Tuesday, August 19, 2008
Beer and research
Posted on the freakonomics blog - research that shows that the more beer academics drink, the less they get published. Uh oh.
Sunday, August 17, 2008
Why have gas prices fallen?
Gas prices have fallen and oil prices are well below their recent peek - which raises the question: Why? Some might say it was supply and demand with the higher price reducing demand, thus resulting in a lower equilibrium price. Others offer a different explanation...prayer.
Perhaps this will lead to a new area of theological economics.
Perhaps this will lead to a new area of theological economics.
Thursday, August 14, 2008
Confessions of a risk manager
Great article on the Economist website giving the views of a risk manager at a major bank at what went wrong in the credit crunch.
italics added by me
Although he doesn't blame the traders, he does say that the risk managers were frequently ignored or overruled, or were under pressure to approve deals. And not surprisingly, the most pressure was on the highest returning deals....
We had not fully appreciated that 20% of a very large number (of AAA bonds) can inflict far greater losses than 80% of a small number (of sub investment grade bonds).
italics added by me
Although he doesn't blame the traders, he does say that the risk managers were frequently ignored or overruled, or were under pressure to approve deals. And not surprisingly, the most pressure was on the highest returning deals....
Tuesday, July 8, 2008
Save for your retirement
Everyone should save for their retirement. Here's a nice story from India.
As a side, the story notes that coins in India are smuggled to Bangladesh to be melted down into razor blades. The metal content of the coin exceeds the face value of the currency. In the US we're getting close to that point with the 1 cent.
As a side, the story notes that coins in India are smuggled to Bangladesh to be melted down into razor blades. The metal content of the coin exceeds the face value of the currency. In the US we're getting close to that point with the 1 cent.
Monday, July 7, 2008
Inflation and stock prices
Stocks should be a good hedge against inflation - they are claims on real cash flows. Bonds on the other hand should do terribly when inflation increases - they are claims on nominal cash flows that cannot adjust. In reality though, stocks do pretty poorly when inflation increases. This article in the Economist offers an explanation - that earnings decline during periods of inflation.
An alternative explanation, and a better one I think, is that investors don't understand how to value stocks in the presence of inflation. They discount real cash flows using nominal rates and they fail to realize that the reduction in earnings due to higher interest costs is merely illusory. In essence, investors suffer from money or inflation illusion. My 2002 Journal of Financial and Quantitative Analysis paper with Jay Ritter discusses this, and several others (here here and here) provide further evidence.
An alternative explanation, and a better one I think, is that investors don't understand how to value stocks in the presence of inflation. They discount real cash flows using nominal rates and they fail to realize that the reduction in earnings due to higher interest costs is merely illusory. In essence, investors suffer from money or inflation illusion. My 2002 Journal of Financial and Quantitative Analysis paper with Jay Ritter discusses this, and several others (here here and here) provide further evidence.
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