A Ph.D. candidate in finance at the Krannert Graduate School of Management, Purdue University, focuses on what he says is "a story left untold" about the Titanic -- to show stock market efficiency.
"Wall Street folklore has it that the stock market was far less efficient in the early part of the 20th century than in the modern era," asserts a release accompanying the paper written by Arun Khanna, who attends the West Lafayette, Ind., school.
"I expected that if market participants reacted to the loss incurred by IMM in the sinking of the Titanic, the value of the loss would have been capitalized into" the stock price of International Mercantile Marine Co., owner of the ship, "when the market first became aware of the sinking," he writes.
He calculates the cumulative market-adjusted returns on IMM's common and preferred stocks for April 15, 1912, the day of the announcement of the sinking, and for April 16. They were, respectively, -0.253% and -0.148%. That translates into an implied loss of $2.6 million, "a number not too different from the loss, net of insurance, suffered by IMM," he writes. He figures IMM's net capital at risk in the Titanic was $2.5 million, after insurance.
"The relatively swift impounding of news of the marine disaster in the price of IMM's common and preferred stock provided evidence consistent with the semi-strong form of market efficiency," he contends, citing Eugene F. Fama's work on the efficient market hypothesis.
To think, capitalist John Jacob Astor went down with the ship never knowing its contribution to modern capital market theory, now discovered by this aspiring Robert Ballard of finance.
