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Session VI-1 Bubbles / Portfolio Holding (18/12/2009 à 11h00)

C. Villa

Bubbles and Investment Horizons

Auteurs : Nadja Guenster (Finance Department, Maastricht University); Erik Kole (Econometric Institute, Erasmus School of Economics, Erasmus University)

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Intervenants : Erik Kole (Econometric Institute, Erasmus School of Economics, Erasmus University)

Rapporteurs : Yuri Biondi

The current theoretical literature makes contradicting predictions regarding the impact of an investor’s horizon on his optimal trading strategy in the presence of bubbles. We analyze this relation empirically using a Regime Switching Model to identify bubbles and crashes. We base our analysis on industry returns and find high positive returns after bubbles at the one-month horizon. At intermediate horizons of 2-4 months our findings are mixed, but thereafter, for horizons up to five years, returns following a bubble are again more positive than returns in the absence of a bubble. We compare a mean-variance as well as a downside-risk averse investor’s portfolio allocation in the presence and absence of a bubble. The weight allocated to the bubbly asset is higher for horizons up to 5 years. These findings suggest that even for a rather unsophisticated trader who does not follow daily market news, riding bubbles is a more profitable strategy than refraining from investing in the bubbly asset. Given the broad range of horizons during which riding bubbles is the optimal strategy, our results question the idea that bubbles are zero-sum games.

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Resilience and contagion in a connected economy

Auteurs : Camille Cornandy (CNRS - BETA); Gwenaël Moysan (ENS-LSH)

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Intervenants : Gwenaël Moysan (ENS-LSH)

Rapporteurs : Christophe Villa

This paper argues that financial links between agents may lead to the resilience or to the contagion of financial distress. Our model details the real effects of agents’ beliefs on the resilience of the economy. When the economy is connected enough, it is subject to an unstable equilibrium. Our model therefore delivers various implications for crisis workouts.

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The Evolution of Aggregate Stock Ownership - A Unified Explanation

Auteurs : Kristian Rydqvist (Binghamton University and CEPR); Joshua Spizman (Binghamton University); Ilya Strebulaev (Stanford University)

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Intervenants : Kristian Rydqvist (Binghamton University and CEPR)

Rapporteurs : Erik Kole

Since World War II, direct stock ownership by households has largely been replaced by indirect stock ownership by financial institutions which manage pensions. We argue that tax policy is the driving force. Using long time-series from eight countries, we show that the fraction of household ownership decreases with measures of the tax benefits of holding stocks inside a pension plan. This finding is important for policy considerations on effective taxation and for financial economics research on the long-term effects of taxation on corporate finance and asset prices.

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