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Volatility Measures for the Dow Jones Indusrtial Average, 1946-96 Daily volatility (percent) 2.5 Panel A: Standard Deviation and Median Absolute Percentage Change 2.0

Standard deviation

1.5

October 1996, Laster & Cole

1.0

0.5 Median absolute percentage change 0 1946

50

55

60

65

70

75

80

85

90

95 96

Source: Current Issues In Economics & Finance – Volume 2 Number 11, October 1996, Laster & Cole

“IF THE US IS INDEED UNDERGOING A SECULAR CHANGE IN ASSET ALLOCATION STRATEGIES, THIS WILL LIKELY LEAD TO A LASTING CHANGE IN ASSET PRICES.” Thus, while many think

amounts of their portfolios to equities,

market will follow suit as investors

of a 60/40 equity to bond portfolio as

they pushed equity dividend yields to

have, for the 25th week in a row,

“balanced”, it is indeed exposed to

levels below that of both the 10 year

withdrawn funds from equity mutual

a disproportionate amount of equity

Treasury and A A A corporate bonds.

funds on a net basis, according to ICI.

risk. Therefore, a secular increase in

One can interpret this as a richening

If the US is indeed undergoing

volatility would only further lead to

of equities in relationship to bonds.

a secular change in asset allocation

even greater portfolio f luctuations due

Academics have found that dividend

strategies, this will likely lead to

to equity allocation and keeping the

yields are positively correlated with

a lasting change in asset prices.

equity premium constant, to a reduced

stock returns

decrease in demand for equities, while

equity bias in portfolios.

dividend yields could imply lower future

keeping

can

only

stock returns. Buckland defines this

result in a decrease in prices.

The

volatility.

Regarding returns,

expected

Buckland

also

future

and therefore, low

supply

constant,

A

makes

an

phenomenon as the “reverse yield gap”

implications for such a scenario, were

before

the

and as an indicator of the prevalence

it to come true, would span all sectors

start of the cult of equities in the

of the “cult of equities.”

of American life, from pension fund

1950s, the spreads between US equity

Buckland observes that the reverse

holdings

dividend yields and both the Moody’s

yield gap has disappeared, meaning

to the way individuals manage their

US Corp Bond Yield (A A A) and US 10

that investors’ irrational belief in the

retirement account. It seems that after

Year Treasury yield were both positive.

equity markets is already decreasing.

claiming major investment banks as

This meant that equities yielded more

In the US however, the SP 500 yielded

victims, the Great Recession rode on

than both corporate A A A rated bonds

1.85% while the US 10 Year Treasury

and buried the cult of equities. iBR

and 10 Year US government bond

As

bond yielded 2.66% (at time of print).

ever-increasing

Nonetheless, it is likely that the US

interesting

investors

observation:

allocated

In Europe,

FA L L 2 0 1 0

111210 hq.indd 9

to

executive

compensation

I N T E R N AT I O N A L B U S I N E S S R E V I E W

9

11/27/2010 3:13:02 PM

Profile for Daniel Hellwig

International Business Review - Fall 2015  

Fall edition of the IBR magazine at the Wharton School.

International Business Review - Fall 2015  

Fall edition of the IBR magazine at the Wharton School.

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