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Missing Risk Premium: a Synopsis

July 22, 2013 Comments (0)

I recently made a presentation of my book, The Missing Risk Premium, and thought it was concise, so I'm sharing it here.Historical return data contradicting 'expected return positively linearly related to risk' theory:Within equities:Firm leverageFirm profitabilityCAPM betaTotal VolatilityResidual VolatilityFinancial Distress/Default metrics and equitiesPenny stocks vs. regular stocksIPOs vs regular stockCountry returns in developed countriesCountry returns in emerging marketsAnalyst...

Are Pre-Modern Societies Socialist?

July 21, 2013 Comments (0)

Many assume that pre-modern society was communistic, like hunter gatherers, and these roots give us a socialist intuition. Larry Arnhart argues this simply isn't true, that hunter-gatherer societies share big game meat, but most everything else is shared communistically only within the nuclear family, other things are more quid-pro-quo. This comes up a lot, as Emmanuel Todd writes interesting books about European history, as in his 1990 L’invention de l’Europe. He makes the bold claim...

Milton Friedman on Behavioral Economics Circa 1978

July 18, 2013 Comments (0)

Ever since Freakonomics and Kahneman's Nobel prize, people have been writing articles about the radical new idea that people are not lightning-quick calculators complicated algorithms as economists always thought, but instead, real people! True enough, but it's useful to understand what rational really means, and why it's used so much by economists. Here's Milton Friedman (22:15ish) noting why it's basically about predicting what people do, on average, nothing more: Also interesting, a very...

Beware Discrete Auctions

July 15, 2013 Comments (0)

There's an interesting paper on High Frequency Trading (HFT) by Budish, Cramton, and Shim from the U of Chicago. They set up an interesting model, but then propose at the end that batching eliminates the HFT arms race, both because it reduces the value of tiny speed advantages and because it transforms competition on speed into competition on price. I think that solution is interesting, but would prefer the following add a 20ish millisecond randomizer to any incoming order (ie, a lag of...

Trayvon Martin and Keynesian Multipliers

July 15, 2013 Comments (0)

This weekend's big news about the George Zimmerman trial was pretty dramatic. As someone who has been in court with big stakes, and a case where the allegations were orthogonal to the real motivation, I empathized a lot with Zimmerman. But then I noticed that pundits, websites, and news programs had very predictable opinions on the guilt of Zimmerman based on their view about marginal tax rates and Keynesian multipliers.  Basically, those that favor more redistribution and governmental...

Altenatives to Rational Expectations

July 14, 2013 Comments (0)

When Rational Expectations was developed in the 1960s most people thought it was a classic academic result.  Certainly mutual fund managers chuckled at the thought a monkey could outperform a skilled professional.  Further, everyone had a stupid relative, neighbor,  or co-worker, that proved people were not rational. Meanwhile, the Capital Asset Pricing Model (ie, Beta), meanwhile, was accepted as true even before data suggested it was.Yet, we now have almost 100 years of data...

Stevenson and Wolfers' Flawed Happiness Research

July 7, 2013 Comments (0)

Russ Roberts had a podcast a couple weeks ago where he interviewed Betsy Stevenson (below) and Justin Wolfers (right), primarily about their research on the Easterlin Paradox, and it highlighted what's wrong with so many academic debates.   To review, in 1974 USC professor Richard Easterlin found that within a given country people with higher incomes were more likely to report being happy. However, between developed countries, the average reported level of happiness did not vary much with...

Gettysburg and American Exceptionalism

July 1, 2013 Comments (0)

150 years ago, Gettysburg was fought.  Here is War Nerd on the battle:You know how many civilians were killed in the whole battle of Gettysburg? One. I dare anybody from any other country anywhere, any time, to find me a battle with over 50,000 military casualties—and one civvies died. One! It’s incredible. People don’t realize how amazing that is. Those were supermen, there’s no other explanation. You read their letters and they write in complete sentences, they even have great...

A Premium for Negative Skew?

June 24, 2013 Comments (0)

Xiong, Idzorek, and Ibbotson have a new paper coming out in the JPM showing that mutual funds with the highest tail risk (ie, highest probability of extreme downside returns) have higher returns. That is, there's a positive risk premium to negative skew. This is rather curious.The only thing I saw in this field related to this found the opposite. That is, in a 2006 JoF paper, Kosowski, Timmermann, and Wermers, and White bootstrapped the alphas of the entire universe of U.S. domestic...

Models aren't Optional

June 23, 2013 Comments (0)

Models get a bad break, and the key is remembering the golden mean: moderation in all things. Macroeconomics, String Theory, Climate studies, all produce highly complicated models that are presented by our best academics as being thoroughly vetted and informative. Yet, for predictions in the real world, they stink. This leads to people saying models are all garbage, and we should all be engineers. Clearly a bad model is worse than no model, but if you are operating in some domain, you...