Stock market trader inattention and major sports events

Whenever some important sports event looms, the popular press inevitably comes up with articles about the loss of productivity during said event. The quoted numbers have always been a mystery to me, as I have yet to see any serious study about this. Well, now there is one, sort of.

Michael Ehrmann and David-Jan Jansen analyze stock market activity during the 2010 FIFA World Cup in South Africa. Using minute by minute activity from 15 stock markets, they find that there are markedly fewer trades when games are on, especially when the home side plays, roughly half of normal trades. That may be because traders are less attentive to markets, but also because domestic investor are less on the ball, so to say. The effect is amplified by goals.

There are other times when attention is decreasing, such as lunchtime. The decrease in trades may have some welfare implications, as some arbitrage opportunities are not taken. However, it appears to be more serious that there is a change in patterns for prices during those football matches, unlike lunch time. Indeed, the cross-section of returns across firms is lower, and the correlation of domestic prices with world prices drops by 20% when a game is on. I cannot quite quantify how much of a welfare consequence this is, I would need a model for that, but I guess this is not negligible. NB: these effects are also present on US stock markets, despite the marginal interest in soccer.

The cost of US fiscal imbalance

It is obvious that the US government is currently spend more than normal. It is also obvious that the current level of deficits is not sustainable. But just how bad would it be if the current fiscal imbalance would be maintained? We have models that can calculate welfare costs of such policies, but because the current policy is not sustainable, it is impossible to solve them and get a number. The only solution we can have is to look at what it would cost to delay going back to a sustainable path.

Bertrand Gruss and José Torres do with a heterogeneous agent DSGE model. According to their results, postponing the return to a sustainable path (defined by a pre-crisis debt/GDP ratio) by two decades leads to a permanent loss of output of 17% and a consumption equivalence loss of 7%. That is gigantic. The losses come mostly from the long run, thus it is all about whether the short-term gain is worth the long-term cost. To understand this result, it is thus important to understand the model.

This is a model of occupational choice (entrepreneur/worker), with idiosyncratic employment risk, no borrowing at the individual level, distortionary taxation and lump sum government transfers. There is another public good, wasteful government spending. A major role of the government is thus to insure agents against shocks, which they can also self-insure with accumulating Treasury bonds. Everybody knows exactly the path of policy. There is no aggregate shock except for fiscal policy. To summarize, the only beneficial thing the government does is insure people against shocks, to some extend. Otherwise, the government is harmful: it takes away goods to destroy them and distorts household choices in adverse ways to finance this. It is then no surprise that almost any government spending is harmful, no matter what the circumstances. In particular, the fact that there could be, for example, a temporarily very high unemployment rate that justifies larger public expenses is ignored here.

In other words, the model ignores the potential benefits of current deficits. Not very useful.

Are poor American voters disenfranchised to improve long term growth?

Now that the election process is in full gear in the United States, it is of interest to reflect on its peculiarities. Of course, the process is convoluted, money and marketing are the dominating factors, and catering to outrageous viewpoints brings points. But one aspect that distinguish US politics from other countries is the surprisingly low voter participation, especially among the poor.

Ranjan Sreedharan sees this as an advantage that the United States has over other countries. As the rich can rule, they put forward policies that can enrich them and then rein in welfare. The outcome are policies that favor long term development. And why do so few poor people vote? For one, many are outright excluded from voting: no fixed address, past felon. Also, voting days are not holidays and the poor, who typically hold jobs with hourly pay, find it difficult or costly to vote.

While I may not like the rhetoric of the paper, the author has a point. The Unites States has a long history of disenfranchising the poor, right from its first days where only white male land holders could vote. Slavery and segregation and gerrymandering have provided additional opportunities for rigging the relevance of votes. Corporations have always had a strong influence in the nation's capitols, with courts increasingly allowing legal bribing of elected officials. Republicans have been the leaders in disenfranchising (previous post on this), yet Democrats have not done much to prevent it. In the end, the poor voter does not matter anymore.

About the cult of statistical significance

A large part of economic research is devoted to empirical studies, and the name of the game there is statistical significance. Once you get an interesting effect being significant, it becomes a study worth writing, and possibly publishing. If you cannot find an effect, then try another specification until it is statistically significant. Nobody will know how much you tried, the one that is significant is all that counts. If one cannot find a statistically significant result, a null result, publishing it becomes really difficult. This game of finding statistical significance is unfortunately misleading, as this hunt dominates theory or even common sense when choosing specifications, and often completely neglects economic significance. What if a statistically significant results is tiny even though it is precise? And what about a large effect that is statistically weak?

I am certainly guilty as well of confusing statistical and economic significance, including on this blog. Indeed, it is often difficult even understanding what the size of the effect is, because the specification does not allow one to relate the effect to something tangible.

The reason I am mentioning all this is that I came across a recent paper by Walter Krämer, who tries to revise the argument made by Stephen Ziliak and Deirdre McCloskey that any statistical significance is useless. While he seems to concur on the general abuse of statistical significance, he claims it can still be useful under some circumstances. And these are when you do exploratory testing, as it allows to discard unviable hypotheses or specifications. But one has to remember, even though this is elementary statistics yet so often ignored, one can only reject or not reject, but never accept a hypothesis. So even the exploratory testing has its limitations.

Why encourage more students to choose scientific careers?

Everyone is calling for more students to go for diplomas in the sciences, with the idea that why need research and development to promote growth. Everyone is also lamenting that today's students are not prepared for such careers because they are lacking in mathematics skills. So it becomes a real struggle to get students interested in those fields, especially women. It is one thing to get students to take one such studies, it is a different struggle to keep them there. For one, it is a tough field to study and many abandon and go for easier topics. Those who end up graduating in sciences must be seriously dedicated to become scientists.

Not quite. Surveying British graduates, Arnaud Chevalier finds that half works outside of scientific fields within three years. Worse, having a science degree bring no wage advantage outside of sciences. In other words, they endured and persevered through science studies for no visible advantage over those who when through business, political sciences or psychology. This raises the question why everyone is pushing so hard to channel students to the science fields. There does not seem to be a market for them after graduation and/or many to do want to work in the scientific field anyway, as satisfaction studies seem to be revealing, including this one.

How to regulate prostitution

While being the oldest profession, prostitution has always been a thorn in the eyes of authorities. The market clearly says it satisfies a demand, but it goes against some moral code. Banning it has never been an efficient solution, in particular because it leads to crime and adverse health outcomes. A better way may be to regulate it in some fashion, but how?

Giovanni Immordino and Francesco Flaviano Russo may have found how, and it involves the prohibition of buying sex, but no limit on selling it. Legalizing selling sex is interesting because it allows taxing it and makes it possible to reduce STD infection rates by applying health policies. What is striking it that the policy for prostitution is the exact opposite of the policy applies in some countries for illegal drugs: decriminalizing consumption and sometimes buying but criminalizing the sale. From what I could see, this seemed to work relatively well. While the tax aspect is the same as for prostitution, the health one is different. By making drug consumption legal, one has better access to consumer to apply health policies, while sellers are of little use in this respect (except when they cut the drug with more harmful material).

How thieving elites can prevent rebellions

The Arab Spring and to a lesser extend the Occupy movement have renewed the interest in political or economic elites and how they manage to stay in power (or not). An extensive literature has already highlighted that elites need to give just enough to the plebs to prevent a rebellion, which can be quite low especially if you have a strong policy or military that is widely represented in the general population yet enjoys significant privileges. But the literature has always concentrated on a model of the elite against the people. What if there could be a potential elite that could try to overthrow the incumbent one?

Bernardo Guimaraes and Kevin Sheedy look at such an eventuality. It should not surprise anyone that an incumbent elite will design institutions that share power to some degree. More interesting is the result that institutions need to guarantee property, and elites need to show restraint in their expropriations. And that is especially good, as plenty of empirical evidence shows that better property rights lead to better aggregate outcomes. Yet, the existence of the elite still leads to too little power sharing and property rights, but more than if others could not overthrow it. According to this theory, Arab leaders went to far in their kleptomania and thereby encouraged rebellions. Let us hope their successors do better.