Regulatory stupidity of the day

There are too many people who say too many stupid things about regulations for me to possibly comment on all them. However, I’ll try to do more of it.

Today’s stupid statement is courtesy of Yglesias, who links to a graph of volatility of equity prices in the US and Germany. Apparently, we’re supposed to see the graphs, notice that the volatilities are highly correlated, and conclude that US regulations cannot be driving changes in equity prices in the US. The implicit additional premise is that US regulations don’t impact German firms.

Unfortunately, that implicit premise is badly mistaken.

The German volatility index in question is calculated on the DAX. The DAX is made up of "German" companies such as: Adidas, Bayer, BMW, Deutsche Bank, and Volkswagen. Obviously, these companies don’t do any business in the US at all and are therefore totally isolated from US regulations! (Note that Deutsche Bank, for example, owns the 8th largest bank holding company in the US).

A little closer to home, I’ve had meetings with lobbyists from 8 different countries on one rule that I’ve been working on. Any examination of lobbying records will show similar results.

Moreover, the regulatory uncertainty argument does not suggest that equity prices of the largest firms in different countries should be dis-similar during periods of uncertainty. Most of us that believe in the regulatory uncertainty argument believe that complex regulations favor large firms. As such, large German firms and large American firms may both benefit roughly equally due to regulatory uncertainty. Therefore, it’s not particularly surprising that their equity prices track each other pretty well.


6 Responses to Regulatory stupidity of the day

  1. They’re not even pointing to equity *prices* in the first place, they’re pointing to *implied vols* of the derivative volatility-indices. These implied vols may reflect many things (hedging activity and algorithmic trading presumably being high on the list) but to trot them out as barometers of the fundamental economic situation in the host countries is pretty daft, and almost bass-ackwards. It’s not simply that Adidas has a presence outside of Germany, it’s that you don’t have to be a German (at all) to have, want, or not-want exposure to Adidas, and thereby to end up (directly or indirectly) pushing up or down the DAX. These indices are reflections of the sentiment of the equity *buyers/sellers*, in other words, not of the companies themselves.

    In reality, these (and most other) vol indices are probably always going to be highly correlated if only because computer programs at quantitative hedge funds doing PCA analysis on baskets of equities execute zillions of automated trades in response to their mutual movements. If the computer program decides Adidas is or should be highly correlated with Nike (and most probably do decide that), it will execute trades that end up pushing around the VDAX and VIX in the same way. This has nada to do with the regulatory situations in the respective countries.

  2. josh says:

    did you see his gem on interest rates?

  3. […] also had a very nice comment on my regulation post from […]

  4. Matt Weber says:

    Yglesias is the smartest moron I think I’ve ever seen. Look at this one:

    about how Italian women need to work more so they can pay taxes and support the government. I think we should call this ‘Feudaliberalism’. Somehow, I don’t think that’s what the feminists had in mind.

  5. Alrenous says:

    I’d like to know what constitutes success for a worked-on regulation.

    In a normal workplace, it’s when your boss thinks you’ve achieved the assigned goal.
    In your personal life, you’re your own boss.

    Who’s your actual boss regarding regulations?

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