Two of the top financial economists in the world, Gene Fama and Ken French, recently started an online forum. They have a Q&A section in which they respond to relevant finance questions, at least a couple of which would probably be of interest to actuarial science students (as well as practitioners):
(1) "Some people have argued that the turmoil was caused by a lack of government regulation. What do you think? Do we need more regulation?"
I think the reference to the possibility of more regulation "stifling financial innovation" is very important. Also interesting is the comment that "regulators are eventually captured by the regulated. As a result, regulation often has results opposite those intended."
(2) "Is the market turmoil a sign that markets are not efficient?"
The Fama-French response identifies two market turmoil factors: expected cashflows (e.g., future dividends and growth rates), and their discount rates. Those of you who have taken my Math 210 course may recall a homework problem I always ask, which is intended to demonstrate potentially how little has to change in order to result in a significant change in the stock market. Using the dividend discount model (P = D / (i - g), where P is the price of the stock or market index, D is the next dividend, g is the growth rate of dividends, and i is the discount rate)), for example, for certain fixed values of D and i, the market consensus regarding the growth rate g need not change much in order to significantly change the price P.
- Rick
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