Benjamin King was working on the idea on how new information would cause the stock prices to change. In his research he found that about half of the change in the stock price was affected by the market factor and only about 10% of the change dealt with industry specific factors. This is interesting in that it shows that the market has more of an influence on stock price then what might be happening in the industry.
Lawrence Fisher took Operational Charge of the Center for Research in Security Prices at the Univeristy of Chicago. The center developed a database of historical asset prices from 1926 to 1960 along with constructing a daily record of stock prices. Through this research Fisher and Lorie were able to calculate the average return over the entire period showing that the average yield of 9% was much higher than other investments.
B for Hoyt - the last sentence of the first paragraph is (critical) and unclear.
ReplyDeleteTo clarify, at the time, financial advisors thought that most of what was driving firm's stock prices was information about the firm, but these results showed that it was mostly the market.
Mehrling uses the phrase low-dimensional statistical characterization to describe King's work. What this means, is that anyone can fit a data series by including a lot of independent variables, but what is really informative is if you can figure out the small set (low dimension) of variables that do most of the fitting. In the case of stocks, the result that 50% or so is fit by the market risk premium is very unusual: there aren't many series around that can be fit well by just one other series. Another way of thinking about that is that the major cause of stock price movements should have been an easy thing to figure out because it was so large ... but somehow this had been missed.
You should also be amazed at the CRSP results mentioned in this section. This is merely 45 years ago, but this was the first time anyone was able to show what the return on stocks (as an asset class) was, and that it was better than other investments.