Flav

The Twenty Year Stock Bubble Is Still Inflated

But testing wether the coefficient is somewhat constant, which means a constant mean, is precisely what a Dickey Fuller test wants to verify. The test would be like this: (MC/GDP)t = a*(MC/GDP)t-1 + et et~N(0,sigma2)

Ho: a = 1
H1: a < 1

Of course, the test should be made using difference expressions, but the nature is the same. If it happens to be stationary, then i would agree that you can compute a historical average, but i'm really skeptic about the series being stationary


On Nov 20 09:38 AM BSD77 wrote:

> Well, if for example the two variables (GDP and MC) are perfectly
> correlated, than the ratio doesn't change at all. E.g. if MC=5 at
> t=0 , GDP=10, growth rate = 5% and corr.coef.=1 --> ratio=2 constantly.
> Of course the assumption of correlation of 1 in this case is not
> realistic but I think I can see the author's point that strong correlation
> between the two should hold in long term (or should in the perfectly
> efficient market environment).

The Twenty Year Stock Bubble Is Still Inflated

But market capitalization and GDP are both non-stationary series, so, why would you expect a variable constructed as a ratio of this two to be stationary? I believe the Dickey-Fuller test is still suitable for this situation, as you define the new variable as MC/GDP. Of course, the correlation between the variables makes things a little messy, but i think is the proof is still valid

The Twenty Year Stock Bubble Is Still Inflated

But market capitalization and GDP are both non-stationary series, so, why would you expect a variable constructed as a ratio of this two to be stationary? I believe the Dickey-Fuller test is still suitable for this situation, as you define the new variable as MC/GDP


On Nov 20 08:14 AM BSD77 wrote:

> I see that sbd. was sitting for the Level 2 exam ;-) but still I'm
> not sure that Dickey Fuller test is relevant here - it is a test
> for non-stationarity of data that's for sure but it would be more
> appropriate for a time series of one dependent variable in time,
> not a ratio, since both of the variables here are (or should be)
> strongly correlated and hence there ratio should be constant over
> time.

The Twenty Year Stock Bubble Is Still Inflated

So, have you test the stationarity of the series in order to claim that a historical average has any meaning? In case you're unaware of, i remind you that when a time series is not stationary, then both its mean and its variance depend and hence change with time, so to compute a historical mean is absolutely worhtless, as i think it is the case here.
Please, before making any statement regarding a financial time series, at least try to make a Dickey-Fuller test

Dividend Aristocrats Will Continue to Outperform

Geoff:
If agents are rational and forward looking, and past information of returns and risk are at their disposal; knowing that a montecarlo simulation which uses this information shows that a basket of stocks will outperform the S&P, shouldn't create an arbitrage opportunity that will soon erase the return diferential, so that the future expected return of this basket is the same of that of the S&P?

The Road Ahead for Investors

Geoff, great article (as always). You made me wait almost a month since the last one you wrote, please write more often!! :)

Kass' Short Bet on Berkshire Falls Short of Reason

Kass is just a deceptive clown. Earlier in 2008, after the Bear Sterns meltdown, he suggested that the market had limited downside. On July, he recommended initiate a long position in financials. He even disclosed he had Citi as one of its holdings (when it was trading near the low 20's). Not satisfied with that, he even disclosed (and adviced initiating) a position in LEH!!!! Want the proof? Here it is: www.thestreet.com/stor...
His sponsor web site exalts him as an investment magician, advertising him as if he had been "right as rain"... with the market falling an astonishing +30%, and running a short only fund, it was kind of impossible to have a bad performance and not beat the market (i think).
What's really ludicrous and hilarious at once, are his investments surpirses, dubbed "outlier" events. He posts a series of delirious events that never actually take place, and assimilates market deveopments to his stupid advice. How in the hell does this person gets all that media attention?
This post is getting too long, but i want to highlight other lousy advices from Mr Kass. These posts are some proof of his misjudgment: www.thestreet.com/stor..., www.thestreet.com/stor..., www.thestreet.com/stor...
Just check the stocks his fund bought at the time it did it. It would be really interesting to see what really was his funds performance, if it really did had thoso holdings on its portfolio

How We Can Avoid Another Tragic Ponzi Scheme

Quote by James Quinn: "Morality is essential for our financial system to operate. The lack of truth and morality is the reason the system is breaking down"
The thing is Mr Quinn, each one of us (human beings) have a different conception on what regards to morality. Maybe some person believes that though Madoff did scam his investors, he should be punished, but in a different way than "a place in hell with Stalin". Maybe other person (like me) thinks that in an economics and financial blog, that kind of statements are a little out of place, and involve subjects that are far from the main objective of the blog.

Another quote from Mr Quinn: "I'll stick to whatever themes I want to discuss. You are free not to read my articles"
Of course, you can (and i think you will) discuss everything you want. I was just suggesting that maybe, asserting that divine punishment will be imposed to someone is a little out of order in a financial blog.
Again, of course i'm free not to read your articles; as a matter of fact, i won't do it. The lack of economic subtstance of them are a convincing proof that you're an accountant (hope a good one) and not an economist

How We Can Avoid Another Tragic Ponzi Scheme

"Ultimately, Mr. Madoff will be judged by his Maker. A special place in Hell awaits him, next to Hitler, Stalin, and Timothy McVeigh. The victims of his crimes are many."
Maybe we should stick to economic and financial themes, don't you think? Let the moral conclusions be brought about by each one privately.

Testing Forward Looking Asset Allocation

Geoff: Again, thank you very much for your quick response. I’ve been reading past articles from yours, and i have a few questions (i must apologise first, they aren't fully related to this article):
Does QPP estimate covariances, so that you can optimize using Excel's solver in order to build the model portfolio? If that's the case, you can compute the correlation coefficients between stocks (or assets)?

If you entered QPP the time series of, for example, the SPY, using the last year and a half data, did the tail risk signal this kind of drop?

Thanks in advance

Testing Forward Looking Asset Allocation

Geoff: How would shorting stocks affect the analysis? Considering than when you short, you profit when the stock goes down, it would have a negative correlation with the other portfolio assets, and therefore, coud short-sale improve the risk/return profile of the portfolio?

Thanks in advance

Tactical Asset Allocation, Part I

Geoff: i hope you don't get tired of my posts, but i have to tell you, once again, great article!!!!!!!

Risk Management and Concentrated Positions

You can check last weekend's Barron's interview with Merril Lynch's top investment executive for more insights on the subject

Risk Management and Concentrated Positions

Geoff, once again, thanks. Maybe if you run it again now, the numbers will be much worse. Your articles are great, and you're very polite with readers' questions.
The reason i asked the first question was beacuse the main strategists of investment banks (what were investment banks) always make projections of posible market trajectories of no more than 2 years, and they say they use computational models, that's why i asked if a program like QPP could be useful for the short term, though you said to me in other question i asked you before that QPP makes long term projections

Risk Management and Concentrated Positions

Geoff, another question:
What's the tail risk for homebuilders like CTX or KBH?
Does it point to a brisk stock price change like it was for financials?