One of the themes that the market-is-inefficient crowd likes to point to as a smoking gun is the volatility in the stock market, which at times ramps up considerably. Robert Shiller was the first to use this argument in his widely cited 1981 paper: “Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?” There’s been a lot of back and forth over this paper in the decades since, but that’s a subject for another day. Meantime, if the volatility in stock prices indicates inefficiency and irrationality in the equity market, the same framework must hold for bonds, right? Enter Paul Krugman, who had an interesting blog post yesterday about fixed income: “What’s moving interest rates?”
Daily Archives: January 20, 2011
JOBLESS CLAIMS FALL TO 404,000
This morning’s weekly update on new jobless claims delivers a refreshing reversal of last week’s surge in filings for unemployment benefits. New claims on a seasonally adjusted basis dropped by a hefty 37,000 last week, more than erasing the revised 30,000 jump for the week through January 8.
MACRO RISK & EQUITY RETURNS: HAVE WE LEARNED ANYTHING YET?
The case for mean reversion is alive and well when it comes to developing intuition about future returns in the equity market, as I discussed earlier this week. True, you can’t prove anything definitively in the money game, but the empirical record is persuasive for thinking the expected returns in the stock market will fluctuate a) dramatically over time and b) with some degree of consistency in connection with fundamental value measures, such as dividend yield, p/e ratio, book value and other metrics. The insight doesn’t help much when it comes to short-term trading, but it provides a fair amount of strategic insight. But that leaves open the question of why return varies so much in the first place?