why the bubble burst

Discussion in 'Trading' started by vladiator, Nov 26, 2002.

  1. Just came across this paper:
    ***********************************************
    "A Century of Stock Market Liquidity and Trading Costs"

    BY: CHARLES M. JONES
    Columbia Business School

    ABSTRACT:
    I assemble an annual time series of bid-ask spreads on Dow Jones
    stocks from 1900-2000, along with an annual estimate of the
    weighted-average commission rate for trading NYSE stocks since
    1925. Spreads are cyclical, especially during periods of market
    turmoil. The sum of half-spreads and one-way commissions,
    multiplied by annual turnover, is an estimate of the annual
    proportional cost of aggregate equity trading. This cost drives
    a wedge between aggregate gross equity returns and net equity
    returns. This wedge can account for only a small part of the
    observed equity premium, but all else equal the gross equity
    premium is perhaps 1% lower today than it was early in the
    1900's. Finally, I present evidence that the transaction cost
    measures that also proxy for liquidity - spreads and turnover -
    predict stock returns one year or more ahead. High spreads
    predict high stock returns; high turnover predicts low stock
    returns. These liquidity variables dominate traditional
    predictor variables, such as the dividend yield. The evidence
    suggests that time-series variation in aggregate liquidity is an
    important determinant of conditional expected stock market
    returns.
    *************************************
    So, the bubble burst b/c of DECIMALIZATION!!! :D Just kidding....
    Slow day...
     
  2. Is this an example of the caveat about correlation not establishing causation?
     
  3. For just one day...I would like the "powers that be" to reload the systems with the prices from March of 2000.. I want to see that lunacy once more because it seems like it was so so long ago!

    I almost don't remeber it. Was it a dream?

    Bring back GLW at 325, just for a day!! :)
     
  4. Could be, I haven't had the time to read the whole article.