Welcome to Asset Pricing

Drop ’til you shop

assetpricing — Sun, 02 Nov 2008 07:01:34 +0000

“IT IS official: the American consumer, for so long the main force driving the global economy, has cracked. Figures released on Thursday October 30th showed that America’s economy shrank at an annualised rate of 0.3% in the third quarter. The story behind the breakdown was a far sharper decline in consumer spending, which makes up around two-thirds of GDP. It fell at an annualised rate of 3.1%, the first decline since 1991 and the biggest drop since 1980. Capital spending by firms also drooped, with house building still the weakest link”. Read the full article at the Economist.

Rough Going for Now, but Stocks Still a Good Bet

assetpricing — Fri, 31 Oct 2008 21:57:46 +0000

“As some say, it’s too late to sell. One thing that I think is also important is again, this is a bear market, but not a huge one. You know we had a 50% bear market from March of 2000 up to October of 2002. This is 20% to 25%. Some people think that it is getting worse and I don’t. Listen, it’s part of the 200-year history of the U.S. Stock Market. And, if you go back 200 years, has it been right to sell in the bear markets? The answer is no. You take the pain, you hold your position, and you will be rewarded in the future”. Read the full interview with Jeremy Siegel at Knowledge.Wharton.

Risk Management Failures…

assetpricing — Wed, 08 Oct 2008 12:13:00 +0000

“A large loss is not evidence of a risk management failure because a large loss can happen even if risk management is flawless. I provide a typology of risk management failures and show how various types of risk management failures occur. Because of the limitations of past data in assessing the probability and the implications of a financial crisis, I conclude that financial institutions should use scenarios for credible financial crisis threats even if they perceive the probability of such events to be extremely small”. Read the full paper by René Stulz.

Japan faces problems as the world economy slows

assetpricing — Tue, 16 Sep 2008 08:10:56 +0000

Mounting economic gloom is combining with political turmoil in Japan. New data show that the country’s economic decline in the second quarter of 2008 was larger than originally estimated. Real GDP contracted by 0.7% quarter on quarter in the three months to June, according to the government’s Cabinet Office. This compares with the Cabinet Office’s previous estimate of minus 0.6%. On an annualised basis, the revision is even starker, with the economy now estimated to have contracted by 3% compared with 2.4% previously. Read the full article at the Economist.

Recession to hit Germany, UK and Spain

assetpricing — Thu, 11 Sep 2008 09:50:00 +0000

Germany, the UK and Spain all face recessions this year, the European Commission forecast on Wednesday, dashing finally any remaining hopes that Europe would avoid a sharp economic downturn. France and Italy would fare little better, it said. Read the full article at FT.com

Where are commodity prices headed next? Look at exchange rates

assetpricing — Tue, 09 Sep 2008 14:40:26 +0000

“In a recent speech, Fed Chair Ben Bernanke highlighted the difficulty of obtaining a meaningful gauge for future commodity price movement, noting the inadequacy of forecasts based on commodity futures signals. Looking at exchange rates may be a promising alternative”. Read the full paper by Yu-chin Chen, Kenneth Rogoff and Barbara Rossi.

The subprime turmoil: What’s old, what’s new, and what’s next

assetpricing — Fri, 05 Sep 2008 12:40:46 +0000

The subprime crisis is the joint product of perverse incentives and historical flukes. This column explains why market actors made unrealistic assumptions about mortgage-backed securities and how various regulatory policies exacerbated the problem. The crisis will necessitate changes in monetary policy, regulation, and the structure of financial intermediation. Read the full paper by C. Calomiris at VOX.

How bad is it?

assetpricing — Fri, 05 Sep 2008 07:06:05 +0000

Not as wretched as the doomsters claim; but reviving the British economy will take time. Read the full article at FT.com

Capital ideas

assetpricing — Mon, 01 Sep 2008 10:23:23 +0000

“Can banks use a “capital insurance” scheme to dampen future crises?” Read the full article at the Economist and download the paper by Anil Kashyap, Raghuram Rajan (University of Chicago) and Jeremy Stein (Harvard University).

Macroeconomic Volatility and Stock Market Volatility, Worldwide

assetpricing — Sun, 31 Aug 2008 11:49:46 +0000

F. X. Diebold and Kamil Yilmaz report: “Notwithstanding its impressive contributions to empirical financial economics, there remains a significant gap in the volatility literature, namely its relative neglect of the connection between macroeconomic fundamentals and asset return volatility. We progress by analyzing a broad international cross section of stock markets covering approximately forty countries. We find a clear link between macroeconomic fundamentals and stock market volatilities, with volatile fundamentals translating into volatile stock markets” (NBER, working paper #14269)