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Tuesday, November 22, 2016

Tuesday, November 15, 2016

Podcast episodes for economics classes

Here are some great podcast episodes for economic classes. I use them (either reference them or make them available to my students).

Remember, my linking to them is not an endorsement of everything they say, but rather a way of getting us all to think about things a little differently)

Economic Podcast Episodes

* Why economics and politics don't mix:

* Introducing GDP: http://www.npr.org/sections/money/2014/02/28/283477546/the-invention-of-the-economy

* Globalization: http://www.npr.org/sections/money/2016/09/23/495226796/episode-725-trade-show

* Textbook prices: http://www.npr.org/sections/money/2014/10/03/353300404/episode-573-why-textbook-prices-keep-climbing

* Externalities: http://www.npr.org/2015/07/17/421490567/how-did-a-medical-miracle-turn-into-a-global-threat

* A carbon tax (short): http://www.npr.org/sections/money/2013/06/28/196355493/economists-have-a-one-page-solution-to-climate-change

* Sustainability and Economics: http://www.npr.org/2015/07/17/421474018/what-can-a-small-town-in-england-teach-us-about-resilience

* The afterlife of a t-shirt: http://www.npr.org/sections/money/2015/08/26/434988401/episode-502-the-afterlife-of-a-t-shirt

* The interconnectivity of Globalization: http://podacademy.org/podcasts/the-butterfly-defect-how-globalization-creates-systemic-risks-and-what-to-do-about-it/

* Protectionist policy and Canadian milk prices FT.com http://podcast.ft.com/?p=3771

* A look at an early strike (I do not think it was the FIRST strike :) )
: http://www.npr.org/sections/money/2015/10/16/449264812/episode-658-strike-one

* Forecasting is hard. http://freakonomics.com/podcast/how-to-be-less-terrible-at-predicting-the-future-a-new-freakonomics-radio-podcast/

* What is inside TPP? http://www.npr.org/sections/money/2015/11/06/455055023/episode-662-omg-tpp

* The economics of education: http://www.highlanderinstitute.org/podcast/episode-025-russ-roberts-on-the-economics-of-education/

* Adam's Smith's Invisible Hand (gets two!)
1. Pro: https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-3-the-role-of-self-interest-and-competition-in-a-market-economy
2. Con: https://www.theguardian.com/commentisfree/audio/2011/oct/06/big-ideas-podcast-adam-smith-audio

* a look at the Fed: http://www.bloomberg.com/news/audio/2016-09-21/benchmark-special-here-s-what-you-need-to-know-about-the-fed

* A look at price inelasticities: Why are weddings so expensive. http://www.bloomberg.com/news/audio/2016-08-31/53-why-are-weddings-so-expensive-blame-econ-101

* Robert Frank on Income Inequality: https://origin-www.bloombergview.com/articles/2016-05-17/barry-ritholtz-s-masters-in-business-robert-frank-interview

* Economics and immigration: http://www.bloomberg.com/news/audio/2016-07-06/45-the-economics-behind-the-boom-in-anti-immigration-sentiment

* The losers in a global economy? Or "the reason for Brexit and Populism in politics?" http://www.bloomberg.com/news/audio/2016-05-18/38-the-quiet-epidemic-that-s-killing-white-americans-in-droves

* how widespread this is: http://www.mckinsey.com/global-themes/employment-and-growth/income-inequality-why-so-many-households-are-not-advancing

* Slower growth affects the "American Dream" http://www.bloomberg.com/news/audio/2016-03-03/episode-27-can-slow-growth-and-the-american-dream-coexist

* Robert Preston on inequality: http://bbc.in/1uTbXVk

* Is Africa the next boom? /https://www.brookings.edu/podcast-episode/made-in-africa-manufacturing-and-economic-growth-on-the-continent/

* Why the stock market and the Economy do not always move together: http://www.goldmansachs.com/our-thinking/podcasts/episodes/02-25-2016-hatzius-currie.html

One that is just fun!
http://www.bloomberg.com/news/audio/2016-04-15/24-meet-the-most-important-country-singer-in-economics

Saturday, September 28, 2013

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:

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.

Thursday, September 26, 2013

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:

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/

Monday, January 23, 2012

It’s Showtime: Do Managers Report Better News Before Annual Shareholder Meetings? by Valentin Dimitrov, Prem Jain :: SSRN

I hope no one is surprised by this: managers seemingly try to influence analysts and shareholders by providing good news just prior to the firm's annual meeting. That is the conclusion on a paper by Dimitrov and Jain that examines the 40 days prior to the firm's annual shareholder meeting.

It’s Showtime: Do Managers Report Better News Before Annual Shareholder Meetings? by Valentin Dimitrov, Prem Jain :: SSRN:

The pre-meeting returns are significantly higher when shareholder discontent with managerial performance is likely to be stronger. The decile of companies with the worst past stock price performance exhibits average cumulative abnormal returns of 3.4% and buy-and-hold returns of 7.0% during the 40-day pre-meeting period. Companies with poor past performance exhibit even higher pre-meeting returns when shareholder pressure on management is greater, such as when institutional ownership is high, when CEO compensation is high, and when shareholders submit proxy proposals on corporate governance. We complement the evidence based on CARs by showing how managers of poorly performing firms manage the timing and content of earnings announcements and management forecast announcements before the annual shareholder meetings. Overall, the results suggest that managers attempt to influence shareholders before annual shareholder meetings through positive news.

One caveat that I would like strengthened a bit: reversion to the mean. If a firm is in worst performing decile, it may get better just by chance/bid ask bounce, etc.

Wednesday, January 18, 2012

Silent Combat: Do Managers Use Share Repurchases to Trade Against Short Sellers? by Harrison Liu, Edward Swanson :: SSRN

Silent Combat: Do Managers Use Share Repurchases to Trade Against Short Sellers? by Harrison Liu, Edward Swanson :: SSRN:

I caught myself literally saying "Wow" when I read this....

Liu and Swanson look at the timing of stock repurchases. Past literature had shown that managers prefer share repurchases to dividends. One reason often given for this preference is the flexibility that buybacks have as opposed to dividends which, once set, are rarely lowered. We have known that this flexibility results in some market timing but what had only been speculated on, was that managers use buybacks to counter act short selling.

The Abstract: (emphasis is my own)

Abstract:
Motivated by the substantial capital used to repurchase stock and its potential to affect price discovery, we develop an empirical model of changes in corporate share repurchases. We find that several accounting measures of capital availability and firm performance influence repurchases, but our novel discovery is that corporate managers trade against shorts by increasing share repurchases in response to an increase in short sales. Trading against shorts appears to violate SEC regulations that price be set by “independent market forces without undue influence by the issuer.” We also examine how managers trade with their personal capital. In general, they trade with short sellers (i.e., selling when shorts sell); however, managers change their behavior and do not sell when the company is repurchasing shares. By not selling their personal stock holdings, managers maintain the credibility of the buy signal from the corporate share repurchases.

Two "Look-ins":

"We estimate that quarterly share repurchases increase by an average of $1,140,000 for each one percentage point increase in short interest. This trading is unlikely to result from reverse causation, whereby short sellers react to corporate repurchases (i.e., endogeneity), because (1) short sellers have no incentive to increase their position when a company is buying back its shares, and (2) the amount of corporate share repurchases is reported quarterly, so it is not readily available to shorts in a timely manner."

and

"Managers can easily monitor the aggregate short position in their company’s stock since short interest is publicly reported....managers’ could adjust share repurchases to counteract changes in short sales. International Bancshares Corporation (IBC) is one of the few companies to publicly admit to this practice. In a press release on March 25, 2009, IBC states that it “is particularly vulnerable to the harmful practices of short-traders because under CPP, the Company is prohibited from repurchasing its common stock. (CCP refers to the U.S. Treasury Department’s Capital Purchase Program.) The Treasury, which held stock warrants as part of TARP funding, responded by granting IBC permission to repurchase stock. "

Fascinating stuff! I^3 (Interesting, important, and informative!)

Cite:
Liu, Harrison and Swanson, Edward P., Silent Combat: Do Managers Use Share Repurchases to Trade Against Short Sellers? (January 16, 2012). Available at SSRN: http://ssrn.com/abstract=1986396

Tuesday, January 03, 2012

Investment strategist: 'Big banks make their money from optimism' | Joris Luyendijk | guardian.co.uk

Investment strategist: 'Big banks make their money from optimism' | Joris Luyendijk | guardian.co.uk:

"In big banks and asset management companies it's very difficult to be negative about the future. The reason is simple: they make their money from optimism. If you are going to tell investors that the economy is going down, they will move their money somewhere safe and reliable such as cash. It is tricky to charge fees for trading or managing cash. It also becomes more difficult to convince investors to purchase riskier products.

"Pension funds have all this money on their hands. People working there want to outsource risks so they give the money to asset and hedge fund managers. If things go wrong, they have somebody to blame."

And I thought I was cynical. Read it! Many good points.

Favorite quote?

"If you take an honest look at the financial sector today, you see banks can borrow money almost for free on what is called the short-term market, then lend that money to governments for 2% or 3%. Now why would they lend to small businesses if they can make money so easily? This is what 'zero interest rates' are doing to our economy, as well as taxing savers with inflation at over 5%. You take on new debt to pay off your old debt. It's like drinking your hangover away with ever more drinks. You are destroying your liver. That's what's currently happening."

HT: MoneyScience

Wednesday, December 28, 2011

Patents: good, bad, or indifferent?

Tabarrok on Innovation | EconTalk | Library of Economics and Liberty:

Ok, so this is probably economics, but it was so interesting I could not pass up sharing it. And be careful to jumping to conclusions. He points out that the one area where he believes it works is in pharmaceuticals. His conclusions? Create patents of differing times periods (some 3 years, some 20 years, etc).

"Alex Tabarrok argues that innovation in the United States is being held back by patent law, the legal system, and immigration policies. He then suggests how these might be improved to create a better climate for innovation that would lead to higher productivity and a higher standard of living."

It is a podcast and Ted Talk. Here is a look-in via the transcript from the podcast from George Mason:

"The argument for patents is that imitation is a lot cheaper than innovation. So that, if a firm innovates, creates something new, and another firm can come along, imitate that product, eat away all the profit, and the first firm can't recover its research and development costs. And then they wouldn't have any incentive to do them and you won't get much innovation in the first place. Exactly right. Now, there's lots of arguments against. One of the first arguments against is just to ask: Are patents necessary?.....in 1930, we created in the Plant Patent Act, we could patent roses. So, did patenting of roses lead to more roses, more beautiful roses? Because people could capture the benefits without fear of being copied? Exactly. Did it lead to a flowering? No, it did not. We didn't see any big increase in rose innovation. In fact, we might have seen a little bit of a decrease. Moreover, even today, most new roses are not patented. Most inventions, most innovations are not patented. And I think people are a little bit surprised about this. With a few exceptions--chemicals, pharmaceuticals--being really the two biggest important exceptions. In some fields we don't even all patents, like fashion. Highly innovative, no patents at all. But in most fields, most innovations are not patented at all. You mention an example I've been thinking about recently, which is sports. Somebody innovates a new formation in football. It can't be patented. But coaches spend hours looking for a small edge."

Here is the Ted Talk:

Wednesday, December 21, 2011

An Asset-Pricing Model for the Contagion Age: Polson and Scott - Bloomberg

An Asset-Pricing Model for the Contagion Age: Polson and Scott - Bloomberg:

From the Bloomberg "Business Class" Blog:

" working on a more accurate pricing model that incorporates The financial crisis and the meltdown in Europe have exposed the deficiencies of traditional asset- pricing models, particularly their inability to account for the effect of contagion from one market to another. The good news is that the length and the persistence of the turmoil have given researchers a trove of data to develop new predictive tools.

In our work, we developed an asset-pricing model to study these market disruptions, which incorporates random shocks to volatility that are correlated across markets"

From the paper itself:

"Crucially, our model expresses all three ways in which market shocks tend to cluster during times of crisis: time-series clustering, whereby large shocks today predict further large shocks tomorrow; cross-sectional clustering, whereby large shocks in one region pre- dict large shocks in other regions; and directional clustering, whereby shocks to aggregate volatility are associated with specific directional biases in contemporaneous country-level returns."

and later:

"We have three main findings. First, we present evidence that European equity markets exhibited significant excess correlation during the debt crisis of 2010, relative to an asset- pricing model that assumes regional market integration.....[Secondly] we find that part of this excess correlation can be attributed to the impact of mutually exciting volatility shocks in the cross-section of expected returns. We propose global and regional volatility-risk factors to quantify this impact, and show how to con- struct these volatility risk factors directly from the time series of market returns....Our third main finding concerns the contemporaneous relationship between volatility and expected returns. We are primarily interested in the role of volatility shocks in under- standing contagion, rather than in estimating volatility per se. Nonetheless, in performing a formal statistical assessment of our volatility model, we find a significant negative rela- tionship between daily volatility and expected returns on the U.S. market portfolio."

Well this one is timely. We ended class this past week saying that what we know and what we don't know about finance. One of the things I said we don't know is the benefits of diversification within a world where correlations increase dramatically in times of market turmoil. The authors do a wonderful job of looking at this "unknown" in a paper that is guaranteed to be coming to a top ranked journal soon.

I^3=Important, Interesting, Informative

Wednesday, March 16, 2011

Does Stock market harm investment incentives?

A fascinating article on Harvard's Governance Blog today. A MUST read for class.

Does the Stock Market Harm Investment Incentives? by Asker, Farre-Mensa, and Ljungqvist.

"The theory literature in economics and finance has long argued that the separation of ownership and control following a stock market listing can lead to agency problems between managers and dispersed stock market investors and hence to suboptimal investment decisions. The literature is divided on whether overinvestment (i.e., empire building) or underinvestment (due to rational short-termism) will result, or indeed whether effective corporate governance mechanisms can be devised to ensure investment does not suffer. "

and later:

"We also show that public companies tend to smooth their earnings growth and dividends and are reluctant to report negative earnings. One interpretation for these patterns is that public firms treat investment spending as the residual after having paid dividends out of their cash flows, whereas private firms treat dividends as the residual after paying for their investment out of cash flows. "

From The paper's abstract:

"Theory suggests that agency problems resulting from separation of ownership and control can cause stock market listed firms to invest suboptimally... Listed firms invest less and are less responsive to changes in investment opportunities compared to observably similar private firms, especially in industries in which stock prices are particularly sensitive to current profits. Listed firms also tend to smooth earnings growth and dividends and avoid reporting losses. These patterns are consistent with models of managerial myopia and do not appear to be due to firms endogenously choosing to be public or private: Firms that go public for reasons other than to fund investment invest like private firms pre-IPO and like public firms post-IPO. Nor do the results appear to be driven by measurement error, tax effects, or firm life-cycle effects. Our evidence suggests that the stock market distorts investment, at least for the fast-growing companies in our sample."

Cite: Asker, John William, Farre-Mensa, Joan and Ljungqvist, Alexander, Does the Stock Market Distort Investment Incentives? (March 13, 2011). ECGI - Finance Working Paper No. 282/2010. Available at SSRN: http://ssrn.com/abstract=1603484

Definitely I^3=Interesting, Informative, and Important!

Wednesday, December 22, 2010

Trader Holds $3 Billion of LME Copper - WSJ.com

Trader Holds $3 Billion of LME Copper - WSJ.com:

"... the ability of a few traders to hold huge swaths of the world's stockpiles is coming under scrutiny.

The latest example is in the copper market, where a single trader has reported it owns 80% to 90% of the copper sitting in London Metal Exchange warehouses, equal to about half of the world's exchange-registered copper stockpile and worth about $3 billion.

Single traders also own large holdings of other metals. One trader holds as much as 90% of the exchange's aluminum stocks. In the nickel, zinc and aluminum alloy markets, single traders own between 50% to 80% of those metals and one firm has 40% to 50% of the LME's tin stockpiles.

While commodities exchanges scrutinize all holdings to ensure a single player isn't trying to corner the market, and many of the positions are owned by big firms on behalf of clients, the large holdings do result in a concentration of ownership that could skew prices."

I had no idea such concentrations were regularly common. And before we all panic, remember that a firm may own if for many many clients.

Monday, December 06, 2010

The Costs of Intense Board Monitoring — The Harvard Law School Forum on Corporate Governance and Financial Regulation

Wow...

The Costs of Intense Board Monitoring — The Harvard Law School Forum on Corporate Governance and Financial Regulation:

"Editor’s Note: The following post comes to us from Olubunmi Faleye of the Finance Department at Northeastern University, Rani Hoitash of the Department of Accountancy at Bentley University, and Udi Hoitash of the Accounting Department at Northeastern University.
In our paper The Costs of Intense Board Monitoring, forthcoming in the Journal of Financial Economics,First, we examine whether the quality of board monitoring is enhanced when the board is more focused on monitoring. Second, we examine whether intense monitoring is associated with weaker advising. Third, we examine how this potential tradeoff between the quality of board monitoring and advising affects overall firm value, emphasizing the role of the firm’s advising requirements in the process.

Takeaway: More active monitoring is a two edged sword. Yes it increases CEO turnover and reduces executive pay, BUT it also reduces the quality of advising and overall (as measured by Tobin's Q) seems to be detrimental to the firm.

Definitely an I^3 paper!

Tuesday, November 23, 2010

FRB: FOMC Minutes, November 2-3, 2010

By now you probably have seen the news story on the Fed lowering their growth forecasts for the coming year. For instance here is how it was reported by the Washington Post:

"Federal Reserve officials expect the unemployment rate to remain around nine percent at the end of next year and eight percent at the end of 2012, according to internal forecasts that drove the central bank to take new efforts to boost the economy three weeks ago.
The 18 top leaders of the central bank expect the U.S. economy to grow at a 3 to 3.6 percent pace next year, which by their calculations will be enough to bring joblessness, currently at 9.6 percent, down to the 8.9 to 9.1 percent range in late 2011."

While the news gets it right, you really only get the headlines. Therefore I would encourage all of you (especially any students who are in Money and Banking or Financial Institutions), to take a few extra minutes and actually read the minutes from the meeting.

FRB: FOMC Minutes, November 2-3, 2010:

"...information reviewed at the November 2-3 meeting indicated that the economic recovery proceeded at a modest rate in recent months, with only a gradual improvement in labor market conditions, and was accompanied by a continued low rate of inflation. Consumer spending, business investment in equipment and software, and exports posted further gains in the third quarter, and nonfarm inventory investment stepped up. But construction activity in both the residential and nonresidential sectors remained depressed, and a significant portion of the rise in domestic demand was again met by imports. U.S. industrial production slowed noticeably in August and September, hiring at private businesses remained modest, and the unemployment rate stayed elevated. Headline consumer price inflation was subdued in recent months, despite a rise in energy prices, as core consumer price inflation trended lower..."

And later a discussion of why unemployment is recovering slowly:

"Participants agreed that progress in reducing unemployment was disappointing; indeed, several noted that the recent rate of output growth, if continued, would more likely be associated with an increase than a decrease in the unemployment rate. Participants again discussed the extent to which employment was being held down, and the unemployment rate boosted, by structural factors such as mismatches between the skills of the workers who had lost their jobs and the skills needed in the sectors of the economy with vacancies, the inability of the unemployed to relocate because their homes were worth less than the principal they owed on their mortgages, and the effects of extended unemployment benefits on the duration of unemployed workers' search for a new job. Participants agreed that such factors were contributing to continued high unemployment but differed in their assessments of the magnitude of such effects."

There is much much more detail and breadth in the minutes. Well worth the read.

Sunday, November 21, 2010

Video of the Trillion Dollar Bet in 5 parts

YouTube - The Black-Scholes Formula - 1/5:

The Trillion Dollar bet, which is based on the Long Term Capital Management story (when Genius Failed) , is a staple in my classes. Here is the first of 5 parts of the old PBS video.

HIGHLY recommended! The show is really two separate stories--on one on the history of the Black Scholes formula, and one on the Collapse of Long Term Capital Management. (FWIW We usually use the latter mainly in class but the whole thing is good!)

The moral of the story is that absolute adherence to quantitative models is what frequently gets you in trouble. Models are representations of reality and reality can often vary widely from the model.

Part 1, Part 2, Part 3, Part 4, Part 5
Thanks to Zvi for the link (and reminding that I had promised to post this!)

Thursday, October 28, 2010

FMA papers-Part IV

The fourth in a series of posts that looks at some of the new research that was presented at the FMA conference last week in NYC.

Two of my favorite papers happened to be in the same session (a fact that I doubt was independent, watching a good (or bad) presentation no doubt has carryover effects to the next paper).

Jayaraman and Millburn examine two simultaneous long term trends of increased market liquidity (which is presumed to make stock prices more informative) and paying executives with more market based pay and find that the latter is dependent on the former. That is, as liquidity increases, so too does pay sensitivity that is tied to stock performance. (Notably, they find no such increase for pay to earnings sensitivity which presumably is seen as a second best solution to paying managers for performance.) Using the change to decimalization and inclusion into S&P 500 as robustness checks gives further support to this idea. (it should be noted that SP inclusion was used because it leads to LESS informative prices and consequently lower equity pay sensitivity.

Then in a paper so good that I really enjoyed it even though the presenter was not an author. Intuitively I just love the idea and can not figure out why firms are not doing it! The author York's Yisone Sam Tian shows that using Asian options (which uses the average stock price instead of closing stock price) helps alleviate some of the incentive problems that arise when using traditional executive stock options. For instance the risk manager would be not need as large of premium for accepting the pay, there would be less incentive to withhold bad news, etc. That said, there might be increased incentive for earnings smoothing as the discussant pointed out. Genius!

Durham, Perry, and Carpenter examine pay equity in NFL football and find that it a team has a wide dispersion of pay (paying some a great deal and many others near the league minimum for example), turnover increases and winning percentages drop. This is not the first time for similar findings. Past researchers have examined pay equity issues in many settings, including professional sports. The past results have been quite mixed, but in a nutshell have suggested that for "large team games" such as US football, baseball, soccer some measure of fairness matters, where in smaller team games (basketball) it matters less (presumably where a few superstars can carry the team). And I really wish they had looked at whether turnover led to turnovers. LOL..

previous posts from the FMAs

Part 1
Part 2
Part 3

Thursday, October 14, 2010

Some videos we will be using in Behavioral Finance class tonight

We are covering the idea of charity or altruism as rational or irrational. Now clearly this idea of helping others is irrational is well established in some circles. To start what is altruism? Let's ask Google.

Now many economists have argued for years that it is bad. For instance, Ayn Rand in her writings and more recently from the Ayn Rand Institute.

Last week we ended class talking about this video where the monkeys shared their gains and acted in a manner that would be seen as uneconomic (giving away nuts, caring about "fairness" etc). If you have not seen that video, I highly recommend it. (oh and please give me a juicy grape :) ) So cooperation may be useful for the species.

Here is an example not in an artificial setting.

Here is a short video on monkeys

So what can we learn from animals? And here is a longer video from Emory University:

This is not a new phenomena. The idea sacrificing for others is seemingly well ingrained in the fabric of our DNA. For instance, SBU's own Joel Bennington presented this to our class last year. It is based on the Ultimatum Game this is from a classic economist.

Thursday, September 30, 2010

S.E.C. Sued Over Shareholder Rule - NYTimes.com

S.E.C. Sued Over Shareholder Rule - NYTimes.com:
The SEC is being sued by two groups to block this.

"The S.E.C., in a 3-2 vote, stipulated that investors or groups of shareholders who have owned 3 percent of a company for three years could have candidates on proxy statements. Under the regulation, shareholders would be able to nominate at least one director and as much as 25 percent of a board. "

We will talk more about it in class, but I have a hard time imagining a firm being "hijacked" by the inclusion of another candidate. Shareholders do not need to vote for the candidate just because (s)he is listed on the proxy.

Sunday, April 11, 2010

More proof market timing does not work

Strategies - Why Timing Isn’t an Investor Strength - NYTimes.com:

"[A] new study that provides yet more evidence that most mutual fund investors would fare better if they didn’t try to time the market. And because so many fund investors try to do so anyway, the study suggests that these fund flows provide a new sentiment indicator for gauging excessive pessimism or optimism.

The new study, “Measuring Investor Sentiment With Mutual Fund Flows,” is forthcoming in the Journal of Financial Economics, an academic publication. Its authors are Avi Wohl, a finance professor at Tel Aviv University; Azi Ben-Rephael, a Ph. D. student there; and Shmuel Kandel, now deceased,.....

the average mutual fund investor would be far better off if he never engaged in stock market timing.

Still, the research also shows how we might become better market timers. The key is to do the opposite of what the average mutual fund investor is doing — in other words, to become a contrarian."

Here is working paper version of the paper from SSRN.

Definitely I^3!!!

Saturday, December 12, 2009

Hedge Fund Exchange: Women Hedge Fund Managers Outperform Men

Hedge Fund Exchange: Women Hedge Fund Managers Outperform Men:

"Women also, apparently, make better money managers according to another study by two professors at UC Davis [3]. That study found that overconfidence caused men to trade stocks 45 percent more often than women, thus lowering their net portfolio returns by 2.65 percent per year (compared with 1.72 percent lower returns for women traders). Moreover, several studies show a link between profit and gender. Companies with several high-ranking women at either officer or director levels tend to have higher earnings per share, return on equity and stock prices than competitors with few or no senior women."

The article mentions other studies as well and I know the evidence suggests strongly that there are differences between genders when it comes to risk financial risk taking.

But I am still not totally convinced. Why? Well there is some conflicting evidence. For instance, Olivares, Diaz, and Besser report that gender differences in risk aversion appear to be driven by wealth differences.

Moreover, even if there is a difference in performance (which I by no means doubt), is it based on gender?

An alternative explanation might be based on the relative numbers of male and female money managers (or board members). For instance, supposed that 80% of board members (or portfolio managers) are male. Further suppose that an equal proportion of males and females are "good at being money managers (or board members). If we assume that on average the more qualified managers get jobs first, then it would be the case that females would outperform. Which MAY be entirely different than the risk aversion explanation.

It does however lead to at least more questions as to the view that markets are efficient and that any money manager is as good as any other.

Wednesday, November 18, 2009

Why China Hates The Carry Trade

I had a student ask about this...

Why China Hates The Carry Trade:

"A carry trade is when you borrow from a currency with a low interest rate, and then invest in a currency with a higher interest rate. Say the US interest rate is 3%, and the Chinese interest rate is 5%. Borrow at 3%, invest at 5%, make 2%, because the Chinese yuan is pegged to the dollar at a fixed rate. "

In international finance one learns that as this happens, what should happen is that the currencies and interest rates adjust to end this opportunity. But in this case the Yuan is pegged (more or less) to the Dollar. So that does not happen.

However, the student asked why don't the interest rates adjust?

The question was why don't US rates go up? The best answer I could give was that they will but currently "under priced" because the US Fed would like to stimulate the economy. In a global world you can not stimulate one part of the world's economy without it having effects elsewhere (and similarly, let's suppose the US Fed decides to raise rates. If other countries do not raise, then this carry trade can work in reverse which is exactly whatis happening to China right now:

"The chairman of the China Banking Regulatory Commission complained to Obama that the carry trade was destabilizing the Chinese economy, but this really means the capital inflows are making it hard to keep the currency peg at its low current level. China has a higher interest rate than the US, and though the US dollar is falling worldwide, the yuan remains at its old peg against the greenback. China could float it, and let the market decide, but like most politicians, he does not trust the market. More importantly, there are worried it will hurt exports because a stronger yuan would increase the price of their exports to the rest of the world."

Thoughts? A better answer? I have not given it a great deal of thought and did no research on it and it is definitely not my specialty.

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