tag:blogger.com,1999:blog-582368152716771238.post5534280562982953265..comments2024-03-29T04:41:56.077-05:00Comments on The Grumpy Economist: Volume and InformationJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger36125tag:blogger.com,1999:blog-582368152716771238.post-89394029645239513862016-10-24T03:45:21.313-05:002016-10-24T03:45:21.313-05:00Companies distribute their earnings using stock bu...Companies distribute their earnings using stock buybacks. Because companies conduct more buybacks when earnings are strong, they "buy-high and sell low" -only the active traders gain from that. The active traders are the counter parties who are forming the other side of the trade buying low and selling high. Passively holding a stock that has a price that bobs up and down does not provide the stock holder with any gain. Re-balancing against other securities or against cash converts such a bobbing price into an income stream.stonehttps://www.blogger.com/profile/07670385074640188296noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-74279146375966339502016-10-18T09:24:47.130-05:002016-10-18T09:24:47.130-05:00This is a very insightful comment and I learned a ...This is a very insightful comment and I learned a lot from the review of the relevant literature. <br /><br />In emerging markets like China, a sudden pump up in trading volume typically does mean at least some informed traders have come in and an ensuing rise in price is highly likely to occur. The volume is generated by "real money". In a highly volatile market like China, traders, especially those with deep pocket,the size of the bet is based on the conviction of certain information.<br /><br />"Why trade?" I asked this question to myself many times. After all, I might trade with someone in possession of information unavailable to me. Generally I became less risk-averse when I obtained or inferred information from members of top management or large shareholders supposed to be at the top tier of the information pyramid or when I had backup plans and systematic methods for managing risks. Yancheng Qiunoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-17974385122535264692016-10-18T09:05:50.388-05:002016-10-18T09:05:50.388-05:00Is there any reference to the numbers - trading pr...Is there any reference to the numbers - trading proportion performed by robots? I'm curious.<br /><br />In academic community, actually, yes, "Volume is The Great Unsolved Problem of Financial Economics" as Prof. Cochrane states it clearly at the beginning, "In our canonical models — such as Bob’s classic consumption-based model — trading volume is essentially zero." I understand that in industry, we may observe many interesting patterns or generate seemingly plausible ideas. But models and theories are not just stories or strategies. Based on my own experience, it is not easy to formulate the idea and build a tractable, dynamic model to explain certain empirical facts or give rise to testable predictions.Yancheng Qiunoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-86963999762806961612016-10-16T22:12:10.868-05:002016-10-16T22:12:10.868-05:00As you write: "I ask practitioners why they ...As you write: "I ask practitioners why they trade and they say 'I’m smarter than the average'. Exactly half are mistaken." But to be a successful trader (luck aside) it is not enough to be smarter than (i.e., more knowledgeable than) the average trader: you have to be smarter than (more knowledgeable than) the market as a whole. Nowhere near half of traders meet that condition. I suspect a lot of active traders reasonably or almost reasonably think they are smarter/more-knowledgeable than average, and they don't realize that that's not good enough to justify their activity.Philohttps://www.blogger.com/profile/02814125172453918700noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-91277574081324933912016-10-14T10:51:09.655-05:002016-10-14T10:51:09.655-05:00John,
"why do we give them money?"
I thi...John,<br />"why do we give them money?"<br />I think the reason is that we are so occupied with our own busy-ness that we end up trusting the salesman and go with what he recommends (I did).... which is what he is paid (by the fund manager's union, as it were) to recommend..... which is the the plan that benefits most the fund managers and their bosses/executives. Which gets to my usual complaint .... "corporate crap".<br />I guess "liberals" whine and "conservatives" bleat. Not sure which one I am, if either. What do rational people do?<br />Cheers,<br />echofiveAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-30644090465179013442016-10-12T23:53:01.524-05:002016-10-12T23:53:01.524-05:00This is a non-puzzle.
If your models does not de...This is a non-puzzle. <br /><br />If your models does not describe the real world, it's not people who are stupid, perhaps it's the models. <br /><br />Trading in any modern exchange is mostly performed by robots - 60 to 80%. These robots are trained by people with slightly different backgrounds, they weigh differently the various sources of information and for this reason have differing views on the near future of markets. Moreover, even if their views are similar, these robots operate in dissimilar contexts - their actions are constrained and sometimes reversed by portfolio-wide and firm-wide risk management tools. <br /><br />The remaining fraction - 20-40% - of trading is initiated by humans but is again performed by robots. Humans also have dissimilar opinions with respect to the future. Why? They have dissimilar beliefs as to what is important and what is less important. Humans speculate. Human traders also operate in dissimilar context, have differing risk tolerances which in turn are affected by their holdings which in turn are affected by their previous trading, and for this reason they have different views on long-term prospects the economy, sectors, sub-sectors, stocks, and futures, and bonds. <br /><br />All these agents and principals are very much rational. Why would rational people have different opinions and value things differently? Perhaps because they have different models of the world and operate in different contexts. <br /><br />Trading is a puzzle to any model that fails to account for differences in opinions (modes) and contexts and tolerances. <br />Vaсslavhttps://www.blogger.com/profile/06907888056591940792noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-12193192783217630572016-10-12T21:51:24.144-05:002016-10-12T21:51:24.144-05:00Well, of the works I cited only one (Admati and Pf...Well, of the works I cited only one (Admati and Pfleiderer) has liquidity traders. Johnson's work on liquidity risk; and, sequential trader models from Foucault and Parlour have endogenized volume. (Lots of others, but those are the most interesting from a volume perspective.) I typoed too: Foucault, Kadan, and Kandel. All of these only require some heterogeneity in reservation values or valuing cash.<br /><br />As for the size of volume: This might just be the puzzle of market volatility versus dividend volatility. It might not seem that way, but pop those into Tim Johnson's model and you'll see they are isomorphic. Apart from that, intermediation chains are long so I doubt we'll explain volume well without models involving intermediation. Finally, the Kyle and Obizhaeva invariant work is... strange stuff, but it also seems to have potential for explaining volume.<br /><br />So "puzzle" is a bit strong. We have plenty of good ideas. Volatility of prices versus dividends and interest rates? That's more of a puzzle.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-23550263070387963582016-10-12T21:32:21.662-05:002016-10-12T21:32:21.662-05:00Anonymous,
"So I guess my question is still ...Anonymous,<br /><br />"So I guess my question is still the same..... why do economists expect people to index instead of trade?"<br /><br />First, I am not an economist by trade and have no expectations of what people do. But to answer your first question:<br /><br />Because economists consider equities the only good worth buying?<br /><br />Because economists assume that individuals live an infinite lifetime and have the patience to ride through any storm?<br /><br />Because economists assume that equity purchases are not leveraged?<br /><br />Because economists assume that indexes are fixed in their membership and no costs are realized by index buyers from turnover within the index?<br /><br />Because indexes (and the companies that create them) give a place for economists to be employed?<br /><br />On to your second question:<br /><br />"From your replies, I'm guessing that you're saying it's limited solely to an inability to trade efficiently on one's own?"<br /><br />Not solely limited, but that is a big chunk of it. Another inefficiency in trading for one's self involves managing capital gains and losses from a taxation perspective. <br /><br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-88884682063390715852016-10-12T20:05:53.351-05:002016-10-12T20:05:53.351-05:00If you read it, you will see I am aware of that wo...If you read it, you will see I am aware of that work and indeed praise it. But they all take one or another shortcut to get to the interesting stuff. Is there one model in your list with fully rational agents? One that does not have liquidity traders? One that matches the astonishing size of volume, not just its interesting patterns? Much progress made -- but a basic puzzle still to go. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-36032465799631149832016-10-12T18:24:09.669-05:002016-10-12T18:24:09.669-05:00Should people read up on this issue? Yes. Should ...Should people read up on this issue? Yes. Should they read this? No. Is it superb? Definitely not. I suspect you might benefit from reading Larry Harris's book (undergrad/MBA level) before diving in to Hasbrouck's book (masters/PhD level). These issues get far better coverage in those books.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-46372206719081202862016-10-12T18:15:04.789-05:002016-10-12T18:15:04.789-05:00Crap like this is exactly why Chicago has had ZERO...Crap like this is exactly why Chicago has had ZERO presence in recent regulatory discussions: there is a shocking level of ignorance of the entire field of market microstructure. Volume is a puzzle? Are you high? It sure as hell is NOT a puzzle. In fact, we have plenty of work on volume clustering (from Admati and Pfleiderer to Colliard, Kadan, and Kandel); work on predicting volume; numerous microstructure model where volume is an endogenous variable; work on depth (which relates to volume) by Glosten and Sandas and others; and, most interestingly, recent work on invariants by Kyle and Obizhaeva.<br /><br />But you keep telling yourself it's a puzzle, John. Or maybe you could go talk to Anat, or Paul, or one of the other people at Stanford who would school you on this issue. But I've had enough interactions with you to guess that you will do no such thing and will continue to proclaim novelty where there is none.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-63449888915146932542016-10-12T12:51:31.145-05:002016-10-12T12:51:31.145-05:00I understand that concept, which is why I wrote th...I understand that concept, which is why I wrote this in my post: "It's not a perfect analogy because, unlike Roulette, in the markets the 'house numbers' go to the players rather than the casino." For the non-gambler, note that the house numbers are what gives the casino it's statistical edge in roulette.<br /><br />So I guess my question is still the same..... why do economists expect people to index instead of trade? From your replies, I'm guessing that you're saying it's limited solely to an inability to trade efficiently on one's own?<br /><br />Either way, thanks for engaging!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-57158449635733083032016-10-12T11:16:35.065-05:002016-10-12T11:16:35.065-05:00John Chochrane,
how would indexing work without t...John Chochrane,<br /><br />how would indexing work without traders setting the prices? If everyone indexed it seems like purchases and sales would simply reflect demographics (people selling in retirement after buy/hold for decades) and not "value".Baconbaconhttps://www.blogger.com/profile/13511082564082971086noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-9828935182660961412016-10-12T10:25:02.730-05:002016-10-12T10:25:02.730-05:00The reason there are so many underperforming activ...The reason there are so many underperforming active managers is simply because people are willing to pay for brands and choice. <br /><br />Why do people pay a huge premium for branded goods over identical store-brand goods? And why are there so many identical brands? Exact same issue at play.<br /><br />If you get utility from having choice and being able to identify with a certain brand then the "active management puzzle" disappears.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-86957411184160249062016-10-12T07:21:48.787-05:002016-10-12T07:21:48.787-05:00That's a good guess on traders. In fact more t...That's a good guess on traders. In fact more than half of mutual fund managers trade actively and underperform the index. The question is, why do they do it, and why do we give them money? <br />--bravobravo :) John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-27942785216095888522016-10-12T01:29:41.765-05:002016-10-12T01:29:41.765-05:00Is it possible that the "uninformed traders&q...Is it possible that the "uninformed traders" are simply the less than averagely informed fund managers?<br />--echofive(John should know my real name even if I don't have the courage to use it)Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-56927390714451080772016-10-11T20:53:14.396-05:002016-10-11T20:53:14.396-05:00Anonymous,
"...aren't indexers the equiv...Anonymous,<br /><br />"...aren't indexers the equivalent of those at the Roulette table who bet on black or red, while traders are those who play the individual numbers in the middle of the table..."<br /><br />The roulette table is a bad analogy because the house wins in the long run generating only losses for the players in aggregate. Sure some lucky individuals will be net winners, but that will be more than offset by the numerous individuals that walk home with empty pockets.<br /><br />Investing and trading in stocks is different. A growing economy generates aggregate net winners for all the players in aggregate. Sure some will suffer net losses, but those losses will be more than offset by the gains of others. Granted, losses may be concentrated in equities to the gain of bonds, land, or some other good in a growing economy, but that is a little bit beyond the scope of John's article.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-70482129172455699182016-10-11T19:19:32.087-05:002016-10-11T19:19:32.087-05:00Hi Frank, the same anonymous here, thanks for your...Hi Frank, the same anonymous here, thanks for your response!<br /><br />I guess what I'm trying to ask is, putting aside the pragmatic logistics of trading (which I foolishly limited to "broker fees" in my first post: as you point out, that's just part of it), how is trading within an index any different from buying the index itself, assuming that one traded randomly and somehow accounted for weight?<br /><br />My assumption was that the economic theories Grumpy is discussing are in no way premised on the average person being unable to execute trades as well as an index, it seemed more theoretical/high-level than that..... though I could certainly be wrong.<br /><br />Maybe another way of asking my question: if we put aside logistical/pragmatic trading issues, aren't indexers the equivalent of those at the Roulette table who bet on "black" or "red," while traders are those who play the individual numbers in the middle of the table (the expected returns of both betting types being mathematically identical: one betting strategy is simply higher risk/reward than the other on any single spin of the wheel)? It's not a perfect analogy because, unlike Roulette, in the markets the "house numbers" go to the players rather than the casino. Hopefully you get the gist of what I'm trying to ask though.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-74963122893251014302016-10-11T17:07:32.587-05:002016-10-11T17:07:32.587-05:00Anonymous,
"Given that the expected results ...Anonymous,<br /><br />"Given that the expected results of indexing and trading within that index should be identical (at least before broker fees), wouldn't it be just as appropriate to ask why anyone bothers to index?"<br /><br />The obvious advantage of index funds comes from pooling money from a group of investors rather than trying as individuals to index separately.<br /><br />It would be difficult and time consuming to purchase enough individual shares from a small starting sum (say $10,000) to match the S&P 500 index on a capitalization weighted basis.<br /><br />This is particularly true for companies that do not split their stock (Berkshire Hathaway for instance), currently trading at $215,920 PER class A share.<br /><br />"The sticky notes are placed in random order. Next I put on a blindfold and throw 5 darts at the wall. Finally I invest 1/5th of my portfolio into each ticker symbol that I hit with a dart."<br /><br />And if you hit Berkshire Hathaway with one of your darts, do you have a quarter million dollars to buy one share on BH and then invest in those other four stocks?<br /><br /><br /><br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-72330181596602798972016-10-11T16:59:31.394-05:002016-10-11T16:59:31.394-05:00John,
"But don't forget the big puzzle -...John,<br /><br />"But don't forget the big puzzle -- who are the uninformed traders who play and lose!"<br /><br />Where do equity issuers fall into the "informed" vs. "uninformed" traders matrix? Obviously, General Motors isn't going to sell it's own shares to turn around and invest in an index of motor companies (Ford, Toyota, Chrysler, etc.).<br /><br />It seems to me that you only think about the equity markets from the buyer's side and classify participants as either:<br /><br />1. Passive buy and hold indexers<br />2. Active traders<br /><br />But I think your question "Who are the uninformed traders who play and lose?" begs another - "Are equity issuers to be considered uninformed traders since by their nature they don't index?".FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-79874005675464118742016-10-11T15:58:13.257-05:002016-10-11T15:58:13.257-05:00Hi Colin, one of your undergrads (me) from over a ...Hi Colin, one of your undergrads (me) from over a decade ago is now a 6th year PhD student in finance and just read it! But I promise to reread also. <br /><br />ParthParth Venkathttps://www.blogger.com/profile/09830285782100016152noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-7394425500394489022016-10-11T14:24:46.988-05:002016-10-11T14:24:46.988-05:00I'm a not an economist, so please agree to tol...I'm a not an economist, so please agree to tolerate what might well be an ignorant question before reading further.....<br /><br />I don't understand why we're asking "why doesn't everyone index?" Given that the expected results of indexing and trading within that index should be identical (at least before broker fees), wouldn't it be just as appropriate to ask why anyone bothers to index?<br /><br />Imagine that every day I to put a series of sticky notes on my wall, each of which has the ticker symbol of a company in the S&P 500 written on its face. For every $X of market cap one of those 500 companies has, I put up another sticky note. The sticky notes are placed in random order. Next I put on a blindfold and throw 5 darts at the wall. Finally I invest 1/5th of my portfolio into each ticker symbol that I hit with a dart. Shouldn't my expected return match the index? If my expected return does match the index, then why wouldn't I trade so long as I (1) enjoy it, and (2) expect that I can at least replicate the results of a blind-folded dart throw?<br /><br />Anyway, probably a silly question, but thanks in advance for any knowledge imparted.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-19379550536774275512016-10-11T13:58:30.788-05:002016-10-11T13:58:30.788-05:00But don't forget the big puzzle -- who are the...But don't forget the big puzzle -- who are the uninformed traders who play and lose! John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-9747143690270978062016-10-11T13:30:13.851-05:002016-10-11T13:30:13.851-05:00I've always wondered who the 'informed'...I've always wondered who the 'informed' traders were empirically? shouldn't there be some demographic/profession with higher-than-average returns outside of the market-makers with monopoly access to flow? Yet fund managers, sell-side analysts, everyone who seems to be 'paying for information' via their time seems to have no alpha in stock picking.Eric Falkensteinhttps://www.blogger.com/profile/07243687157322033496noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-39945671616949606452016-10-11T12:05:38.284-05:002016-10-11T12:05:38.284-05:00I took "exactly half" as a literary asid...I took "exactly half" as a literary aside ..... not to be taken literally.<br />From the money's point of view, i.e. each individual dollar, exactly half the transactions are to a loser and half to a winner.<br />--echofiveAnonymousnoreply@blogger.com