Finance: Past, Present and Future

This Vox article explains why I'm not on Facebook.

Chris Colvin and Bernardo Batiz-Lazo had the wonderful idea of having final-year students write reviews of working papers for NEP-HIS Blog. The first student  post  is by Elizabeth Meagher (undergraduate at Bangor University) - she reviews a paper entitled West versus East: Early Globalization and the Great Divergence .

Iain Mansfield, a member of the British diplomatic service in Manila, was the winner of the IEA's Brexit prize . His prize-winning essay, which can be accessed here , argues that Britain's exit from the EU should be used as an opportunity to embrace free-trade agreements with other major trading nations. Guardian coverage is here  and a Daily Telegraph story on how Mansfield was silenced by the Foreign Office can be found here . Of course, the great irony was that the prize money was paid in euros!

In their new working paper, Peter Koudijs and Hans-Joachim Voth, using unique archival data from C18th Amsterdam, show that personal experience can affect individual risk-taking and aggregate leverage. You can access their paper here , read VOX coverage of their article here , and Economist coverage here .  Here is the paper's abstract: What determines risk-bearing capacity and the amount of leverage in financial markets? Using unique archival data on collateralized lending, we show that personal experience can affect individual risk-taking and aggregate leverage. When an investor syndicate speculating in Amsterdam in 1772 went bankrupt, many lenders were exposed. In the end, none of them actually lost money. Nonetheless, only those at risk of losing money changed their behavior markedly – they lent with much higher haircuts. The rest continued as before. The differential change is remarkable since the distress was public knowledge. Overall leverage in the Amsterdam st...

QUCEH is today hosting the 2014 European Association for Banking and Financial History New Scholars Workshop - the line-up is here and the papers are available here . The workshop is for PhD students working in finance and financial history. I'm particularly looking forward to a paper by Queen's Will Quinn on what moved the nineteenth-century stock-market and Geraldine David's paper on art as a safe-haven investment during the First World War.

Click here to read a recent Bank of England Quarterly Bulletin article on how commercial banks create money in the modern economy. A video interview with one of the report's authors is below and an excellent critique of the article's discussion of QE can be found at Uneasy Money .

This week's Economist has a special essay on financial crises, which argues that financial systems are not just prone to crises, but that they are shaped by them. The big punchline in the essay is that government plays too large a role in financial systems, which actually makes them more unstable. In Banking in Crisis , my forthcoming book, I argue that this is only a part of the explanation as to why banking systems are prone to crises.

How can we know if a stock-market is over or undervalued? In the Authers' Note below, Andrew Smithers explains the various ways in which we can assess whether a market is over or undervalued. He favours Tobin's Q and CAPE, both of which suggest that the market is 70% overvalued at the minute!

A new working paper series has just been set up by Queen's University Centre for Economic History (QUCEH) - click here for details.  The first paper in the series looks at corporate ownership and control in Victorian Britain. I and my co-authors find that corporate ownership was much more dispersed in the Victorian era than we previously thought. This is a bit of a puzzle for the law and finance hypothesis because investor protection law was so poor in this era. The second paper in the series is by Arcangelo Dimico . Arcangelo looks at the Scramble for Africa and the partition of ethnic groups. He finds that partitioning did not in and of itself matter for development in Africa. However, it does matter when the partitioned ethnic groups are relatively small.

Queen's University Management School is now offering its MSc Finance and MSc Risk Management programmes on a part-time basis. The various courses on the degree programmes will be delivered in the evening and students will be taught in our Bloomberg Trading Room . Further information is available here .     

Every year my Money and Banking class write blogs as part of their coursework. There was a tie this year for the top spot between Philip Ellis and Andrew Copeland. Philip's blog was a piece of analysis looking at the informal market in Vietnamese Dong. Andrew's blog  looks at creative destruction in the context of bank failures and bailouts. In the runner-up spot was Claire Doran - her blog looked at the role of women in banking.    

Harvard Business School has just appointed former Manchester United manager Sir Alex Ferguson to a long-term teaching position - click here for story.    

Tim Harford has an interesting post on financial rules of thumb or heuristics such as (a) the percentage of your portfolio not invested in stocks should be set equal to your age and (b) if you are distributing funds amongst asset classes just distribute them equally. One of the leading experts in heuristics is Gerd Gigerenzer . Below is a video where he talks about heuristics and their use in economics. 

Fabio Braggion and Steven Ongena have a post at Vox which looks at corporate leverage and firm-bank relationships in the UK from 1895 to 2009. They document an increase in corporate leverage from c.1970 and a simultaneous increase in firms having multiple relationships with banks. Braggion and Ongena argue that the increase in leverage can be traced to the deregulation of the UK banking system in the early 1970s and the breaking up of the banking cartel. Their working paper is available here .

A National Audit Office report released today has criticized the UK government for selling shares in Royal Mail too cheaply. Some estimates suggest that the UK taxpayer could have obtained £1 billion more in the privatisation.  The underpricing of Initial Public Offerings (IPO) is a well-known phenomenon in financial economics, with the average IPO making a first-day return of 10% (see Jay Ritter's homepage ). However, the first-day return on the Royal Mail IPO was 38% - the company was sold too cheaply by the government. The question is: why did they do this? Was it simply incompetence? Were the investment banks behind the issue lining their pockets and those of their clients?