The Rise in the Russian Stock Market Is it a Bubble?

Transcription

1 The Rise in the Russian Stock Market Is it a Bubble? International Symposion on Economic Reforms in Russia and Germany Academy of Management and Economics Saint Petersburg, Oct 2 nd, 2006 Prof. Dr. Peter Reichling Prof. Dr. Dr. Bodo Vogt Otto-von-Guericke-University Magdeburg 1

2 Technical Terms Bubbles Fads Rational Expectations Fundamental Value Keynes Beauty Contest 2

3 Agenda 1 Booming Russian Stock Market 2 Random Walk Down Dolgorukovskaya 3 Trading Strategies 4 Fundamental Value 5 Conclusion 3

4 1 Booming Russian Stock Market Stock market pays for inflation (money market does not) Index Value (Jan 00 = 100) Bull Market in Russia MICEX (RUR) RTS (USD) Price Index Year 4

5 1 Booming Russian Stock Market Risk Return Trade-offs 100% Russian Risk Premium Puzzle Excess Return Over MIBOR 50% 2005 RTS (USD) - MIBOR 8-30d MICEX (RUR) - MIBOR 8-30d % 15% 25% 35% Volatility 5

6 Agenda 1 Booming Russian Stock Market 2 Random Walk Down Dolgorukovskaya 3 Trading Strategies 4 Fundamental Value 5 Conclusion 6

7 2 Random Walk Down Dolgorukovskaya Price path is similar to a random walk 10% Index Return and Random Walk (Drift-adjusted with Same Volatility) RTS Return Random Return 20% RTS Return 0% -10% 10% 0% Random Return -20% % 7

8 2 Random Walk Down Dolgorukovskaya A Closer Look at % Volatility Clusters Low Volatility High Volatility 20% RTS Return 0% -10% 10% 0% Random Return -20% RTS Random Return % 8

9 2 Random Walk Down Dolgorukovskaya Fat Tails and Peakedness Frequency 30% 20% 10% Fat Tails of Index Returns RTS Return Random Return 0% -11% -9% -7% -5% -3% -1% 1% 3% 5% 7% 9% Daily Return (Jan 00 - Jun 06) 9

10 Agenda 1 Booming Russian Stock Market 2 Random Walk Down Dolgorukovskaya 3 Trading Strategies 4 Fundamental Value 5 Conclusion 10

11 3 Trading Strategies No strong autocorrelation Autocorrelation of RTS Returns 0,06 Correlation 0,04 0,02 0,00-0,02-0, Lag 11

12 3 Trading Strategies Non-strong momentum supports Markov Process Momentum Curve 1,3 Momentum (20 Days) 1,0 0,

13 3 Trading Strategies No significant mean reversion 45% Volatility w.r.t. Time Horizon Volatility (per Year) 35% 25% Basis (Days) 13

14 Agenda 1 Booming Russian Stock Market 2 Random Walk Down Dolgorukovskaya 3 Trading Strategies 4 Fundamental Value 5 Conclusion 14

15 4 Fundamental Value Real Index Values (Domestic View) Deviation from Fundamental Value 400 Index Value (Jan 00 = 100) 200 CPI-adjusted RTS (USD) Industrial Production 0 Volatility (CPI-adjusted RTS) 36 % Volatility (Industrial Production) 20 % Year 15

16 4 Fundamental Value Small Differences between USD- and RUR-based RTS 35 Stable Exchange Rate USD/RUR Exchange Rate Year 16

17 4 Fundamental Value Real Index Values (Foreign View) Deviation from Fundamental Value Index Value (Jan 00 = 100) US CPI-adjusted RTS Industrial Production Year 17

18 Agenda 1 Booming Russian Stock Market 2 Random Walk Down Dolgorukovskaya 3 Trading Strategies 4 Fundamental Value 5 Conclusion 18

19 5 Conclusion Results for Domestic Investors No strong deviation of the index price path from a random walk Only little volatility clustering and a small tendency to fat tails No momentum and no mean reversion indicate no arbitrage within the market No evidence for a bubble from the domestic investors viewpoint 19

20 5 Conclusion Results for US Dollar Investors Strong evidence for a bubble from the US dollar investors viewpoint Bubble must not burst as long as the USD-RUR exchange rate is stable No incentive for (domestic and) foreign investors to change their strategy or behavior 20

21 5 Conclusion Implications Implications for Domestic Investors Stock market pays for inflation and GDP growth (Nominal) stock market prices are highly correlated with the inflation rate for US dollar Investors If hedging is possible using a foreign (commodity) market (and the exchange rate stays stable), a profitable strategy with low risk can be pursued If the inflation rate is high, investors are better off with stocks than with bonds 21