tag:blogger.com,1999:blog-582368152716771238.post6855307674928289689..comments2024-03-29T04:41:56.077-05:00Comments on The Grumpy Economist: The sources of stock market fluctuationsJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger12125tag:blogger.com,1999:blog-582368152716771238.post-46083366377114571432016-10-02T21:39:52.756-05:002016-10-02T21:39:52.756-05:00Prof Cochrane,
Apologies for coming to this so la...Prof Cochrane,<br /><br />Apologies for coming to this so late; this is a wonderful model to view prices through. <br /><br />The view that earnings and prices are co-integrated seems to give rise to the following two interpretations:<br /><br />- there is a long term price change driven by the cashflow/fundamentals of the stock market and a short term volatility driver that contributes little to the long term price change. This means that there is a drift component that should show up in short term returns that is just a function of this "excess short term" volatility (0=Mu - 0.5* Variance or Mu = 0.5* Variance for a lognormal return process) even if there is no change in prices.<br /><br />- you can construct a portfolio over the term 'h' that is a sum of the buy and hold "t+h" returns and one that is short this "short term" volatility. I am interpreting this as rebalancing return based on your idea that rebalancing is akin to being short volatility; and it seems the math is exploiting not the volatility itself but the "diversification effect" of Fama-Booth. That formulation is independent of distributional assumptions and so can take higher moments. The first component will be driven by a different driver of variance (dividend in your formulation) while the second component will be driven by another (expected return in your read). And if the long term buy and hold returns are a function of cashflows- we might be better off looking at industrial economics based ideas to earn long term returns (strategic competitive advantage, rents earned) like the Value investors do. <br /><br />A second possible interpretation is that long term co-integration leads to a error correction model over the short run which if we mine for "largest" mean reversion looks a lot like the "Value portfolio" of Fama-French (long stocks that have the smallest "log price-log earnings" and vice versa). Or can we legitimately see Value factor returns as just this short term volatility induced by co-integration between prices and fundamentals like book value or earnings or dividends or cash flows showing up as "expected returns". <br /><br />If this is plain wrong, do let me know. And if there is academic work that resembles this, I would appreciate your directing me to them.<br /><br />SunilAnonymoushttps://www.blogger.com/profile/00308504929487340591noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-26186391909602413992015-04-17T15:44:49.462-05:002015-04-17T15:44:49.462-05:00Prices and dividends are cointegrated; therefore n...Prices and dividends are cointegrated; therefore no persistent variation in expected returns. What about secular stagnation? Does that not imply real yields have permanently dropped to 0 or below? How can that not show up as an I(1) error in the cointegrating regression? Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-83358911659011215202015-04-17T09:31:31.806-05:002015-04-17T09:31:31.806-05:00The math is beyond me, but how does this take into...The math is beyond me, but how does this take into account other means of returning cash to shareholders (ie. buybacks)Justinhttps://www.blogger.com/profile/03164507110289451742noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-24786662885241116472015-04-14T11:19:31.627-05:002015-04-14T11:19:31.627-05:00Final comment on asset sales, and on Greece:
http...Final comment on asset sales, and on Greece: <br />http://www.rolandberger.de/medien/news/2012-01-31-rbsc-news-EURECA_in_2012.html<br />Failed to avert 2 bailouts because of grotesque scale of fraud, waste, abuse in Greek national accounts – nobody will buy assets without due diligence without an audit. This fraud is contagious, as evident in following quote from James Galbraith:<br />http://www.newyorker.com/magazine/2015/03/09/greeces-next-move<br />“…Galbraith said, “When they went to the Ministry of Finance for the first time, there was not a document, not a computer. The Wi-Fi was not turned on.”..”<br />But the employees were there, right? Must have been, as headcount and personnel costs at the Ministry of Finance both increased since Syriza formed a government – so how about someone asks those employees, do they know anything about the missing documents and equipment? If not, why not?<br />Ecoute Sauvagehttps://www.blogger.com/profile/16322296385474846302noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-65135016479948465752015-04-13T16:24:30.538-05:002015-04-13T16:24:30.538-05:00Perhaps, an example from US debt, in this book:
...Perhaps, an example from US debt, in this book: <br />https://ficpress.wordpress.com/2012/11/28/is-u-s-government-debt-different/<br />Chapter 12, titled Burning the Furniture to Heat the House – The Potential Role of Asset<br />Sales in Funding the Federal Government’s Deficits by Jim Millstein.<br /><br />"......The aggregate sales price of all of these non-defense assets could be<br />between $4.3 and $5.4 trillion, which, if applied to debt reduction,<br />could decrease publicly-held debt as a share of GDP to between 36<br />and 43 percent—well below the 90 percent threshold associated with<br />slower growth26 and in line with AAA-rated Sweden......"Ecoute Sauvagehttps://www.blogger.com/profile/16322296385474846302noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-18611913746387432702015-04-12T15:48:35.483-05:002015-04-12T15:48:35.483-05:00Greatly obliged to you, prof. Cochrane, and I thin...Greatly obliged to you, prof. Cochrane, and I think I understand this point, I was just trying to reconcile applied finance (my field) and theory, to wit: "....All monetary models contain a (sometimes implicit) Ricardian footnote, “the Treasury passively adjusts<br />lump‐sum taxes to pay off changes in the real value of government debt.”..."..." <br /><br />If a sovereign sells off non-income-producing assets (unencumbered state lands, say) in a micro-sense it's like me discovering I owe lots more money than I have and doing an inventory of my silverware, jewelry, fur coats, cars, etc. But in a macro sense, as in eg Greece, could this monetization of non-productive-assets, be viewed as mathematically identical to the Ricardian footnote in your text?Ecoute Sauvagehttps://www.blogger.com/profile/16322296385474846302noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-29300602368400783222015-04-11T13:32:31.683-05:002015-04-11T13:32:31.683-05:00you can add real assets as either the flow of surp...you can add real assets as either the flow of surpluses they generate, or add their value. B/P - b (real assets) = E sum ... John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-49566918484774963962015-04-11T13:12:17.614-05:002015-04-11T13:12:17.614-05:00Question from: "The Fiscal Theory of the Pric...Question from: "The Fiscal Theory of the Price Level<br />and its Implications for Current Policy in the United States and Europe", the basic equation only includes flows in order to solve for a stock, value of the debt at time t, but what about another stock, net assets of the sovereign? In particular, could this one-time-tax be interpreted as a sale of sovereign assets? Thanks for any reply.<br />"...“Fiscal theory” then, just amounts to paying a bit more attention to where the fiscal part of coordination<br />comes from, and whether it is in place. If you’re examining a gold standard, you want to know if the<br />country has taxing power to obtain or borrow gold, or to avoid raiding its reserves. “Fiscal theory”<br />means making a similar examination of today’s monetary‐fiscal coordination.<br />All monetary models contain a (sometimes implicit) Ricardian footnote, “the Treasury passively adjusts<br />lump‐sum taxes to pay off changes in the real value of government debt.”..."Ecoute Sauvagehttps://www.blogger.com/profile/16322296385474846302noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-41474412840290952342015-04-05T15:49:57.213-05:002015-04-05T15:49:57.213-05:00Off, topic, but, SImon Wren Lewis has an interesti...Off, topic, but, SImon Wren Lewis has an interesting new post, you can take a look if you want.<br />http://mainlymacro.blogspot.com/2015/04/do-not-underestimate-power-of.htmlEdwardnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-19587551050492960122015-04-03T11:29:27.795-05:002015-04-03T11:29:27.795-05:00The Evans (AER 1991) bubble model does not imply a...The Evans (AER 1991) bubble model does not imply a p/d ratio that grows forever. And the analysis in the first section of "Discount Rates" does not rule out bubbles. phi = 0.94, b_d = 0, and b_r = 0.1 are fully consistent with a bubble, see Engsted, Pedersen and Tanggaard (JFQA, 2012).Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-78727089914729669612015-04-03T09:34:55.005-05:002015-04-03T09:34:55.005-05:00Actually "rational" bubbles, violations ...Actually "rational" bubbles, violations of the transversality condition, are testable. They imply a p/d ratio that grows forever in expectation. And the test fails (I spent a lot of my youth fascinated by these. Too bad.) More details in the first section of "discount rates" if you want to follow up. <br /><br />The discussion here points out that these particular facts can't tell you if the variation in expected return -- high prices mean low expected returns -- is "rational," agents know about it and it reflects changes in risk aversion, or "irrational", agents think otherwise and we're picking up the true expected returns that only the Wise Academics know is what's really going on.John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-44935530269525369932015-04-03T08:51:26.178-05:002015-04-03T08:51:26.178-05:00Your disclaimer at the end notwithstanding, I thin...Your disclaimer at the end notwithstanding, I think it is worthwhile pointing out that your analysis does not rule out rational bubbles as a contributing factor in explaining variation i price-dividend ratios (a point that is often neglected or misunderstood).<br /><br />phi = 0.94, b_d = 0, and b_r = 0.1 are fully consistent with a bubble, e.g. the partially and periodically bursting rational bubble in Evans (AER 1991). Cointegration between prices and dividends is also fully consistent with a bubble, in contrast to what is often claimed.<br /><br />Lots of econometric evidence over the last 10 years points to explosive elements in price-dividend and price-earnings ratios, consistent with a rational bubble. <br /><br />For details and further references, see Engsted, Pedersen and Tanggaard (JFQA 2012): http://journals.cambridge.org/action/displayAbstract?fromPage=online&aid=8675165&fileId=S0022109012000191 .Anonymousnoreply@blogger.com