Archive for the ‘Robert Shiller’ category

The Rational Exuberance

 

In the age of information, quotes become books and books become religion, almost. Robert Shiller’s Irrational Exuberance was a voice of caution that appeared in March 2000, before the start of a decade long sequence of negative fluctuations. The book itself was written about economic bubbles and investor psychology.

Shiller’s based his work on his 1981 research paper in the American Economic review, where he showed the divergence between fundamentals and market prices. He took the present value (PV) of dividends paid on S&P composite stock price index discounted by a constant real discount rate for the period (1871-2002). He illustrated that PV behaves remarkably like a stable trend. In contrast, stock price index gyrates, wildly up and down around this trend. Shiller’s contention was that the divergence was much larger than what valuation could explain. Price change was driven by psychology not by fundamentals. He suggested feedback dynamics between human interactions as the explanation for excessive volatility or bubbles.

Who owns the truth?

On one side Shiller and other new age experts highlighted the weakness in the assumption of efficiency, but on the other hand was it correct to swing to total irrationality (inefficiency)? Why could we not give benefit of doubt to earlier thoughts on rationality (normality)? After all there were no tera-bytes of data and real computing power. In hindsight the rationalist argument might have gaps, but how do we think tomorrow would judge the “irrationalists”?

A recent award winning paper by David N. Esch in the Journal of Investment Management addresses the…

This article was written for Business Standard

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Mukul Pal, is a Chartered Market Technician, MBA Finance and a member of the reputed Market Technicians Association (MTA). He has more than a decade of Capital Market experience dealing with derivatives and global assets. He has worked for Bombay Stock  Exchange, multinational Banks and brokerage houses in leading research positions before starting on his own in 2005. He is the President of the MTA Central and Eastern European Chapter.


The Black Crow


Call it a good omen or bad, human beings have associated natural occurrences with events. Though ‘objectivists’ say human beings suffer from illusion and see what they want, reconsideration shows there is more to illusion than just a black crow or swan.

Watching a crow perched outside your window or a black swan (aka rare event) gliding on a lake or on the trading screen are patterns because they repeat, even if rarely. If there was constant crisis we would not connect them to rare events because there would be no precedent for it. Only when the passing comet coincides with a famine is it that we label its next passing as a bad omen. It’s the repetition or the cyclicality of a process that guides society to establish patterns, no matter their frequency.

The point I am making here is that identifying an outlier such as a crow perching itself outside your window and metaphorically connecting it to economics, sensationalising a fluctuation does not make it all objective. At the soul of every pattern is a repetition, a cycle. The pattern keeps repeating because the cycle keeps pulsating. So, if time is at the heart of every pattern, why do patterns sell more than a time cycle? Patterns do offer a story and humans love stories (Shiller in Irrational Exuberance), but is there really an objective reason, which can make cycles more objective and scientific?

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Shiller’s Fluctuations vs. Temporal Changes

Robert Shiller was not only one of the few to challenge the efficient market theory, as early as 1981 he was also the first to connect fundamental data with market data.

His paper on ‘The Volatility of Stock markets Prices’ published in 1987 uses dividend data and real interest rates to seek evidence that true investment value changes through time sufficiently to justify the price changes. His paper concluded that most of the volatility of the stock market prices appears unexplained.

Shiller’s volatility or fluctuations prove that behavior of markets is not normal. Non normal distribution series is a widely followed proof of inefficiency in prices. He illustrated his fluctuation case (Fig. 2) where he plotted the fluctuations of market prices compared to a fundamental value. The fluctuation in real market were simply too large to explain.

How did we explain Shiller’s fluctuations with temporal changes?

This article is written for ATMA

Time Triads, Time Fractals, Time Arbitrage, Performance Cycles are terms coined by Orpheus Research. Time Triads is our weekly market letter. The report covers various aspects on TIME patterns, TIME forecast, alternative research, emerging markets, behavioral finance, market fractals, econohistory, econostatistics, time cyclicality, investment psychology, socioeconomics, pop cultural trends, macro economics, interest rates, derivatives, money management, Intermarket trends etc.

Shiller's Fluctuations vs. Temporal Changes

Robert Shiller was not only one of the few to challenge the efficient market theory, as early as 1981 he was also the first to connect fundamental data with market data.

His paper on ‘The Volatility of Stock markets Prices’ published in 1987 uses dividend data and real interest rates to seek evidence that true investment value changes through time sufficiently to justify the price changes. His paper concluded that most of the volatility of the stock market prices appears unexplained.

Shiller’s volatility or fluctuations prove that behavior of markets is not normal. Non normal distribution series is a widely followed proof of inefficiency in prices. He illustrated his fluctuation case (Fig. 2) where he plotted the fluctuations of market prices compared to a fundamental value. The fluctuation in real market were simply too large to explain.

How did we explain Shiller’s fluctuations with temporal changes?

This article is written for ATMA

Time Triads, Time Fractals, Time Arbitrage, Performance Cycles are terms coined by Orpheus Research. Time Triads is our weekly market letter. The report covers various aspects on TIME patterns, TIME forecast, alternative research, emerging markets, behavioral finance, market fractals, econohistory, econostatistics, time cyclicality, investment psychology, socioeconomics, pop cultural trends, macro economics, interest rates, derivatives, money management, Intermarket trends etc.