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Jul

14

What Would be the Impact of a 20% less Volatile NYSE?

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Frank Dean recently commented on how radically different the behavior of US Mutual would be from current investment behavior.  Usually, the volume of short interests, or those who sell short a stock, is only 1% of the volume of buy interests.  He fears that my ”strategy will be impossible for a large player to implement without causing substantial price movements, which will destroy returns.”  But what’s key here is that it would only reduce the returns for the most volatile and underperforming stocks in the NYSE and it would increase the returns for the most stable performers. 

I asked a fellow economist who specializes in Macroeconomics what would be the impact of a 20% reduction in the volatility of the NYSE.

Off the top of my head, a reduction in the volatility of the stock market would lead to more savings by households (assuming they are risk-averse). This would drive down expected returns somewhat, mitigating the incentive to save slightly, but the increased capital stock would spur growth, perhaps quite significantly.

The price of government debt would rise (since demand for bonds would fall due to the decreased risk of stocks), and so the equity premium would reduce.

 

So I guess the only thing to fear is fear itself?  Well…maybe not, but more sophisticated modelling of the theoretical impact of  a US Mutual on the US Economy are definitely in order.

dlw

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