tag:blogger.com,1999:blog-17232051.post1119993067085006255..comments2024-03-28T03:16:14.104-04:00Comments on Noahpinion: If Fama were Newton, would Shiller be Einstein?Noah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comBlogger46125tag:blogger.com,1999:blog-17232051.post-74569779846221864662013-11-01T07:42:26.895-04:002013-11-01T07:42:26.895-04:00"There are no good measures of risk"
Wh..."There are no good measures of risk"<br /><br />What's risky is a psychological matter and varies by person -- it's a matter of what people are comfortable with. Many of the investments conventionally considered "risky" aren't risky at all, AFAICT, they're merely volatile.Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-68828026446882140802013-11-01T07:40:21.596-04:002013-11-01T07:40:21.596-04:00IF you do your research, you can beat the market b...IF you do your research, you can beat the market by stock-picking. Largely because most people invested in the stock market have never seriously examined any of the individual businesses they are investing in. Some of them get valuations which are *wildly* off -- some are overpriced, others are underpriced.<br /><br />This is a little trickier than looking at P/E because you're predicting future earnings, but my point is that most "analysts" are careless, short-sighted, and pay no attention to fundamentals when predicting future earnings -- so people who spend the time and effort can do better.<br /><br />In a sense, this is compatible with the most interesting form of the efficient markets hypothesis:<br /><br />*If* everyone had the same information and paid attention to it, *then* markets would give the "correct price" and you couldn't beat them. Markets do not give the correct price and you can beat them, *therefore* people do *not* have the same information and do *not* pay attention to the same things.Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-74174969219940217662013-11-01T07:36:23.785-04:002013-11-01T07:36:23.785-04:00"Most mutual funds are scams with no intent o..."Most mutual funds are scams with no intent on beating the market. Even so, the primary reason they don't beat the market is fees, not stock-picking, especially in highly correlated markets, having nothing to do with EMH."<br /><br />Nathanael's Law of Investment Advisors: If someone can beat the markets (and lots of people can beat the markets), then that someone will charge a fee commenserate with how much they can beat the markets by. Therefore you cannot, over time, beat the markets by hiring an advisor or mutual fund manager.Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-88277412040558326302013-10-24T12:11:28.639-04:002013-10-24T12:11:28.639-04:00"Why "technical analysis", or chart..."Why "technical analysis", or chartism, doesn't work (except perhaps in the highest-frequency domains)."<br /><br />Some people who use technical analysis (or just their gut instinct) make a lot of money from trading. It's not just high-frequency trading systems that are profitable.<br /><br />The EMH predicts that ALL traders who make a sufficiently high number of trades will lose money, because the EMH claims that the market is a random walk, so there's a 50/50 chance whether the price will go in the direction that the trader is predicting. But traders also have to pay commission to place trades, so if the market were a random walk they actually have a less than 50% chance of winning. So if they make a high number of trades with less than 50% chance of winning there's virtually no chance that they can make a profit. And yet some people make a fortune from trading, therefore the EMH is nonsense.<br /><br />Newton's theory of gravity stood for hundreds of years and it describes what actually happens in nature to a very high level of accuracy - and it's still taught in universities as if it's correct(e.g. on mechanical engineering degrees), because it is so accurate. In comparison, Fama's EMH was never right to begin with.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-45320114838678305222013-10-18T18:24:00.400-04:002013-10-18T18:24:00.400-04:00In your post blog you "answer" to Martin...In your post blog you "answer" to Martin Feldstein that it is impossible that 0,25% IOER is holding the inflation, because that it is "too little".<br /><br />But what's the point in even deliberating all that. As I understand it, BANKS CAN'T LEND OUT RESERVES. (Once again the link to the article <br />http://www.standardandpoors.com/spf/upload/Ratings_US/Repeat_After_Me_8_14_13.pdf<br /><br />As Bernanke says is his answer:<br /><br />http://www.jec.senate.gov/public/index.cfm?p=Hearings&ContentRecord_id=fc790bc0-9493-499b-8904-2cebf3e229e0&ContentType_id=14f995b9-dfa5-407a-9d35-56cc7152a7ed<br /><br />1:16min:30s <br /><br />The amount of reserves is given and banks can't do anything about it. Banks can't "spend" it they can only absorb it during the lending process.<br /><br />All the banks can do is to change "the label" on reserves from excessive to required. Both types gives the same interest rate.<br /><br />Am I thinking about it in a proper way, if so, why such a famous economist as Cochrane:<br /><br />http://johnhcochrane.blogspot.com.es/2013/06/monetary-policy-puzzle.html<br /><br />is writing about "lending out" reserves. I though that this is simple banking mechanics and there are no confusions about it in economic profession, eventually this is not some theory. And banks can't lend out reserves no way!!!<br /><br />And the question is: "Can banks land out reserves?" If so making loan isn't an alternative to reserve usage...Wadnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-88568812935427684052013-10-18T11:42:12.917-04:002013-10-18T11:42:12.917-04:00I don't understand your question.I don't understand your question.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-80459160910081852252013-10-18T11:41:39.071-04:002013-10-18T11:41:39.071-04:00I'd suggest asking one of the people at the Fe...I'd suggest asking one of the people at the Fed who is working on this...Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-91800465493093937672013-10-18T10:24:51.857-04:002013-10-18T10:24:51.857-04:00Is everyone who doesn't share your opinion on ...Is everyone who doesn't share your opinion on stimulus spouting "staggeringly stupid nonsense"? How could they be so ignorant?!<br /><br />They must be malicious tricksters.Old Odd Jobshttps://www.blogger.com/profile/14239083003799351747noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-80814570383273517502013-10-17T13:28:19.753-04:002013-10-17T13:28:19.753-04:00Hi prof. Smith,
I'd like to "return"...Hi prof. Smith,<br /><br />I'd like to "return" to one of your blog posts namely that one:<br /><br />http://noahpinionblog.blogspot.com/2013/07/is-interest-rate-on-reserves-holding.html<br /><br />As it is well known, commercial banks don't have influence how much reserves there is in the system, as it is explained here:<br /><br />http://www.forbes.com/sites/bobmcteer/2013/05/22/bank-reserves-a-hot-potato/<br /><br />Bank can't "lend out" reserves:<br />http://www.standardandpoors.com/spf/upload/Ratings_US/Repeat_After_Me_8_14_13.pdf<br /><br />So what's the point in deliberating this subject. As I understand it banks can only "change" the status of reserves from excessive to required (or push it to other bank). Both of them give the same interest rate.<br /><br />Am I thinking about something in wrong way??? (Thx for the answer in advance.)Wadnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-78344190234911106732013-10-17T13:23:29.017-04:002013-10-17T13:23:29.017-04:00"governments need to NOT assume that stable f..."governments need to NOT assume that stable fundamentals mean that policymakers don't need to brace for recessions."<br /><br />But this is a very general statement, which is to be expected from an academic. But what does this mean practically? Once again, suppose that the Australian government asked you to tell them what the high real estate prices mean, and what specific actions they need to take. What would you tell them?CAnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-69157225883569985012013-10-16T15:10:42.836-04:002013-10-16T15:10:42.836-04:00The point is, we didn't ditch Ptolemy's sy...The point is, we didn't ditch Ptolemy's system because it was an inexact approximation. We ditched it because it had un-fixable flaws. Maybe someday we'll ditch the Weak EMH because we find some un-fixable flaw (and in fact I'm playing around with a couple ideas for those, and I'm sure most financial economists are as well). We already ditched the Strong EMH because it had an un-fixable flaw (information costs)...that happened way back in the early 1980s.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-21131384365422185582013-10-16T14:33:53.916-04:002013-10-16T14:33:53.916-04:00Scott Sumner also thinks falling asset prices are ...Scott Sumner also thinks falling asset prices are a result of the recession (or at least people anticipating that NGDP growth was slowing and the Fed wasn't going to respond correctly). He's a big proponent of the EMH.Wonks Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-34261466307749567792013-10-16T14:31:17.842-04:002013-10-16T14:31:17.842-04:00Fama is known for his financial economics, which i...Fama is known for his financial economics, which is what got him a Nobel. Macroeconomics, not so much. Although I think he did publish some notable stuff on a theory of banks. It involved spaceships.Wonks Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-23840126867266647502013-10-16T14:26:27.183-04:002013-10-16T14:26:27.183-04:00Copernicus had to add more epicycles to his model ...Copernicus had to add more epicycles to his model in order to make it heliocentric & free of equants. Hardly anybody discussing the transition to heliocentrism talks about "equants" though.Wonks Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-591807785807728602013-10-16T13:33:45.736-04:002013-10-16T13:33:45.736-04:00Having said that, I think you underestimate the im...<i>Having said that, I think you underestimate the importance of EMH for policy. For it raises the question that if it impossible for expert market participants to identify and profit from a bubble, the how can government officials make the right call? Are we to rely on people's hunches? Just look at the on-going debate in Australia as to whether the increase in real estate prices, similar to that in the US, reflects a bubble or not. As of yet, prices have not dropped. Without a specific definition and a model, how are we to know?</i><br /><br />Predicting the timing of asset price movements is not the same as preparing for large swings. Shiller's work shows that asset prices swing more than fundamentals. Whatever the cause of that, governments need to NOT assume that stable fundamentals mean that policymakers don't need to brace for recessions.<br /><br /><i>Finally, Kurt is correct that mean reversion does not necessary invalidate the EMH. It may reflect changes in the risk premium driven by changes in market risk as economic conditions improve or deteriorate.</i><br /><br />Check out this post:<br />http://johnhcochrane.blogspot.com/2013/10/bob-shillers-nobel.html<br /><br />I'd echo Cochrane's call for independent measures of discount rates and behavioral factors, but I'd also add that the idea of predictable discount rates muddies the EMH concept (if my personal discount rate never changes, am I "beating the market" by taking advantage of forecastable returns? I'd argue "yes")...Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-5246870045753441482013-10-16T13:25:02.537-04:002013-10-16T13:25:02.537-04:00Well, Newton believed in alchemy.Well, Newton believed in alchemy.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-73123048628568927002013-10-16T13:00:35.921-04:002013-10-16T13:00:35.921-04:00Noah,
I have to say though, that in the interview...Noah,<br /><br />I have to say though, that in the interview Fama's criticism of macroeconomics shows a man that may have drunk a bit too much of his own medicine. In essence, he is saying that falling asset prices is a consequence rather than the cause of the recession, and by criticizing macro he is basically dodging the question of, then, what did cause the recession. I think most macroeconomists would disagree with Fama by arguing that falling asset prices had something to with it. <br /><br />Having said that, I think you underestimate the importance of EMH for policy. For it raises the question that if it impossible for expert market participants to identify and profit from a bubble, the how can government officials make the right call? Are we to rely on people's hunches? Just look at the on-going debate in Australia as to whether the increase in real estate prices, similar to that in the US, reflects a bubble or not. As of yet, prices have not dropped. Without a specific definition and a model, how are we to know?<br /><br />Finally, Kurt is correct that mean reversion does not necessary invalidate the EMH. It may reflect changes in the risk premium driven by changes in market risk as economic conditions improve or deteriorate.CAnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-15729881471553612992013-10-16T11:48:48.923-04:002013-10-16T11:48:48.923-04:00There's some staggeringly stupid nonsense from...There's some staggeringly stupid nonsense from Fara (link below). He claims stimulus isn't possible. With that level of ignorance I'm baffled as to how he got his prize: or rather I'm not baffled. Various tricksters over the years have written papers that are deliberate rubbish and got them published in academic journals. So if academic journals publish any old rubbish then presumably we shouldn't be surprised if any old rubbish gets you a Nobel prize. See:<br /><br />http://www.dimensional.com/famafrench/2009/01/bailouts-and-stimulus-plans.htmlRalph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-37762295558441053052013-10-16T09:25:45.513-04:002013-10-16T09:25:45.513-04:00Well, as John Cochrane points out, without an inde...Well, as John Cochrane points out, without an independent measure of discount rates, this is all just...er...speculation...Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-1737394734479761332013-10-16T09:19:54.292-04:002013-10-16T09:19:54.292-04:00There are other reasons EMH fails besides momentum...There are other reasons EMH fails besides momentum and mean reversion. Fundamental analysis is probably a Grossman-Stiglitz kind of thing.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-12609601823991833352013-10-16T09:18:34.025-04:002013-10-16T09:18:34.025-04:00http://www.econ.ucsb.edu/~sleroy/downloads/excess....http://www.econ.ucsb.edu/~sleroy/downloads/excess.pdfNoah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-68886301758023218512013-10-16T08:35:29.209-04:002013-10-16T08:35:29.209-04:00I don't see how efficient markets fails to acc...I don't see how efficient markets fails to account for momentum or mean-reversion.<br /><br />1) Mean reversion. This is actually quite simple. Efficient markets don't say that expected returns should be constant. No, they could be time-varying, because they could be, for example, linked to the business cycle. In that case, mean-reversion (and predictability) is completely consistent with the EMH.<br /><br />2) Momentum. Granted, this is a though one to sell. But imagine that momentum is a noisy proxy for those time-varying expected returns. Also image that expected returns, although time-varying, are relatively persistent. In that case, momentum is a noisy proxy for expected returns, which explains why winners keep winning and losers keep losing.<br /><br />So inconsistent with the EMH? I'm not that sure... Could be or could not be. Who knows?Anonymoushttps://www.blogger.com/profile/02760057825151620840noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-11909424785403257912013-10-16T06:53:48.583-04:002013-10-16T06:53:48.583-04:00"because stock prices fluctuate more than the..."because stock prices fluctuate more than the value of firms."<br /><br />How can you be sure of that? Where is the evidence? Sounds like an opinon!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-28823045639513322962013-10-16T05:10:07.896-04:002013-10-16T05:10:07.896-04:00More like applying Shiller's work than describ...More like applying Shiller's work than describing it... :-).rosserjb@jmu.eduhttps://www.blogger.com/profile/09300046915843554101noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-16021177743056025072013-10-16T02:16:23.792-04:002013-10-16T02:16:23.792-04:00You're describing Shiller's work... :-)You're describing Shiller's work... :-)Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.com