Simoleon Sense » Finance

An Overview of Distressed Debt Investing

Miguel — Wed, 08 Sep 2010 00:59:50 +0000

Awesome find via Distressed Debt Investing

Click Here To Download: An Overview of Distressed Debt Investing

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How to Make Cognitive Illusions Disappear: Beyond “Heuristics and Biases”

Miguel — Sat, 04 Sep 2010 16:56:20 +0000

Fun read!!

Abstract (Via Gigerenzer)

Most so-called “errors” in probabilistic reasoning are in fact not violations of probability theory. Examples of such “errors” include overconfi dence bias, conjunction fallacy, and base-rate neglect. Researchers have relied on a very narrow normative view, and have ignored conceptual distinctions—for example, single case versus relative frequency—fundamental to probability theory. By recognizing and using these distinctions, however, we can make apparently stable “errors” disappear, reappear, or even invert. I suggest what a reformed understanding of judgments under uncertainty might look like.

Click Here To Read: How to Make Cognitive Illusions Disappear: Beyond “Heuristics and Biases”

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Knowing What You Tell, Telling What You Know: Uncertainty and Asymmetries of Meaning in Interpreting Graphical Data

Miguel — Sat, 04 Sep 2010 16:45:57 +0000

Abstract (Via Roth & Middleton)

Research on knowing and learning in science commonly presupposes that knowledge, expertise, power, identity, and so on are stable features determining the outcome of interactions between individuals. In addition such individuals are conceptualized as differing in terms of the amount or types of the things in these categories. However, in a variety of disciplines including social psychology, sociology, and anthropology, the starting point for theoretical and empirical work is different: What really matters to social interaction is not the content of mind but how participants in social interaction deploy a variety of resources to constitute such things as memory, knowledge, expertise, and so on. This study was designed to investigate the local organization of interaction between research assistants, who had been hired to conduct a series of interviews (using a think-aloud protocol) about graphs, and scientists (N = 37) to better understand the person-situation interface in studies of scientific and mathematical knowing. Drawing on analytic methods from discursive psychology and conversation analysis, our analyses show how knowledgeability with respect to graphs and natural phenomena, assessment, giving and receiving of instruction, accountability, insight, and uncertainty are continuously shifting as interview participants draw on a variety of resources as means for managing the task at hand. In the process, uncertainty itself is managed by drawing on uncertainty.

Click Here To Read: Knowing What You Tell, Telling What You Know: Uncertainty and Asymmetries of Meaning in Interpreting Graphical Data

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Finite Bubbles With Short Sale Constraints & Asymmetric Information

Miguel — Sat, 04 Sep 2010 16:42:19 +0000

Abstract (via Allen, Morris, & Postlewaite)

We present a finite period general equilibrium model of an exchange economy with asymmetric information. We say that a rational expectations equilibrium exhibits an expected bubble if the price of an asset in one period is higher than any agent’s marginal valuation of holding the asset to maturity. WE say the equilibrium exhibits a strong bubble if the price is higher than the dividend with probability one. We show that a necessary condition for an expected bubble to exist is that each agent must be short sale constrained at some period in the future with positive probability We show that necessary conditions for a strong bubble to occur are that (1) each agent must have private information in the period and state in which the bubble occurs and (2) agent’s trades are not common knowledge. We also present examples of rational expectations equilibria that exhibit strict bubbles when the necessary conditions are satisfied.

Click Here To Read: Finite Bubbles With Short Sale Constraints & Asymmetric Information

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Robert Shiller Uses Epidemic Models To Understand Bubbles !!

Miguel — Sat, 04 Sep 2010 16:36:26 +0000

Very cool

Abstract Via Robert Shiller @ Econpapers

Contagion or epidemic models of financial markets are proposed in which interest in or attention to individual stocks is spread by word of mouth. The models give alternative interpretations of the random walk character of stock prices. A questionnaire survey of institutional investors was undertaken to ascertain the relevance of such models. Questions elicited what fraction of these investors were unsystematic and allowed themselves to be influenced by word-of-mouth communications or other salient stimuli. Rough indications of the infection rate and removal rate were produced. Investors in stocks whose price had recently increased dramatically to a high P/E ratio were contrasted with a control group of investors.

Click Here To Read: Robert Shiller Uses Epidemic Models To Understand Bubbles !!

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Global Stock Markets in the 20th Century

Miguel — Sat, 04 Sep 2010 16:31:58 +0000

Think Reinhard & Rogoff

Very worthwhile for super brainwashed financial planners…

Abstract (Via Jorion & Goetzmann)

Long- term estimates of expected return on equities are typically derived from U.S. Data only. There are reasons to suspect, however, that these estimates are subject to survivorship, as the United States is arguably the most successful capitalist system in the world. We collect a database of capital appreciation indexes for 39 markets going back into the 1920s. Over 1921 to 1996 U.S. equities had the highest real returns of all countries at 4.3percent versus a median of .8% for other countries. The high equity premium obtained for U.S. Equities therefore appears to be the exception rather than the rule.

Click Here To Read: Global Stock Markets in the 20th Century

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What Drives Firm-Level Stock Returns?

Miguel — Sat, 04 Sep 2010 16:23:44 +0000

Abstract (Via Tuomo Vuolteenaho @ SSRN)

I use a simple vector autoregressive (VAR) model to decompose a typical firm’s stock return into two components: changes in cash-flow expectations (i.e., cash-flow news) and changes in discount rates (i.e., expected-return news). The VAR model yields three main results. First, firm-level stock returns are mainly driven by cash-flow news. For a typical stock, the variance of cash-flow news is more than twice that of expected-return news. Second, expected-return news series are highly correlated across firms, while cash-flow news can largely be diversified away in aggregate portfolios. Third, shocks to expected returns and cash flows are, perhaps surprisingly, positively correlated for a typical small stock. This positive correlation is inconsistent with a simple overreaction story suggesting that small-stock investors overreact to positive cash-flow news and thereby drive expected returns down.

Click Here To Read: What Drives Firm-Level Stock Returns?

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Stock market valuation indicators: is this time different?

Miguel — Sat, 04 Sep 2010 16:21:31 +0000

Abstract (Via Jean Helwege, David Laster, Kevin Cole)

Record low dividend yields and record high market-to-book ratios in recent months have led many market watchers to conclude that these indicators now behave differently from how they have in the past. This paper examines the relationship between traditional market indicators and stock performance, and then addresses two popular claims that the meaning of these indicators has changed in recent years. The first is that dividend yields are permanently lower now than in the past because firms have increased their use of share repurchases as a tax-advantaged substitute for dividends. The second claim is that the implementation of Financial Accounting Standard (FAS) 106 for retiree health liabilities has seriously depressed the reported book values of many companies since the early 1990s, artificially raising their market-to-book ratios. We conclude that, even after adjusting for these factors, the current level of market indicators is a cause for concern.

Click Here To Read: Stock market valuation indicators: is this time different?

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The Equity Share in New Issues and Aggregate Stock Returns

Miguel — Sat, 04 Sep 2010 16:17:52 +0000

Efficiency sucks….

Abstract (Via Baker & Wurgler)

The share of equity issues in total new equity and debt issues is a strong predictor of U.S. stock market returns between 1928 and 1997. In particular, firms issue relatively more equity than debt just before periods of low market returns. The equity share in new issues has stable predictive power in both halves of the sample period and after controlling for other known predictors. We do not find support for efficient market explanations of the results. Instead, the fact that the equity share sometimes predicts significantly negative market returns suggests inefficiency and that firms time the market component of their returns when issuing securities.

Click Here To Read: The Equity Share in New Issues and Aggregate Stock Returns

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The Effect of Short Selling Constraints on Earning Announcements: the Case of Hong Kong

Miguel — Sat, 04 Sep 2010 16:10:42 +0000

Abstract (via Kadapakkam)

In Hong Kong, only designated securities are eligible for short-selling. In contrast to U.S., short interest for eligible securities is disclosed on a daily basis. We examine the effect of short selling constraints on price reactions to earnings announcements. We provide evidence that the removal of short selling constraints does not reduce the information content of earnings announcements. Further, there is no relationship between the abnormal level of short interests prior to earnings announcement and announcement date return.

Excerpted Conclusion (via Kadapakkam)

Unbounded short selling is one of the major assumptions in many conventional financial theories, but actually short selling is highly regulated in most financial markets around the world. Many regulatory agencies are worried that short selling without restrictions might disturb the market and trigger a big crash. We examine this issue by using data from the Hong Kong Stock Exchange, on which only some securities are eligible for short-selling. Thus, we can analyze the impact of short-selling controlling for other institutional factors. Preliminary results indicate that allowing short selling has very limited effects. Even for negative earning shocks, short selling eligibility does not significantly change the information content of earnings announcement. The magnitude of stock price reactions to unanticipated earnings shock remains unaltered. Further, abnormal returns to earnings announcements cannot be explained by unusual level short interest prior to earnings announcement.

Click Here To Read: The Effect of Short Selling Constraints on Earning Announcements: the Case of Hong Kong

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