Archive for October 21st, 2020

Plugging old piece: Auction and IPL cricket

October 21, 2020

As I was hearing Amit Varma’s fab webinar, a participant asked about auction theory and IPL.

I remembered writing a piece for Mint way back when IPL just started. Replugging the piece titled as Go Dutch for Dhoni..

Posted in Cricket, Economics - macro, micro etc, Financial Markets/ Finance | 2 Comments »

Harshad Mehta’s equity markets vs ours

October 21, 2020

SonyLiv is playing the Harshad Mehta scam story.

Dhirendra Kumar of ValueResearch in this piece reflects on how times have changed and how they remain the same:

….talking to a few young people over the last few days, I have come away with a sense of disquiet about the impression being carried away by those who know nothing about the modern world of equity investing in India, especially if you access equity investing through equity mutual funds. I found that those who have no idea about what things are like nowadays are carrying away the impression that the basics of equity trading, of why and how prices move and how money can be made is still the same. They understand that we have computers and networks and flatscreens now instead of people yelling at each other on crowded trading floors. However, they come away with the impression that what people actually do is still the same.

Nothing could be further from the truth. Maybe. Now that I have declared that things are completely different, I’m not so sure. The technology has moved forward a century, the rules and regulations are immeasurably stricter, transparency is up by many orders of magnitude. All this has changed behaviour a great deal. However, the unfortunate part is that motivations are mostly the same. A lot of people still think that the purpose of the stock market, as far as they are concerned, is that it’s a place to get rich quickly. And the way to get rich quickly must be to get to know about some secret trick that must be known to those who have already made money.

This part has not changed, and looks like it will not change for a long time, regardless of how Harshad mehta’s story ended.

 

Posted in Discussion, Indian Economy/Financial Markets | Leave a Comment »

Rebooting economy through financial market reforms

October 21, 2020

Ajay Tyagi, Chairperson of SEBI gave a speech today.

He discussed reforms generally means radical changes and for fixing the system. However reforms could also mean incremental changes and preventive measures. SEBI’s approach to reforms over the years has been consultative and works through the committee system.

He also reviews SEBI’s reforms during the pandemic while avoiding “self-praise”.

Finally, he stresses on the role of other stakeholders such as Industry associations, Board of Directors and Shareholders.

 

Posted in Indian Economy/Financial Markets, Speech / Interviews | Leave a Comment »

The Great Depression, banking crises, and Keynes’ paradox of thrift

October 21, 2020

Victor Degorce and Eric Monnet in this voxeu research:

The surge in savings following the 2008-2009 Global Crisis and the recent pandemic have rekindled the interest of economists and policymakers in the paradox of thrift, formulated by Keynes in the 1930s. Subsequent research on the Great Depression of the 1930s, however, has not addressed the link between precautionary savings and growth. Using data on deposits in savings institutions of 22 countries, this column studies the fate of savings during the Great Depression and shows that Keynes’ intuition was right. Banking crises had an impact on economic growth not only through the direct lending channel, but also indirectly through an increase in precautionary savings. This bears important lessons for today.

….

How should governments and central banks respond to the large increase in savings rates? What kind of policy was likely to end the accumulation of precautionary savings during the Great Depression? According to the literature on the sources of economic recovery in the 1930s (Temin and Wigmore 1984, Eichengreen 2002, Eggertsson 2008), leaving the gold standard proved to be the typical and most effective way for authorities to signal a change in policy, stabilise business and consumer expectations, and implement countercyclical policies to foster recovery. As can be seen in Figure 3, the ratio of savings to nominal GDP levelled off (and eventually decreased) once a country had left gold.

Figure 3 Ratio of savings institutions deposits to nominal GDP before and after leaving the gold standard

Source: Degorce and Monnet (2020)Image

A clear commitment to countercyclical policies was a sine qua non condition for stopping the detrimental accumulation of precautionary savings. But Figure 3 and, more generally, the history of recovery from the Great Depression in the 1930s (Eichengreen 1992, Romer 1992) also reveal that the situation did not come back to normal quickly. As in 1937 in the US for example, the first attempt to relax accommodative policies came at a high cost. The efforts of governments are here to stay if we want to prevent uncertainty about economic outcomes from incentivising a high level of precautionary savings. The history of the 1930s also highlights that banking difficulties would only aggravate the current trends in savings accumulation. Avoiding such difficulties in the future remains a major policy issue. Not only do banking crises have a direct effect on outcomes through the volume of lending, but also because they trigger precautionary savings and thus worsen the paradox of thrift. 

Research on Great Depression continues to give lessons for today..

Posted in Academic research & research papers, Central Banks / Monetary Policy, Economics - macro, micro etc, Financial Markets/ Finance | Leave a Comment »

The Stock Market–Real Economy “Disconnect”: A Closer Look

October 21, 2020

Andrew Chen, Markus Ibert and Francisco Vazquez-Grande in this Federal Reserve research analyse the disconnect between Stock markets and real economy:

Between March and September 2020, broad equity price indexes around the world experienced a historic rally. Although this rally followed a significant decline in stock prices, it appears difficult to explain due to continuing concerns about the global pandemic and national economies running far below their potentials.

However, stock prices are forward looking and reflect expectations about profits and discount rates even as far as decades ahead. In this note, we construct assets that are more comparable to near and medium term economic conditions using data on domestic and international dividend futures and the cross section of U.S. stock returns. We find that the disconnect is driven by gains in the market value of long-term (beyond five years) dividends. In contrast, the value of corporate dividends for the next five years remains far below pre-pandemic levels.2 We provide additional evidence supporting this theme using a cross section of U.S. stocks sorted on price-dividend ratios and equity duration, as well as evidence from dividend futures for a cross section of international equity indexes.

Taken together, our evidence suggests that financial markets remained connected to near and medium-term economic conditions during the 2020 summer rally. Specifically, dividend futures prices remained depressed even at five-year horizons both domestically and internationally, and the recovery in stock prices between the middle of March and September has largely been driven by an increase in the prices of far-dated dividend claims as well as high duration stocks.

Hmm..

Posted in Academic research & research papers, Central Banks / Monetary Policy, Economics - macro, micro etc, Financial Markets/ Finance | Leave a Comment »

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