History and stories

January 5, 2018 | Author: Anonymous | Category: Business, Finance, Investing
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History, Stories, and Amplification Mechanisms Fin254f: Spring 2010 Lecture notes 2.5 Readings: Shiller 3-7

What is this Section About?  Shiller's

qualitative takes on financial

bubbles  How do they get started?  What makes them really take off?  What mechanisms contribute?

Outline  Precipitating

factors in the late 20th

century  Amplification mechanisms  The media  New era thinking

Precipitating Factors Mostly in the 80's and 90's  Capitalist

explosion  Cultural changes toward business  New information technologies  Supportive monetary policy  The baby boom and bust  Business news reporting  Analysts optimism

Precipitating Factors Mostly in the 80's and 90's  Institutional 



investment changes

Defined contribution pensions (mutual funds) Hedge funds

 Low

inflation  High frequency trading  Gambling opportunities

Capitalist Explosion and Ownership Society  Increase

in market organized economies  Labor union declines (1983: 20.1% 2000:13.5%)  Employee stock option plans 

Greater fixation on stock prices

Cultural Changes Favoring Business  More

materialistic measures of worth  Cuts in tax rates  Greater acceptance of large salaries  (Is this all changing?)

New Information Technology Cell phones (1982)  Internet (military -> academic -> everyone)  Earnings growth: 1994 +36%, 8 in 1995, and 10 in 1996 

 



Probably not internet How much should a new technology effect existing firms?

Remember, what matters is public perception

Monetary Policy and the Greenspan Put  No

moves to tighten monetary policy in the 90's 



Interesting given irrational exuberance speech Several events where liquidity provided (LTCM, Y2K)

 Also,

did the Fed lower rates too much in 2003?

Baby Boom and Baby Bust  Baby

boomers save and drive up stock market 



Saving bulge : demographic Generation forgets depression

 Problems:  

What about when and how they sell? What about global demographics?

 www.hsdent.com

Expansion of Media Coverage  CNBC,

CNNfn, Bloomberg TV  Business news gets "glitzier"  Stock tip shows (Cramer)

Analyst Forecasts  Overly

optimistic (in 1999 only 1% sell)  Analyst problems 





Employed by investment banks (underwriting) Might lose info contacts at firms they rate negatively Employed by brokers : interest in volume

 Some

regulatory reform around 2000

Expansion of Defined Contribution Pension Plans Defined Benefit versus Defined Contribution  Less costly to firms  Better for mobile workers  Generates more public attention to stocks  How well do people diversity? 



 

Bernartzi/Thaler on what people do Equal weight in stock and bond funds and in stock and stock/bond funds

Growth of Mutual Funds  1982:

340, 1998: 3513  More equity mutual funds than stocks on NYSE  Start in 1920's  Public perception rises and falls  Part of 401K investments  Currently seem ok, and draws more attention to markets

Decline of Inflation  Lower

inflation -> Public confidence  Money illusion  



Most price series reported in nominal terms Reporters think inflation too complicated and no one cares Makes a big difference, two examples U.S. stocks in the 1970's  Long term home price series 

Online Trading  Etrade  

and daytrading (internet)

Turnover rates double between 82-99 Lower transactions costs

 Does

this impact a bubble?

Gambling Opportunities  Rise

of state lotteries  Increase in casinos  Changes attitudes toward risk  Can this spill into the stock market?

Amplification Mechanisms  Confidence  Feedback

Shiller Surveys  "The

stock market is the best investment for long-term holders, who can just buy and hold through the ups and downs of the market."  2000: 97% at least somewhat agree  2004: 83%

Shiller: Real estate as Long Term Investment  See

table

Forecasts of Returns: Dow  1989:

0%  1996: 4.1%  2000: 6.7%  2001: 8.4%  2004: 6.4%

Confidence Levels Again  See

figure 4.1  Fraction thinking market is over valued  Compare institutional and individual investors

How do People Process Data?  Recent

and distant past  Memory

Feedback  Price

-> Buy -> Price -> Buy  Price -> GDP -> Price -> GDP  Can we model this?

More on Ponzi  Basic  



 In   

parts

Plausible stories High returns Early success : start slow, ramp up

stocks Story: exaggerated, but not a lie Early price manipulation Draw in crowd

Real Estate and the Stock Market  Stock 

market

"Had no effect on my decision to buy a house" : 72% in 2003-4

News Media 

Record overload 

Superlatives (record everyday)

Stock market moves and big news  Tag along news 



News tags along as an "explanation" for price moves

Crashes of 29 and 87  New media outlets and rumors 



Internet sites

29 in Press 

Crash of 29: October 28-29  



NYT(29 AM): "general loss of confidence" WSJ(29 AM): "necessitous liquidation of impaired accounts" President Hoover develops inland waterways

Some news on Smoot-Hawley tariffs, but could that be so big?  Black Thursday, October 24, 1929 





Market falls by 12.9%, but then recovers

No real big stories

October 28th/29th 1929 -12.3% and –11.3% “general loss of confidence in the market and the inability of any man or group to stem such a torrent of selling.”

October 19, 1987 in the Press  Shiller  

survey

10 news stories Most important: story about past price declines

 Higher

than expected trade deficit, possible tax changes  Fires off computerized sell programs (negative feedback)

October 19, 1987 -20.5% “Worry over dollar and trade deficit”

Feedback Again 

Leverage   



Price falls Borrowed fraction increases Sell off some (deleverage) -> price falls

Short selling   

Price rise Value of "borrowed" stock increases Need to buy some back to reduce borrowing - > price rise

New Eras  

“New economy” 1901 



1920’s  



Trains, electricity, new century

Electricity, mass production, prohibition Irving Fisher

50’s and 60’s 

Baby boom, computers, credit cards, macroeconomic policy

New Eras  90’s     

Globalization Technology Low inflation (macro policy again) Profits Productivity

Global New Eras  Largest  

See table 7.1 See also subsequent year patterns

 Largest 

1 year decreases

See table 7.2

 Largest 

1 year stock market increases

5 year increases

See table 7.3

Stories  Philippines:

Dec85-86: +683%, Marcos regime collapses. Aquino takes over. Avoids messy civil war.  Taiwan: Oct86-87, +400%, booming exports, double digit growth, shifting to high tech goods, P/E ratios to 45, gambling frenzy, eventually declines by 79% (89-90)

More Stories  Venezuela:

90-91 +384%, recovering economy, oil market uncertainty (Gulf War I), eventually prices fall by 82%  India: April 91-92, +155%, begins large scale deregulation, opens to foreign investment, some price manipulation maybe, falls by -50% next year

Reversals  Do

most stock increases reverse?  If true, big deviation from random walk.  68% of 5 year winners see price decline in next 5 years  80% of 5 year losers see price increase in next 5 years

Outline  Precipitating

factors in the late 20th

century  Amplification mechanisms  The media  New era thinking

Summary  Stories  Amplifications  

Price feedback News

 Global  

mechanisms

info

Stock market increases (bubbles) common Most reverse

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