Tuesday, November 08, 2005
FinanceProfessor.com: How 1+1+1+1 Can Equal Less Than 4 - New York Times
The other example that is used is the one of the used car that can be sold for less than the sum of its parts. The specialist knows the value of the parts, but the layperson does not and does not have the time to find out.
Stumbling and Mumbling: When stupidity pays
The noise-trader risk. Does it apply to other walks of life? Almost certainly. Does people that are loud and confident but limited in ability drive out those that are more cautious and more intelligent?
Saturday, October 29, 2005
SSRN-A Century of Global Stock Markets by William Goetzmann, Philippe Jorion: "The expected return on equity capital is possibly the most important driving factor in asset allocation decisions. Yet, the long-term estimates we typically use are derived from U.S. data only. There are reasons to suspect, however, that these estimates of return on capital are subject to survivorship, as the United States is arguably the most successful capitalist system in the world; most other countries have been plagued by political upheaval, war, and financial crises. The purpose of this paper is to provide estimates of return on capital from long-term histories for world equity markets. By putting together a variety of sources, we collected a database of capital appreciation indexes for 39 markets with histories going back as far back as the l920s. Our results are striking. We find that the United States has by far the highest uninterrupted real rate of appreciation of all countries, at about 5 percent annually. For other countries, the median real appreciation rate is about 1.5 percent. The high return premium obtained for U.S. equities therefore appears to be the exception rather than the rule. Our global databases also allow us to reconstruct monthly real and dollar-valued capital appreciation indices for global markets, providing further evidence on the benefits of international diversification. "
Saturday, October 22, 2005
Sunday, October 09, 2005
Stumbling and Mumbling: Firm volatility and macro stability: "For me, there;s a puzzle here. How do we reconcile this claim with the finding by John Campbell and colleagues, that firm-level volatility has been rising relative to market volatility since the 1960s (with correlations between stocks trending down)?"
I think that increased flexibility of firms must help to stabilise the economy. I am not sure that the stock market is a good indication of the underlying volatility of firm performance. I guess I don't fully accept EMH.
Marginal Revolution also have the story.
Bel Ranto: Stress Testing: What Do We Know Anyway?: "Rowe begins by �stating the obvious,� and by that I think he means that there is essentially universal agreement that �the intended focus of stress testing is what may happen beyond the threshold at which we measure VaR.� "
Thursday, September 29, 2005
New Economist: Has Barro solved the equity premium puzzle?: "It's not quite the holy grail of financial economics, but certainly one of the longest running debates has been over what is known as the equity premium puzzle - or why US stock returns are so much higher than returns on Treasury bonds."
Tuesday, September 27, 2005
Martin Wolf in the FT asks the question "Is a benign outcome to the imbalances in the world economy likely?". "No, is the short answer." He goes through the imbalances and produces some excellewnt charts of the savings-investment imbalance through the world. He argues that the US imbalance is matched by a lack of investment in emerging Asia. Europe is on the sidelines but the IMF WER suggests that structural reform could play some part in the rebalancing (as could such change in Japan).
Thursday, September 15, 2005
SSRN-How the Internet Lowers Prices: Evidence from Matched Survey and Auto Transaction Data by Florian Zettelmeyer, Fiona Scott Morton, Jorge Silva Risso: "Abstract:
There is convincing evidence that the Internet has lowered the prices paid by some consumers in established industries, for example, term life insurance and car retailing. However, current research does not reveal much about how using the Internet lowers prices. This paper answers this question for the auto retailing industry. We use direct measures of search behavior and consumer characteristics to investigate how the Internet affects negotiated prices. We show that the Internet lowers prices for two distinct reasons. First, the Internet helps consumers learn the invoice price of dealers. Second, the referral process of online buying services, a novel institution made possible by the Internet, also helps consumers obtain lower prices. The combined information and referral price effects are -1.5%, corresponding to 22% of dealers' average gross profit margin per vehicle. We also find that buyers with a high disutility of bargaining benefit from information on the specific car they eventually purchased while buyers who like the bargaining process do not. The results suggest that the decisions consumers make to use the Internet to gather information and to use the negotiating clout of an online buying service have a real effect on the prices paid by these consumers. "
Wednesday, September 14, 2005
Sunday, September 11, 2005
Tuesday, August 30, 2005
SSRN-Measuring the True Cost of Active Management by Mutual Funds by Ross Miller: "In particular, funds engaging in closet or shadow indexing charge their investors for active management while providing them with little more than an indexed investment. Even the average mutual fund, which ostensibly provides only active management, will have over 90% of the variance in its returns explained by its benchmark index."
Monday, August 22, 2005
Friday, August 19, 2005
Economist.com | Articles by Subject | Credit derivatives: "Of course, things can go wrong. It is possible that the pricing of ever more complicated instruments might sometimes be too much even for the ultra-brainy lot who do it, with expensive results. Tranched instruments have no clear market price, so they have to be valued with complex models. Working out whether a default in a portfolio is likely to be an isolated event, or is a harbinger of more to come, is especially tricky, not least because data on credit defaults are relatively sparse. "
Isn’t a corporation more like the corner shop? The initial investment that has taken place means that reputation and a longer term outlook are important. Those firms that are successful are usually appreciated by their customers.
FT.com / Comment & analysis / Editorial comment - Hedge fund is now a meaningless term: "The time has come to stop talking about hedge funds versus non-hedge funds, and to think about asset management as comprised of active and passive investors, with hedge funds a form of ultra-active management. In time, the industry is likely to polarise between the extremes, at the expense of traditional active management."
Tuesday, August 16, 2005
FT.com / Home UK - American investors move away from US assets: "�It is partly because of the dollar, partly corporate scandals. Both have been a wake-up call to investors with too much exposure to US equities,� said Brian Garvey, strategist at State Street bank."
FT.com / Lex - Lex: Private equity: "Interestingly, in the US, it is not clear that size confers much of an advantage. According to data from Private Equity Intelligence, of a sample 77 US funds that were in the top quartile by size between 1988 and 2003, only a tiny majority beat the median internal rate of return hardly a head start. Intriguingly, large European funds did a little better relative to the benchmark. One factor that might explain this difference is the higher degree of competition in the US. "
Friday, August 12, 2005
FT.com / Markets / Investor's notebook - Market Insight: Show of strength with US shares buyback: "Combined with the fact that companies are under no legal obligation to follow up the announcement of a buyback programme with the actual repurchase of stock, this makes buybacks a poor yardstick for stock selection, says Mr McVey, who contends that the market has not rewarded shrinkage of share count since 2002.
Tobias Levkovich, the chief US equity strategist at Citigroup�s Smith Barney unit, would beg to differ. He says that his analysis shows �such companies tend to outperform and thus we contend that such [buyback] programmes are a good use of cash�. Alongside dividends, investment strategists see buybacks, as a method to deprive management teams of cash they would otherwise use for investments that turn out to be wasteful in the long run."
How and Why Do Small Firms Manage Interest Rate Risk? Evidence from Commercial Loans - Federal Reserve Bank of New York: "Although small firms are most sensitive to interest rate and other shocks, empirical work on corporate risk management has focused instead on large public companies. This paper studies fixed-rate and adjustable-rate loans to see how small firms manage their exposure to interest rate risk. The cross-sectional findings are as follows: credit-constrained firms consistently favor fixed-rate loans, minimizing their exposure to rising interest rates; firms adjust their exposure depending on how interest rate shocks covary with industry output; and �fixed versus adjustable� outcomes are correlated with lender characteristics. In a twenty-eight-year time series, the aggregate share of fixed-rate bank loans moves with interest rates in a manner consistent with recent evidence on debt market timing. I conclude that the �fixed versus adjustable� dimension of financial contracting helps small U.S. firms ameliorate interest rate risk, and discuss the implications for risk management theories and the credit channel of monetary policy."
Friday, August 05, 2005
BBC NEWS | Business | EU firms enjoy US spending spree: "The volume of US companies being taken over by their European rivals is now nearing its highest level in four years, according to a financial report.
So far this year businesses in Europe have spent $47.2bn (�27bn) buying up 262 of their American counterparts. "
SSRN-Forecasting Power of Implied Volatility: Evidence from Individual Equities by Jonathan Godbey, James Mahar: "Assuming use of the correct option pricing model and an efficient market, an option's implied volatility is the market's consensus forecast of future realized volatility over the remaining life of that option. We examine 460 of the S&P 500 firms to demonstrate that 1) implied volatility is a better forecaster of realized volatility than historic volatility or GARCH models and 2) the information content of implied volatility significantly decreases with liquidity. Since individual equity options are American style, we obtain implied volatility from calls and puts separately rather than only calls or pooled data. "
Wednesday, August 03, 2005
Monday, August 01, 2005
ScienceDirect - Journal of Banking & Finance : Futures trading activity and predictable foreign exchange market movements: "In this paper, we examine the relation between futures trading activity by trader type and returns over short horizons in five foreign currency futures markets � British pound, Canadian dollar, Deutsche mark, Japanese yen, and Swiss franc. Transforming trading activity into a sentiment measure, we find that speculator sentiment is positively related to future returns. In contrast, hedger sentiment covaries negatively with future returns. We also find that extreme sentiment by trader type is more correlated with future market movements than moderate sentiment. Our results suggest that hedgers lose to speculators in these futures markets, on average. Based on equilibrium pricing models that futures risk premiums are determined by both market risk and hedging pressure, we show that the profits to speculators are in general compensation for bearing risk."
Wednesday, July 27, 2005
Stumbling and Mumbling: "The intuition here is that if everyone sees a recession coming, bond markets will anticipate lower short rates and lower future inflation, as the recession lowers inflation. That will drive long yields down more than short rates (as these do not fall in response to future inflation.) The result will be a yield curve inversion and a subsequent recession.
However, under a regime of strict inflation targeting, bond markets know what future inflation will be, so long yields won't move so much. In this regime, the yield curve will be a worse predictor of output than in a regime where monetary policy is used to stabilize output. This, shows Mr Estrella, is why the yield curve has become a less good predictor of output since 1987 - because since then, the Fed has given more weight to inflation targeting relative to output stabilization. "
Tuesday, July 26, 2005
Market share - The Boston Globe - Boston.com - Ideas - News: "''It is remarkable that people receive crucial information from individuals whose very existence they have forgotten,' Granovetter wrote in a 1973 article, ''The Strength of Weak Ties.' New information, about jobs or anything else, rarely comes from your close friends, he argued, because they tend to know the same things, and the same people, you know. Your friends may want to help you find a job, but your acquaintances can help you, because they're the people with information about openings you haven't already heard of.
''Weak ties' are your connections to people who don't know each other and who do know other people you don't know. These are ''the channels through which ideas, influences, or information socially distant from [someone] may reach him.'
Today, studying social connections, or ''social networks,' is the hottest field in economic sociology. Focusing on a particular network--the connections between venture capital firms in Silicon Valley, say, or between directors and producers in Hollywood--lets researchers examine the social context of economic decisions."
Monday, July 25, 2005
FT.com / Lex - Lex live: Crude oil: "Excess liquidity needs to find a home and equity valuations in the Gulf�s stock markets are already pumped up. Appetite for foreign investment is increasing. The top two bidders in the recent Turk Telecom privatisation were both from the Gulf. "
Econbrowser: How many people should be working in America?: "The method that Bradbury used in order to arrive at her lowest estimate, 1.6 million, of the number of missing jobs, was to look at the change between the current participation rate for a given demographic group and its value when the recession started in March 2001, and compare this change with the corresponding 4-year change following each of the recessions in 1960, 1969, 1973, 1981, and 1990. This essentially amounts to assuming that the slope of a linear trend fit from 1960-1994 could be extrapolated to 2001-2005 to identify the magnitude that we should normally be expecting for that figure. In the case of mature men, that's maybe not such a bad assumption, and in fact Bradbury finds that for men aged 45-54, the participation rate in 2005 is actually higher than one might have predicted based on the previous 5 downturns. On the other hand, for women aged 35-44, this amounts to assuming that the increase in women's labor force participation rates between 1960 and 1994 should have continued to climb upward, and, since it has not, Bradbury finds 1.1 million 'missing' jobs in this group alone."
FT- foreign funds: "More than $51bn flowed into international funds in the six months to June - four times the $12.4bn the domestic funds attracted, according to fund tracker Lipper. This was a sharp turnround from last year's first half, when $51bn went into US funds and $35bn into international funds."
This will tend to act against the financing coming from overseas demand for US assets.
Wednesday, July 20, 2005
Econbrowser: Fact-checking the fact-checkers: "When Chairman Ben Bernanke of the Council of Economic Advisors made a statement about the U.S. housing market last week, some analysts jumped all over him. It looks to me like Bernanke had his facts exactly right."
Sunday, July 17, 2005
SSRN-Sources of Hedge Fund Returns: Alphas, Betas, and Costs by Roger Ibbotson, Peng Chen: "Hedge funds have grown dramatically to roughly one trillion dollars currently. In this paper we focus on two issues. First, we analyze the potential biases in reported hedge fund returns, in particular survivorship bias and backfill bias. Second, we decompose the returns into three components: the systematic market exposure (beta), the value added by hedge funds (alpha), and the hedge fund fees (costs). We analyze the performance of a universe of about 3,500 hedge funds from the TASS database from January 1995 through March 2004. Our results indicate that both survivorship and backfill biases are potentially serious problems. The equally weighted performance of the funds that existed at the end of the sample period had a compound annual return of 16.64% net fees. Including dead funds reduced this return to 13.90%. Excluding backfill further reduced the return to 9.06%, net of fees. In this last sample, we estimate a pre-fee return of 12.8%, which we split into a fee (3.8%), an alpha (3.7%), and a beta return (5.4%). Overall, we find that the alphas are significantly positive and are approximately equal to the fees, meaning the excess returns were almost equally shared between hedge fund managers and their investors. "
Saturday, July 02, 2005
Thursday, June 23, 2005
Lex live: Italy:
"Both companies are protected - if that is the word - by shareholder pacts among the great and the good. Mediobanca, for example, is 55 per cent owned by a group including leading banks, Fiat and Telecom Italia. If these pacts were solid, there would not be an issue. But the level of consternation evident in Italy suggests they are fraying, with each of the insiders worried that one of the others might crack and sell out first. "
Wednesday, June 22, 2005
Thursday, June 16, 2005
A Fistful of Euros: No Answers Only Questions: "One person who could rightly claim to know more about global ageing and its possible consequences than anyone else in the business is the German Director of the Manheim Research Institute for the Economics of Ageing Axel B'rsch-Supan."
Saturday, June 11, 2005
Interesting discussion on the recent payout for investors (dividends and equity purchase). There is also a look at the way that firms may be paying cash now but neglecting the future. The high level of cash holdings and the relatively low level of investment seems to be one recent feature.
Tuesday, June 07, 2005
Sunday, June 05, 2005
"This paper examines whether socio-economic and psychological factors, which are known to influence lottery purchases, lead to excess investment in lottery-type stocks. The results indicate that, unlike institutional investors, individual investors prefer stocks with lottery-type features. The demand for lottery-type stocks increases during bad economic times and demand shifts influence the returns and idiosyncratic volatility of those stocks. In the cross-section, factors which induce greater expenditure in lotteries also induce greater investment in lottery-type stocks. Poor, young, less educated men who live in urban, Republican dominated regions and belong to specific minority (African American and Hispanic) and religious (Catholic) groups invest more in lottery-type stocks. As expected, investors who exhibit stronger preference for lottery-type stocks experience greater mean under performance. Collectively, the evidence indicates that people's attitudes toward gambling are reflected in their stock investment choices and stock returns"
Interesting paper and thanks to finance professor for the link. Finance Professor
Saturday, June 04, 2005
Friday, May 20, 2005
Tuesday, May 17, 2005
SSRN-Work and Leisure in the U.S. and Europe: Why so Different? by Alberto Alesina, Edward Glaeser, Bruce Sacerdote
Monday, May 16, 2005
Friday, May 06, 2005
Mahalanobis: "Kerkorian sees the arb. Buy managing interest in GM. Sell GMAC. Spit out a special dividend with GM's cash, which would otherwise only be subsidizing a losing operation. GM would then go bankrupt rather quickly. GMAC plus cash dividend should exceed the current value of GM be a bit. It may seem cruel, but it is only accelerating the inevitable, and it is never in society's best interest to subsidize a money-losing operation with no growth prospects, as this merely means that you are encouraging value destruction. "
Sunday, May 01, 2005
Wednesday, April 27, 2005
Demographics, and the Stock Market by Stefano DellaVigna, Joshua Pollet:
"Do investors pay enough attention to long-term fundamentals? We consider the case of demographic information. Cohort size fluctuations produce forecastable demand changes for age-sensitive sectors, such as toys, bicycles, beer, life insurance, and nursing homes. These demand changes are predictable once a specific cohort is born. We use lagged consumption and demographic data to forecast future consumption demand growth induced by changes in age structure. We find that demand forecasts predict profitability by industry. Moreover, forecasted demand changes 5 to 10 years in the future predict annual industry returns. One additional percentage point of annualized demand growth due to demographics predicts a 5 to 10 percentage point increase in annual abnormal industry stock returns. However, forecasted demand changes over shorter horizons do not predict stock returns. The predictability results are more substantial for industries with higher barriers to entry and with more pronounced age patterns in consumption. A trading strategy exploiting demographic information earns an annualized risk-adjusted return of 5 to 7 percent. We present a model of underreaction to information about the distant future that is consistent with the findings. "
Monday, April 25, 2005
At face value it would appear that an aging population is likely to be a net seller of financial assets as they pass retirement age. However, there is a not a lot of empirical evidence to support this view.
Thursday, April 21, 2005
This is a paper looking at central bank losses. More focused on commercial bank problems than FX reerves, but I suspect the principal is the same.
Brad Setser has a much wider discussion of this topic. This includes an item from Billion.
Tuesday, April 19, 2005
Brad Delong brings together a number of stories about the increased pressure from the US administration on China to revalue its currency.
Friday, April 15, 2005
A look at some of the factors that may temporarily drive asset prices from fundamentals. I tend to agree that these factors are temporary but it woudl be interesting to align these ideas with those that suggest that there is a return available to those prepare to take risk, those with superior information and those with capital to take short term losses.
Thursday, April 14, 2005
Links to Brad Delong story about recent weakness in real wages. This looks at some of the tricky parts of the "real" part of this. What about product improvements? Does everyone benefit from this?
FT (subscription required) talks about the political pressure in China for a change in the exchange rate regeime. "Exchange rates are subservient to China's overarching aim of maintaining annual economic growth of about 7 per cent to 8 per cent, creating the 15m to 20m jobs a year that the government believes are needed to maintain social stability and meet expectations of higher living standards."
There is a lot more on this issue Brad Stetser's blog
It seems to me that there is a risk to changing excahnge rate policy in China and that the fortunes of the Chinese economy are very much mixed up with those of the US. Any fall in US economic growth will mean a reduction in Chinese exports (even without a currency change) and this will complicate the aim of creating 15m to 20m jobs a year. However, the threat of losses on FX reserves and the continued increase in money supply that the unsterilised intervention implies suggest that changing the exchange rate regeime would be advantagous.
Wednesday, April 13, 2005
FT (subscription required) on the sorry Rover saga.
"This latest, probably final chapter began in 2000, when BMW, the German carmaker that had poured £3.4bn into Rover since buying it from British Aerospace in 1994, abandoned all hope of turning the lossmaking business around. BMW announced a plan to sell Rover to Alchemy, a private equity firm led by Jon Moulton, which would whittle it down to a niche producer of MG sports cars, cutting 4,000 jobs. BMW, fearful of the potential backlash in one of its most important markets, offered a dowry of £500m to help fund the restructuring and redundancy. "
John Kay: Cult of the practical man killed MG Rover
Kay argues that modern firms need outside expertise.
Friday, April 08, 2005
How could so many people have transfered their pension to the new Rover group rather than stay with BMW? It does not make much sense unless there was some pressure or incentive.
"Initially, the researchers assumed that on average Neanderthals and modern humans had the same abilities for most of these attributes. They therefore set the values of those variables equal for both species. Only in the case of the trading and specialisation variables did they allow Homo sapiens an advantage: specifically, they assumed that the most efficient human hunters specialised in hunting, while bad hunters hung up their spears and made things such as clothes and tools instead. Hunters and craftsmen then traded with one another.
According to the model, this arrangement resulted in everyone getting more meat, which drove up fertility and thus increased the population. Since the supply of meat was finite, that left less for Neanderthals, and their population declined.
A computer model was probably not necessary to arrive at this conclusion. But what the model does suggest, which is not self-evident, is how rapidly such a decline might take place. Depending on the numbers plugged in, Neanderthals become extinct between 2,500 and 30,000 years after the two species begin competing�a range that nicely brackets reality. Moreover, in the model, the presence of a trading economy in the modern human population can result in the extermination of Neanderthals even if the latter are at an advantage in traditional biological attributes, such as hunting ability."
Tuesday, March 29, 2005
Discussion between Nouriel Roubini and David Altig over the risks to the US from the current account position. Lots of very useful links.
Thursday, March 24, 2005
Wednesday, March 23, 2005
Changes in the financial adjustment channels occur primarily through the exchange rate, and it is therefore tempting to ask the question: can we predict future exchange rates by looking at the ratio of net exports and net foreign assets? Econometric analysis suggests that this may indeed be so. "
Saturday, March 12, 2005
One fact of the international scene is that the increase in current account positions of UK and Australia. The Australian current account deficit is even larger than that of the US (in terms of percent of GDP). It is also the case that many important developed nations are saving more - Germany, Japan. Unless we have a downward lurch in global output (which seems likely at some point) someone must do less saving to compensate.
Monday, March 07, 2005
Is this due to the fact that the alternative currencies have risen in value vs the USD? Not clear, but I would suspect that this a factor that makes the change less dramatic than the headline.
FT.com / Comment & analysis / Columnists - Martin Wolf: Argentina holds a weak hand
His main points: 1) If a sovereign decides that it is more painful to service debts than default, only another sovereign can prevent it.
2) Lending to sovereigns is risky. 3) Moral hazard worries are overdone. 4) No default may be more painful than default. 5) Once default is optimal, a deep default is the most optimal. 6) There is a role for the IMF in identifying what is a sustainable level of debt. 7) There is no need for a mechanism for sovereign debt restructuring.
Thursday, March 03, 2005
Interesting. I am inclined to believe that this is something to do with consistently over-stating growth forecasts and understating productivity forecasts, but, as you say, these are well known factors. Many of the other factors that you mention seem to be related to productivity. Incidently, here is an article about the ability of futures markets to provide insight into economic data pdf file.
Wednesday, March 02, 2005
Also a very good discussion on recent practice by the Chinese central bank at Brad Setser's excellent site
I think that the scale of USD buying by the Chinese central bank highlights the size of the inflow into China. Some of this is clearly speculative given the widespread talk that there will be an eventual revaluation. I think that it is pretty clear that the Chinese have to purchase EUR-USD just to maintain the existing balance of their reserves and that they, along with other Asian central banks, are more concerned about exports that an eventual loss on the FX reserves. Even if there is an eventual crisis and the USD starts to collapse as the Chinese peg is relaxed, it is hard to imagine Asian central banks adding to the crisis by selling USD reserves. It would be like the Bundesbank selling ITL or GBP and buying NGL during the ERM crisis - financially astute, but politically embarassing.
Friday, February 25, 2005
Wednesday, February 23, 2005
Tuesday, February 22, 2005
I wonder if this can be applied to FX rates - taking a basket of options prices and bringing them together with some other sentiment indices (futures positions etc).
Friday, February 18, 2005
The relationship between economic growth and the returns to capital. Can these diverge sharply?
Sunday, February 13, 2005
"DEEP in the basement of a dusty university library in Edinburgh lies a small black box, roughly the size of two cigarette packets side by side, that churns out random numbers in an endless stream.
At first glance it is an unremarkable piece of equipment. Encased in metal, it contains at its heart a microchip no more complex than the ones found in modern pocket calculators. But, according to a growing band of top scientists, this box has quite extraordinary powers. It is, they claim, the 'eye' of a machine that appears capable of peering into the future and predicting major world events"
Very strange, slightly scary. I would be more comfortable if it just anticipated changing human emotion....
Saturday, February 12, 2005
One interesting thing here is whether the sharp increase in personal borrowing is associated with this fall in inflation expectation. The increased willingness to take on debt appears to be most evident in the likes of the US, the UK and Australia (where the fall in inflation expectations is probably much greater than in Germany for instance).
Tuesday, February 08, 2005
This is a lovely comment by Brad on the relation between earnings growth and GDP growth and how even a complete diversification will miss out on the returns to future entreprenurship.
Great summary of what we know and what we don't know - including links to authoritative papers.
Sunday, February 06, 2005
This is an interesting drive through the practicalities of competition and contestable markets.
Friday, February 04, 2005
Thursday, February 03, 2005
This is an IMF paper that may provide some insight into the pressure on Asian central banks to think about the value of the USD reserves that they hold. It seems to me that there is little pressure on central banks to think about the ruture value of the reserves. Other policy considerations (maintainance of favourable exchange rates) are more important.
Wednesday, February 02, 2005
Friday, January 28, 2005
A more general overview of the literature A theory of currency denomination of international trade. (pdf)
Thursday, January 27, 2005
"Suppose that a number of small BW2 periphery countries diversify out of US dollars into yen and euros and that leads to a weaker $ relative to Euro and yen. Then, the BOJ may start intervening again and the ECB may start to intervene altogether to avoid excessive appreciation. Then, the BW2 periphery would free ride on the ECB and BOJ: they would be able to dump their undesired $ assets and acquite Euros and Yen provided by the BOJ and ECB intervention at no cost to these free riders as the $ cross rate relative to euro and yen would be unaffected if such intervention occurs and at not cost in terms of bilateral currency value relative to the US $ as someone is absorbing the undesired hot potato of dollar assets. This way ECB and BOJ get the hot potatos of $ assets that small countries do not want and give Euros and Yens to the free riders in exchange."
Also US and China "Balance of Financial Terror Prisoners' Dilemma Game.
Discussion of Chinese move to a basket peg.
Reuters Indifferent 2 year-note auction.
Sunday, January 23, 2005
The effect of UK building society conversion on pricing behaviour
This paper says that UK building societies (similar to a cross between S&Ls and credit unions) acted to boost profits after they were privatised. This was one of the many arguments against privatistion at the time. The Nationwide, which refrained from privatisation and maintains its mutual status, has tried to emphasise the fact that its borrowing rates are lower and deposit rates are higher than the regular banks. It also emphasises the fact that benefits accrue to members.
Thursday, January 20, 2005
"I knew things were bad elsewhere, but I didn't realize just how bad. Europe is projected to have an 18% population decline over the next 45 years. By 2050,30% of the Chinese population will be over 65. Over that same time period,Japan's worker to retiree ratio is projected to be -- get this -- 0.3. That is not a typo. There will be three retirees for every worker. This is caused in part by very low fertility rates (estimated to be 1.32 for the past 5 years; this contrasts with our recent estimated rate of 2.11). Japan's problems are also exacerbated by a total lack of immigration: our new immigration is almost as large on a yearly basis as is Japan's entire population of foreign nationals."
Lots of interesting information about demographics and good links to the information sources.
Here (pdf) is a simple outline by James M. Poterba of some of the issues related to demographic change,asset accumulation and prices
Tuesday, January 18, 2005
Friday, January 14, 2005
Lovely analogy of the argument in favour of micro rather than macro solutions from the Fed.
"Or to return to an analogy I used last summer, if Mr. Greenspan were a bartender with one rowdy drunk:
He would double the price of beer for all, in an effort to bankrupt the drunk more quickly, rather than simply cut off the drunk, letting the decent folk continue
to act decently at an unchanged price.
I firmly believe that the welfare-maximizing policy for society would be to cut off the drunk. But I don’t run America’s monetary policy. Mr. Greenspan is the monopolist bartender, not me. Accordingly, if he wants to endeavor (one of his favorite words!) to engender uncertainty, otherwise known as fear, in the minds, hearts and wallets of those engaged in “excessive risk taking,” all of us, not just those engaged in excessive risk taking, should get a firm grip on our wallets.
Or, to return to my analogy, we should take a walk ‘round the block, until the rowdy drunk falls off his stool."
Thursday, January 13, 2005
Why are English-speaking nations doing best?
Arnold Kling on James C. Bennet's The Anglosphere Challenge.
Monday, January 10, 2005
Excellent McKinsey article about the pressure China is putting on Mexico and some comparisons of various industries struggling to move up the value-chain.
Sunday, January 09, 2005
This is a comment about the apparent preference in China for local currency rather than the USD. Given the speculation about a renminbi revaluation, this should not be a total surprise. There are some anecdotal reports in addition to the data from the Peoples' Bank of China.
I believe that most of the research on the Asian crisis suggests that domestic players were the most swift and most sucessful in moving money out of the country (or at lease into other currencies). There is no reason to believe that it would not work the other way round. All the talk is when not if the Chinese authorities will revalue the renminbi.
Thursday, January 06, 2005
Top comment on the central bank buying of US debt - lots of data sources and information on fx market from the BIS.
More information here from Brad on international capital flows and US deficit financing
Wednesday, January 05, 2005
This is a detailed discussion about the prospect for equity returns in coming years. This links in with a second post by Brad about equity returns.
Equity Returns in the Future II: "Well, the upshot is that the 3-4% annual expected equity premium return that I see still seems very large to me: to correspond to the preferences of a 62-year-old male expecting to spend his wealth in the next fifteen years or to the preferences of a money manager for whom reporting a big loss in the next four years is a career-limiting move, rather than to the risk preferences of the economy considered as a frictionless social welfare maximizing machine. And this means that there is still a powerful, powerful case for stocks for patient investors with a long horizon of a quarter century or more. If you can wait a quarter century, stocks do not look like a sure thing relative to Treasury bonds, but they do look like a 90% thing."
Tuesday, January 04, 2005
Very interesting article about the return on certain assets over the last 20 years. The Economist makes the point that the last 20 years may have been an exception. They also point to the relatively high P/E rating that US stocks currently enjoy.
Monday, January 03, 2005
Talking about new accounting rules that will "Huffing and puffing, though, is part of the game because IFRS is, in the view of accounting firm Ernst & Young, 'the biggest change in financial reporting in a generation'. Opportunistic hedge funds are known to be taking a keen interest, knowing that investors' instinct on seeing unexpectedly poor numbers will be to sell first and ask questions later. "
This suggests that any uncertainty about the economic reality behind accounts causes distortions to the market. It does not appear likely to me. Isn't this what equity analysts are supposed to do - sort the financial wheat from the chaft and find the underlying picture of the firm beneath the announting surface? Individual investors are not likely to be able to complete this task, but the current price should reflect the professional information. This professional information is not likely to be distracted by new accounting rules.
Reuters: "'If you look at a study done by the WTO in September, it shows that India and China will grab about 80 percent of the world market and the remaining 20 percent will have to be shared by the rest of world,' said Narainduth Boodhoo, duty director of Mauritius's Trade Policy Unit."
More detail on the changes from the LA Times here? with lots of information about current exports and imports. Also the Economist reports here.
I would have thought that Africa would have a comparative advantage here, but these stories highlight the disadvantages that many of the least developed countries face.
They are not really stuck with it (apart from the institutional sense). When they decide to allow more flexibility in their currencies they will purchase less USD assets. This will also be the point when the adjustment of the US current account deficit starts to take place: US imports from Asia(making the vast bulk of the US defict) will become more expensive and US long term interest rates will rise. This is more likely to 'correct' the deficit than continued gains in EUR-USD.