William Shambora

Oops, we should have diversified!

This article extends the research on the improvements to the efficient portfolio frontier in globally diversified portfolios. We examine efficient frontiers of regional equity portfolios from developed and undeveloped countries. We show that a globally diversified portfolio has higher reward with less risk than individual regional portfolios. We also show that, in the past 8 years, a US investor would have achieved higher returns for the same risk if diversified in emerging and frontier markets. These results have implications for practical portfolio selection as well as empirical applications of Capital Asset Pricing Model (CAPM).

The relationship between stock returns and inflation in four European markets

We study the effects of expected and unexpected inflation on real stock returns for France, Germany, Italy and the UK. We find evidence that unexpected inflation affects stock returns in France, Italy and the UK, but that expected inflation does not. Unexpected interest rates also affect real stock returns in the three countries. However, we find no evidence of these variables affecting real stock returns in Germany.

Are stocks really riskier than bonds

Conventional wisdom holds that stocks are riskier than bonds; thus when the stock market becomes volatile, money flows from the stock market into the perceived safe haven of the bond market. In this article, we find that this notion is not necessarily accurate and might lead people to make incorrect investment decisions. In fact, intermediate- and long-term bonds are riskier than stocks when we measure risk by the coefficient of variation. We examine a case where an inaccurate perception regarding the relative riskiness of the two types of assets could play a part in what appears to be short-sighted and potentially costly behaviour of investors in financial markets.

Will retiring boomers really cause a stock market meltdown

The meltdown hypothesis predicts a large fall in stock prices when baby boomers cash in their equity holdings to fund their retirement. Using an estimated vector autoregression model this paper finds empirical evidence that retiring baby boomers will induce a drag on the stock market, but most likely not of meltdown proportions. An important discovery is that the response to shocks to the supply of equity securities is a key factor in short-term market price movements. Foreign buying associated with the current account deficit is shown to be a minor influence on stock prices.

Explaining anomalous inferences regarding the expectations theory

This paper examines inferences from two traditional tests of Expectations Hypothesis of the Term Structure (EHTS) under various models of the data generating process of the short-term interest rate. It is found that inference from these tests can be different under different models and that some of the tests most likely to support EHTS are those that are the least powerful.

Are Stocks Riskier than Bonds

Many economics principles textbooks mention that stocks and bonds are substitutes, and some textbook authors state that stocks are riskier than bonds. Most people seem to believe this idea. Whenever the stock market is volatile, money flows from the stock market into the safe haven of the bond market. This notion, however, is not accurate and might lead people to make incorrect investment decisions. In this paper, we examine how economics textbooks treat this question and if their treatment is accurate. We find that the notion that stocks are riskier than bonds is inaccurate. The textbooks that provide students with this notion might lead them to make faulty investment decisions. We also provide a case where this inaccurate notion could lead to an irrational behavior of investors in financial markets.