Subprimes and such

[mike777]

Richard Roll is most famous for saying basically defining "the market" is impossible. If you cannot define a market CAPM falls apart.

 

In any case what ever you define the market is...you are leaving important stuff out.

 

 

CLEARLY since 2008 there have been important parts of the market that have gone up and those that have declined. Of course one can make money in a decline.

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The Possible Misdiagnosis of a Crisis

Richard Roll

 

This article is on another subject...the financial crises and its cause.

 

 

 

as for his article..that basically claims we may be misdefining the cause of the crises so far presented, offers a counter theory, but concedes he only offers a theory..not proof.

 

As I said open to debate...granted many posters want to close the discussion and claim a housing bubble.

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he illness underlying the 2007–08 financial

crisis might have been misdiagnosed, as is

strongly suggested by some elementary

principles of finance and development economics.

Moreover, there is an explanation for the

crisis that is fully consistent with rational beliefs

and well-functioning markets. If this explanation is

true, public policy prescriptions should be reexamined

because there is a danger that the attempted

cure is worse than the disease.

Various diagnoses have been

 

 

http://www.cfapubs.org/doi/pdf/10.2469/faj.v67.n2.3

[jdeegan]

:P In principle one can never perfectly apply the CAPM because the variability of total returns for the totality of all asset classes in unknowable. This problem has been obvious for God knows how long. Never stopped anybody from using it in its imperfect form.

 

The 2008 debacle happened because the variability of total returns for subprime mortgages, subprime auto loans, et.al. had not enough history to determine wtf they actually were. Beta is essentially the ratio between the two with the variance of total returns for all asset classes on the bottom. Not precisely knowing the bottom part of that ratio was the least of the problem.

 

I was there. It was like something out of a slapstick comedy. Not only did nobody know how these new loans would perform, they put them in blind, randomly selected securitization pools just to make it even harder to figure out what was going on even after the sh*t hit the fan once the teaser rates of a zillion criminally underwritten subprime mortgages started to reset. Some people thought that buying insurance from the world's largest insurance company protected them. Not so. AIG was not near big enough.

 

Imho, the whole affair happened because of the new innovations in financial instruments. Gotta have innovation. Can't really avoid the ensuing disasters. It was as much like the Dutch tulip bubble or the John Law South Sea Bubble as anything else. Lack of government regulation wasn't even to blame. To regulate that way you gotta have some history upon which to base it. No history. No way to effectively regulate without stifling innovation.