Moscow Can Be an International Financial Centre
This autumn, the Third International Moscow Finance Conference will take place at the HSE, on the 8th and 9th November, 2013. One of the keynote speakers is Rajnish Mehra, Emeritus Professor at the University of California, Santa Barbara. We spoke to Professor Mehra ahead of his visit and asked him about the conference and his work.
— You have been invited to be a keynote speaker at the Third International Moscow Finance Conference. The title of your speech is ‘The Macroeconomic Determinants of Financial Predictability’. Could you tell us about some of the major findings that you will include in your presentation?
— Recent research (for example, that carried out by Robert Shiller and John Cochrane) suggests that aggregate price-dividend ratios, the ratio of the market value of equity to GDP, and other measures of stock market value relative to cash flow appear to predict future returns. There is, however, no theoretical basis for this predictability. In our paper (written jointly with John. B. Donaldson), we evaluate a class of models where equity returns are stationary and mean reverting, thereby laying the foundation for predictability.
— Since your much cited paper with Edward Prescott in 1985, a recurrent theme in your research has been the equity premium puzzle, i.e. the problem of reconciling the economic models of asset pricing with the high return premiums that stocks earn over safe assets. In your view, is this still a puzzle today?
— Almost thirty years ago our paper on the Equity Premium highlighted the failure of the standard neoclassical model to account for the enormous differential between the return on equity and the return on bonds. Over the past two decades, attempts to resolve the puzzle have been a major research impetus in both finance and economics. Some very good research has emerged at these fault lines of theory confronted with observation, with several generalizations of the Mehra–Prescott (1985) model proposed to try and reconcile the two. Consequently, we have a deeper understanding of the role and importance of the abstractions that contribute to the puzzle. While no single explanation has fully solved the anomaly, considerable progress has been made and the equity premium is a far lesser puzzle today than it was thirty years ago.
— What is your view on the interaction between economic research and real financial markets?
— There is a symbiotic relation between research and financial innovation. Almost all prominent financial centers - New York, London, Singapore, Hong Kong, Zurich to name a few - are supported by well-funded, first rate, innovative research Universities and Institutes, and vice versa.
— Can economic research have an impact on financial markets?
— Absolutely! By fostering innovation and providing the talent needed for global competitiveness.
— The Russian government has put forward the goal of creating an international financial center in Moscow. Given your experience with the development of Indian financial markets, do you think this is a realistic goal?
— Not only is it realistic, it is overdue! For an economy to grow, capital needs to flow from households to businesses to financially productive investments.
— What does Moscow need if it’s going to become an international financial center?
— Basically, three things:
a) An educated workforce, supported by world-class educational institutes in finance and economics.
b) A comprehensive and transparent regulatory environment covering the whole spectrum of financial instruments and investment vehicles
c) Investor protection, low transaction costs and 'time consistent' tax and legal policies
— Is this your first visit to Moscow? Do you have any plans and will you hopefully have some opportunities to visit any places of interest here in addition to the conference sessions?
— I have been to Moscow before and have travelled widely throughout Russia. In 2008, I spent two weeks on the Trans-Siberian traveling from Moscow to Vladivostok. If I have some time, I plan to re-visit some of my favorite underground stations!