Archive Page 2


Paper: Hello? IPO?

Where Have All the IPOs Gone?


During 1980-2000, an average of 311 companies per year went public in the U.S. Since the technology bubble burst in 2000, the average has been only 102 initial public offerings (IPOs) per year, with the drop especially precipitous among small firms. Many have blamed the Sarbanes-Oxley Act of 2002 and the 2003 Global Settlement’s effects on analyst coverage for the decline in U.S. IPO activity. We offer an alternative explanation. We posit that the advantages of selling out to a larger organization, which can speed a product to market and realize economies of scope, have increased relative to the benefits of remaining as an independent firm. Consistent with this hypothesis, we document that there has been a decline in the profitability of small company IPOs, and that small company IPOs have provided public market investors with low returns throughout the last three decades. Venture capitalists have been increasingly exiting their investments with trade sales rather than IPOs, and an increasing fraction of firms that have gone public have been involved in acquisitions. Our analysis suggests that IPO volume will not return to the levels of the 1980s and 1990s even with regulatory changes.

Link al Paper


Paper: Anomalías y su impacto en el riesgo sistémico

The race to zero

1.  Introduction

Stock prices can go down as well as up.  Never in financial history has this adage been more apt than on 6 May 2010.  Then, the so-called “Flash Crash” sent shocks waves through global equity markets.  The Dow Jones experienced its largest ever intraday point fall, losing $1 trillion of market value in the space of half an hour.  History is full of such fat-tailed falls in stocks.  Was this just another to add to the list, perhaps compressed into a smaller time window?

No.  This one was different.  For a time, equity prices of some of the world’s biggest companies were in freefall.  They appeared to be in a race to zero.  Peak to trough, Accenture shares fell by over 99%, from $40 to $0.01.  At precisely the same time, shares in Sotheby’s rose three thousand-fold, from $34 to $99,999.99.  These tails were not just fatter and faster.  They wagged up as well as down.

The Flash Crash left market participants, regulators and academics agog.  More than one year on, they remain agog.  There has been no shortage of potential explanations.  These are as varied as they are many:  from fat fingers to fat tails; from block trades to blocked lines; from high-speed traders to low-level abuse.  From this mixed bag, only one clear explanation emerges:  that there is no clear explanation.  To a first approximation, we remain unsure quite what caused the Flash Crash or whether it could recur.

That conclusion sits uneasily on the shoulders.  Asset markets rely on accurate pricing of risk.  And financial regulation relies on an accurate reading of markets.  Whether trading assets or regulating exchanges, ignorance is rarely bliss.  It is this uncertainty, rather than the Flash Crash itself, which makes this an issue of potential systemic importance.

 In many respects, this uncertainty should come as no surprise.  Driven by a potent cocktail of technology and regulation, trading in financial markets has evolved dramatically during the course of this century.  Platforms for trading equities have proliferated and fragmented.  And the speed limit for trading has gone through the roof.  Technologists now believe the sky is the limit.

This rapidly-changing topology of trading raises some big questions for risk management.  There are good reasons, theoretically and empirically, to believe that while this evolution in trading may have brought benefits such as a reduction in transaction costs, it may also have increased abnormalities in the distribution of risk and return in the financial system.  Such abnormalities hallmarked the Flash Crash.  This paper considers some of the evidence on these abnormalities and their impact on systemic risk.

Regulation has thin-sliced trading.  And technology has thin-sliced time.  Among traders, as among stocks on 6 May, there is a race to zero.  Yet it is unclear that this race will have a winner.  If it raises systemic risk, it is possible capital markets could be the loser.  To avoid that, a redesign of mechanisms for securing capital  market stability may be needed.

Link al Paper


Tabla du Jour: Sin palabras…

(Fuente: Bespoke Investment Group)


Humor du Jour: End Market Correlation!

 (Fuente: Infectious Greed)


Fun & Finance: #15, Charla sobre la Tasa Libre de Riesgo

En este episodio, Manuel le explica a Gaston que es la Tasa Libre de Riesgo y -de forma introductoria- que rol juega en los modelos de pricing de activos.

Siempre Mejor en HD

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Finanzas 101: Proxy Hedging

Tal vez es una serie de post más para finanzas 301, pero los ultimos 3 post de Quantivity hacen un buen capitulo de Hedging.

Proxy / Cross Hedging

“The root challenge of two current equity risk and alpha projects boil down to hedging using non-underlying instruments, known as proxy hedging or cross hedging.”

Empirical Quantiles and Proxy Selection

“(…)how to choose an appropriate hedge instrument, especially amongst several alternatives.”

Empirical Copulas and Hedge Basis Risk

“Of particular interest is understanding the dynamics of basis risk under extreme scenarios (both up and down), which are driven by time-varying stochastic joint covariation.”


Paper: Una vuelta por el mundo…

Equity Premia Around the World

We update our global evidence on the long-term realized equity risk premium, relative to both bills and bonds, in 19 different countries. Our study now runs from 1900 to the start of 2011. While there is considerable variation across countries, the realized equity risk premium was substantial everywhere. For our 19-country World index, over the entire 111 years, geometric mean real returns were an annualized 5.5%; the equity premium relative to Treasury bills was an annualized 4.5%; and the equity premium relative to long-term government bonds was an annualized 3.8%. The expected equity premium is lower, around 3% to 3½% on an annualized basis.

Link al Paper

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Fun & Finance Rollover

"It is hard to be finite upon an infinite subject, and all subjects are infinite." Herman Melville

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