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The Finance World in 2050

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As we approach the end of 2010, many publications are presenting forecasts for next year and sometimes a few years ahead. The Economist, for instance, gathered some forecasts for 2036. We would like to take the opportunity to speculate about the world in 2050, 40 years from now.

Why such a long horizon? Knowing where we are heading is the first step of planning our journey. Freeing ourselves of the present constraints can give us some interesting insights on the future.


Open Yale

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Professor Shiller has recorded some lectures on financial markets in Spring 2008. You can access his course materials, read, listen and watch him online here. It is quite amazing.

Chicago School Interviews

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We have read with great interest a series of interviews by economists from Chicago. This is the link. In particular the views from Professor Eugene Fama appear very dogmatic and at the same time skeptical of the conventional explanations, he does not seem to acknowledge the existence of bubbles and believes that the economics crisis preceded the financial crisis. Professor John Cochrane offers a more balanced view on the financial crisis and the state of financial economics.

A Series of Unfortunate Events

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A Series of Unfortunate Events:
Common Sequencing Patterns in Financial Crises

In this lecture, Carmen Reinhart identifies the common patterns in boom-bust cycles. She takes a historical approach and use international comparisons. She documents the severity of the recent financial crisis and its impact on financial markets and international trade using a global crisis index (banking, currency and inflation composite, BCDI Index, calculated for 66 countries during the 1900-2010 period). She then attempts to indicate where the economy stands in the post-crisis environment by focusing on the housing and labor markets.  The last part of the paper discusses the common causes of the crisis and what makes it worse than the past crises, the increase in public debt in all developed economies and the effect of financial repression.


Managerial Miscalibration

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Managerial Miscalibration

by Itzhak Ben-David (Ohio State University), John R. Graham and Campbell R. Harvey (Duke University)

Graham and Harvey are well known for their CFO survey of the equity risk premium. In this paper, they test whether these executives are miscalibrated, i.e. the distribution of their expectations is not correct. They use a unique panel that includes over 12,500 probability distributions of future stock market returns collected from top financial executives over nearly a decade. They find that executives are severely miscalibrated: realized market returns are within the executives’ 80% confidence intervals only 33% of the time. These executives seem therefore to be overconfident in their views. They show that miscalibration improves following poor market performance periods because forecasters are influenced by extreme negative past returns. Poor returns are salient events that seem to influence these executives. They also find that the degree of miscalibration is strongly correlated with the confidence interval that executives provide to their own-firm project returns. Finally, executives’ miscalibration is correlated with their own-firms’ level of investment.

This is an interesting paper that shows that the risk premium is very difficult to forecast even by professional executives and seems to cast doubt on the efficient market hypothesis since their expectations seem to be systematically miscalibrated and therefore wrong. This is also a cautionary tale for not relying on surveys to forecast macro and financial variables, even when the participants are sophisticated executives. At the same time, their forecasts can guide their investment decisions; public policy makers should take note and provide better public forecasts to complement the private miscalibrated forecasts.

You can read the paper here .

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