Daily Academic Alpha: Market Panics

Daily Academic Alpha: Market Panics

April 1, 2015 Uncategorized

Last updated on January 18th, 2017 at 02:27 pm

Print Friendly

Rumors and Runs in Opaque Markets: Evidence from the Panic of 1907

Using a new daily dataset for all stocks traded on the New York Stock Exchange, we study the impact of information asymmetry during the liquidity freeze and market run of October 1907 – one of the most severe financial crises of the 20th century. We estimate that the run on the market increased spreads from 0.5% to 3% during the peak of the crisis and, using a spread decomposition, we also demonstrate that fears of informed trading account for most of that deterioration of liquidity. Information costs rose most in the mining sector – the origin of the panic rumors – and in other sectors with poor track records of corporate reporting. In addition to wider spreads and tight money markets, we find other hallmarks of information-based illiquidity: trading volume dropped and price impact rose. Importantly, despite short-term cash infusions into the market, we find that the market remained relatively illiquid for several months following the panic. We go on to show that rising illiquidity enters positively in the cross section of stock returns. Thus, our findings demonstrate how opaque markets can easily transmit an idiosyncratic rumor into a long-lasting, market-wide crisis. Our results also demonstrate the usefulness of illiquidity measures to alert market participants to impending market runs.

Risky Business: Popular Images and Reality of Capital Markets Handling Risk – From the Tulip Craze to the Decade of Greed

Speculators are often portrayed in literature, film and the media as evil businessmen who prey upon markets. Or they are portrayed as fools, who art with their money. The popular portraits accepted by the culture, while colorful, are ill-informed.

This article looks at the view held of speculators in early bubbles such as Tulip Mania and the South Sea Bubble. It then moves to the 1780s and early 1790s in the United States and looks at the broadsides fired at speculators in Revolutionary War debt by supporters of Jefferson and Madison. Next, the Gilded Age exemplified by Jim Fisk (the great drummer and war profiteer), Daniel Drew (the Speculative Director), Jay Gould (the Dark Genius of Wall Street), and Commodore Vanderbilt (“the public be damned”) is surveyed. The article concludes its survey with the Decade of Greed, the 1980s, as seen through “Other People’s Money” and “Wall Street.”

While the portraits of these culprits are vivid and the fulminations and exhortations against speculation are entertaining, the historic and economic reality is much different. Speculators provide an important and discrete function. They provide capital and liquidity, risk taking, and rationing of resources vital for all market economies.

Is Housing Overvalued?

This paper examines whether it costs more to own a home or to rent. We argue this is a useful criterion for assessing housing overvaluation. We use a new Australian dataset, which includes prices and rents for matched properties, letting us value housing in levels. We find that if real house prices grow at their historical average pace, then owning a home is about as expensive as renting. If prices grow more slowly, as some forecasters predict, the framework used in this paper suggests that the average home buyer would be financially better off renting. We decompose house prices into contributions from rents, interest rates and expected capital gains, which may help policymakers in the detection of housing bubbles. Recent data do not show signs of a bubble.

Note: This site provides no information on our value investing ETFs or our momentum investing ETFs. Please refer to this site.

Join thousands of other readers and subscribe to our blog.

Please remember that past performance is not an indicator of future results. Please read our full disclaimer. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. This material has been provided to you solely for information and educational purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and Alpha Architect to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Alpha Architect.

About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray received a PhD, and was a finance professor at Drexel University. Dr. Gray’s interest in entrepreneurship and behavioral finance led him to found Alpha Architect. Dr. Gray has published three books: EMBEDDED: A Marine Corps Adviser Inside the Iraqi Army, QUANTITATIVE VALUE: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors, and DIY FINANCIAL ADVISOR: A Simple Solution to Build and Protect Your Wealth. His numerous published works has been highlighted on CBNC, CNN, NPR, Motley Fool, WSJ Market Watch, CFA Institute, Institutional Investor, and CBS News. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.