Tuesday, November 08, 2005

How 1+1+1+1 Can Equal Less Than 4 - New York Times

Conglomorates may be poor at allocating capital.

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.

When stupidity pays

Nice one Chris and Arsene.

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

Estimating equity returns.

This paper looks suggests that the most common estimates of equity returns, being based on the US market, are plagued by "survivorship bias".

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

US TIC data

US TIC data for August show that net flows into long term securities remained very strong.  The total net portfolio inflow to the US was $91.3bn in August.  This was up from $87.5bn in July and the largest figure since $92.0bn in April 2004.  The inflow was larger than the figures of $55bn that had been expected and is easily sufficient to finance the US current account shortfall. The breakdown of the data reveals that there was a sharp increase in foreign purchase of US corporate bonds.  Foreigners bought a net $40.3bn of US corporate bonds in August against $24.9bn in July.  Foreign net purchase of US agency bonds slipped to $15.7bn from 37.8bn in July. Foreign purchase of US equities remains modest, at $3.8bn in August compared to $10.0bn the previous month.  Though US accounts continue to move money into overseas equities ($13.5bn this August compared to $8.7bn in July), this is clearly only putting a small dent in the continue huge appetite for US bonds from overseas. 

Sunday, October 09, 2005

Firm volatility and macro stability

Chris Dillow is sceptial and gives a good overview.

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?

Great discussion of VAR and its limitations

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

Has Barro solved the equity premium puzzle?

A soluton to the equity risk premium.

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

Do not put off imbalances correction

Martin Wolf in the FT:

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:

Putting some numbers to the impact of the internet on prices and profit-margins.
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

Biases in FX-forecasts: Evidence from panel data

This paper "Biases in FX-forecasts: Evidence from panel data" by David Audretscha and Georg Stadtmann, looks at WSJ exchange rate forecasts. While I would take issue with their assertion that the responses to the WSJ survey are equivalent to the ideas acted upon by foreign exchange traders, there are some very interesting findings. First, during this period, July 1989 to July 2003, forecasters consistently expected the JPY to weaken more than it did. I would suggest that the weakness of the Japanese economy encouraged this belief. However, this view does not account for the huge Japanese current account surplus that, without large outflows of capital from Japan, will tend to keep the JPY supported. Second, the paper identifies four different methods of forecasting amongst those surveyed: an extrapolative model; a regressive model; a combination of these models; and neither of these.

Sunday, September 11, 2005

Foreign direct investment: The human dimension

This paper looks at the role of family ties in the location of FDI. It uses a number of proxies for human ties that have existed since the beginning of trading. A modern version is the family ties that have been at least one of the reasons for the extraordinary level of high tech FDI into Ireland from the US.

Tuesday, August 30, 2005

True Cost of Active Management by Mutual Funds

Already highlighted by Finance Professor, but important anyway so I repeat.

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

House prices through the ages

Lots of stories about house prices as usual.  The New York Times as a very good item about Shiller’s latest warning on house prices.  Be Warned: Mr. Bubble's Worried Again - New York Times  The big interest here is that he has a new series of US house prices that takes an index of prices of one set of houses through the last 400 years.  The figures show that prices are mean-reverting.  Excessive price gains lead to new developments in new areas.  However, the last several years have been an exception that shows bubble-like qualities.  Shiller’s work is based on an unpublished paper by Professor Piet Eichholtz of the University of Amsterdam who recorded house prices along the Herengracht from 1628 to 1973. More in this article from Australia -   Don't bet on your house.  The graph of Us house prices produced by Shiller is here US house prices.

Friday, August 19, 2005

Credit derivatives

The Economist has another moan about credit derivatives.

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. "

The Oxbridge view of the corporation

The Oxbridge view of the corporation is a person standing on a street corner selling a television that does not work. However, this is a pretty poor version of the modern firm.  Though the immediate profits are fairly high, the long term outlook is very poor.  The person cannot stand on the same street corner tomorrow.  The ‘customer’ with the defective television will return for repayment.  This means that costs rise with increased sales.  The person selling the dud televisions has to keep running to more obscure and less optimal places.  

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.

Hedge fund is now a meaningless term

Wow - great editorial from the FT. I have thought this for some time. Hedge funds are just funds. They are funds without many of the restrictions of conventional funds. They are the funds that are found in the financial theory. They can go short and long and take advantage of mis-pricing (if it exists).

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

American investors move away from US assets

US investors diversify and add to the need for the US to attract overseas finance in order to maintain the value of the US dollar.
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."

Private equity: returns and size

Is there a paper looking at the return to private equity funds compared to the size? Is the data available?

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

US shares buyback

Is this a possible area for research? Does the market reward the purchase and calcellation of shares?

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 Do Small Firms Manage Interest Rate Risk?

FRBNY paper on how smaller firms manage interest rate risk.

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

EU firms enjoy US spending spree

Part of the reason that the USD has held up despite the huge current account deficit?

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. "

Power of Implied Volatility

Paper about implied volatility and its forecasting power.

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

Econommic development

This is mahalanobis highlighting a paper that compares development in various regions with the average of the OECD. Mahalanobis: "The table also reveals that the fastest learning countries are China, India and the East Asian group. Remarkably, China has experienced over four centuries of base trajectory OECD growth in the last 52 years taking it to year 1917 levels on the OECD trajectory. India and the East Asian group of countries have experienced more than three and a half centuries of base trajectory growth in 52 years, taking them to mid-nineteenth century OECD levels of income.'[1]"

Monday, August 01, 2005

Futures trading activity and predictable foreign exchange market movements

Paper by Changyun Wang on futures and trading in FX.

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

Team Titans attack -

George Porge Posted by Picasa

The yield curve

Thanks for the insight into a paper on the yeild curve and inflation targeting.

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


An article about the interactions between economists and sociologists provides some additional insight into things like clustering and externalities.

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

Lex live: Crude oil

Oil money looking for a home.
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. "

How many people should be working in America?

Excellent coverage of the relatively low participation rate in the US. While many have said that this undermines the positive colour of the low unemployment rate. Econvbrowser has first-rate coverage of some other scenarios.

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."

US investors into foreign funds

FT reports on the June data for mutual funds. This shows increased appetite for overseas investment.

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

Clear coverage of Bernanke and the housing bubble issue.

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

Great overview of the hedge fund industry.

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

U.S. Net Foreign Liabilities

Interesting area. Can some of the adjustment in net foreign assets happen as a result of change in exchange rate values. This was certainly the case in 2004. This will certainly be less important in 2005. Nouriel Roubini's Global Economics Blog: U.S. Net Foreign Liabilities...larger and larger: "So, what does this imply for the change in the U.S. net foreign liabilities at the end of 2005? In 2004 we got lucky that a large $600 billion plus current account deficit led to a much smaller change in net foreign liabilities because, in part, of $190 billion (or $272 billion) capital gain in currency values"

Thursday, June 23, 2005

Application of game theory

The FT has a superb example that can be appled to game theory. I have not thought it through this clearly as yet. However, I am sure that someone who knew more than the basics could use this to analyse the situation.

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

The Risk Return Tradeoff in the Long-Run

Thanks to Finance Professor for the link - SSRN-The Risk Return Tradeoff in the Long-Run: 1836-2003 by Christian Lundblad: "The risk�return tradeoff is fundamental to finance. However, while many asset pricing models imply a positive relationship between the risk premium on the market portfolio and the variance of its return, previous studies find the empirical relationship is weak at best. In sharp contrast, this study, demonstrates that the weak empirical relationship is an artifact of the small sample nature of the available data, as an extremely large number of time-series observations is required to precisely estimate this relationship. To maximize the available time-series, I employ the nearly two century history of US equity market returns from Schwert (1990), exploring the empirical risk-return tradeoff for a variety of specifications that allow for asymmetric volatility, regime-switching, and additional factors associated with intertemporal (ICAPM) hedging demands. Similar to studies that use the more recent US equity price history, conditional market volatility in the historical data is persistent and displays strong asymmetric relationships to return innovations. Further, the conditional correlation between stock and bond markets is closely related to periods of documented financial crises. Finally, in contrast to evidence based upon the recent US experience, the estimated relationship between risk and return is positive and statistically significant across every specification considered. "

Thursday, June 16, 2005


A great overview of what we know and what we do not know about aging.

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

Cheap - with reason

Stumbling and Mumbling: Cheap - with reason: "US equities are cheap. That's one overlooked message from yesterday's flow of funds data from the Fed."

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

Dead trees, dead brains

Stumbling and Mumbling: Dead trees, dead brains: "Or is it because the FT is an equal opportunities employer in the same sense that the BBC is � it employs people from any Oxbridge college, regardless of ability?"

Ha ha ha ha ha

Sunday, June 05, 2005

Who Gambles in the Stock Market?

SSRN-Who Gambles in the Stock Market? by Alok Kumar:
"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

Friday, May 20, 2005

Asset prices and consumption in Germany

This paper by the BBK looks at the relationship between the wealth-consumption ratio and asset prices in Germany and finds that, contrary to the experience of similar studies in the US, there is no effect of asset prices on consumption. Consumption in Germany is much more a function of changes in permanent income. This could be one explanation for the weakness of consumer spending relative to that seen in the US and the UK. Permanent income is likely to have declined with the structural adjustments taking place in Germany and with demographic and fiscal policy issues for the future. In the US and UK, while similar fiscal and demographic issues exist, the increase in private housing assets may have temporarily boosted consumption above its long run trend.

Tuesday, May 17, 2005

Work and Leisure in the U.S. and Europe

Another angle on the US-European divide. This suggests that the labour practices in declining European industries explain much of the difference in work and lesiure between the US and Europe. It is argued that there are increased returns to lesiure - it becomes more valuable as more people enjoy it.

SSRN-Work and Leisure in the U.S. and Europe: Why so Different? by Alberto Alesina, Edward Glaeser, Bruce Sacerdote

Monday, May 16, 2005

Renminbi/Hong Kong

FT (subscription required) on the effect of rinminbi speculation on Hong Kong. FT.com / Lex - Lex live: Renminbi/Hong Kong: "The capitalist enclave is awash with hot money betting on currency appreciation across the border. That creates inflationary pressure against which Hong Kong � having effectively handed monetary policy to the US via its currency peg � has scant defence. Hong Kong�s de facto central bank has raised the warning flag on inflation and taken unprecedented steps � including, reportedly, intervening in the swaps market. It is now pondering (minor) technical adjustments to the peg."

Friday, May 06, 2005

GM arb

Hedge fund guy looks at the ideas behind an investment in GM. Sounds rather similar to Rover (though without the financial arm).

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

Berkshire large short USD

Berkshire Loses Currency Bet: "Omaha-based Berkshire's stake in foreign currency contracts total 'a little more than $21 billion,' compared with $21.4 billion spread among 12 currencies at year end, Buffett said."

Wednesday, April 27, 2005

Demographics, and the Stock Market

This paper looks at how demographic changes can predict changes in demand and pofitability for certain industries. The paper suggests that the securities prices under react to information about demographic changes and provides the opportunity for excess returns.

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

Will an aging population lower stock returns?

Marginal Revolution: Will an aging population lower stock returns?: "The study, by James M. Poterba, an economics professor at the Massachusetts Institute of Technology, has found that changes in the proportion of retirees in the population have only a modest impact on stock market returns. So while the market is likely to come under some downward pressure from the retirement of boomers over the next couple of decades, he says he believes that there is no reason to expect the effects to be severe."

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

Central Bank Losses and Experiences in Selected Countries

Central Bank Losses and Experiences in Selected Countries

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

Does the U.S. Want the Renminbi to Rise Now?

Brad DeLong's Website: Does the U.S. Want the Renminbi to Rise Now?

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

Do Fundamentals or Emotions Drive the Stock Market? - - CFO.com

FinanceProfessor.com: Do Fundamentals or Emotions Drive the Stock Market?

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

Why aren't wages rising more?

Marginal Revolution: Why aren't wages rising more?

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?

China's dollar dilemma

FT.com / Comment & analysis - China's dollar dilemma:

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

The history of Rover

FT.com / Comment & analysis / Analysis - The wrong and winding road:

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

MG Rover staff face pension wait

BBC NEWS | Business | MG Rover staff face pension wait: "BMW has told BBC News that well over 90% of MG Rover staff chose to transfer their pensions from the BMW-run Rover Group Pension to the new MG Rover scheme. "

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.

Economist: Human evolution

Economist looks at research by Dr Shogren suggesting that it was the ability to trade that ensured that modern man prevailed over the Neanderthal. Trade allowed the better hunters to hunt while the others specialised in other activities - trade then took place. This allowed modern man to get more meat at the expense of the Neanderthal.

"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

WSJ.com - Discussion of US overseas position.

WSJ.com - Does Overseas Appetite for Bonds Put the U.S. Economy at Risk?: "Much has been said in recent months about the growing U.S. budget, but less has been said about how the U.S. is managing the deficit, keeping the government functioning by selling Treasury bonds -- lots of them. But will these IOUs keep things running smoothly?"

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

Women's participation in the labour market

Mahalanobis: "ECB WP: GDP per head in Europe [EU-15] is around 65% that of the United States and the main reason for this gap is the relatively low labour utilisation in European countries. In particular, Europeans work 13% less hours on average than Americans do. While the existence of the gap on hours worked per head is not disputed, there is some disagreement as how to explain it. Some argue that the gap reflects social norms according to which Europeans value leisure more than Americans do, while others put emphasis on the influence of the institutional framework, in particular the disincentive effect of taxes on labour. This paper indirectly contributes to this debate by analysing another aspect behind the relatively low labour utilisation in Europe, i.e. low participation rates. Concretely, it examines the determinants of women�s participation in Europe."

Wednesday, March 23, 2005

Wolfgang Munchau: The dollar has fallen enough

FT.com / Comment & analysis / Columnists - Wolfgang Munchau: The dollar has fallen enough: "A more detailed analysis suggests that the trade adjustment channel is still more important than the financial adjustment channel. But the financial adjustment channel presently acts as a kind of automatic stabiliser. As long as foreign investors, especially foreign central banks, are willing to hold US assets, the dollar's exchange rate does not need to devalue by as much as would have been the case if all the adjustment had to come from trade alone. Put another way, the sustainable current account deficit may be higher than otherwise thought.
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

Ben Bernanke Thinks We Ought To Worry A Little Less via macroblog

macroblog: More Trade Deficits -- And Why Ben Bernanke Thinks We Ought To Worry A Little Less: "Most interesting, however, is that the experience of the United States in recent years is not so nearly unique among industrial countries as one might think initially... a number of key industrial countries other than the United States have seen their current accounts move substantially toward deficit since 1996, including France, Italy, Spain, Australia, and the United Kingdom"

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

FT.com / Business / US - BIS reveals extent of shift out of dollar assets

FT.com / Business / US - BIS reveals extent of shift out of dollar assets

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.

Argentina's restructuring

Argentina's debt restructuring: "IN 1902, after Venezuela defaulted on its sovereign debt, German, British and Italian gunboats blockaded the country's ports until the government paid up. In 1881, after the Ottoman empire failed to honour its obligations, European powers simply seized Ottoman customs houses and helped themselves to their due. The options available to more than 500,000 aggrieved creditors of the Republic of Argentina, which defaulted on bonds worth $81 billion in December 2001, were more limited. After much bluff and bluster, a large majority of them meekly surrendered their claims before a deadline on February 25th, in exchange for new bonds worth roughly 35 cents on the dollar."

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

The Big Picture: The Mystery of the Awful Economists

The Big Picture: The Mystery of the Awful Economists

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

Asian central bank reserves

Brad DeLong's Website: Notes on Blanchard, Giavazzi, and Sa, "The U.S. Current Account and the Dollar": "But isn't it more likely that when the peg collapses Asian central banks' desires to hold dollar assets will be severely diminished, and that the foreign demand curve for dollar-denominated assets will move back to its original un-shifted-out position? In that case we have:"

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.

Were Bid-Ask Spreads in the FX Market Excessive During the Asian Crisis?

Were Bid-Ask Spreads in the FX Market Excessive During the Asian Crisis?: "Summary: Bid-ask spreads for Asian emerging market currencies increased sharply during the Asian crisis. A key question is whether such wide spreads were excessive or explained by models of bid-ask spreads. Precrisis estimates of standard models show that spreads during the crisis were in most cases tighter than spreads predicted by the models and there are few cases of excessive spreads. The result is largely explained by the substantial increase in exchange rate volatility during the crisis and to some extent by the level change. The empirical models have greater explanatory power for emerging- than for mature-market currencies."

Friday, February 25, 2005


24 March 2004: "But for everyday purposes, it is quite enough to know the story of the $10 bill and its unexpectedly complex interpretation. The efficient market hypothesis is 90 per cent true, and you will lose money by ignoring it. The search for the elusive 10 per cent, like the search for discarded $10 bills, attracts effort greater than the rewards. But for the very few skilled searchers, the rewards can be large indeed. "

Current account adjustment and capital flows - BIS Working Papers No 169 - February 2005

Current account adjustment and capital flows - BIS Working Papers No 169 - February 2005: "This paper examines episodes of current account adjustment in industrial countries over the past 30 years. We find that they were typically associated with a sizeable slowdown in domestic growth and a large exchange rate depreciation. There was no discernable change in the nature of capital flows in the period just prior to an adjustment, with the possible exception of non-residents� holdings of currency and deposits. This suggests that a current account adjustment may be an endogenous event - responding to the resolution of domestic imbalances - rather than an exogenous event where the size of the current account deficit itself precipitates the adjustment in the domestic economy and the exchange rate. Econometric evidence suggests that global developments trigger the adjustment, possibly because they trigger the unwinding of the domestic imbalances. We find that the bulk of the ex post adjustment of the financial account was in private sector flows, primarily on the part of foreign investors. Finally, we document some notable differences in the adjustment of the current account in the United States in 1987 compared with that observed in the other episodes. "

Wednesday, February 23, 2005

Economist.com: Investing in art

Economist.com | The Buttonwood column: "Britain�s Barclays Capital tests this theory in detail in the latest edition of its Equity Gilt Study, published on February 22nd. Barclays looks at how art and other assets performed over different phases of the business cycle and over different periods of time, using data from 1970 onwards. Art does best when the economy is growing, and it survives the ravages of inflation better than most, it transpires. Art prices rise when bond returns slump, and move broadly in tandem with property and (less so) commodities. Because its price bounces around so much, investors have to hold art for at least 35 years to be certain of real annual returns. All in all, and subject to tonnes of caveats, the best portfolio mix for a pension-fund investor, in particular, with a horizon of ten years or more would include a 10% weighting in art."

Tuesday, February 22, 2005

VIX Needs a Friend

The Big Picture: VIX Needs a Friend: "For a buy indicator, few things in life beat a spike in the VIX over 50. But as a shorter term sell indicator, I've gotten better results -- and more consistently -- using the VIX in tandem with one or two other signals. "

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).

LTCM vs Enron


The fall compared.

Sunday, February 13, 2005

Can This Black Box See Into the Future?

RedNova News - Can This Black Box See Into the Future?:

"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....

Keeping the Yuan Down...

Keeping the Yuan Down...

Brad Delong summarises the discussions of the dollar and yuan in San Francisco.

Saturday, February 12, 2005

Inflation-Risk Premium

macroblog: More On The "Inflation-Risk Premium"

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

Brad DeLong's Website: Why Capital Gains Are Likely to Lag Economy-Wide Growth

Brad DeLong's Website: Why Capital Gains Are Likely to Lag Economy-Wide Growth: "Why stock-index earnings growth lags economy-wide profit growth--and why, with a constant P/E ratio and a constant profit share in income, real GDP growth is likely to average 1% per year more than the (non buyback-induced) capital gains on a diversified stock portfolio."

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.

What do we know about currencies and interest rates?

Marginal Revolution: What do we know about currencies and interest rates?
Great summary of what we know and what we don't know - including links to authoritative papers.

Sunday, February 06, 2005

Is Antitrust Worthwhile?

Cafe Hayek: Is Antitrust Worthwhile?: "Does the evidence show that antitrust enforcement is worthwhile? Robert Crandall and Clifford Winston say no."

This is an interesting drive through the practicalities of competition and contestable markets.

Friday, February 04, 2005

Bubble, risk and insurance

Bubbles and risk
This paper looks at bubbles through history and questions the usual risk assessments that inform financial theory. Lots of useful information about bubbles.

Thursday, February 03, 2005

Capitalizing Central Banks: A Net Worth Approach

Capitalizing Central Banks: A Net Worth Approach

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


Mahalanobis: "This magazine article has a great headline ('Zero intelligence' trading closely mimics stock market), and technically it's true: they calibrated a model where noise traders (also known as 'zero intelligence' traders) mimic stock price patterns, with the standard fat tailed distributions."

Friday, January 28, 2005

Vehicle Currency Use in International Trade

Vehicle Currency Use in International Trade. The paper suggests that industries with high demand elasticity are more likely to display hurding in their use of a particular invoicing currency. Are these the industries that will switch from invoicing in USD to EUR?

A more general overview of the literature A theory of currency denomination of international trade. (pdf)

Thursday, January 27, 2005

USD reserve diversification

Nouriel Roubini :

"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

Valentines day more expensive?

The BBC report that Interflora, the UK mutual for delivering flowers, has agreed to a buy out by 3i. Story. Will prices now rise? A recent study suggests that privatisation does encourage firms to concentrate on profit-maximisation.

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

Demographics are Destiny

The Dead Parrot Society: Demographics are Destiny:

"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

CO2 trading

European CO2 markets are becoming more liquid. The Economist provides an overview.

FT on COs derivative: "Trading of allowances for carbon dioxide emissions in Europe took a step forward on Monday with the first derivatives contract to be cash settled."

Friday, January 14, 2005

Money, assets and central banks

PIMCO Bonds - FF Jan 05

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.

I would add - walk round the block, because the drunk will be pretty soon looking to borrow money to maintain the drinking. It's going to get ugly.

Thursday, January 13, 2005

Why are English-speaking nations doing best?

Comments from Martin Woolf at the FT (subscription required) about the recent outperformance of English-speaking countries.

Why are English-speaking nations doing best?

Arnold Kling on James C. Bennet's The Anglosphere Challenge.


Argentina and the IMF - should creditors accept the Argentine terms, should the IMF charge market rates?

Brad Setser's Web Log: Should the IMF ever take a haircut?

Similar lines from Roubini

and Reuters article Argentina pushes debt swap

Speculation and volatility

Talks about hedge funds and Uranium. Here is the old dispute about speculation and volatility.

Monday, January 10, 2005


The McKinsey Quarterly: Beyond cheap labor: Lessons for developing economies

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

Chinese citizens now prefer renminbi to dollars ...

Brad Setser's Web Log: So private Chinese citizens now prefer renminbi to dollars ...

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

Joel on Software - Camels and Rubber Duckies

Joel on Software - Camels and Rubber Duckies

This is an excellent article. Pricing, the consumer surplus and market segmentation. All written in a very funny style.

Asian central banks and the yield curve

Brad Setser's Web Log: Unraveling the mysteries of the Treasury yield curve

Top comment on the central bank buying of US debt - lots of data sources and information on fx market from the BIS.

It seems intuitively obvious that, without the intervention from Asian central bank FX internvetion (parked in US treasuries), interest rates would be higher in the US. Brad Setser does the groundwork with the figures for bond purchases etc. The solution to increasing net external debt of the US is to reduce the curent account deficit through higher prices and lower relative growth. The Asian central banks are preventing these things from taking place.

More information here from Brad on international capital flows and US deficit financing

Wednesday, January 05, 2005

Brad DeLong's: Equity Returns in the Future

Equity Returns in the Future

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."


This is a very highbrow comment on probability theory with a lot of links in the comment section about the more theoretical ideas backing probability theory.

Tuesday, January 04, 2005

The Social Seurity Debate Continues

Here are some links to the debate over social security, the projections and the whole issue of changing from wage indexation to price indexation.

Marginal Revolution
Vox Baby
Nouriel Roubini
Brad DeLong

Have fun!

Options and market efficiency


Comment on Nassim Taleb and the idea that long tails suggest super-normal profits from options.

Investing money

Economist.com | Investing money

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

Fears over new 'fair value' accounts

Guardian: Fears over new 'fair value' accounts:

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.

Global textile market opens

China is expected to benefit from opening of world textile market IHT. The article includes comments from African nations complaining about the labour conditions in India and China.

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.

Brad Setser's Web Log: Bretton Woods Two Lives

Brad Setser's Web Log: Bretton Woods Two Lives: "Europe complains that it alone bears the burden of currency adjustment v. the dollar. Emerging Asian central banks could just as well complain that they alone are stuck with the burden of financing the United States."

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.