Stock price synchronicity under fat-tailed stock returns

This paper addresses a subtle but important assumption in the broad literature on stock price synchronicity, that is, whether the standard errors used in hypothesis testing are well defined. Findings of relationships between synchronicity and explanatory variables are often unstable or reverse their sign in subsequent research using a different time period. This paper offers a simple explanation for these contradictory findings. Research into stock price synchronicity has a kurtosis problem. As a consequence, results in research using R-squared as a dependent variable are suspect. Estimation of stock price synchronicity typically requires the kurtosis of underlying firm-specific returns to be finite, but a large proportion of stocks is likely to have infinite or undefined kurtosis, which invalidates estimates of synchronicity for these stocks. Therefore, stock price synchronicity cannot be known in general and may be estimated only if finiteness of kurtosis can be established.

Fat tails in private equity fund returns: The smooth double Pareto distribution

A new smooth double Pareto distribution can explain the stationary distribution of private equity funds’ valuation multiples. Fat tails are particularly pronounced in venture capital funds and suggest returns with infinite variance over the lifetime of the fund. The smooth double Pareto distribution has wide applicability to growth processes with a random initial value.

Estimating the value of an inflation-capped pension from market data

The University Superannuation Scheme (USS) is planning to introduce a cap of 2.5% for inflation adjustments to its members’ accrued pensions. The effect of this cap is to increase new accrued pension benefits in line with official consumer prices (CPI) but only up to 2.5% per year. If inflation runs hotter than 2.5%, that year’s …

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Inflating away your pension — 2021 update

This is an update to my earlier estimate of the effects of an inflation cap on USS pensions. I have added the two most recent years of CPI data and extended the time series of inflation by added earlier years from 1971, the year of the Nixon shock and the de-facto end of the Bretton …

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Tax simplification or entrepreneurship tax? Founders vs investors in the OTS report

The recent report by the Office of Tax Simplification (OTS)[i] recommends a range of policy adjustments to simplify the administration of the capital gains tax (CGT) and remove biases and distortions of behaviours.[ii] One of the recommendations suggests to align CGT and income tax (recommendation 1), in particular for owner-managers who may have a choice …

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