Richard Roll Offers New Diagnosis for the Financial Crisis

Richard W. Roll, the Joel Fried Chair in Applied Finance, has authored a paper that offers a new diagnosis for the recent financial crisis. The paper, "The Possible Misdiagnosis of a Crisis," appeared in the March/April 2011 issue of the Financial Analysts Journal, a publication of the CFA Institute.

In the paper, Professor Roll uses basic principles of finance to challenge prevailing explanations, "including excessive leverage, subprime mortgages, exotic derivatives, reckless risk taking, and easy money that spawned a housing bubble."

He offers an alternative diagnosis for the crisis and prescribes a treatment protocol of less government spending, lower taxes and greater reliance on the private sector to stimulate the U.S. and global economies. Professor Roll describes this as "economic liberalization," meaning an increase in the fraction of GDP spent by the private sector relative to the fraction spent by the public sector.

The paper earned Professor Roll his fourth Graham and Dodd Award from the Financial Analysts Journal. The award was in the "Best Perspectives" category recognizing timely, thought-provoking opinion. The FAJ Advisory Council and Editorial Board selected the winners. The award, created in 1960, honors the contributions of legendary investors Benjamin Graham and David L. Dodd to the investment analysis field.

In addition to his work at UCLA Anderson, Professor Roll is principal of the consulting firm, Compensation Valuation, Inc.

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