Episode 212: Prof Ralph Koijen: Demand System Asset Pricing & Inelastic Markets

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The impact on expected returns is much smaller. If prices go up by 10%, then expected returns go down by 10% times the dividend yield. How much government debt can the US issue before yields really start to rise? Those questions you all want to consider in a global context, because if you don’t want to buy US bonds, then that capital is going to go somewhere else. Or, investors get worried about Europe, then it’s going to have a spillover effect on US demand. We’ve estimated at least during the last 15 years, that there’s very strong demand for US assets, has a large impact on valuations.

Australia’s Treasury Wine warns of demand hit from inflation

The extra layers of security, storage and resiliency will be inflationary. The non-optimal allocation of resources, barriers to knowledge and data transfer will result in higher capital expenditure and hinder movement of a skilled workforce thinkmarkets review across borders. However, some countries and sectors will emerge as winners of this repositioning. Emerging markets like India, Vietnam, Thailand, Indonesia and Mexico are likely to benefit from reshoring, friend-shoring and nearshoring.

If I equity weight them, then I put 100% weight on the balance fund, because it holds all of the equities, I put zero weight on the bond fund. All you have to tell me is the beta and some ideas to credit risk and off you go. At the level of aggregate stock markets, the substituted would be, let’s say, bonds, or maybe some corporate bonds. The idea is that the more similar two securities are, the higher the cross-elasticity between the two. The extreme example would be, take a 10-year government bond and a nine-year government bond with 11 months to maturity.

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I think at a single stock level, people have been trying to estimate that since the mid-80s. The gap between an elasticity of 5,000, that theories imply, and the elasticity of and one that people estimate is the first thing. Now the second thing is that as we talked about before, the macro-elasticity is below the micro-elasticity. Because stocks and bonds are less close substitutes than Apple and Google.

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Instead, what we find is that the correlation between flows from one institution to another and how informed these individual institutions are about future fundamentals is very weak. It’s not the case that money systematically moved from more informed to less informed institutions to the other type. It’s more of a mixed result in the sense that impact on valuations, but in terms of the connection between evaluations and future fundamentals, there’s less of a connection there. What you find is that there’s a non-trivial impact on valuations. Success, is if I understand that are how financial markets work and how to interact with the macro economy. The bigger goal is putting there’s a lot of things in finance that we don’t understand, like two basic questions, why the markets go up and down?

• What we do is we can first go investor group by by investor group.
• If you trade 1% of a stock, then the price impact will be 1 over 5,000.
• Then our next steps are going to be to connect that to the macro economy and global economy.
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