We show that the premia ills of finance, asset mispricing and short-termism, have a common cause. The problems stem from the commonly adopted, and seemingly prudent practice whereby Giant pension and other institutional funds benchmark short-term performance of their delegated asset managers to market cap indexes or peer group performance. This forces the managers to chase rising prices irrespective of fundamental value, which in turn leads to high volatility of over-valued assets, momentum trading, and over-valuation of the aggregate market. Excessive focus on short-term asset prices obliges corporates to follow suit to the detriment of capital investment and long term growth. The solution will benefit social and investor wealth.
Paul Woolley’s career has spanned the private sector, academia and policy-oriented institutions. He gained his BA and D Phil in Economics from the University of York (UK) and was a Lecturer there in the early 1970’s. Following this, he had a long spell at the International Monetary Fund in Washington, latterly heading the division managing the Fund’s investment and borrowing activities. He returned to the UK as a Director of Merchant Bank, Baring Brothers. He then founded, and ran for 20 years, the UK arm of GMO, the global fund management business based in Boston, US. He returned to academic life in 2007, funding the Paul Woolley Centre for the study of Capital Market Dysfunctionality at the London School of Economics, where he is a full-time member of the research team. He is a Senior Fellow at the LSE. He has published widely on asset management and related fields in both academic and policy journals throughout his career
Dimitri Vayanos is Professor of Finance at the London School of Economics, where he also directs the Financial Markets Group and the Paul Woolley Centre for the Study of Capital Market Dysfunctionality. He is a Fellow of the British Academy, a former Director and Managing Editor of the Review of Economic Studies, a Research Fellow at CEPR and a former Director of its Financial Economics program, a Research Associate at NBER, and a former Director of the American Finance Association. His research, published in leading economics and finance journals, such as Econometrica, the Journal of Finance, the Journal of Financial Economics, the Journal of Political Economy, the Quarterly Journal of Economics, the Review of Economic Studies, and the Review of Financial Studies, focuses on financial markets, and especially on what drives market liquidity, why asset prices can differ from assets’ fundamental values, why bubbles and crises can occur, and what are appropriate regulatory and policy responses. He is a co-editor of the book “Beyond Austerity: Reforming the Greek Economy”, a member of the Pissarides Committee, tasked by the Greek government to develop a growth plan for Greece, and co-author of the European Safe Bonds (ESBies) proposal, and a Director of WWF Greece.
Wednesday, 10 May 2023
11:00 - 11:45 BST
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