Passive investing

The Washingtom Post have recently published an interview with Harvard university professor Ken Rogoff. He bacame famous in the early 80s with the study Empirical Exchange Rate Models of the Seventies: Do they fit out of sample? coauthored with Richard Meese. Ih this study, both economists showed that a random walk model of exchange rates is better than the theoretical fundametal models taught at the universites in the 80s. Investors are thus better off tossing a coin than relying on various fundamental models. This result was later confirmed in another studies (here and here).

Professor Rogoff and Carmen Reinhart have recently published a book This time it’s different in which they had examined data for the last 800 years covering 66 countries. They focused on financial crises which are according to their reaserch accompanied by sovereign debt crises. In their opinon, each significant financial crisis is preceeded by high leverage and an real estate buble. Moreover, Rogoff said in the interview that it is extremely difficult to predict crises. People who claim having predicted the current crisis have probaly been predicting it for the last 10 years.