macrocephalopod on Twitter: "Here’s an easy way to see where you’re wrong. If a dividend paying stock is priced so that it’s expected return was the rfr, then only thing that affects the price is changes in the rfr or changes in the expected future divs. But stocks are *way* more volatile than that.… https://t.co/rfw5jEufs0"

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Adam Goldstein‏ @goldstein_aa 26 May 2021

Replying to @MarkGutman9 @M1tchRosenthal and

What you seem to be missing is that the current spot price of the stock drives the forward price, not the other way around. Current spot is priced for a risk premium relative to risk-free rate, forward gets that same risk premium + risk-free rate

1 reply 0 retweets 1 like

Mark Gutman‏ @MarkGutman9 26 May 2021

Replying to @goldstein_aa @M1tchRosenthal and

It’s actually the opposite. Fwd moves spot.

2 replies 0 retweets 0 likes

Adam Goldstein‏ @goldstein_aa 26 May 2021

Replying to @MarkGutman9 @M1tchRosenthal and

I see, so let me get this straight. You believe the mere presence of a liquid forward market for any risky financial asset causes all such assets to be priced for risk-free rate of return? Guess that insight escaped all asset pricing theorists for the past 70 years or so?

1 reply 0 retweets 0 likes

Mark Gutman‏ @MarkGutman9 27 May 2021

Replying to @goldstein_aa @M1tchRosenthal and

Yes and no. And asset pricing theorists are not wrong. But there is a difference between expected return at one point in time (given a state of the word) vs expected return over time (with an evolving state of the world). Liquid fwds or not, doesn’t make a difference

2 replies 0 retweets 0 likes

Adam Goldstein‏ @goldstein_aa 27 May 2021

Replying to @MarkGutman9 @M1tchRosenthal and

It think you're trying to resolve a paradox with this "expected return over time" vs. "expected return at one point in time" logic, but you're focusing on the wrong thing. Here's the key: expected future price of a financial forward contract is *not* its current market price.

2 replies 0 retweets 0 likes

Adam Goldstein‏ @goldstein_aa 27 May 2021

Replying to @goldstein_aa @MarkGutman9 and

The price of a financial futures contract has no predictive value - it's simply the spot price + a risk-free premium. For risky assets, both the spot and futures contract price contain the same embedded risk premium, whose size depends on how risky the asset is.

1 reply 0 retweets 1 like

Mark Gutman‏ @MarkGutman9 27 May 2021

Replying to @goldstein_aa @M1tchRosenthal and

It is correct that it’s not predictive. But it’s what the market expects in the aggregate.

1 reply 0 retweets 1 like

Adam Goldstein‏ @goldstein_aa 27 May 2021

Replying to @MarkGutman9 @M1tchRosenthal and

That is an incorrect statement. Here is what 70 years of asset pricing theory says: risky assets are priced such that expected return = risk-free rate + risk premium. Cash+carry arbitrage theory says futures contract is priced at spot + risk-free rate - cost of carry. Therefore,

1 reply 0 retweets 1 like

Adam Goldstein‏ @goldstein_aa 27 May 2021

Replying to @goldstein_aa @MarkGutman9 and

futures price has same embedded risk premium as spot price for financial futures. My statements are all backed by 70 years of asset pricing theory. If you want to dispute them, you need to provide evidence, you can't just make statements about how you think markets work.

1 reply 0 retweets 0 likes

Mark Gutman‏ @MarkGutman9 27 May 2021

Replying to @goldstein_aa @M1tchRosenthal and

I suspect that I know how markets work better than you think. And I’m trying to get people to understand them better by giving them some food for thought.

2 replies 0 retweets 3 likes

macrocephalopod‏ @macrocephalopod 28 May 2021

Replying to @MarkGutman9 @goldstein_aa and

Here’s an easy way to see where you’re wrong. If a dividend paying stock is priced so that it’s expected return was the rfr, then only thing that affects the price is changes in the rfr or changes in the expected future divs. But stocks are *way* more volatile than that.

12:00 AM - 28 May 2021

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1. Mark Gutman‏ @MarkGutman9 28 May 2021
  Replying to @macrocephalopod @goldstein_aa and
  
  Mark Gutman Retweeted Mark Gutman
  
  Exactly right, and that applies to everything, not just for dividend paying stocks. Expectations (and information) are a volatile thing.https://twitter.com/MarkGutman9/status/1397807459587268608 …
  
  Mark Gutman added,
  
  Mark Gutman @MarkGutman9
  
  This is at the core of why “expected return at one point in time” is different from “expected return over time”.
  
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