Social and Behavioral Sciences Commons^™

The Intuition Behind Wallace Neutrality, Richard H. Serlin

Richard H. Serlin

Wallace neutrality is a term that, as far as I know, was coined by University of Michigan economist Miles Kimball. It refers to the seminal model of Neil Wallace in "A Modigliani-Miller Theorem for Open-Market Operations", American Economic Review, June 1981. In Wallace's model, open market operations have no effect on any asset prices, including money (no effect on inflation). This is a shocking result, and it cries out for how and why. Intuitively, how and why can this possibly happen? However, like so many modern models, it's extremely difficult to see the intuition behind the wall of math, and …

Compound Interest And The Power Of Saving, Richard H. Serlin

Richard H. Serlin

This is an article with an included assignment that I give to my personal finance 1 students. The first part talks about the power of compound interest. I go into depth about the intuition why it's so powerful, why it takes off, and has been called the eighth wonder of the world. I've haven't seen anywhere else an extensive explanation of the intuition like I have here.

In the second part I give the students a nice assignment to see how much their savings can grow if they invest even a modest amount consistently, month in and month out, in …

Towards Better Estimation Of Jump Diffusion Models, Richard H. Serlin

Richard H. Serlin

I discuss in-depth modern techniques for the estimation of Jump Diffusion models with suggestions for improvements. There is a heavy focus on intuition. I also point out examples of the use of improper techniques (biased and inconsistent) in the top tier finance literature.

Excel Calculator For Assignment/Article "Compound Interest And The Power Of Saving", Richard H. Serlin

Richard H. Serlin

No abstract provided.

Supply Based Explanation Of The Equity Premium Puzzle, Richard H. Serlin

Richard H. Serlin

All of the explanations for the equity premium puzzle I have seen in the literature are based on the demand side; trying to find utility functions for a representative investor and ex-ante probability distributions for returns that would explain investors demanding such high average returns for stocks relative to bonds. I suggest a supply side explanation: The long run supply curve for corporate stock may simply be extremely long and flat, and consistently about 5 ½ percentage points in return higher than the premium bonds supply curve, even at stock quantities as high as the entire national savings rate. Why? …

Estimate Of Risk Of Privatized Social Security Should Be Based On Far More Information Than Just Historical Stock And Bond Returns, Richard H. Serlin

Richard H. Serlin

All of the explanations for the equity premium puzzle I have seen in the literature are based on the demand side; trying to find utility functions for a representative investor, and ex-ante probability distributions for returns, that would explain investors demanding such high average returns for stocks relative to bonds. I suggest a supply side explanation: The long run supply curve for corporate stock may simply be extremely long and flat, and consistently about 5 ½ percentage points in return higher than the premium bonds supply curve, even at stock quantities as high as the entire national savings rate. Why? …

Let's Cut The Ammunition To The Housing Arms Race Permanently, Richard H. Serlin

Richard H. Serlin

The largest roots of today's epidemic of financial distress are the great increase in economic risk over the last generation and the great increase in the percentage of individual and family budgets spent on large fixed expenses, what Harvard bankruptcy expert Elizabeth Warren calls "Must-Haves". This is primarily due to a housing bidding war that has taken place since 1970. I discuss the key reasons for this destructive bidding war, one of which is the great relaxation of legal interest rate restrictions. This has allowed families to borrow far greater amounts relative to their income than they could have a …

Revisiting Random Walk Questions With Newer And Better Tools, Richard H. Serlin

Richard H. Serlin

I propose the use of Bayesian and Bootstraping Techniques to analyze the efficiency and nearness to a Random Walk of Stock Returns. These tests have greater accuracy than the traditional asymptotic point hypothesis tests performed in the literature, and by providing densities rather than points yield much richer information that is much less likely to mislead.

Theoretical Constraints On The Price-Rent Ratio And Other Insights From A New Real Estate Model, Richard H. Serlin

Richard H. Serlin

I develop a model of the real estate market with rational informed individuals who are either liquid or illiquid. The model shows bounds on the price-rent ratio and dispels some common real estate myths. Suggestions are given for empirical tests of the models implications.

Bias In What We Truly Want To Measure In The Most Common Test Of Uncovered Interest Parity And A Suggestion For An Unbiased Alternative, Richard H. Serlin

Richard H. Serlin

The most common test of uncovered interest parity, performed in at least 75 studies, is based on a specification error and is biased. I suggest an alternative test which is based on the true specification.