5 things I learned today #2

I had fun with my 5 things yesterday's so I am doing it again.

Five things I learned today:

1. Volume of equity options traded with the Options Clearing House (OCC )is over 10 times that of non equity traded options.  This ratio has stayed relatively constant since 2000.  Data source: OCC. http://www.optionsclearing.com/webapps/historical-volume-query (Sept 26, 2013)

year	equity	non equity	equity percentage	equity to non equity
2012	3,681,820,659	322,050,649	90.23%	11.43
2011	4,224,604,529	338,143,665	91.06%	12.49
2010	3,610,436,931	288,631,739	91.35%	12.51
2009	3,366,967,321	245,669,797	92.57%	13.71
2008	3,284,761,345	297,811,236	91.42%	11.03
2007	2,592,102,961	270,723,257	89.96%	9.57
2006	1,844,181,918	183,665,668	90.20%	10.04
2005	1,369,048,282	135,263,258	90.32%	10.12
2004	1,083,649,226	98,390,870	91.33%	11.01
2003	830,308,227	77,550,428	90.94%	10.71
2002	709,784,014	70,673,329	90.87%	10.04
2001	722,680,249	58,581,686	92.50%	12.34
2000	672,871,757	53,856,182	92.59%	12.49

  2.  Playing with FINVIZ is fun.  For instance:

There are over 3600 firms that trade on the NYSE. (Finviz.com)

391 of the S&P 500 trade on the NYSE
109 of the S&P 500 trade on the NASDAQ

27 of the Dow Jones Industrial stocks trade on the NYSE
 3 of the Dow Jones Industrial stocks trade on the NASDAQ

 http://finviz.com/screener.ashx?v=111&f=exch_nyse,fa_div_pos


3. Given the importance of option trading, Kane's finding that option markets are important for price discovery should not be a surprise, but rather seen as confirmation of what we already assumed.

"I find evidence that the equity prices do adjust towards the option prices to reconcile the mispricing event. The results show that there is a significant movement in the equity prices towards the option prices, however consistent with the model the equity prices only move part of the way and the implied prices move back resulting in a reconciliation price in the middle"

Kane, Hayden, Price Discovery Across Equity and Option Markets (September 13, 2013). Available at SSRN: http://ssrn.com/abstract=2325714 or http://dx.doi.org/10.2139/ssrn.2325714

4. CEO pay was pretty constant from 1936 to 1980...then, not so much:

Time        Median CEO pay in millions of constant 2000 dollars

1936-1939	1.1
1940-1945	1.07
1946-1949	0.9
1950-1959	0.97
1960-1969	0.99
1970-1979	1.17
1980-1989	1.81
1990-1999	4.09
2000-2005	9.2

Source:

Arantxa Jarque: CEO Compensation: Trends, Market Changes, and Regulation in Economic Quarterly, Summer 2008

Available at http://www.richmondfed.org/publications/research/economic_quarterly/2008/summer/pdf/jarque.pdf

Note: the original source of the data is: Frydman and Saks (2007).

5.  The quarterly correlation between bonds and stocks has been negative in the 2000s.   CBS reported on a paper by Harvard's Malcom Baker and NYU's Jeffery Wurgler.

Here is the key table from the CBS report:
     
            Decade   Correlation

• 1970-79: 0.49
• 1980-89: 0.36
• 1990-99: 0.19
• 2000-11: -0.55

Source: http://www.cbsnews.com/8301-505123_162-57464128/the-correlation-of-bond-and-stock-returns/

The second really cool thing about the Baker and Wurgler paper is that in it they break down bonds into different types: for instance "bond like" stocks have a higher correlation whereas more speculative stocks have a lower correlation.  VERY cool!

(as I would label it: I^3: Informative, Interesting, and Important!


  I didn't believe the correlations were so low so I decided to test it myself.  I took a closed end fund and compared it to the S&P and the Dow.  And, well, they seem to be right!  Check for yourself: here.



 

5 things I learned today

I have decided I need to get back to blogging more.  I am not sure where the time will come from, but has to happen, so:

Five things I learned today:

1.  Diversified firms have less underpricing in IPOs.  This may be caused by signaling quality by the more focused firms. 

The source of this new knowledge is: “Industrial Diversification and Underpricing of Initial Public Offerings” with Thomas Boulton and Scott Smart, 2013, Financial Management, 42, 679-704  Available online: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=101895

   2. Better governed firms adjust their capital structure faster.    Especially when further "out of whack"   Source of new knowledge: Liao, Mukherjee, and Wang.  

A look in: 

"...predict that a good corporate governance system would, in

serving the best interest of shareholders, induce managers to make more timely

(upward) adjustments to capital structure deviations."

  3. Dividends have a more pronounced signal (ie are more important) in countries where investor protections are lower.  (FYI this is exactly what I have been hypothesizing in class.  Good to get confirmation.)  

"Results suggest that dividends are more informative in firms with potentially more severe agency problems and in countries with weak investor protection and low transparency" 

 Source of New Knowledge (SONK): Dividend Informativeness and Agency Problems: A Cross-Country Analysis by Wen He, Lilian Ng, Nataliya Zaiats and Bohui Zhan

  4.  There are roughly 4800 ETFs and ETPs in the world.    ETFs have about $2 trillion invested in them.  SONK: http://www.cnbc.com/id/100695142

  5. Credit Default Swaps on US debt are starting to rise in the face of a potential default when the debt ceiling is hit.  SONK: http://www.washingtonpost.com/blogs/wonkblog/wp/2013/09/24/markets-are-starting-to-worry-about-the-debt-ceiling-in-one-chart/

Selling covered calls is not without risk

Where Did 6 Million Missing Workers Go? | The Exchange - Yahoo Finance

Where Did 6 Million Missing Workers Go? | The Exchange - Yahoo Finance:

"The other reason is a surprising pullback in the portion of Americans who even want to work. The labor-force participation rate is declining for a variety of reasons, such as younger people going to college or graduate school instead of looking for a job, and out-of-work middle-aged people who simply give up looking for a job and become labor-force dropouts. Economists have been expecting the participation rate to inch up as the economy recovers. But it hasn’t."

How serious is this?

Opinions vary, but the New Yorker estimates the unemployment rate at about 11% if not for the dropouts:

"In August, 2008, just before Lehman Brothers blew up, the participation rate was 66.1 per cent. Five years later, it’s still almost three percentage points lower than it was then.
Assuming the participation rate stayed constant over the past five years, ...A bit of grade-school arithmetic provides the answer. In August, 2008, the participation rate was 66.1 per cent. Applying that figure to a working-age population that has grown by about ten million in the past five years, there would be about 162.6 million people in the labor force, rather than the actual figure of 155.5 million. With 144.2 million Americans currently employed, 18.4 million would then be classified as unemployed. (The actual figure is 11.3 million.) And the unemployment rate would be roughly 11.3 per cent...."

In fairness the New Yorker also tries the calculations under different assumptions, but regardless, the "real" unemployment rate is higher than what we see report.  

Measuring fund performance class lesson

How does your fund stack up?

Portfolio math for class

I am loving these videos.  Nice for students to prep for class and to review after.  Feel free to use.

Citigroup sheds more than $6 billion in PE, hedge fund assets: WSJ - Yahoo! Finance

Citigroup sheds more than $6 billion in PE, hedge fund assets: WSJ - Yahoo! Finance: (Reuters) -

"Citigroup Inc (NYS:C) has sold more than $6 billion in private equity and hedge fund assets in the past month to comply with new regulations that limit such investments, the Wall Street Journal reported, citing people familiar with the transactions."