Title: Prediction of Stock market crashes,entry exits from bubbles, hedge fund disasters and their prevention
Speaker: Prof. William T. Ziemba
Affiliation: Sauder School of Business, University of British Columbia
Location: LG19b Seminar Room, Business School
Abstract. Bubbles occur in financial markets from time to time. By a bubble we mean that the prices are going up just because people expect them to continue rising. In these cases the prices exceed the fair value based on fundamentals. Jarrow and his colleagues have developed tests for the existence of such bubbles. While that is interesting our main focus is on can we predict when the bubble like market-not necessarily a strict bubble will crash. For this we use the BSEYD and other models. The BSEYD model suggests a crash of 10%+ is coming in the next year or so from the signal date when the long bond interest rate exceeds the earnings yield of stocks by a critical amount. The idea is that bonds and stocks compete for the investment dollar and when interest rates relative to earnings are too high a crash is likely. The talk will discuss the history of this signal in US, Japanese and other markets since I discovered it in Japan based on the US 1987 stock market crash in 1988. Besides a crash signal the BSEYD model is useful for long term asset allocation. I will discuss three other large crash models one based on behavorial finance relating to overconfidence measured by the put and call options market. Famed investor Warren Buffett has a measure based on the value of the economy to the value of the stock market. While the way buffett presents it the measure value of the economy to the stock market does not predict. The measure can be fixed to actually predict. The fourth measure is the value of Sotheby’s stock. This then provides signals to exit markets but does not tell you when to exit. The BSEYD signal did give correct calls in two instances where the world’s most famous bubble trader George Soros shorted too soon and lost a lot of money namely the nikkei stock average in 1988 (BSEYD signal in April 1989) and the Nasdaq 100 in 1998-9(BSEYD signal in April 1999). The issue of when to exit we analyze using an approach developed with two Russian colleagues. The idea is that there is a rising trend then a peak then a decline. That model is based on research of Shiraev modified by Zhitlukhin for our purpose here. We apply it to apple computer stock in 2012, to the Nasdaq in circa 1990, to the Nikkei stock average in 1989, to the bigger bubble golf course membership market in the same circa 1989-90 period, to the 1987 and 1929 stock market crashes in the united states. In general the exits are very good. This model is also useful for shorts as well as longs with somewhat different interpretation as a trading tool. The talk also discusses famed market guru Marty Zweigs prediction methods based on fed movements and momentum and small partially anticipated decides based on economics and political events such as the Brexit, Trump and French elections. These are useful in futures trading.
About the speaker. Dr William T. Ziemba is the Alumni Professor (Emeritus) of Financial Modeling and Stochastic Optimization in the Sauder School of Business, University of British Columbia where he taught from 1968-2006. His PhD is from the University of California, Berkeley. He currently teaches part time and makes short research visits at various universities. Recently he is the Distinguished Visiting Research Associate, Systemic Risk Centre, London School of Economics. He has been a visiting professor at Cambridge, Oxford, London School of Economics, University of Reading and Warwick in the UK, at Stanford, UCLA, Berkeley, MIT, University of Washington and Chicago in the US, Universities of Bergamo, Venice and Luiss in Italy, the Universities of Zurich, Cyprus, Tsukuba (Japan), KAIST (Korea) and the National University and the National Technological University of Singapore.
He has been a consultant to a number of leading financial institutions including the Frank Russell Company, Morgan Stanley, Buchanan Partners, RAB Hedge Funds, Gordon Capital, Matcap, Ketchum Trading and, in the gambling area, to the BC Lotto Corporation, SCA Insurance, Singapore Pools, Canadian Sports Pool, Keeneland Racetrack and some racetrack syndicates in Hong Kong, Manila and Australia. His research is in asset-liability management, portfolio theory and practice, security market imperfections, Japanese and Asian financial markets, hedge fund strategies, risk management, sports and lottery investments and applied stochastic programming. His co-written practitioner paper on the Russell-Yasuda model won second prize in the 1993 Edelman Practice of Management Science Competition. He has been a futures and equity trader and hedge fund and investment manager since 1983.
He has published widely in journals such as Operations Research, Management Science,, Mathematics of OR, Mathematical Programming, American Economic Review, Journal of Economic Perspectives, Journal of Finance, Journal of Economic Dynamics and Control, JFQA, Quantitative Finance, Journal of Portfolio Management and Journal of Banking and Finance and in many books and special journal issues.
Recent books include Applications of Stochastic Programming with S.W. Wallace, SIAM-MPS, 2005, Stochastic Optimization Models in Finance, 2nd edition with R.G. Vickson, World Scientific, 2006 and Handbook of Asset and Liability Modeling, Volume 1: Theory and Methodology (2006) and Volume 2: Applications and Case Studies (2007) with S. A. Zenios, North Holland, Scenarios for Risk Management and Global Investment Strategies with Rachel Ziemba, Wiley, 2007, Handbook of Investments: Sports and Lottery Betting Markets, with Donald Hausch, North Holland, 2008, Optimizing the Aging, Retirement and Pensions Dilemma with Marida Bertocchi and Sandra Schwartz and The Kelly Capital Growth Investment Criterion, 2010, with legendary hedge fund trader Edward Thorp and Leonard MacLean, Calendar Anomalies and Arbitrage, The Handbook of Financial Decision Making (with Leonard MacLean) and Stochastic Programming (with Horand Gassman), published by World Scientific in 2012 and 2013. In progress in 2014 are Handbooks on the Economics of Wine (with O. Ashenfelter, O. Gergaud and K. Storchmann) and Futures (with T. Mallaris)
He is the series editor for North Holland’s Handbooks in Finance, World Scientific Handbooks in Financial Economics and Books in Finance, and previously was the CORS editor of INFOR and the department of finance editor of Management Science, 1982-1992. He has continued his columns in Wilmott and his 2013 book with Rachel Ziemba have the 2007-2013 columns updated with new material published by World Scientific. Ziemba, along with Hausch, wrote the famous Beat the Racetrack book (1984 (which was revised into Dr Z’s Beat the Racetrack (1987), which presented their place and show betting system and the Efficiency of Racetrack Betting Markets (1994, 2008) – the so-called bible of racetrack syndicates. Their 1986 book Betting at the Racetrack extends this efficient/inefficient market approach to simple exotic bets. Ziemba is revising BATR into Exotic Betting at the Racetrack (World Scientific) which adds Pick3,4,5,6, etc and provides updates to be out in the spring 2014.