Copyright (c) 2010 All rights reserved. http://works.bepress.com/richard_serlin Recent documents in Richard H. Serlin en-us Sun, 19 Sep 2010 15:55:29 PDT 3600 http://works.bepress.com/richard_serlin/18 http://works.bepress.com/richard_serlin/18 Wed, 01 Apr 2009 16:59:52 PDT All of the explanations for the equity premium puzzle I have seen in the literature are based on the demand side; trying to find utility functions for a representative investor and ex-ante probability distributions for returns that would explain investors demanding such high average returns for stocks relative to bonds. I suggest a supply side explanation: The long run supply curve for corporate stock may simply be extremely long and flat, and consistently about 5 ½ percentage points in return higher than the premium bonds supply curve, even at stock quantities as high as the entire national savings rate. Why? I posit that stock might simply allow a firm to create more wealth with an investment dollar than bonds because of the flexibility of stock. Firms are able to invest in high return long run projects when they raise money with stock that they sometimes cannot when money is raised from bonds, due to the short run constraints of having to make interest payments and satisfy bond covenants. Richard H. Serlin Investments http://works.bepress.com/richard_serlin/17 http://works.bepress.com/richard_serlin/17 Wed, 15 Oct 2008 22:00:46 PDT This is the current version (3.1) of the personal finance course I am writing for the upcoming University of Arizona Free Personal Finance website. I will probably be making frequent modifications to polish and improve it in 2009. Richard H. Serlin Personal Finance http://works.bepress.com/richard_serlin/16 http://works.bepress.com/richard_serlin/16 Wed, 09 Jul 2008 14:10:33 PDT In the long run, and overall, capital gains tax cuts, do in fact cost the government a great deal of revenue, even though in the short run total revenue from capital gains taxes may go up. The first reason for this is that, unlike the income and payroll taxes working Americans pay, investors get to decide when they pay capital gains taxes. If Paris Hilton owns $100 million in Hilton stock, and it goes up to $120 million, she has a $20 million capital gain, but she will not pay taxes on this gain until she sells the stock, which may be many years later. When there is a cut in the capital gains tax rate, there is an incentive to sell the stock then, and get the lower tax rate before a new administration raises it again. Thus, when the capital gains tax is cut, there is a rush of investors selling stocks to pay their capital gains taxes now, when the rate is law, rather than later when the rate may be raised back up. Capital gains tax revenue to the government thus may go up now, but it will go down later, and it will go down overall. In addition, when capital gains taxes are cut, there is an incentive to pay CEOs and top managers more in stock and options and less in regular dollar income, so as to utilize the lower tax rate. This would raise capital gains tax revenue to the government, but lower income tax revenue by a greater amount. Finally, capital gains tax cuts tend to occur during periods of Republican control. These periods have been shown to result in drastic increases in income inequality – today there is more income inequality than at any time since the Gilded Age. With so much income shifted towards the wealthiest Americans, capital gains can increase, as they own the vast majority of stock, but at the same time these policies have resulted in stagnant or declining real wages for the rest of Americans, lowering income tax revenue, and contributing to the record budget deficits we have seen in conservative administrations. Richard H. Serlin Other Works http://works.bepress.com/richard_serlin/15 http://works.bepress.com/richard_serlin/15 Tue, 06 May 2008 12:20:40 PDT Important information on student loans today, for example, did you know that fully private student loans, with very rare exception, can never be dismissed in bankruptcy, even though with interest rates that can be in the 20s they can easily spiral to the point where they can never be paid? Important related and tangential topics include defending yourself against creditors, taxes, 401ks, and the appropriate roles of government. Richard H. Serlin Personal Finance http://works.bepress.com/richard_serlin/14 http://works.bepress.com/richard_serlin/14 Mon, 21 Apr 2008 17:59:17 PDT The largest roots of today's epidemic of financial distress are the great increase in economic risk over the last generation and the great increase in the percentage of individual and family budgets spent on large fixed expenses, what Harvard bankruptcy expert Elizabeth Warren calls "Must-Haves". This is primarily due to a housing bidding war that has taken place since 1970. I discuss the key reasons for this destructive bidding war, one of which is the great relaxation of legal interest rate restrictions. This has allowed families to borrow far greater amounts relative to their income than they could have a generation ago. I propose restoring interest rate ceilings as a way to decrease the money families can bring to the bidding war for homes in the most desirable neighborhoods. With all families restricted in the same way, none would lose their relative position, but all would pay much less for housing, helping greatly to restore security to family finances. Richard H. Serlin Real Estate http://works.bepress.com/richard_serlin/13 http://works.bepress.com/richard_serlin/13 Sun, 24 Feb 2008 20:18:19 PST This is an article with an included assignment that I give to my personal finance 1 students. The first 11 pages discuss in-depth the power of compound interest (or return), how even moderate savings can grow very large over the long run. Included is a great deal of explanation of the intuition for this. The rest of the article gives instructions for the assignment, with related discussion of careers, income, and the use of an easy to use Excel future wealth calculator I designed (available at: http://works.bepress.com/richard_serlin/12/ ). Before reading this article my students will have read about three quarters of Harvard Professor Elizabeth Warren's book, "All Your Worth: The Ultimate Lifetime Money Plan" (with AmeliaWarren Tyagi), so the article includes some terms and concepts from that book. However, those who have not read it should still be able to understand the vast majority of the article fine. I do, though, strongly recommend this inexpensive paperback to everyone. I think it is by far the best personal finance book on the market. Richard H. Serlin Personal Finance http://works.bepress.com/richard_serlin/12 http://works.bepress.com/richard_serlin/12 Sun, 24 Feb 2008 19:30:44 PST This is a calculator that I designed for my personal finance 1 students. It calculates how much a lump sum of savings will grow to after a number of years, how much saving an amount each month will grow to, and how much wealth you will accumulate if you steadily increase your monthly savings amount over the years. Nice tables are generated. The calculator will not operate unless you have Microsoft Excel or OpenOffice installed on your computer. OpenOffice is actually an outstanding office program not much different from Microsoft Office, but it is a free open source program. You can download it at: http://www.openoffice.org/ . Richard H. Serlin Personal Finance http://works.bepress.com/richard_serlin/11 http://works.bepress.com/richard_serlin/11 Sat, 23 Feb 2008 20:32:03 PST This article concludes my personal finance 1 course by summarizing what I think are for most people the three most important things to know in personal finance today: 1) Professor Warren's Balanced Money Plan, 2) The key basics of real estate, and 3) The importance of diversification (in many areas, not just stock investing). I assign this article only after students have read cover-to-cover Harvard Professor Warren's book, "All Your Worth: The Ultimate Lifetime Money Plan" (with Amelia Warren Tyagi). If you haven't read this book, you can still get a great deal out of the article, but there are some terms and concepts you may not be familiar with. I do, though, strongly recommend this inexpensive paperback to everyone. I think it is by far the best personal finance book on the market. Richard H. Serlin Personal Finance http://works.bepress.com/richard_serlin/10 http://works.bepress.com/richard_serlin/10 Sat, 23 Feb 2008 19:34:17 PST This is a fictional, but very plausible and realistic story, of three young couples who started out identically after graduating college at age 22. All three couples were modestly paid social workers, with equivalent starting assets – just two ten year old Honda Civics. However, they followed very different personal finance strategies, and made very different decisions. The first couple followed the advice of Professors Serlin and Warren beautifully and had a very happy and prosperous ten years, accumulating over $200,000 in net worth. The second couple made many of the mistakes typical today and had great stress and struggle, accumulating over ten hard years just $7,500 in net worth. The third couple made most of the typical mistakes we see today and after 10 years ended up bankrupt and divorced. I assign this story in my personal finance 1 course only after students have read cover-to-cover Harvard Professor Warren's book, "All Your Worth: The Ultimate Lifetime Money Plan" (with Amelia Warren Tyagi). If you haven't read this book, you can still get a great deal out of the article, but there are some terms and concepts you may not be familiar with. I do, though, strongly recommend this inexpensive paperback to everyone. I think it is by far the best personal finance book on the market. Richard H. Serlin Personal Finance http://works.bepress.com/richard_serlin/9 http://works.bepress.com/richard_serlin/9 Fri, 22 Feb 2008 18:38:13 PST This is an article I assign to my personal finance 1 students about basic personal investment strategy. It covers all key aspects, and is written for laypeople. However, I assign it only after students have read cover-to-cover Harvard Professor Elizabeth Warren's book, "All Your Worth: The Ultimate Lifetime Money Plan" (with Amelia Warren Tyagi). If you haven't read this book, you can still get a great deal out of the article, but there are some terms and concepts you may not be familiar with. I do, though, strongly recommend this inexpensive paperback to everyone. I think it is by far the best personal finance book on the market. Richard H. Serlin Personal Finance http://works.bepress.com/richard_serlin/8 http://works.bepress.com/richard_serlin/8 Fri, 22 Feb 2008 17:46:13 PST This is the Spring 2008 syllabus for my basic and intermediate online personal finance course, INDV 102. It is one of the largest university personal finance courses in the country with over 500 students per year and has received extraordinary reviews. Richard H. Serlin Personal Finance http://works.bepress.com/richard_serlin/7 http://works.bepress.com/richard_serlin/7 Fri, 22 Feb 2008 17:20:37 PST The most common test of uncovered interest parity, performed in at least 75 studies, is based on a specification error and is biased. I suggest an alternative test which is based on the true specification. Richard H. Serlin Investments -- Highly Mathematical http://works.bepress.com/richard_serlin/6 http://works.bepress.com/richard_serlin/6 Thu, 21 Feb 2008 20:02:54 PST I propose the use of Bayesian and Bootstraping Techniques to analyze the efficiency and nearness to a Random Walk of Stock Returns. These tests have greater accuracy than the traditional asymptotic point hypothesis tests performed in the literature, and by providing densities rather than points yield much richer information that is much less likely to mislead. Richard H. Serlin Investments -- Highly Mathematical http://works.bepress.com/richard_serlin/5 http://works.bepress.com/richard_serlin/5 Thu, 21 Feb 2008 19:19:43 PST I develop a model of the real estate market with rational informed individuals who are either liquid or illiquid. The model shows bounds on the price-rent ratio and dispels some common real estate myths. Suggestions are given for empirical tests of the models implications. Richard H. Serlin Real Estate http://works.bepress.com/richard_serlin/4 http://works.bepress.com/richard_serlin/4 Mon, 18 Feb 2008 16:52:05 PST I discuss in-depth modern techniques for the estimation of Jump Diffusion models with suggestions for improvements. There is a heavy focus on intuition. I also point out examples of the use of improper techniques (biased and inconsistent) in the top tier finance literature. Richard H. Serlin Investments -- Highly Mathematical http://works.bepress.com/richard_serlin/3 http://works.bepress.com/richard_serlin/3 Sun, 17 Feb 2008 19:23:36 PST Richard Serlin questions whether returns would really be abnormally high for privatized social security accounts. Richard H. Serlin Investments http://works.bepress.com/richard_serlin/2 http://works.bepress.com/richard_serlin/2 Tue, 05 Feb 2008 21:14:57 PST All of the explanations for the equity premium puzzle I have seen in the literature are based on the demand side; trying to find utility functions for a representative investor, and ex-ante probability distributions for returns, that would explain investors demanding such high average returns for stocks relative to bonds. I suggest a supply side explanation: The long run supply curve for corporate stock may simply be extremely long and flat, and consistently about 5 ½ percentage points in return higher than the premium bonds supply curve, even at stock quantities as high as the entire national savings rate. Why? I posit that stock might simply allow a firm to create more wealth with an investment dollar than bonds, and this is because of the flexibility of stock. Firms are able to invest in high return long run projects when they raise money with stock that they sometimes cannot when money is raised from bonds due to the short run constraints of having to make interest payments and satisfy bond covenants. In addition, firm managers may just stubbornly refuse to use more than a small historically stable proportion of debt financing even with a large equity premium, as debt increases their personal risk. The article also discusses other aspects regarding the risk and return of potential privatized social security stock accounts. Richard H. Serlin Investments http://works.bepress.com/richard_serlin/1 http://works.bepress.com/richard_serlin/1 Thu, 14 Dec 2006 19:47:11 PST J. Bradford DeLong and Konstantin Magin's July, 2006 article gave several good reasons why "informed and aggressive" investors will not necessarily push prices all of the way to their fundamental levels, but missing was the fact that there may not be enough such investors given that none will rationally choose to be too aggressive and have too undiversified a portfolio, according to Richard Serlin. Richard H. Serlin Investments