UCLA Anderson School of Management | Knowledge Assets | UCLA Anderson Faculty Highlights

WOW! Occasionally I am still blown away by how many amazingly good resources are available online. This is a great case in point. UCLA's Andersen School of Management has made many of their faculty available to us.

UCLA Anderson School of Management | Knowledge Assets | UCLA Anderson Faculty Highlights

I really don't know where to start, but here goes. I just watched these and a few others. All good. All Recommended. I am picking these since they fit my class the best, but by all means watch them all!

William Ouchi on Corporate Governance in the US.




Sanford Jacoby and Emily Nason on governance in Japan and the US.



John Hughes on information asymmetries and how to impact the cost of capital it must impact on systematic risk (which is based on his paper with Liu and Liu that is available here). Richard Roll on Real Estate prices and interest rates.

Wisdom of Crowds Videos

We are doing market efficiency in class and these are a great way to get exposed to some of the ideas we will be discussing.

From PBS:



An interview with James Suroweicki:

Ten questions the House Financial Services Committee could use from the NY Times

GREAT stuff here....Andrew Sorkin provides 10 questions that those receiving bail out money should answer. The questions are great, but even more than that, he sets the stage well with his lead in. Indeed, some of them might make the basis for some good essay test questions ;)


DealBook Column - Up Next for Big-Shot Bankers - A Public Flogging - NYTimes.com: "

"On Wednesday, eight chief executives of big banks will make their way to Washington...to appear at a Congressional hearing in front of ...the House Financial Services Committee. Here are 10 questions members of the committee might consider asking":

From question number 5:

"Much has been made of the subprime debacle. But few seem to be willing to talk about another looming crisis: credit card debt. People like Nouriel Roubini, the professor who has predicted much of this crisis, have estimated that you could have losses of as much as $3.6 trillion, which would bankrupt the industry. What do you make of that number? And since credit card defaults are correlated to employment, what happens if unemployment goes as high as 10 percent or more? What is the highest unemployment level that you’ve used in your forecasting models? And do you have adequate reserves for your worst-case situation? If your assumptions are wrong, what happens?"

From question number 7 which seems to call for the same type of partnerships that my colleague Mark Wilson has been saying are needed:

"Your compensation structure has been “heads I win, tails I win” for you and many of your employees, despite putting your firm and the nation’s fiscal health in jeopardy. What’s the right model? And how do you feel about forcing your employees to risk their own money, not just the firm’s, when they make a trade or participate in a transaction that puts shareholder capital at risk?"

I also really like questions 1,2,8 but find question number 4 is horribly scary and why I fear government bailouts/equity stakes etc.

What is finance for? - Columns - livemint.com

Sort of in light of the Adam Smith quote, the following article looks at the main roles of finance. It is generally something that we forget or take for granted (often rushed through on the first few days of an introductory finance class) but it serves us all well (myself included) to stop now and then and remember what finance is here for.


From Nirvikar Singh is a professor of economics at the University of California, Santa Cruz:

What is finance for? - Columns - livemint.com:

"Discussions on how to improve regulation of the financial sector often are limited by starting from current institutions, and thinking of adjustments to these institutions. Boundaries between institutional categories, determined by historical legacies, are often taken as given. A more productive approach to considering regulatory reform could be to first answer the question, “What are the economic roles of financial institutions?” (invariably some form of intermediaries)

What roles do financial intermediaries play? Here are seven examples."

• Economizing on the costs of completing and implementing transactions.

• Matching buyers and sellers.

• Economizing on search costs.

• Providing expertise.

• Smoothing the market.

• Providing reputation.

• Transforming products.

Singh expounds on each of the seven showing what are the strengths (bringing buyers and sellers together) and weaknesses (many assets to not trade, experts are blinded by pay etc), and discusses how regulatory changes should take these facts into account.

Good stuff! Well worth a read.

Financial Quote of the day

From Adam Smith whose most famous work, The Wealth of Nations, was published in 1776, but still resonates today.

Adam Smith Quotes:

"It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country"

Quoted is from BrainyQuote.com

Which in the language of class says that Financial Intermediaries exist to lower transaction costs.

Becker and Murphy Say the Short-Term Benefit of the Stimulus Package Will Be Less Than Expected - WSJ.com

The Wall Street Journal has an interesting look at what the impact of the stimulus package might actually be.

Becker and Murphy Say the Short-Term Benefit of the Stimulus Package Will Be Less Than Expected - WSJ.com:

"...our conclusion is that the net stimulus to short-term GDP will not be zero, and will be positive, but the stimulus is likely to be modest in magnitude. Some economists have assumed that every $1 billion spent by the government through the stimulus package would raise short-term GDP by $1.5 billion. Or, in economics jargon, that the multiplier is 1.5.

That seems too optimistic given the nature of the spending programs being proposed. We believe a multiplier well below one seems much more likely"

They list five other points as well including:

"The increased government spending in the stimulus package is supposed to be only temporary, until the economy returns to a full employment level, but probably won't be.

The evidence of past expansions of government programs is just the opposite. Once created they tend to survive and grow over time, even when the increases initially were said to be temporary. The underlying reason for this is that interest groups develop around new and expanded programs, and they lobby to keep and expand those programs."

Which is not to say the current stimulus plan should or should not be passed, but merely that the benefits may be less than hoped.

BTW As Becker is a Nobel Prize winner in economics. So his words carry some additional weight.

Muslim investors profit by adhering to faith

This past week in my Problems in Finance class we did a fast review of international finance (I miss teaching that class BTW). In it we did not get to speak about many of the differences based on religion, so I was pretty excited to see this article from the San Francisco Chronicle that will provide me an excuse to mention that strict adherence to the Quaran does not allow lending and borrowing.

Muslim investors profit by adhering to faith:

"Their renunciation of the interest-based economy kept them away from investments in financial services companies, whose stocks have collapsed, and out of traditional mortgages.....Dow Jones Islamic Market Indexes, which represent benchmarks for Islamically correct investment categories, have been outperforming their non-Islamically compliant counterparts by 3 to 4 percent in key indexes.

Of course one year does not mean that much, but it does show that at least last year forgoing debt, for whatever reason, was a good thing!

BTW If you are interested in this, here is a page of notes on Islamic Finance that I used back when I did teach International Finance. I have not touched it in a long time.

Cramer's Star Outshines His Stock Picks - Barrons.com

I get more questions every year from students is on Jim Cramer than any other topic (well except "will this be on the test"). Most such questions come in two main flavors: "what do you think of Cramer" or "did you see Cramer talking about ....".

My stock answer is that while I think he is a really smart and hard working person, I have my reservations that anyone can consistently outperform the market and further most of the evidence suggests he can not.

My points were strengthened by Barrons this week:

Cramer's Star Outshines His Stock Picks - Barrons.com:

"The guy is a hardworking genius with a word of advice for everyone...many words of advice, actually. He dispenses thousands of Buy/Sell recommendations a year.....From May to December of last year....Cramer's Sells "made money" by outperforming the market on the downside by as much as five percentage points (depending on the holding period and benchmark). His Buys, however, lost up to 10 percentage points more than the market."

But the article went on to discuss much more. For example Cramer's "prepared buys and sell recommendations" did (SLIGHTLY) better than the lightning round picks. Which might be because of more rigorous analysis but the differences (especially on buys) makes any theory speculative.

Further, recent price movements appear to be a factor in what stocks get discussed and their recommendations. While I am usually not a fan of charts, this one may show why he does not do very well; his buy recommendations are usually for stocks that have gone recently (while his sells are for those that have gone down).

All in all a good article and definitely worth reading.

Two past FinanceProfessor blog articles on Cramer that are of interest:

1. A Barron's article showing his stock picking was not not much better back in 2007.
2. A tirade (which turned out quite prophetic) from 2007 saying that rising rates and falling real estate markets were going to cause a major problem with liquidity.

Unrelated to Cramer but one tidbit in the article that I am looking forward to using in class: EventVestor.com. Seems like an easy way to do event studies that could be used in several classes. Stay tuned on that!

Quote of the day

I did not do any of the weekend so we can get two today:

"I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle." -Winston Churchill

As quoted by Five Million Dots.

"It is common sense to take a method and try it.
If it fails, admit it frankly and try another.
But above all, try something.--FDR"

As quoted at Famous Quotes

An imperfect hedge: the case of Metallgesellschaft

If you have had me for MBA 610 you know in the "what can go wrong" with derivatives part of the class we usually discuss Metallgesellschaft. It is a classic case of when an imperfect hedge can really hurt you. I just stumbled upon this six minute explanation of what caused their problems that is very good.

SSRN-Costly External Finance, Corporate Investment, and the Subprime Mortgage Credit Crisis by Ran Duchin, Oguzhan Ozbas, Berk Sensoy

Durchin, Ozbas, and Sensoy look at Corporate Investment after the Subprime Mortgage Crisis and find much proof that the liquidity crisis is reducing capital spending.

SSRN-Costly External Finance, Corporate Investment, and the Subprime Mortgage Credit Crisis by Ran Duchin, Oguzhan Ozbas, Berk Sensoy:

"We study corporate investment in the wake of the sub prime mortgage credit crisis that began in summer 2007. The crisis represents an unexplored negative shock to the supply of credit for non-financial firms. We find that corporate investment declines significantly following the onset of the crisis. The decline is greatest for firms that have low cash reserves (or high net debt) or are financially constrained, i.e. more likely to face difficulties raising external capital. These results are robust to controls for industry- and firm-specific investment opportunities. We also find that 'excess' cash, as defined by previous work, is positively related to post-crisis investment, suggesting an important precautionary savings role for seemingly excess cash that has not been emphasized in the literature. Overall, our results suggest that an important channel for the effects of the sub prime crisis on the real economy is a tightened supply of credit for non-financial firms."

SSRN-The Equity Premium in 100 Textbooks by Pablo Fernandez

So which is it? In class this week we have been discussing CAPM and the question has some up a few times as to what is the market risk premium. I guess we are not the only ones who have some uncertainty on this issue. Pablo Fernandez shares with us his working paper on the issue.

SSRN-The Equity Premium in 100 Textbooks by Pablo Fernandez: "[I review] 100 finance and valuation textbooks published between 1979 and 2008 (Brealey, Myers, Copeland, Damodaran, Merton, Ross, Bruner, Bodie, Penman, Weston, Arzac...) and find that their recommendations regarding the equity premium range from 3% to 10%, and that several books use different equity premia in different pages.

Some confusion arises from not distinguishing among the four concepts that the word equity premium designates: Historical equity premium, Expected equity premium, Required equity premium and Implied equity premium."

A look in:

"... The average is 6.6%. Figure 1 is in line with an update of Welch (2000), who reports
that in December 2007, 90% of the professors used in their classrooms equity premiums between 4% and 8.5%, and with Fernandez (2008) who reports that in June 2008 finance professors in Spain used equity premiums between 3.5% and 10% (average 5.5%).

Figure 1 of the paper is very interesting:

After this he goes on to show what each author has used for the Risk Premium in different editions of the book.

So if you are not sure which premium you should use, I guess you are not alone. What do I use in class? Usually 6% but this follows a discussion of why risk premiums may change (transaction costs, increased/decreased risk aversion, more/less volatile economy).

Interesting work. Must have taken a while to go through 100 text books.

Financial Quote of the day

This one, which was right on, is by Susan Schmidt Bies (Fed Governor) speaking at a risk Management Conference in December of 2004. Seemingly many financial institutions did not get the message.

FRB: Speech, Olson—Qualitative aspects of risk management—December 7, 2004:

"Although the importance of the quantitative aspects of risk measurement may be quite apparent...the importance of the qualitative aspects may be less so. In practice, though, these qualitative aspects are no less important to the successful operation of a business.... Some qualitative factors--such as experience and judgment--affect what one does with model results. It is important that we not let models make the decisions, that we keep in mind that they are just tools, because in many cases it is management experience--aided by models to be sure--that helps to limit losses."

More evidence that correlations increase in bad times

In the typical "wow what great timing" yesterday as we were talking about correlations and diversification in class, SeekingAlpha ran the following article:

Opportunities in a High Correlation World -- Seeking Alpha:

"One of the most striking features of 2008 was the fact that correlations between most asset classes went up substantially: everything declined at the same time. One of the principal motivations behind diversifying is that all of your holdings will not decline at the same time. Declines in one class will be buffered by gains in another—or at least lesser losses in others. This effect has not provided much buffer in 2008."

The article provides some very interesting correlation matrices (uh, that sentence may never have been written before!) showing how correlations went way up as market prices went way down.

This is not the first time that has happened. In fact, it seems to be the norm. Butler and Joaquin (2001) showed the same thing. From their paper Are the Gains from International Portfolio Diversification Exaggerated? The Influence of Downside Risk in Bear Markets:

"The fundamental rationale for international portfolio diversification is that it expands the opportunities for gains from portfolio diversification beyond those that are available through domestic securities. However, if international stock market correlations are higher than normal in bear markets, then international diversification will fail to yie ld the promised gains just when they are needed most...."

This does not mean to not diversify, but rather to realize that diversification may not be enough and that in bad times, you have to expect all assets to more together more. This can help explain why puts (that move in opposite directions) and cash are in such demand during bear markets.