Weekly Top 5 Papers – November 12, 2018

1. 18 topics badly explained by many Finance Professors by Pablo Fernandez (University of Navarra – IESE Business School)

2A Quantitative Approach to Tactical Asset Allocation by Meb Faber (Cambria Investment Management)

3. A Brief Introduction to the Basics of Game Theory by Matthew O. Jackson ( Stanford University – Department of Economics)

4. Financial Volatility and Economic Activity by Fabio Fornari (European Central Bank (ECB)) and Antonio Mele (University of Lugano)

5. The First Eighty Years of the US Bond Market: Investor Total Return from 1793, Combining Federal, Municipal, and Corporate Bonds by Edward F. McQuarrie (Santa Clara University – Leavey School of Business)

This paper is the latest in a series I wrote using historical data collected and made available at eh.netby Richard Sylla.  It’s part of a book in progress: Stock and Bond Performance in the 19th Century—Not What You Thought.

In 1994 Jeremy Siegel of Wharton published Stocks for the Long Run, in which he advanced two bold conjectures: 1. Over the long-term stocks converge on a return of 6.6% real; 2. Over multi-decade periods stocks will beat bonds.

Siegel was the first to assemble both a stock and a bond series all the way back to 1802. I thought Siegel’s early 19th century data provided powerful rhetorical support.  The US had a very different economy in 1802: small and agrarian.  The century was full of negative shocks: we almost lost the War of 1812; the Civil War tore us apart; bust followed boom in weary succession.

To show that stocks had always returned 6.6%, and beat bonds, last century as well as this century, elevated Siegel’s findings from “could be a biased sample” to “might this be natural law?”  Maybe stocks weren’t risky at all, if you would just buy and hold?  Two hundred years of evidence now pointed Siegel to “yes.”

At some point I grew skeptical. I had retired and was seeking a new project with a historical bent. When I compared the new eh.net data to Siegel’s sources, I was surprised to find how much had been left out. Dozens of stocks, including the very largest, had been excluded by the sources on which Siegel relied, as had 90-99% of the total amount of traded bond issues.

My SSRN papers describe what I found using this larger and more complete dataset. In the 19th century sometimes stocks fared far worse than 6.6%. Sometimes bonds beat stocks for decades.

The 19th century was different from the 20th century. Siegel’s generalizations did not hold once better data was examined.

Perhaps 21st century results for stocks will be different yet.


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