--- Doug Henwood <dhenwood at panix.com> wrote: > Daniel Davies
wrote:
>
> >I agree that the thread title does have a certain flavour of
> >"Famous Bear Shits in Woods", but the actual job of genuine
> >economists is the high-level planning and discussion of the
> >optimisation of the process of production, a useful thing
> which
> >would be needed in any society not based on household
> >production.
>
> What does this project have to do with most of the stuff that
> appears
> in the AER or the Journal of Finance?
Fair question; I don't read the AER, but the last Journal of Finance had the following articles (see below). I count about 25% apologetics, with most of the worst articles giving fair-enough clues straight up, like the presence of the words "International Monetary Fund" in the guy's affiliation. The rest of it is mainly technical papers on known inefficiencies in the operation of stock markets. So, given that stock markets are part of the reality that these guys live in, I don't think that they can be called apologists merely for writing about them. As I say, any society that cared about allocating capital to different tasks would need people doing more or less the same job as the authors below, with many of the same mathematical tools -- it's a shame that the Central Economic Mathematical Institute of the Soviet Academy doesn't publish on-line.
I would guess that the AER would be closer to 50/50 technical/apologetic papers than 75/25. But given the state of teachers, doctors and lawyers, I'm rather heartened that subversion of the profession to capitalism has made so little progress.
The profession which has resisted capitalism the best, so far, is of course that of accountancy.
d^2
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Optimal Portfolio Choice for Long-Horizon Investors with Nontradable Labor Income Luis M. Viceira
Harvard University, CEPR and NBER:
Abstract:
"This paper examines how risky labor income and retirement affect optimal portfolio choice. With idiosyncratic labor income risk, the optimal allocation to stocks is unambiguously larger for employed investors than for retired investors, consistent with the typical recommendations of investment advisors. Increasing idiosyncratic labor income risk raises investors' willingness to save and reduces their stock portfolio allocation towards the level of retired investors. Positive correlation between labor income and stock returns has a further negative effect and can actually reduce stockholdings below the level of retired investors."
In other words, it's more or less a technical article in what used to be called "actuarial science", working out how to optimally trade off risk versus return in planning for retirement income. This is a problem that would exist at some level in any society which recognised the concept of retirement. If one was in a harsh mood, one would say that there is an element of apologetics because the article takes for granted the existing facts of the matter about retirement income being an individual matter rather than anything else, but on the other hand, research of this sort is the last best hope against Social Security privatisation in the USA, so should probably be allowed the benefit of the doubt.
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2. The Expiration of IPO Share Lockups
Laura Casares Field
Penn State University: Gordon Hanka
Penn State University:
"Abstract:
We examine 1,948 share lockup agreements that prevent insiders from selling their shares in the period immediately after the IPO (typically 180 days). While lockups are in effect, there is little selling by insiders. When lockups expire, we find a permanent 40 percent increase in average trading volume, and a statistically prominent three-day abnormal return of -1.5 percent. The abnormal return and volume are much larger when the firm is financed by venture capital, and we find that venture capitalists sell more aggressively than executives and other shareholders. We find limited support for several hypotheses that may explain the abnormal return, but no complete explanation."
Basically establishes that when lock up periods end, insiders sell. Aside from being a bit of a complete fucking waste of time, this again doesn't look like apologetics -- if anything the reverse as it helps destroy the myth of the stock market as anything other than a convenience for rentiers.
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3. Market Liquidity and Trading Activity
Tarun Chordia
Goizueta Business School at Emory University: Richard Roll (BIG NAME --dd)
Anderson School of Management at UCLA: Avanidhar Subrahmanyam
Anderson School of Management at UCLA:
"Abstract:
Previous studies of liquidity span short time periods and focus on the individual security. In contrast, we study aggregate market spreads, depths, and trading activity for U.S. equities over an extended time sample. Daily changes in market averages of liquidity and trading activity are highly volatile and negatively serially dependent. Liquidity plummets significantly in down markets. Recent market volatility induces a decrease in trading activity and spreads. There are strong day-of-the-week effects; Fridays accompany a significant decrease in trading activity and liquidity, while Tuesdays display the opposite pattern. Long- and short-term interest rates influence liquidity. Depth and trading activity increase just prior to major macroeconomic announcements."
This is fairly and squarely process-of-production stuff. Roll et.al are studying the conditions under which stock markets fail to deliver what they are set up to do. If we had a non-market capital allocation mechanism, they would be doing equally nargy mathematical models trying to unpick the web of principal-agent problems at work in that system.
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4. Can Investors Profit from the Prophets? Security Analyst Recommendations and Stock Returns
Brad Barber
Graduate School of Management, University of California, Davis: Reuven Lehavy
Haas School of Business, University of California, Berkeley: Maureen McNichols
Graduate School of Business, Stanford University: Brett Trueman
Haas School of Business, University of California, Berkeley:
"Abstract:
We document that purchasing (selling short) stocks with the most (least) favorable consensus recommendations, in conjunction with daily portfolio rebalancing and a timely response to recommendation changes, yield annual abnormal gross returns greater than four percent. Less frequent portfolio rebalancing or a delay in reacting to recommendation changes diminishes these returns; however, they remain significant for the least favorably rated stocks. We also show that high trading levels are required to capture the excess returns generated by the strategies analyzed, entailing substantial transactions costs and leading to abnormal net returns for these strategies that are not reliably greater than zero."
Mainly monitoring the effectiveness of the guardians of the system of capital allocation. OK, I think, as some sort of similar post-facto auditing would be needed in any society that cared about how it was used.
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5. Valuation and Control in Venture Finance
Andrei A. Kirilenko
International Monetary Fund: (oh dear --dd)
"Abstract:
This paper presents the model of a relationship between a venture capitalist and an entrepreneur engaged in the formation of a new firm. I assume that the entrepreneur derives private nonpecuniary benefits from having some control over the firm. I show that to separate the entrepreneur's value of control from the firm's expected payoff, the venture capitalist demands disproportionately highercontrol rights than the size of his equity investment. The entrepreneur is compensated for a greater loss of control through better terms of financing, ability to extract higher rents from asymmetric information, and improved risk sharing."
Yeh, this one is about as bad as it sounds.
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6. What Makes Investors Trade?
Mark Grinblatt
Anderson School at UCLA: Matti Keloharju
Helsinki School of Economics, Finland:
"Abstract:
A unique data set allows us to monitor the buys, sells, and holds of individuals and institutions in the Finnish stock market on a daily basis. With this data set, we employ Logit regressions to identify the determinants of buying and selling activity over a two-year period. We find evidence that investors are reluctant to realize losses, that they engage in tax-loss selling activity, and that past returns and historical price patterns, such as being at a monthly high or low, affect trading. There also is modest evidence that life-cycle trading plays a role in the pattern of buys and sells."
Hmmmmm .... whole paper is conditional on some sort of homeconomicus assumption which can't be rationalised away as productive optimisation. However, it more or less helps to falsify market efficiency, so probably let this one live.
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7. Banking Market Structure, Financial Dependence and Growth: International Evidence from Industry Data
Nicola Cetorelli
Federal Reserve Bank of Chicago: Michele Gambera
Morningstar, Inc.:
"Abstract:
This paper explores the empirical relevance of banking market structure on growth. There is substantial evidence of a positive relationship between the level of development of the banking sector of an economy and its long-run output growth. Little is known, however, about the role played by the market structure of the banking sector on the dynamics of capital accumulation. This paper provides evidence that bank concentration promotes the growth of those industrial sectors that are more in need of external finance by facilitating credit access to younger firms. However, we also find evidence of a general depressing effect on growth associated with a concentrated banking industry, which impacts all sectors and all firms indiscriminately."
Looks like big banks apologetics to me -- in principle, someone with a pure conscience could have carried this out as a simple exercise in determining the optimal size of decision-making unit, but I doubt it.
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8. Extreme Correlation of International Equity Markets
François Longin
Department of Research and Innovation at HSBC CCF Group, and ESSEC and CEPR: Bruno Solnik
Fondation HEC:
"Abstract:
Testing the hypothesis that international equity market correlation increases in volatile times is a difficult exercise and misleading results have often been reported in the past because of a spurious relationship between correlation and volatility. Using “extreme value theory” to model the multivariate distribution tails, we derive the distribution of extreme correlation for a wide class of return distributions. Empirically, we reject the null hypothesis of multivariate normality for the negative tail, but not for the positive tail. We also find that correlation is not related to market volatility per se but to the market trend. Correlation increases in bear markets, but not in bull markets."
Pretty neutral stuff -- useful if you're dealing in these markets, but not obviously something anyone would care about if they weren't.
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Shorter Papers
9. Corporate Bond Trading Costs: A Peek Behind the Curtain
Paul Schultz
University of Notre Dame:
"Abstract:
In this paper, I use institutional corporate bond trade data to estimate transactions costs in the over-the-counter bond market. I find average round-trip trading costs to be about $0.27 per $100 of par value. Trading costs are lower for larger trades. Small institutions pay more to trade than large institutions, all else being equal. Small bond dealers charge more than large ones. I find no evidence that trading costs more for lower-rated bonds."
Horrendously dull&worthy. But data-gathering like this would be far more necessary under socialism.
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10. Profitability of Momentum Strategies: An Evaluation of Alternative Explanations
Narasimhan Jegadeesh
University of Illinois at Urbana-Champaign: Sheridan Titman
University of Texas at Austin and the NBER:
"Abstract:
This paper evaluates various explanations for the profitability of momentum strategies documented in Jegadeesh and Titman (1993). The evidence indicates that momentum profits have continued in the 1990s, suggesting that the original results were not a product of data snooping bias. The paper also examines the predictions of recent behavioral models that propose that momentum profits are due to delayed overreactions that are eventually reversed. Our evidence provides support for the behavioral models, but this support should be tempered with caution."
Apologetics, although it looks like they're further disproving efficient markets theory, the actual paper keeps on referring to the falsificatory evidence as "anomalies".
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11. Testing for Mean-Variance Spanning with Short Sales Constraints and Transaction Costs: The Case of Emerging Markets
Frans A. de Roon
Erasmus University Rotterdam and CEPR: Theo E. Nijman
Tilburg University: Bas J. M. Werker
Tilburg University:
"Abstract:
We propose regression-based tests for mean-variance spanning in the case where investors face market frictions such as short sales constraints and transaction costs. We test whether U.S. investors can extend their efficient set by investing in emerging markets when accounting for such frictions. For the period after the major liberalizations in the emerging markets, we find strong evidence for diversification benefits when market frictions are excluded, but this evidence disappears when investors face short sales constraints or small transaction costs. Although simulations suggest that there is a possible small-sample bias, this bias appears to be too small to affect our conclusions."
Pretty bad stuff, dressed up in maths. Mean-variance spanning and regression-based tests are pretty much last year's model, so it seems odd that the JoF would be printing this article if it didn't have the politically convenient conclusion that developed countries should liberalise their capital markets. Note the last two sentences in which the authors achieve statistical anti-gravity; they make estimates of the bias in their own data.
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12. Explaining the Cross-Section of Stock Returns in Japan: Factors or Characteristics?
Kent Daniel
Kellogg Graduate School of Management, Northwestern University and NBER: Sheridan Titman
Department of Finance, University of Texas at Austin: K.C. John Wei
Department of Finance, Hong Kong University of Science and Technology:
"Japanese stock returns are even more closely related to their book-to-market ratios than are their U.S. counterparts, and thus provide a good setting for testing whether the return premia associated with these characteristics arise because the characteristics are proxies for covariance with priced factors. Our tests, which replicate the Daniel and Titman (1997) tests on a Japanese sample, reject the Fama and French (1993) three-factor model, but fail to reject the characteristic model."
Yet more retro financial economics, with a fair chunk of gratuitous Japan-bashing sprinkled throughout.
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13. Limit Orders, Depth, and Volatility: Evidence from the Stock Exchange of Hong Kong
Hee-Joon Ahn
Sookmyung Women's University: Kee-Hong Bae
Hong Kong University of Science and Technology: Kalok Chan
Hong Kong University of Science and Technology:
"Abstract:
We investigate the role of limit orders in the liquidity provision in a pure order-driven market. Results show that market depth rises subsequent to an increase in transitory volatility, and transitory volatility declines subsequent to an increase in market depth. We also examine how transitory volatility affects the mix between limit orders and market orders. When transitory volatility arises from the ask (bid) side, investors will submit more limit sell (buy) orders than market sell (buy) orders. This result is consistent with the existence of limit-order traders who enter the market and place orders when liquidity is needed."
The actual article is pretty poor, but this is along the lines of the Roll one above; purely technical once one has accepted the existence of capital markets at all.
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14. The Price of Options Illiquidity
Menachem Brenner
Stern School of Business, New York University: Rafi Eldor
Arison Business School, IDC, Herzelia: Shmuel Hauser
School of Management, Ben Gurion University, and the Israel Securities Authority:
"Abstract:
The purpose of this paper is to examine the effect of illiquidity on the value of currency options. We use a unique dataset that allows us to explore this issue in special circumstances where options are issued by a central bank and are not traded prior to maturity. The value of these options is compared to similar options traded on the exchange. We find that the nontradable options are priced about 21 percent less than the exchange-traded options. This gap cannot be arbitraged away due to transactions costs and the risk that the exchange rate will change during the bidding process."
Yeh, apologetics. I can't see the specific angle, but whenever you get a comparison of a traded with a non-traded instrument, it's best not to give benefits of doubts.
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>
> Doug
===== ... in countries which do not enjoy Mediterranean sunshine idleness is more difficult, and a great public propaganda will be required to inaugurate it. -- Bertrand Russell
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