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.� "