Are Equities Overvalued? Prof. Michael Spence Explains in Op-Ed

mspenceIn a recent opinion editorial on Project Syndicate, NYU Stern Professor Michael Spence examined the relationship between rising equity prices and current stock market trends. His editorial included insight on whether stock valuations are excessive relative to future earnings potential, banks’ unconventional monetary policies, and the economy’s equilibrium conditions. In terms of growth patterns,

While expectations of faster earnings growth may well be contributing to elevated P/E levels, the current situation is complicated, to say the least. What is certain is that expectations of high earnings growth would have a more durable positive effect on P/E levels than the suppression of the equity risk premium.

The other important factor affecting P/E is the risk-free rate. As monetary policy normalizes – a process that has already begun in the United States – the risk-free rate is expected to rise to a level that is consistent with stable 2% inflation, which, in turn, corresponds with a level of unemployment. What precisely that rate is, however, remains uncertain – and extremely difficult to determine, given that it is affected by virtually every aspect of the unfolding growth patterns.

To read the entire opinion editorial, please click here.

Posted in Market Risk | Tagged , , , , | Leave a comment

Prof. Nouriel Roubini Discusses a Greek Exit from the Euro

nrIn a recent interview with Bloomberg Business, Professor Nouriel Roubini discussed the implications of the “Grexit,” or what the Greek exit from the euro would look like. Professor Roubini described the exit as a “massive contagion” that would highly stress other European banks.

Professor Roubini also examined the geopolitical, financial, and economic damage on the Eurozone, concluding that despite market concerns, “economically and financially, it doesn’t make sense to have a Greek exit.”

To watch the entire interview, please click here.

Posted in Sovereign Risk, Systemic Risk | Tagged , , , , , | Leave a comment

Prof. Robert Engle Discusses the NYU Stern Systemic Risk Rankings

Robert Engle NYU SternIn a recent article on the International Business Times, NYU Stern Professor Robert Engle discussed banking stress tests and the NYU Stern Systemic Risk Rankings. Following the first round of the Federal Reserve’s annual stress tests last week- in which an unprecedented 31 major US-based banks were deemed able to continue operating in a deep economic downturn- many analysts raised concerns about whether these tests were diversified enough to predict or prevent the next financial crisis.

Professor Engle, who pioneered a way of measuring the riskiness of individual banks at NYU, explained:

“There are obviously a lot of issues about how you choose the scenarios that you’re going to use. The use of one or two scenarios is a drawback. Other industries, like insurance, use thousands of scenarios.”

In comparison to the Federal Reserve’s banking stress tests, Professor Engle also discussed the NYU Stern Systemic Risk Rankings:

The alternative test Engle and his colleagues have designed provides an example of what a more systemic approach might look like. Dubbed the V-Lab, the process uses publicly available metrics to gauge how individual banks, and their underlying equities, might react to overall shifts in the market.

“We ask, ‘How much is the equity going to fall in the case of a financial crisis?’” Engle said. Since banks hold vast stores of diverse assets, broader market movements correlate with the rise and fall of individual banks. “The amount they go down is a way of measuring how sensitive they are to overall collapse.”

To read the entire article on International Business Times, click here.

To learn more about NYU Stern’s V Lab, please click here.

Posted in Systemic Risk | Tagged , , , , , | Leave a comment

Nobel Laureate Robert Engle Delivers Inaugural “Gallatin Lecture Series on Banking”

engle-1NYU Stern Professor and Nobel Laureate Robert Engle delivered the inaugural session of the Gallatin Lecture Series on Banking, the first of four lectures jointly hosted by NYU Stern and The Clearing House. His presentation, titled Prospects for Financial Stability, drew on the work of Stern’s Volatility Lab and explained the varying levels of systemic risk in different countries, relative to GDP and market capitalization.

In his lecture, Professor Engle noted “that it is difficult to test for risk on a forward-looking basis, but showed that the Systemic Risk Ranking results were consistent with what was seen during the 2008 financial crisis, and when applied to banks, provided a rapid and effective alternative to supervisory stress tests to determine strong and weak banks.”

To read more about Professor Engle’s lecture and the new Gallatin Lecture Series on Banking, please click here.

Posted in Systemic Risk | Tagged , , , , | Leave a comment

Prof. Roy Smith Discusses the Impact of Basel III Regulations on the Banking Industry

rsmithIn a recent article on Bankrate, NYU Stern Professor Roy Smith discussed the stabilizing US banking industry, including current threats to the economy, a long-term outlook of the industry, and the impact of several legal regulations. In particular, Professor Smith explained the continued implementation of the Basel III standards- an international agreement that requires large banks to increase the amount of capital they have on hand to cover bad loans- and the construction of a new legal framework under the Dodd-Frank financial reform law in 2014:

“Four years after it was passed, it’s still got a long way to go to be done, but the major parts of it are clear,” Smith says.

Among those major parts are capital requirements that are higher even than those called for in Basel III.

“That’s going to mean that the banks, who already have doubled the amount of capital to meet Basel III, have to add some more and limit other things,” he says.

To read more of Professor Smith’s insights on the banking industry, please click here.

Posted in Regulatory Risk, Uncategorized | Tagged , , , , , , | Leave a comment

Prof. Ian Bremmer on “How to Lead in Ambiguous Times”

ianbremmerIn a recent opinion editorial on Strategy + Business, NYU Stern Global Research Professor Ian Bremmer discussed how businesses can succeed in a time of geopolitical turbulence and an uncertain economic future. Professor Bremmer explained three strategies for decision making that will carry businesses through crises, by focusing on stability, resilience, and relationships:

The kind of decision making that works when you know what’s likely to happen won’t suffice. Sustaining a business in uncertain times requires executives to prioritize stability, resilience, and relationship management. Underpinning all three is a shift in strategic direction—from a focus on growth above all else to a focus on having enough. You make your company prosper enough by maintaining and improving the quality and caliber of what you do. You decentralize your business enough so that the parts can be strong if the whole faces risk. And you maintain and improve the relationships that your business depends on enough by integrating them with your whole company. Developing these executive practices won’t shield you from crisis, but it will help ensure that when the dust settles, your company is not just standing, but moving forward.

To read the entire article, please click here.

Posted in Behavioral Finance, Systemic Risk | Tagged , , , , , , , , | Leave a comment

Economists Need to Analyze and Explain, Don’t Prognosticate by Dean Peter Henry

The following is an excerpt from an op-ed published in the New York Times, written by NYU Stern Dean Peter Henry:

Dean HenryBecause the economics profession failed to predict the financial crisis in advanced nations, critics claim that economists have little practical use and wield too much influence. In fact, the opposite is true. We need economists’ thinking now more than ever — provided we match the tools of economics to the proper task.

Economists who tailor their advice to ideology rather than reason earn their maligned status, contributing more noise to a political echo chamber. But economists also fail when they attempt to predict short-term business cycles, a task for which the discipline is ill equipped. By trying to time booms and busts the way meteorologists forecast weather, a handful of economists have generated unrealistic expectations about what they can and should do. Little surprise, then, that we’re caught in a public shouting match over why few, if any, economists called the end of the Great Moderation.

The dismal science works when economists adopt a modest stance and ply their craft as a forensic tool, using history and data to separate cycle from trend and demonstrate the power of sustained commitment to markets. Viewed through the longer-term lens of history, the most important economic event of the last three decades is not the unanticipated demise of the Great Moderation, but the turnaround that occurred in developing countries once their leaders adopted the advice of economists.

Read the full article as published in The New York Times.

Posted in NYU Stern | Tagged , , | Leave a comment

What’s Next for Cuba? by NYU Stern Professor Ingo Walter

The following is an excerpt from CNBC:

iwalterNow that the decision has been made in Washington to reset Cuban-American relations, it’s a good time for an outside perspective on where things may go from here. Bottom line: Cuba may well become a rising star in the region and an attractive economic partner for the U.S. if things are managed well. In financial terms, Cuba will be a “buy” when the time comes. A recent visit revealed some impressive strengths buried not far below the surface.

The Cuban experiment with Socialism was doomed from the start. It assured Cuba’s position at the nadir among the world’s economic underperformers. Cuba’s form of collectivism was abandoned long ago by almost all who attempted it – the attempt to improve social welfare by working against human nature rather than with it. You can push water uphill, but only by wasting enormous amounts of human and physical capital. And even people who are true believers will still try to do what’s best for themselves in their daily lives, regardless of any economic command and control structure.

Eleven million people, comparatively well educated, with unusually strong extended family ties and sufficient entrepreneurial vigor to be explosive once preoccupation with working around the “dead hand” of the state gradually fades away. The few sectors already liberalized show plenty of sprouts, like a long-vacant lot after a spring rain, suggesting the latent power of lifting price and wage controls sometime down the road – there’s a reason farmers, budding restauranteurs and taxi drivers are among the best-off Cubans today.

Read the full article published by CNBC

Posted in Market Risk, NYU Stern, Sovereign Risk | Tagged , , , | Leave a comment

The Human Element in Investment Decisions

zshapira_articleExcerpt - Making strategic investment decisions is not a task that should be taken haphazardly. Managers and MBA students spend time studying appropriate decision criteria such as net present value (NPV) to aid in making profit-maximizing decisions. However, in discussing investment decisions with practicing managers over the years, we sensed that managers often systematically deviated from profit maximization. In particular, we noticed that managers often equate changes in scaled profit measures (e.g., changes in return on investment [ROI]) with changes in total profits (i.e., marginal profits). This causes them to deviate systematically from profit maximization with respect to strategic investment decisions (e.g., research and development [R&D] investments, capital investments, acquisitions) by avoiding investments that increase total profits yet are less profitable than their average current investment. In other words, current levels of average profit create an anchor by which investments are assessed. This decision-making behavior, subtle but critical, was recently demonstrated by NYU Stern Management Professor Zur Shapira.

Professor Shapira, along with Carlson School of Management Professor J. Myles Shaver, devised studies that teased out this counter-productive pattern and described it in “Confounding Changes in Averages With Marginal Effects: How Anchoring Can Destroy Economic Value In Strategic Investment Assessments.”

Read the full paper here.

Posted in Behavioral Finance | Tagged , , , | Leave a comment

Professor Edward Altman’s Z-Score Measure is Featured

The following is an excerpt from USA Today:

ealtmanEver hear of the Altman Z-Score? If not, it’s time to start – just ask investors in Caesars Entertainment (CZR).

Caesars’ shares Thursday are down nearly 8% to $11.72 on news one of the casino operator’s units plans to file for Chapter 11 restructuring. It wasn’t a surprise to investors paying attention.

An easy-to-use financial measure, invented decades ago by New York University Stern School of business professor Edward Altman, was designed to be an early warning signal of companies in major trouble. Professional investors swear by the Altman Z-Score and the number has proved prescient, yet again. Oddly and regrettably, many individual investors don’t know about it – even though it was designed to make financial warnings available to all.

Read the full article here.

Posted in Bankruptcy, NYU Stern | Tagged , , , , | Leave a comment