make investment decisions.... The majority of experts surveyed believe the SRI approach will be extended to include asset classes other than equities.
Apart from Germany, most experts are expecting pension funds to become more active owners. Environmental criteria are considered to be the most important element of the SRI concept. Respondents agreed that the growing SRI trend is being driven much less by the expectation of higher returns or lower risk as it is by public pressure."

Again, there is nothing inherently right or wrong with SRI.  You would expect a tradeoff as the more socially responsible investors likely forgo some returns in return for "doing good."
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A Company’s Debut Hints at an I.P.O. Revival -

A Company’s Debut Hints at an I.P.O. Revival -
"...a decade after its founding, Higher One got its chance on June 17, raising nearly $35 million in an initial public offering on the New York Stock Exchange. The shares made their debut at $12 and closed on Thursday at $14.67, a slight rise from their first-day close.

Many analysts view Higher One’s success as a sign of a long-awaited thaw in the market for initial public offerings. About 62 companies have come to market this year in the United States, according to Thomson Reuters, outpacing the 61 that went public last year and the 34 that did so in 2008. An additional 125 companies have started the process in hopes of soon going public"
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Twitter Feels Like Falling in Love, At Least From a Hormonal Perspective

Twitter Feels Like Falling in Love, At Least From a Hormonal Perspective:
"As Penenberg tweeted, they measured his hormonal levels with surprising results:

'In those 10 minutes between blood batches one and two, my oxytocin levels spiked 13.2%.... Meanwhile, stress hormones cortisol and ACTH went down'"

I can see this. I would imagine that Tweeting (or Facebook) becomes a sign of acceptance. I would imagine that it is the acceptance factor that lowers stress and increases oxytocin levels. In a way, not unlike trading, or at least herding.

(here is a look at it from
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Société Générale Trader Remains an Enigma -

Société Générale Trader Remains an Enigma -
"The trial of Jérôme Kerviel, accused of setting off nearly €5 billion in losses at the French bank Société Générale, ended Friday with judges and prosecutors conceding that a two-year investigation and three weeks of court hearings had left them no wiser about what had ultimately motivated the former trader to make his enormous, unauthorized bets.

A three-judge panel will now spend the coming months poring over the testimony of more than 40 witnesses in an attempt to determine whether blame for the scandal should rest solely on the shoulders of one man."
Here are some past coverage of the story which gets class time if for no other reason to show what a single trader can do. At the time this was seen as rouge trader 2 in the spirit of Nick Leeson at Barings bank.

Thursday, June 24, 2010

Debt up $1.7B during Isner-Mahut Wimbledon match - On Politics: Covering the US Congress, Governors, and the 2010 Election -

Debt up $1.7B during Isner-Mahut Wimbledon match - On Politics: Covering the US Congress, Governors, and the 2010 Election -
"Shortly after the 11-hour, five-minute match between American John Isner and Nicolas Mahut, of France, Buchanan posted the following to Twitter: 'Think Wimbledon tickets are expensive? Our National Debt has gone up by $1,729,000,000 during the Isner v. Mahut match #USA."

Upstart Unveils Alternative To Morningstar Fund Rating System

Upstart Unveils Alternative To Morningstar Fund Rating System:
"Hedgeable ranks fund managers against their peers in roughly 100 categories. It creates a curve that awards the top 10% of managers in each category with four-and-a-half or five stars, the bottom 10% with one-half or one star, and the middle 80% between one and four stars, depending on where they fall on the curve. Ratings are updated weekly.

The Morningstar fund rating system, which debuted in 1985, assigns funds from one to five stars based on a quantitative assessment of a fund’s past return and risk performance. Funds are compared with their peer group across a broad range of categories. The funds are rated over three-, five- and ten-year periods, and the ratings are weighted and combined to come up with the overall rating"

Inside the Secret $178 Million Tesla IPO Presentation

Tesla Roadster Engineering Prototype at Yahoo!.Image via Wikipedia
Inside the Secret $178 Million Tesla IPO Presentation:
"After selling just over 1000 cars since 2008 and recording its first — and only — profitable quarter in July of 2009, Tesla Motors is going public. The company will be offering 11.1 million shares to investors, at an expected valuation of $14 to $16 each, for up to $177.6 million in capital. It's a big-money step for a company that has until this point relied on hundreds of millions in funding from private investors and low-interest government loans."

It goes on to give a fascinating story of how the firm HOPES to make money by selling cars that will cost about $60,000.

This one will DEFINITELY be used in class when we are talking about IPOs!

AND you can actually watch the roadshow (plus others) here.

Thanks to Carl P for pointing this one out to me.

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Wednesday, June 23, 2010

Housing market collapses after tax credit expires

Given the size of the US population now (307 million) vs the population in 1963 (189 million),  these numbers are even more staggering. 

Sales of US new Homes sales plunge to lowest level on record--Bloomberg

"Purchases of U.S. new homes fell in May to the lowest level on record after a tax credit expired, showing the market remains dependent on government support.

Sales collapsed an unprecedented 33 percent from April to an annual pace of 300,000, less than the median estimate of economists surveyed by Bloomberg News and the fewest in data going back to 1963, figures from the Commerce Department showed today in Washington."

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SSRN-Initial Day Return and Underpricing Cost in Advance Payment Initial Public Offerings by Joseph Fung, Sanry Che

SSRN-Initial Day Return and Underpricing Cost in Advance Payment Initial Public Offerings by Joseph Fung, Sanry Che:

IPO underpricing has been looked at in almost every way.  And yet there always seems to be another angle.  In this paper Fang and Che look at IPOs in Hong Kong where, unlike in the US, IPOs are paid for in advance. 

Some look-ins:

"The Hong Kong IPO market was ranked second in the world surpassing New York and behind only London... new equity capital raised in 2006 (Hong Kong Securities and Futures Commission, 2007). In sharp contrast to the US and European markets, Hong Kong adopts a non-discretionary allocation process and subscribers are required to pay in advance for the shares they apply for.  Australia, China, Korea, and the UK also use an advance payment process."

In other words, whoever wants to buy shares for an IPO pay up front.  Then all the demand is tallied up, and the shares are distributed.  In the event that the investor does not get his/her full order, the money is returned but with no interest.  Not surprisingly the authors find that the higher the demand, the greater the returns when the IPO eventually does go public.  They also find that the interest rates matter to both investors (interest paid reduces returns) and to firms.

 "Data from a sample of 386 IPOs listed between 2000 and 2007 reveals that interest cost can reduce the return to public subscribers by 44%; while the HIBOR-based interest earnings to issuers are estimated at 0.59% of funds raised, and at 6.27% of forecast earnings. "
Not surprisingly they also find that subscription rates help predict returns but that subscriptions reduce as interest rates (i.e. opportunity costs) increase. 

Good stuff:

Cite:  Fung, Joseph K. W. and Che, Sanry Y.S., Initial Day Return and Underpricing Cost in Advance Payment Initial Public Offerings (December 31, 2009). HKIMR Working Paper No. 35/2009. Available at SSRN:

How Much Is a CEO Worth? - BusinessWeek

How Much Is a CEO Worth? - BusinessWeek:
"Graef Crystal, a pioneer in compensation consulting, analyzed the 2009 pay of 271 chief executive officers. His findings? 'Simply put,' Crystal says, 'companies don't pay for performance.'

.... Crystal, 76, developed the formulas he uses over the course of 30 years advising companies....In an ideal world, Crystal and many investors agree, stock performance and CEO pay would be closely aligned. But no matter how he parsed the numbers, Crystal discovered no relationship between shareholder returns and CEO compensation."

One more worry for banks: Wal-Mart - Jun. 22, 2010

An easy, interesting article for a Commercial Bank Management class or even Money and Banking:

One more worry for banks: Wal-Mart - Jun. 22, 2010:
"'Wal-Mart's income from the provision of financial services is currently an insignificant part of their overall income,' says Rajesh Narayanan, finance professor at Louisiana State University. 'But the rapidity which they have expanded their services in this arena suggest that their eyes are on a larger prize.'

For Wal-Mart, the benefits of offering financial services are clear. In addition to the $3 or so that customers pay for things like applying for and refilling debit cards, and having checks processed or printed, Wal-Mart steers shoppers toward making purchases in its stores through cash-back incentives. It also benefits from offering what amounts to a mall of services within its own stores

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Monday, June 21, 2010

Don’t Gut Proxy Access - DealBook Blog -

I could not agree more!!! Great article by Harvard's Lucian Bebchuk.

Short version: strengthen corporate governance practices even though management may not want you to!

Another View: Don’t Gut Proxy Access - DealBook Blog -
"While shareholder power to elect new directors is supposed to serve as a foundation for our system of corporate governance, American shareholders seeking to replace incumbent directors face considerable legal impediments. Lowering these impediments would make directors more focused on shareholder interests. The case for doing so is supported by empirical evidence indicating that arrangements increasing directors’ insulation from removal are associated with lower company value and worse performance.

Any reform of corporate elections should include ending incumbents’ monopoly over the corporate ballot — the proxy card sent by the company at its expense to all shareholders. Only board-nominated candidates get to appear on this ballot; challengers must bear the costs of sending (and getting back) their own proxy card to shareholders. Providing shareholders with proxy access — the right to place candidates on the ballot — would contribute to leveling the playing field."

Sunday, June 20, 2010

SSRN-CEO Interviews on CNBC by Felix Meschke, Young Han Kim

Definitely will be mentioned in class. Up on anticipation, then reverses.

SSRN-CEO Interviews on CNBC by Felix Meschke, Young Han Kim:
"This paper investigates whether media attention systematically affects stock prices by analyzing price and volume reactions to 6,937 CEO interviews that were broadcast on CNBC between 1997 and 2006. We document a significant positive abnormal return of 162 basis points accompanied by abnormally high trading volume over the [-2, 0] trading day window. After the interviews, prices exhibit strong mean reversion; over the following ten trading days, the cumulative abnormal return is negative 108 basis points. The pattern is robust even after controlling for the announcements of major corporate events and surrounding news articles. We also find that one standard deviation larger abnormal viewership is associated with a 0.5% higher event day abnormal return and 0.5% larger post-event reversals. Furthermore, we find evidence that enthusiastic individual investors are more likely to trade purely based on CNBC interviews not confounded by any events or news articles. These price and volume dynamics suggest that the financial news media is able to generate transitory buying pressure by catching the attention of enthusiastic individual investors.

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Friday, June 18, 2010

Behavioral Real Estate

Need more evidence of the impact of seemingly irrational behavior?  Look no further than the Real Estate Market where Seiler, Lane, and Seiler find that people make decisions that differ substantially from what classic economists would suggest.

Mental Accounting and False Reference Points in Real Estate Investment Decisions by Seiler, Lane, and Seiler. 

From Abstract:
"We find a statistically significant degree of mental accounting at all points throughout the disposition effect curve when holding a real estate investment in isolation versus holding the asset as part of a mixed-asset portfolio. We also identify four distinct disposition curve shapes beyond the traditional “S-shaped” curve where investors are more willing to sell an asset that is in the gains domain. Further, we conclude that an investor’s willingness to sell jumps by the greatest amount when going from zero return into profitable territory. Finally, this false reference point does take into consideration transaction costs."
From the paper:
"If people were rational utility-maximizers, the decision to sell an asset would be independent of the price that was paid for the asset. The price paid in the past is a sunk cost, and should therefore be irrelevant to future buy/sell/hold decisions."

This would suggest a S-shaped function where people would be less willing to sell at a loss and more willing to sell at a gain.  This is what they found most of the time.  However they also found some exceptions: people who would sell major losers and major winners, but were reluctant to sell in the middle (the so-called U shaped curve).

"... the “S-shaped” disposition curve does not hold for all investors. Specifically, 7.3% of the sample possesses a “U-shaped” curve. This means that their willingness to sell is higher or lower around their break-even point when compared to extreme gains and losses."

The behavioral findings are very strong, but there are at least some "rational" people, but not many.  The authors find
".... only 6.8% (36/533) of the sample exhibits complete rationality. In support of the extent literature, 74.9% (399/533) of the sample are more willing to sell as the return on the investment increases.
Good stuff that will definitely make it to the classroom!

Cite:  Seiler, Vicky L., Lane, Mark and Seiler, Michael Joseph, Mental Accounting and False Reference Points in Real Estate Investment Decision-Making (June 15, 2010). Available at SSRN:

Thursday, June 17, 2010

Stanford Graduate School of Business Research: Saving for Retirement? Beware the 4% Rule | Business Wire

Stanford Graduate School of Business Research: Saving for Retirement? Beware the 4% Rule | Business Wire:
"If a retiree adopts a 4% rule, he will waste money by purchasing surpluses, will overpay for his spending distribution, and may be saddled with an inferior spending plan,' wrote Sharpe and colleagues Jason Scott, managing director of the Retiree Research Center at Financial Engines, and John Watson, a fellow at Financial Engines, Inc., of Palo Alto, Calif.

What's really wrong with the 4% plan is its insistence on fixed spending coupled with investing in a portfolio with variable returns, says Sharpe. In the most obvious case, when a retiree's portfolio underperforms, stubbornly pulling money out at the same rate means he'll run out of money at some point. Clearly, most advisors would see that coming, and caution the retiree to spend less."

and later:
"If people are going to invest in risky assets after they retire, they will need to choose a strategy that adjusts their spending as the value of their savings changes. And that's quite a leap from the inflexible 4% rule."

Will try to update this one later.

Wednesday, June 16, 2010

Dan Ariely: The Mind's Grey Areas -

I just got his second book, The Upside of Irrationality.  (the first was great and is used in class often)

In an example of good timing (probably not coincidental or irrational!).

Dan Ariely: The Mind's Grey Areas

"We have recently seen a number of big corporate frauds and stock market scandals. The question arises: is it just the case of a few bad apples or is it a deeper systemic problem? 

The answer, we've found, lies in conflicts of interest. What happens when you put good people in situations that create conflict? They usually succumb to temptation. You see it in everybody, be it politicians or businessmen. So, how do we understand these influences in order to prevent them?

In our experiments, we find that a lot of people cheat by just a little bit. In standard economics, cheating is supposedly a straight cost benefit analysis. People look at the odds of getting caught and the associated punishment, and then cheat when it makes sense to do so. However, in our experiments we find that people do not act strictly according to this model; they cheat only to the extent that they can continue to feel good about themselves and rationalize their action"

SSRN-Is There a Correlation between World Cups and S&P 500 Performance? by Ralph Baddour

SSRN-Is There a Correlation between World Cups and S&P 500 Performance? by Ralph Baddour:
"...using data from 1950 to 2006, it was shown empirically that the S&P 500 Composite Index has an expected return of -2% over the period of a FIFA World Cup tournament. This relationship could be classified as a subset of the calendar effect class of behavioral finance anomalies."

Yeah...not going to put much stock in this one. (pun intended)

SSRN-Validity of Capital Assets Pricing Model: Evidence from KSE-Pakistan by Uzair Bhatti, Muhammad Hanif

Beating a dead horse? More evidence that CAPM does not work as currently constructed.

SSRN-Validity of Capital Assets Pricing Model: Evidence from KSE-Pakistan by Uzair Bhatti, Muhammad Hanif:
"Purpose of the research is to form an opinion about authenticity and validity of CAPM. Our methodology includes the beta calculation through variance/covariance approach in order to predict the required return, consequently price the underlying security. Pricing of the security and risk calculation is required by the investors in portfolio composition. In this study returns used are the capital gains only due to unavailability of information about the dividends paid. Historical returns are used for calculation of results. Findings suggest that CAPM gives accurate results for a limited period and for few companies only. Out of 360 observations only 28 results supporting CAPM while 332 are against it, hence model is rejected in this institutional frame work.

CITE: Bhatti, Uzair and Hanif, Muhammad, Validity of Capital Assets Pricing Model: Evidence from KSE-Pakistan (January 29, 2010). European Journal of Economics, Finance and Administrative Sciences, No. 20. Available at SSRN:

Fannie, Freddie to delist from NYSE - Jun. 16, 2010

Fannie, Freddie to delist from NYSE - Jun. 16, 2010:
"Mortgage finance giants Fannie Mae and Freddie Mac were ordered by their federal regulator to no longer trade their shares on the New York Stock Exchange, the agency announced Wednesday. Both stocks plummeted on the news."
and later:
"Shares of Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) both plunged about 50% in late-morning trading. Fannie Mae fell to 45 cents, while Freddie Mac was trading at 61 cents. Each firms' shares are eventually expected to trade publicly on the over-the-counter bulletin board, also known as pink sheet trading."

It would be interesting to know what part of this drop was caused by a lack of liquidity and what part is a signaling story (even though it is denied in the CNN story).

Women Prefer Men Holding State Bonds, Japan Ad Says (Update1) -

Women Prefer Men Holding State Bonds, Japan Ad Says (Update1) -
"Japanese women are seeking men who invest in government bonds, according to an advertisement being run by the Ministry of Finance....The government’s plan to attract marrying-age men comes after a campaign aimed at retirees started last August. That push featured Junko Kubo, a former anchor on Japan’s public broadcaster NHK, in ads placed in the backs of taxi cabs. Kubo followed Koyuki, an actress and model who in 2003 appeared in “The Last Samurai” with Tom Cruise as well as posters for government bonds."

I would love to see a study on this. Behavioral models (INEPT etc) would suggest that they would work. What will be interesting to see is if they "work"--ie have lower yields--because of their reported target market (young males) or if they work because institutional traders buy them more as well.

H/T to Freakonomics.

Tuesday, June 15, 2010

Role of allocation from Ibbotson

Advisor Perspectives:
"Another way to understand the contributors to return variance, Ibbotson said, is to consider a four-step process that looks like this: You begin by assuming you start with cash, then you go to an average asset mix, and then you go to the specific policy mix for a particular fund. Finally, you put in active management, which consists of actively managing your asset allocation plus actively managing your stock and bond selection, security selection, and of course paying some fees.

“Just going from cash to that average asset mix explains approximately 70% of the variation of returns,” Ibbotson said, although in the BHB study it was a little more than that. When you go to the next piece, which is the policy piece, it explains another 15% or so. The last piece, active management, explains the remaining 15% in the variation of returns."
HT to Derek Hernquist

The Economics of Libertarianism, Revealed - Economix Blog -

The Economics of Libertarianism, Revealed - Economix Blog -
"Libertarianism rests on two bedrock beliefs: human freedom is a great good and the public sector tends to screw things up. The first belief is based more on faith than empirical result; the second derives from millennia of human experience. The increased appeal of libertarianism today reflects a nonpartisan view that the public sector has been deeply problematic under either party.

Monday, June 14, 2010

Nobelist Merton Rejoins MIT Sloan School From Harvard (Update2) - BusinessWeek

Nobelist Merton Rejoins MIT Sloan School From Harvard (Update2) - BusinessWeek:
"Robert C. Merton, winner of the 1997 Nobel Prize in economics, said he will rejoin the faculty of the Massachusetts of Institute of Technology’s Sloan School of Management to focus on training students in quantitative finance....He will retire from Harvard Business School at the end of this month after 22 years, he said."

Tuesday, June 08, 2010

SSRN-Too Big to Fail in Financial Crisis: Motives, Countermeasures, and Prospects by Bernard Shull

SSRN-Too Big to Fail in Financial Crisis: Motives, Countermeasures, and Prospects by Bernard Shull:
"This paper proceeds on the view that a better understanding of why too-big-to-fail policies have persisted will provide a stronger basis for developing effective reforms. After a review of experience in the United States over the last 40 years, it considers a number of possible motives. The explicit rationale of regulatory authorities has been to stem a systemic threat to the financial system and the economy resulting from interconnections and contagion, and/or to assure the continuation of financial services in particular localities or regions. It has been contended, however, that such threats have been exaggerated, and that forbearance and bailouts have been motivated by the “career interests” of regulators. Finally, it has been suggested that existing large financial firms are preserved because they serve a public interest independent of the systemic threat of failure they pose – they constitute a “national resource”.

Each of these motives indicates a different type of reform necessary to contain too-big-to-fail policies. They are not, however, mutually exclusive, and may all be operative simultaneously


CITE: Shull, Bernard, Too Big to Fail in Financial Crisis: Motives, Countermeasures, and Prospects (June 7, 2010). Levy Economics Institute Working Paper No. 601. Available at SSRN:

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