An Introduction to New Zealand Capital Markets.
As one might expect from the title, Roger Bowden surveys the principal capital market institutions, and the instruments: bonds, equities, derivatives and foreign exchange. The book is then similar in scope to that of Girol Karacaoglu's An Introduction to Financial Markets in New Zealand. However, it has the advantage of having been written by an academic (my prejudices here are unsurprising) who is also acquainted (vicariously) with the dealing room. With the exception of Girol's introduction, his book lacks the first perspective. Both, of course, are valuable, but the combination is not only cumulative but synergistic.
Roger's perspective as an academic is manifested most pointedly in supplementing the essential description of capital markets with asking a number of tough (as opposed to merely controversial) questions and answering them in the same spirit. For example, in reviewing the call for takeovers legislation, the disciplining role of the takeover threat is highlighted, and in language that would prompt writs if individuals were mentioned (pp. 84-85). Later, in reviewing fund management, and the issue of whether the "expertise" justifies the fees, it is clear that Roger is not hoping for a job in the industry.
It is also expressed in his irreverence. Examples are:
expressing debt as a percent of GDP is pretty meaningless, but
everybody does it (p. 10).
In relation to dealing rooms:
Listen carefully to the rational and learned discourse across desks
In relation to market jargon:
Throw these words around and the job is yours (p. 4).
This expression looks like trendy managerial gobbledygook and
possibly is (p. 1).
Given its objectives, the book largely omits the formulas; there is no Black-Scholes formula for option pricing or even an infinite stream discounted cash flow formula for equities. (Strangely, however, there is considerable detail on bond valuation formulas.) Thus, for the student, it would complement a "formulas" text or course.
Irreverence aside, Roger's literary style is endearing, mixing casual expressions with the occasional vocabulary outlier. I found myself grasping for the Concise Oxford over "basal ganglia" and "post-prandial perambulations"! Bouncing the latter off a colleague elicited the speculation that it referred to "rolling around in the herb garden".
As tough an industry critic as Roger has been, he could have been even tougher. On the issue of fund management and "expertise" in picking winners, he notes that the "trick is to sort out the sheep from the goats", and goes on to observe that various companies provide rankings on fund managers. Of course, the good performers embrace these as marketing aids. However, they are only rarely statistically significant and even that small percentage may be reconciled with type 1 error.
Even tougher is the issue of speculative trading by financial institutions. Roger notes that "the general idea is to cut your losses and let your profits run". He might have asked whether the whole expedition was any more than expensive coin tossing (like Roger, I am signalling my future career path with these comments). The issue neatly parallels that of fund manager "expertise", which Roger has no hesitation in raising.
In summary, this book is a good and provocative read for three classes: students seeking a critical introduction to institutions and instruments; industry practitioners seeking to be better informed about the key issues; finally, finance academics who limit their reading to new applications of GARCH will be apprised of recent real-world developments. However, members of the second group likely to be easily offended are "advised to exercise discretion".
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|Publication:||New Zealand Economic Papers|
|Article Type:||Book Review|
|Date:||Dec 1, 1997|
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