A little finance never hurts and two articles on equities caught my attention. The first article comes from Bloomberg, where they cite some research by Wharton Professor Jeremy Siegel. The professor's research shows that for the first time since 1861, the thirty year return on bonds exceeds that of equity. You will remember from introductory finance class that equity returns should exceed bond returns given the higher risk in being an equityholder. A few possible explanations for this rare phenomena:
- Equities are undervalued
- We are in some sort of "war" market akin to the U.S. Civil War
- Demand for bonds is disproportionately high, driving up prices and returns, in response to various global uncertainties (the other side of point 1.)
The other article cites some high level mathematical analysis from Cornell Professor Robert Jarrow and Columbia Professor Phillip Protter to identify bubbles, or overvaluation, in different asset classes including equities. For example, the methodology correctly identified the dot.com era and the price runup after the LinkedIn IPO as bubbles. Also interesting, the methodology shows that current gold prices are not a bubble. Of course trading on such math should correct for the bubble in a given stock. Question I have is whether the professors have applied their methodology to whole asset classes such as bonds or equities to see if they give us any insight into the current existence of bubbles. If bonds showed "bubble" behavior, that might explain Siegel's findings.
I found at least one of these articles on FinanceProfessor.com.
