Wednesday, April 24, 2013

Piros & Pinto, Economics for Investment Decision Makers

If your command of economics is either rusty or fuzzy but you don’t have the time to sit through three or four semester courses, Economics for Investment Decision Makers: Micro, Macro, and International Economics (Wiley, 2013) might be just the ticket. This 700+-page book by Christopher D. Piros and Jerald E. Pinto is part of the CFA Institute Investment Series. You don’t have to aspire to become a certified financial analyst to benefit from the book. It’s a good foundational text for every investor.

The book is divided into twelve chapters: (1) demand and supply analysis: introduction, (2) demand and supply analysis: consumer demand, (3) demand and supply analysis: the firm, (4) the firm and market structures, (5) aggregate output, prices, and economic growth, (6)understanding business cycles, (7) monetary and fiscal policy, (8) international trade and capital flows, (9) currency exchange rates, (10) currency exchange rates: determination and forecasting, (11) economic growth and the investment decision, and (12) economics of regulation.

My hunch is that, of the topics covered in this book, investors probably know the least about currency exchange rates. Yes, they know that it can be more or less expensive to travel to Europe or to buy a Japanese-manufactured car depending on the strength of the dollar against the euro or the yen—though even here it should be noted that “Many studies find long lags, perhaps lasting several years, between (1) the onset of the exchange rate change and (2) the adjustment in traded goods prices in response to the change in the exchange rate, and then (3) the eventual effect of the change in traded goods prices on import and export demand.” (p. 613)

Perhaps they even think they understand the basic principles of the carry trade. But can they answer these two questions about carry trade strategies? (1)Carry trades can be profitable when: A. covered interest rate parity does not hold. B. uncovered interest rate parity does not hold. C. the international Fisher effect does not hold. (2) Over time, the return distribution of the fund’s FX carry trades is most likely to resemble: A. a normal distribution with fat tails. B. a distribution with fat tails and a negative skew. C. a distribution with thin tails and a positive skew. (“B” is the correct answer to both.)

If your response to these questions and answers is not “of course,” you will probably learn a lot from this book. It’s not bedtime reading, but I suspect the time invested in studying it will pay off.

There’s also a workbook that goes along with this text, but I haven’t seen it.

2 comments:

  1. Why don't you offer Amazon links? I'd be glad to buy these books through your Amazon links.

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  2. I used to offer Amazon links, but then Amazon shut down its associates program in CT for sales tax reasons.

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