A Golden Age for Research
Our Endowed Chair in Finance and Investing and Distinguished Professor of Finance, Allan Timmermann, finds the pandemic outbreak has challenged research into the economy and financial markets. But also academics can now monitor the societal impact of the pandemic—and plan the best path to recovery. He enjoys any opportunity to help others avoid risks and setbacks from the financial markets, too.
Allan Timmermann, a world-renowned scholar in financial econometrics and economic forecasting at the Rady School of Management at UC San Diego, always felt fascinated with the twists and turns of global financial markets—and sometimes, world events molded the focus of his research.
He learned of this quality early, in 1987, while studying economics at the London School of Economics after leaving his Danish motherland and studies at the University of Copenhagen. The October 19, 1987 Stock Market Crash occurred in his first year—and that world event, which created investor panic globally, inspired him to study the financial markets. “This was a fascinating event,” he recalls. “The US stock market had crashed by 22 %—in a single day. And there was seemingly no single piece of news leading to the crash. Even today, people are still looking for what triggered that event.”
Today, that his new, endowed chair title comes from Harry Markowitz, the Nobel laureate for economics, feels even more fitting. Markowitz’s path-breaking, distinguished work rigorously shows that linkages between markets and correlation really count. “It’s the co-movement between different asset classes such as stocks and bonds that’s so fascinating,” Timmermann adds. “And these are practical problems affecting millions of people thinking about retirement plans and investment strategies. Shedding light on these issues using data and rigorous techniques stimulate really practical questions,” he says. “That’s really what fascinates me in my work.”
What world upheaval can teach us about how we ought to invest
Many of course notice this rare enthusiasm, wisdom, strategy, and vigor. Today, influential researchers and commentators on world financial markets trust—and cite—Timmermann’s research which uses econometric techniques, i.e., applying statistical methods to economic data to provide vital context to economic relationships. Over 22,800 publications cite his work and 10,000 of those citations occurred since 2015. Top-tier, prestigious journals, including the Journal of Finance, American Economic Review, and Journal of American Statistical Association have also published his works.
His article in the Journal of Finance “Can Mutual Fund ‘Stars’ Really Pick Stocks?” remains highly regarded with over 1,000 citations. And because Timmermann ensures his research findings create some larger societal impact, he also has graced world councils. In 2012, the Federal Reserve Board invited Timmermann to join their inaugural Model Validation Council to better stress test financial institutions. The goal: To ensure these institutions be well capitalized and in a good position ahead of future crises.
He finds combining different forecasting models generates the best forecast of stock returns. The same goes for investment managers—no one manager is likely to yield great results. “Using a forecast combination is a very good strategy,” he says. “Don’t put all your eggs into one basket. Don’t put all your money into one stock. Don’t use just one forecasting model – more often than not, it will turn out to be wrong.”
What world upheaval teaches us about finance and economics
With the world pandemic, Timmermann’s research has become even more prolific. Following the pandemic outbreak, along with an academic colleague at Johns Hopkins, he partnered with Nate Silver’s FiveThirtyEight and The Initiative on Global Markets (IGM) at University of Chicago to survey academic economists. The initiative hopes to help predict how the US economy might fare during COVID-19. And he’s designing ways to track companies’ financial health through real-time monitoring systems to help avoid future economic or financial crises.
The professor reasons that through the pandemic researchers can, with the help of recent advancements in big data and computing power, link daily data on how firms perform to the ways that the economy performs. Providing solid guidance for policy makers in government and central banks is important and helped stimulate a wave of economic research that became “like a Manhattan project to our profession,” he says.
Timmermann, who attributes part of his energy to a daily, 10k jog, also wonders what COVID-19 and the market’s response to this economic upheaval can tell us about how we ought to invest. Also, what can we interpret from these events? The vaccinations, the pace of outbreak, and the length of the pandemic, at the date of this article, now over a year long, makes the uncertainty of the trajectory of the financial markets extraordinary, he notes. “Disregarding the 1918 influenza pandemic, we don’t really have any historical precedents like this in modern times, and even the 1918 pandemic was very different from the uncertainties and policy options we face today.”
Staying tenacious and inspiring others as an academic
At the Rady School, Timmermann feels perfectly suited to a program focused on entrepreneurship and innovation. You would only accept the challenge of coming to the Rady School if you were an innovator by heart, he reasons. “You have to be risk tolerant and entrepreneurial to enter a small group where you may have more impact but more uncertainty—all which entrepreneurs accept and know.”
With an entrepreneurial spirit and mind, Timmermann balances a portfolio of research projects and ideas. He compares his research style to “having many balls in the air knowing some will fall and others will float a while before becoming very good projects.” He tries not to preempt media responses and resists assuming excitement. Although his work on “data snooping” became surprising indeed.
The research asked: “How do you separate skill from luck?” Timmermann and fellow researchers found evidence that some investment fund managers do have skills. But some very top performers also take a lot of risk. And so they can establish a strong track record mostly as a result of luck. “The problem with luck is that it is hard to repeat in the future. We found you can’t just look at the investment managers at the very top. These findings turned out to be quite controversial and others disputed and debated.”
He also recognizes the competitiveness of working on ideas with huge impact. Economists must think
cleverly about which topics to add to their research portfolio. The same goes with learning the financial markets and investors which, with machine learning, makes it like an arms race. “It is so hard to beat the market. Many wonder: Are the markets incorporating new information so efficiently that it’s impossible to outperform them? Then again, there are also trends pulling in the opposite direction as witnessed by recent trading in stocks like Gamestop.”
As a professor, Timmermann feels pride seeing his students progress in their thinking and skillset. He helped push ahead with a small business initiative at the Rady School where students, faculty, lecturers and staff from the Rady School and the Beyster Institute volunteered to help. And this level of help and commitment impressed him.
Looking back at his own studies, he feels blessed to have benefited from working with world-class individuals sharing their time and placing a premium on helping young academics thrive. His schoolteacher father also taught him the value of educating with the aim of giving back. He strives to do the same for his students. “You can inspire them—and this often becomes a two-way street where they inspire you to come up with something you had not previously thought of. It’s a very interactive process and you get to work with truly outstanding students at UCSD.”
A golden age of research
With spring almost underway, Timmermann remains upbeat about the Rady School, his research and how finance research like his, and that of his students, can provide insights that ultimately might help with a pandemic recovery. “I actually think that finance is all about forecasting—they go hand in hand. This is because, after all, finance is about investing for the future. And the future is always uncertain so you need to think clearly about likely scenarios and possible risks” he says.
Becoming an endowed chair holder inspires and uplifts him and any resources he gains go to continuing research—hiring graduate students and ensuring they gain access to funding and data sets. “It becomes a terrific tool for achieving further research objectives and helping prepare future generations of scholars.”
Does he think any world-scale crisis can happen again? Yes. For sure; although, like earthquakes, he cautions we cannot predict the timing and magnitude of future crises with much accuracy. And nobody predicted this pandemic the way it has unfolded. But any future crises ought to avoid committing the same mistakes twice, he notes.
He likens his research to when the Federal Aviation Administration (FAA) probes an airline accident. Meaning: With the objective of never repeating past mistakes. And yet, with every economic crisis having its own causes, academic research on the topic becomes exhilarating, vital, but also challenging. And then he becomes motivated again by his beliefs: That the financial stress testing of banks conducted by the Federal Reserve system in the aftermath of the Global Financial Crisis in 2008-09 has played a key role in ensuring that we have, so far, avoided a major financial crisis during the Covid pandemic.
“For those working in finance and economics, now’s a golden age for research.”