Re: NYT on equity risk premium
Jordan Hayes wrote:
Doug asks:
Why, if stocks are more volatile than bonds, should they return more?
I think there’s a clue buried in this story:
there may just be something special about American capital markets
Note the emphasis on American capital markets. And there is: it’s called liquidity, transparency, and regulation. Despite all the terrible stories you hear, on par, it’s very difficult to be a publically traded company in the US. You’re held to very high standards of those three; slip on any one of them, and you get dropped like a hot potato. This is related to the phenomenon of small-caps: the good ones don’t stay small, they fall out of the average; so the group as a whole underperforms over time.
So: I think they win because they are well-run companies.
So that means the market is overestimating the risk? Then that should lower returns over time.
I read a paper while researching Wall Street that showed that, statistically speaking, the US was the only stock market in the world that had a return that was greater than 0 in a statistically significant sense. The authors wondered why this was so, and speculated that it had something to do with the US being the world’s top capitalist power. And these guys weren’t radicals.
That may be a twisting of the classic factoid that 80% of futures traders lose money.
And I’m not even sure that’s true; every futures contract has a winner and a loser at each transaction point including the final one. The number you might be misremembering is 80% of options contracts expire worthless, which was put out there by “Options on Futures” by Summa and Lubow and backed up by some numbers from the CME and CBOE, but since American options are often profitable before expiry, only something like 60% of the open interest makes it to expiration.
No, the factoid was about futures traders. And it could still be correct because there are a large number of public speculators and a relatively small number of commercials and professionals. So 80% of traders could lose money even if 80% of trades don’t.
Summa, by the way, is a former New School econ student and URPE member. Looks like he’s gone on to running a hedge fund.
Doug