Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation


Links to some interesting stuff that I have been reading

  • The
    quiet coup
    by Simon Johnson. Many others like William Buiter have
    written about crony capitalism and regulatory capture in the US (I too
    about it a year ago). But none is as comprehensive, as persuasive and
    as chilling as this piece by a former chief economist at the IMF and a
    co-founder of the must-read Baseline Scenario blog.
  • Are Stocks Really Less
    Volatile in the Long Run?
    by Pastor and
    Stambaugh. “Conventional wisdom views stocks as less volatile
    over long horizons than over short horizons due to mean reversion
    induced by return predictability. In contrast, we find stocks are
    substantially more volatile over long horizons from an investor’s
    perspective. This perspective recognizes that parameters are
    uncertain, even with two centuries of data, and that observable
    predictors imperfectly deliver the conditional expected
  • An
    old (2006) paper by Edward Altman on bond defaults.
    Altman argued
    that the low default rates of the mid 2000s was due to excess
    liquidity and that default rates were likely to rise back to the long
    term average as this liquidity receded – perhaps as early as
    2007. “But as investment managers like to say, the past is not
    necessarily a perfect guide to future performance. The question is
    which past will manifest in the next few years. Will it be the longer
    patterns of the past 30 years or will the most recent past continue to
    dominate? I have always believed in ‘regression to the
    mean,’ and in this case I mean the long-term mean and not the
    average of the recent past. ”
  • Blame
    Washington more than Wall Street for the financial crisis
    transcript of a panel discussion featuring (among others) Niall
    Ferguson, Nouriel Roubini and Jim Chanos. One nice quote from Roubini:
    “actually greed in some sense is good, is one of the drivers of
    capitalism. But we know that greed has to be controlled by three
    things. By fear of losses, by the fact they should not expect to be
    bailed out, and by a system of prudential regulation and supervision
    of the financial system because financial markets without ruling
    institutions are like the law of the jungle.” And one from
    Ferguson: “And I move in conclusion, that we should blame
    Washington more than Wall Street, for this crisis. Not least because
    in my view, Washington sold itself to Wall Street. And I very much
    fear, is still in hock to it.”

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