new evidence of the impact of dividend taxation and on the identity of the marginal investor this paper examines the impact of a major change in dividend taxation introduced in the united kingdom in july 1997 the reform was structured in such a way that the immediate impact fell almost entirely on the largest investor class in the united kingdom namely pension funds we find significant changes in the valuation of dividend income after the reform in particular for high yielding companies these results provide strong support for the hypothesis that taxation affects the valua tion of companies and that pension funds were the effective marginal investors for high yielding companies

ex day behavior tax or short term trading effects this study examines the behavior of share prices around the ex dividend dates before and after the introduction of the 1988 income and corporation taxes act that reduced substantially the tax differential between dividends and capital gains in the united kingdom we find that in the pre 1988 period when the differential taxation of dividends and capital gains is high ex day returns are positive and significant in contrast in the post 1988 period ex day returns are in most cases negative and insignificant further analysis reveals that while ex day returns are significantly related to dividend yield and to the length of the settlement period they are not affected by the commonly used measures of transaction costs such as the bid ask spread and trading volume or by the day of week month of the year type of dividend distribution or number of days to the actual receipt of the cash dividend we conclude that taxation affects significantly ex day share prices in the previous studies have documented that the risk adjusted abnormal returns on the ex dividend dates are positive and significantly related to the dividend yield the interpretation of these findings is however controversial the question relates to what category of investors sets ex day prices elton and

dividend stripping risk exposure and the effect of the 1984 tax reform act on the ex dividend day behavior this article investigates the importance of risk exposure and the effects of the 1984 tax reform act on the ex dividend day behavior the tax reform appears to have inhibited short term trading activities by increasing the risk exposure of incorporated traders moreover stocks for which existing listed options permitted the reduction of risk through hedged dividend stripping strategies were affected much less from the new tax code than their nonoptionable counterparts this implies that risk affects investors dividend yield choice and that the ex dividend day behavior may be caused in part by the existence of risk premia copyright 1989 by the university of chicago

stationary equilibrium in a market for durable assets this paper presents a dynamic model of consumer trading on the primary secondary and scrap markets for a stochastically deteriorating durable good in a stationary economy with perfect information and no transaction costs we explicitly model the trading process by tracking each durable from its birth in the primary market through its sequence of owners in the secondary market until its death in the scrap market we prove that a stationary equilibrium exists characterize the distribution of consumer holdings of durables and show that equilibrium asset prices are shadow prices to a particular regenerative optimal stopping problem we show that each heterogeneous agent equilibrium is observationally equivalent to a homogeneous agent equilibrium we derive a differential equation for equilibrium rental rates and a functional equation which links rental rates to asset prices these equations show precisely how the structure of durable prices and rental rates embody the functional form and population distribution of preferences and the technological characteristics of durable goods this abstract was borrowed from another version of this item

approximate option valuation for arbitrary stochastic processes abstract we show how a given probability distribution can be approximated by an arbitrary distribution in terms of a series expansion involving second and higher moments this theoretical development is specialized to the problem of option valuation where the underlying security distribution if not lognormal can be approximated by a lognormally distributed random variable the resulting option price is expressed as the sum of a black scholes price plus adjustment terms which depend on the second and higher moments of the underlying security stochastic process this approach permits the impact on the option price of skewness and kurtosis of the underlying stock s distribution to be evaluated

tests of the foreign exchange risk premium using the expected second moments implied by option pricing abstract this paper utilizes the second moment expectations implied by currency option pricing to demonstrate that these expectations are systematically related to expected return differentials across assets denominated in different currencies because the measured deviations from uncovered interest rate parity are tied to variables which theory links to the risk premium the results provide substantial evidence that a risk premium does indeed exist as opposed to the alternative of a violation of rational expectations however like previous attempts the data do not support an explicit mean variance formulation of the risk premium

durable goods monopolists durable goods monopolists face special problems because the sale of their products creates a secondhand market not controlled by the monopolist to the extent the monopolist is able to rent his product rather than sell it or to make binding promises about his future production such problems are ameliorated given the inability to do the above the monopolist is led to producing goods less durable than those produced by either competitive firms or monopolist returns a reverse averch johnson result that monopolist sellers may invest less in fixed costs including plant modernization and research and development than would the renters is shown it is also shown that even though sellers have less monopoly power than renters and nondurable goods monopolists it is possible that the seller will cause a greater deadweight loss than the other types of monopolies

the ex dividend day behavior of option prices a security purchased at the opening of trade on the ex dividend day does not include a claim to the dividend announced earlier yet if purchased on the previous day the last cum dividend day it does thus the price of a security that goes exdividend is expected to drop in this time interval the expected price drop around the ex dividend day has been compared to the dividend per share in various past studies campbell and beranek 1955 durand and may 1960 elton and gruber 1970 kalay 1982 the documented behavior of stock prices around the ex dividend day seems to be consistent with market efficiency that is it provides no profit opportunities an interesting question that arises is whether the discontinuity in the stock price carries over to call options on the stock with similar implications for market efficiency because call options are unprotected against payment of dividends their pricing has to take into account the change in the value of the underlying asset around the ex dividend day this point has been recognized in the literature since it is well known that the price of a share of common stock is expected to drop around the ex dividend day since call options written on such underlying shares are not protected against dividend payment a question arises as to the behavior of the prices of call options around the exdividend day assuming a rational exercise policy on the part of investors it can be demonstrated that the price behavior of american call options around the ex dividend day should not be different from that on any other arbitrarily chosen day however our empirical analysis using both parametric and nonparametric methods indicates that perhaps because of a wrong exercise policy on the part of investors abnormal returns are observed in certain cases this finding casts some doubt on the presumption of efficiency of the american call option market around the exdividend day we wish to thank john long stanley kon clifford smith jeremy bulow and harry friedman for helpful comments on earlier drafts of this paper we are also indebted to david cho and elli kraizberg for their assistance finally the financial support of the salomon brothers center for the study of financial institutions new york university is gratefully acknowledge

jump risks and the intertemporal capital asset pricing model the specification of the stochastic process for stock prices is an important assumption underlying most equilibrium and option pricing models in modern finance this is particularly true of the continuous time capital asset pricing models where it is assumed that asset prices follow diffusion processes with continuous sample paths see merton 1973a breeden 1979 grossman and shiller 1982 the extent to which the implications of these models generalize to discontinuous sample paths is an unanswered question in theoretical finance however the answer to this question is of more than just theoretical interest since accumulated empirical evidence appears to be inconsistent with the continuous sample path assumption see rosenberg 1972 oldfield rogalski and jarrow 1977 rosenfeld 1982 one purpose of this paper is to provide some answers to this question we do this by extending merton s 1973a intertemporal asset pricing model in the special case of a constant investment opportunity set to include discontinuous sample paths for asset prices the constant investment opportunity set assumption is imposed because we are interested in obtaining sufficient conditions under which an instantaneous capital asset pricing model capm results the extension of our model to a stochastic opportunity set is discussed briefly in the text this paper investigates an economy where stock prices follow a jump diffusion process the first part of the analysis derives a sufficient condition under which an instantaneous capm will characterize equilibrium expected returns the sufficient condition is that the jump component of a stock s return must be unsystematic and diversifiable in the market portfolio the second part of the paper is an empirical investigation of the satisfaction of this condition the evidence is seen to be inconsistent with the satisfaction of this hypothesis that is the market portfolio appears to contain a jump component

option prices as predictors of equilibrium stock prices the black scholes option pricing model modified for dividend payments is used to calculate jointly implied stock prices and implied standard deviations a comparison of the implied stock prices with observed stock prices reveals that the implied prices contain information regarding equilibrium stock prices that is not fully reflected in observed stock prices the implications of this finding are discussed this study investigates the role of call option prices as predictors of the equilibrium prices of their underlying stocks using the black scholes 3 bs model previous tests of the bs model have shown that the formula is highly successful in explaining the observed market prices of options see black and scholes 2 galai 8 chiras and manaster 6 and macbeth and merville 12 according to the model the option price is a function of the current value of the underlying stock the instantaneous variance of the stock s rate of return the time to maturity of the option the risk free rate of interest and the exercise price of the option 1 given an observed option price and known values of all input parameters to the bs model except the stock price one can determine the price of the underlying stock that equates the observed option price to its calculated value it follows from the underlying logic of the model that the implied price is the value of the underlying stock for which a continuously revised option bond portfolio would be a perfect substitute for the stock hence if options are actually priced according to the model implied stock prices will be the option market s assessment of equilibrium stock values previous empirical studies have assumed that observed stock prices are the relevant stock prices for option valuation however just as stock prices may differ in the short run from one exchange to another i e nyse midwest

arbitrage continuous trading and margin requirements this paper studies the impact that margin requirements have on both the existence of arbitrage opportunities and the valuation of call options in the context of the blackscholes economy margin restrictions are shown to exclude continuous trading arbitrage opportunities and with two additional hypotheses still to allow the black scholes call model to apply the black scholes economy consists of a continuously traded stock with a price process that follows a geometric brownian motion and a continuously traded bond with a price process that is deterministic continuous trading security market models constitute a significant area of continuing reesearch in financial economics these models form the basis of the option pricing methodology see merton 16 for a review and current intertemporal asset pricing models see merton 15 breeden 3 and cox ingersoll and ross 5 given the importance of these models it is of no surprise that there has been significant academic concern see dybvig 9 cox ingersoll and ross 4 p 341 and ingersoll 13 pp 13 25 over the discovery of a continuous trading strategy by harrison and kreps 10 called the doubling strategy that generates a sure dollar from a zero investment the existence of this doubling strategy violates a basic premise of the option pricing methodology the premise of no arbitrage opportunities given this violation the question naturally arises as to whether the option pricing methodology is internally consistent fortunately harrison and pliska 11 showed that the exclusion of arbitrage opportunities and the doubling strategy does not invalidate the familiar derivation of the black scholes call option formula the exogenous exclusion of these doubling strategies is somewhat arbitrary however types of constraints that exclude continuous trading arbitrage opportunities were studied by kreps 14 harrison and kreps 10 and dybvig 9 these papers provide constraints that are unsatisfactory from an institutional point of view since they have no market analogue margin requirements on the other hand have a market analogue one purpose of this paper is to show that margin requirements also exclude continuous trading arbitrage opportunities to make this argument self contained we first provide a unified framework that synthesizes the previously stated results our assertion concerning margin re

tests of two models for valuing call options on stocks with dividends roll has recently formulated an option pricing model which allows dividend payments on the underlying stock this paper compares the performance of the exact roll model with a modified but inexact black scholes model the results indicate that the roll model prices are significantly closer to actual market prices

taxes and dividends the uk evidence abstract this paper provides empirical evidence on the simultaneous effects of both corporation and personal income taxes on dividend payment adjustments and on the behaviour of share prices on the ex dividend dates the results show that companies set their dividend policies to minimise their tax liability and to maximise the after tax return of their shareholders in particular firms that are unable to deduct the advanced corporation tax from their tax liability are found to pay low dividends in addition consistent with the tax hypothesis we find that the differential taxation of dividends and capital gains results in a decrease in ex day share prices by significantly less than the amount of the dividend there is no evidence of a tax induced dividend clientele

quality over quantity reexamining the link between entrepreneurship and job creation although much has been written about the quantity of jobs created by entrepreneurs scholars have yet to examine the quality of these jobs in this article the authors begin to address this important issue by examining nearly 5 000 businesses that began operations in 2004 they investigate the extent to which nascent employers provide what many think of as quality jobs those offering health care coverage and a retirement plan the authors find that because of small scale constrained resources and protection from institutional pressures start up companies do not provide their employees with either of these proxies for job quality and their likelihood of offering health or retirement benefits increases only marginally over their first six years of operation the finding that entrepreneurs impressive record of job creation is not matched by a similarly impressive outcome with respect to job quality challenges policymakers to ensure that entrepreneurs are encouraged to create quality employment opportunities in the course of creating new businesses abstract from author

a direct test of the lemons model the market for used pickup trucks of the implications of models of markets with asymmetric information in the seminal paper on markets with asymmetric information george akerlof 1970 pointed out two possible outcomes that may occur where sellers have better information about the quality of products than do buyers one possibility is that bad products will drive out good products if buyers cannot distinguish quality until after the purchase has been made there will be no incentive for sellers to provide good quality products and the average quality in the market will decline in the case of cars an often cited example of this phenomenon owners who discover that they have a lemon will attempt to sell it in the used car market to an unsuspecting buyer the owner of a creampuff will not sell his car since it is indistinguishable from a lemon to buyers and must therefore sell for the price of a car of average quality the effect of quality uncertainty is to reduce the volume of transactions in the used car market below the socially optimal level a second possibility suggested by akerlof is that institutions may develop to counteract the effects of quality uncertainty warranties and brand names can be used to give the buyer some assurance of quality these institutions may prevent good products from being driven from the market but they will

new evidence that taxes affect the valuation of dividends this paper uses british data to examine the effects of dividend taxes on investors relative valuation of dividends and capital gains british data offer great potential to illuminate the dividends and taxes question since there have been two radical changes and several minor reforms in british dividend tax policy during the last 30 years studying the relationship between dividends and stock price movements during different tax regimes offers an ideal controlled experiment for assessing the effects of taxes on investors valuation of dividends using daily data on a small sample of firms and monthly data on a much broader sample we find clear evidence that taxes affect the equilibrium relationship between dividend yields and market returns these findings suggest that taxes are important determinants of security market equilibrium and deepen the puzzle of why firms pay dividends financial economists have long been puzzled by corporate dividend behavior many individual investors should value a dollar of corporate dividends less than a dollar of corporate retentions because the former gives rise to greater tax liabilities corporations however face equal costs of paying out dividends and retaining earnings miller and modigliani 31 demonstrated that in the absence of taxes dividend policy should have no effect on share valuation if dividends are tax penalized however a value maximizing firm should pay no dividends widespread dividend payments to taxable investors are therefore surprising in 1981 dividend tax revenues in the united states were estimated to exceed 20 billion dollars indeed some have interpreted the large volume of dividends paid as evidence against the rational behavior postulates typically used by economists the dividend question has stimulated a large theoretical and empirical literature concerned with the qluestion of investors valuation of dividends in particular the question of how taxes affect the market valuation of dividends has generated considerable controversy numerous studies including auerbach 2 litzenberger and ramaswamy 24 26 morgan 34 and rosenberg and marathe

the maximum likelihood estimation of security price volatility theory evidence and application to option pricing the market requires efficient estimation of the assuming security price dynamics are governed by a diffusion process and given the publicly most available form of data this paper provides the maximum likelihood estimator of security price volatility a monte carlo simulation compares the small sample properties of this and other proposed security price volatility estimators the resultant maximum likelihood estimator of the black scholes call option price formulation is also derived for small sample sizes a monte carlo simulation study facilitates comparison with other proposed estimation procedures also the statistically most powerful confidence intervals for the blackscholes call option price are constructed we would like to thank the participants of the statistics department seminar and finance department workshop at the university of michigan for their helpful comments we are especially grateful to fred hoppe adrian tschoegl and an anonymous referee for their insightful suggestions any remaining errors are our responsibility

gasoline prices and the used automobile market a rational expectations asset price approach this paper examines the impact of changes in gasoline price expectations on the market values of used automobiles an asset model of automobile valuation is used to relate year to year changes in market values to changes in the present discounted value of gasoline expenses econometric evidence from data covering the years 1972 through 1981 substantially confirms the hypothesis of the model that a gasoline price shock causes relative price changes across automobile types in proportion to the differences in their rates of fuel consumption

the calculation of implied variances from the black scholes model a note black and scholes 2 have derived a model for the equilibrium price of a european stock purchase option according to the black and scholes model equilibrium option prices are a function of the time to maturity of the option the exercise price the current price of the underlying stock the risk free rate of interest and the instantaneous variance of the stock s rate of return of these five variables only the first four can be directly observed the instantaneous variance of the stock s return can only be estimated recently severdl authors 3 4 5 6 10 11 rather than estimating a variance from past data have attempted to employ the black scholes option pricing formula to derive an implied variance an implied variance is the value of the instantaneous variance of the stock s return which when employed in the blackscholes formula results in a model price equal to the market price u nfortunately the implied variance cannot be calculated explicitly and previous researchers have used numerical methods such as the newton raphson method and its variants 8 however for many options no values of implied variance could be found to justify the observed option prices in this note necessary and sufficient conditions for the existence of a positive implied variance are given an algorithm is presented which converges monotonically and quadratically to the unique implied variance when it exists the most valuable feature of this algorithm is that it provides a starting value for the first iteration of the newton raphson procedure if one applies the newton raphson procedure without the correct starting value solutions that do exist can be overlooked the option pricing formula of black and scholes is

affirmative action and labor markets affirmative action remains controversial the controversy extends from the original antidiscrimination legislation and its interpretation to estimates of affirmative action s effect on the labor market this paper provides a progress report on our recent efforts at detecting the effects of affirmative action on minority wages and employment although we find a substantial increase in wages for black men and black women over our sample period the timing of these wage changes is surprising most of the wage gains came prior to 1974 before the establishment of an effective monitoring structure for affirmative action indeed when the powers of the eeoc and ofcc are greatest the wage effects for young blacks are somewhat perverse using eeo 1 reports we find a major shift in black employment toward firms most vulnerable to the monitoring and potential sanctions of the affirmative action programs as with wages the shift in minority employment came prior to the expansion of the powers and budgets of the ee

the valuation of multivariate contingent claims in discrete time models there are several examples in the literature of contingent claims whose payoffs depend on the outcomes of two or more stochastic variables familiar cases of such claims include options on a portfolio of options options whose exercise price is stochastic and options to exchange one asset for another this paper derives risk neutral valuation relationships rnvrs in a discrete time setting that facilitate the pricing of such complex contingent claims in two specific cases joint lognormally distributed underlying variables and constant proportional risk aversion on the part of investors and joint normally distributed underlying variables and constant absolute risk aversion preferences respectively this methodology is then applied to the valuation of several interesting complex contingent claims such as multiperiod bonds multicurrency option bonds and investment options

the stability of uk risk measures and the problem of thin trading this paper examines the problems of estimating risk measures and their stability in thin markets it shows analytically that conventional approaches used in previous studies can lead to serious overestimates of the stability of risk measures when shares are subject to thin trading it then demonstrates using uk data that this is in fact a serious practical problem and that the resultant biases are of precisely the form predicted finally the paper presents reliable evidence on the stability of uk risk measures by using an estimation method designed to avoid thin trading bias using this approach risk measures are found to be as stable in the uk as they are in the usa this paper examines the stability of risk measures in the uk the focus is on providing reliable evidence in a market where many of the shares suffer from thin trading this is important because thin trading can seriously distort stability measures leading to incorrect conclusions indeed this is a problem which has almost certainly afflicted many previous studies of stability the paper makes four main contributions first it shows analytically that thin trading can lead to serious overstatements about stability second it uses uk data to illustrate that this is in fact a serious practical problem and that the biases are of precisely the form predicted this is important for anyone who wishes to interpret previous claims on beta stability in thin markets third the paper presents reliable evidence on the stability of uk betas by using an estimation method designed to avoid thin trading bias besides avoiding bias our

foreign and domestic investors and tax induced ex dividend day trading abstract this paper reports evidence on the consequences of differential tax treatment for domestic and foreign owners in a market with a high degree of foreign ownership for certain stocks the helsinki stock exchange hse we find that ex dividend day ratios vary with the degree of foreign ownership and detect significantly abnormal ex dividend day trading volumes the average ex dividend price drops for high yield high foreign ownership stocks are likely to lie outside no arbitrage boundaries for domestic taxable investors an investigation of short selling through a derivatives instrument also reveals significant excess trading volumes in ex dividend months the tax heterogeneity of the company s ownership structure seems to play a role in explaining deviations from dividend neutrality more deviations are observed for companies with a more homogeneous ownership structure in terms of taxation

further results on the constant elasticity of variance call option pricing model the black scholes 4 call option model is a member of the class of constant elasticity of variance call option models proposed by cox 6 while the black scholes model assumes that the volatility or instantaneous variance of return is constant through time the other members of the class allow the volatility to change with the stock price this property is of interest because empirical evidence suggests that returns to common stock are heteroscedastic and also that volatilities implied from the black scholes model and market prices of call options are not constant

the valuation of american call options and the expected ex dividend stock price decline abstract this study focuses on the ex dividend stock price decline implicit within the valuation of american call options on dividend paying stocks the roll 1977 american call option pricing formula and the observed structure of cboe call option transaction prices are used to infer the expected ex dividend stock price decline as a proportion of the amount of the dividend the relative decline is shown to be not meaningfully different from one confirming some recent evidence from studies which examined stock prices in the days surrounding ex dividend

ex dividend stock price behavior and arbitrage opportunities this paper investigates the relation between ex dividend stock price behavior and arbitrage oppor tunities in a continuous trading frictionless economy the authors demonstrate that it is possible for the ex dividend stock price drop to differ from the dividend and still short term traders cannot gene rate arbitrage profits the argument is independent of transactions c osts the relevance of this insight to estimating the marginal tax br acket based on ex dividend stock price drops is explored furthermore this insight is also applied to the area of option pricing in which the special class of escrowed dividend stock price processes is stud ied the authors show that most elements from this class of stock pri ce processes generate invalid option pricing formulas copyright 1988 by the university of chicago

the market for used cars new evidence of the lemons phenomenon the lemons model assumes that owners of used cars have an information advantage over potential buyers with respect to the quality of their vehicles owners of bad cars try to sell them to ill informed buyers while owners of good cars hold on to theirs consequently the quality of traded automobiles tends to be sub average in contrast to previous empirical work the following article investigates the behaviour of both buyers and sellers testing for adverse selection by sellers and for quality uncertainty among buyers with a sample consisting of all 1985 cars registered in the swiss canton of basle city over the period 1985 to 1991 our data supports both adverse selection and buyer uncertainty suggesting that a lemons problem exists

do living wage ordinances reduce urban poverty living wage ordinances typically mandate that businesses under contract with a city or in some cases receiving assistance from a city must pay their workers a wage sufficient to support a family financially we estimate the effects of these ordinances on wages hours and employment in cities that have adopted such legislation we then examine the effects of these laws on poverty our findings indicate that living wage ordinances boost wages of low wage workers moreover we find a moderate negative employment effect finally some of the evidence suggests that living wages achieve modest reductions in urban poverty

marginal stockholder tax effects and ex dividend day price behavior evidence from taxable versus nontaxable closed end funds almost all research on the movement of stock prices on ex dividend days has found that prices decline by less than the dividend though this is consistent with tax effects several papers have argued that this phenomenon could be caused by market microstructure effects in this paper we make use of a natural experiment that provides support for the tax explanations of ex dividend behavior some closed end funds have taxable and some have nontaxable dividend distributions both types are subject to taxes on capital gains the implication of this for ex dividendday price behavior is very different between these two types of funds if taxes matter this paper demonstrates that the direction of ex dividendday price behavior is consistent with a tax explanation and that ex dividend day price behavior changes as theory would suggest with changes in the tax law

the relationship between arbitrage and first order stochastic dominance this paper joins together two fields of research in financial economics the first field studies stochastic dominance while the second field studies arbitrage pricing the two fields are linked together through the derivation and the proof of a characterization theorem the characterization theorem gives necessary and sufficient conditions for the existence of arbitrage opportunities in terms of the existence of two assets one of which first order stochastically dominates the other and the price of a particular contingent claim examples are provided to demonstrate the theorem s content this paper joins together two fields of research in financial economics the first field studies portfolio choice from the perspective of stochastic dominance see hadar and russell 5 6 hanoch and levy 7 levy and kroll 13 the second field studies arbitrage pricing its characterization and implications see ross 15 kreps 12 harrison and kreps 8 harrison and pliska 9 in these fields it is well known that the existence of arbitrage opportunities implies first order stochastic dominance and that the converse does not hold this paper provides a set of conditions under which the converse is true given complete markets the existence of an arbitrage opportunity is characterized in terms of the existence of two traded assets one of which stochastically dominates the other along with one additional condition the additional condition is roughly that state contingent prices must be zero over the states where the first asset dominates the second the theorem has a qualification however it is applicable only in markets which are complete not in the arrow debreu sense but in a weaker sense in the sense that all contingent claims on the primary assets must trade in many applications especially with respect to continuous trading models this condition is usually satisfied see duffie 2 and harrison and pliska 9 in the case of stochastically dominated assets this paper shows that the relationship of the assets to the state contingent prices is important in identifying arbitrage opportunities in this sense this paper is related to a recent paper of jagannathan 10 jagannathan studies the relationship of second order stochastic dominance not first order to call option valuation this characterization theorem relating arbitrage opportunities to stochastic dominance should provide a valuable tool in the area of stochastic dominance this theorem specifies conditions under which two assets can be compared using first order stochastic dominance on an individual basis for inclusion in the

some evidence on race welfare reform and household income the authors results suggest that for 1997 tanf is associated with insignificant increases in household income for whites and hispanic children and again insignificant reductions in household income for black children the point estimates for 1998 and 1999 bounds suggest that the impact may have been positive for all three groups

options taxes and ex dividend day behavior a novel way of estimating the expected as opposed to the actual share price fall off is developed using option prices this method is applied to the uk traded options market using data from 1979 to 1984 the results show that a the average expected fall off implicit in option prices is around 55 to 60 of the dividend and significantly different from it the fall off also varied inversely with the dividend yield which is consistent with the prediction of the tax clientele hypothesis b the estimates of the expected fall off were not significantly different from the actual fall off c finally the results imply that the usual assumption made in valuing options on dividend paying stocks that the fall off is equal to the dividend would lead to downward biased estimates of the option value

god save the queen and her dividends corporate payouts in the united kingdom we examine whether the decline in the number of dividend payers is purely a u s phenomenon or is part of a global trend focusing on the united kingdom a capital market comparable in maturity and sophistication to that of the united states we find that the number of u k firms paying dividends declines from 75 9 to 54 5 after controlling for firm size and profitability we find a declining propensity to pay dividends over the 1998 2002 subperiod we conclude that a shift in catering incentives appears most likely explain these recent changes in u k payout policies

recovering from a bad reputation changing beliefs about the quality of u s autos abstract acquiring a reputation for high quality is especially urgent for producers in markets for durable goods with quality characteristics that remain uncertain over the product s life using data from the u s automobile industry our empirical evidence shows that a poor reputation associated with u s autos during the early 1980 s has persisted in reducing prices of more recent models despite quality improvements as of 1990 used cars in the u s were still discounted five percent on average relative to their japanese counterparts however models with the strongest improvement in reported vehicle quality have bridged the gap somewhat in resale value

the incidence of mandated maternity benefits i consider the labor market effects of mandates which raise the costs of employing a demographically identifiable group the efficiency of these policies will be largely dependent on the extent to which their costs are shifted to group specific wages i study several state and federal mandates which stipulated that childbirth be covered comprehensively in health insurance plans raising the relative cost of insuring women of childbearing age i find substantial shifting of the costs of these mandates to the wages of the targeted group correspondingly i find little effect on total labor input for that group jel 118 j32 h51 in an era of tight fiscal budget constraints mandating employer provision of workplace benefits to employees is an attractive means for a government to finance its policy agenda consequently in recent years there has been a growth of interest in mandated benefits as a tool of social policy for example the centerpiece of president bill clinton s health care proposal is mandated employer provision of health insurance and more than 20 states have man

a reassessment of the new economics of the minimum wage literature with monthly data from the current population survey we estimate the employment effects of federal minimum wage increases using monthly current population survey cps data from 1979 through 1997 we find that the empirical differences in the new minimum wage literature based on cps data primarily can be traced to alternative methods of controlling for macroeconomic conditions we argue that the macroeconomic controls commonly included in models where no employment impact is found are inappropriate we consistently find a significant but modest negative relationship between minimum wage increases and teenage employment using alternative controls or allowing employer responses to the policy to occur with some delay

tax induced trading around ex dividend days abstract this paper investigates trading volume around ex dividend days for taxable distributions cash dividends it is found that trading volume increases significantly around the ex dividend day this increase is more pronounced for high yield actively traded stocks and after brokerage commissions became negotiable the results are consistent with the hypothesis that short term traders have an impact on ex day price behavior at least for taxable distributions for non taxable distributions stock splits and stock dividends we find negative abnormal volume around ex day

new car sales and used car stocks a model of the automobile market this article develops a short run general equilibrium model of the automobile market by combining a discrete choice model of consumer automobile demand with simple models of new automobile production and used vehicle scrappage the theoretical model allows an unlimited degree of heterogeneity of both consumers and automobiles with equilibrium defined as aggregate demand equal to supply for every vehicle type econometric estimates of the scrappage and demand functions are then used to create a simulation model of the automobile market which is used to provide forecasts of automobile sales stocks and scrappage for the 1978 1990 period

tax reform and ex dividend day behavior this paper investigates the effect of a major canadian tax reform on the ex dividend day behavior of companies on the toronto stock exchange the results are inconsistent with the hypothesis that price changes on ex dividend days reflect the relative taxation of dividends and capital gains for the representative investor but are consistent with the hypothesis that ex dividend day price behavior reflects short term trading activities

errors in implied volatility estimation estimating implied volatility by inverting the black scholes formula is subject to considerable error when option characteristics are observed with plausible errors especially for options away from the money large changes in volatility produce small changes in option prices conversely small errors in option prices and other option characteristics produce large errors in implied volatilities in the presence of small measurement errors unobserved truncation of option prices that violate lower bounds for absence of arbitrage can also lead to systematic volatility smiles the paper proposes feasible gls estimators that reduce the noise and bias in implied volatility estimates

the valuation of options when asset returns are generated by a binomial process this paper values options on assets whose returns over a finite interval of time are generated by a binomial process it shows that a simple valuation relationship between the option and the underlying stock obtains if investors have preference functions that belong to a particular class even if opportunities to hedge do not exist one particular application of the theory is in the case where the stock price over a finite interval could increase by an amount fall by the same amount or stay at the same level the results in this paper may be viewed as the foundation of the preference based approaches to obtaining a risk neutral valuation relationship in this paper we value options on assets whose returns over a single period of time are generated by a multi stage binomial process of the additive and multiplicative types the market is open only at the beginning and end of the single period and consequently the risks involved in holding options cannot be hedged the case of a single stage binomial process in such a setting has been

option values under stochastic volatility theory and empirical estimates abstract this paper numerically solves the call option valuation problem given a fairly general continuous stochastic process for return volatility statistical estimators for volatility process parameters are derived and parameter estimates are calculated for several individual stocks and indices the resulting estimated option values do not differ dramatically from black scholes values in most cases although there is some evidence that for longer maturity index options black scholes overvalues out of the money calls in relation to in the money calls

asset prices and public information abstract this paper examines the impact of public quality information on the structure of equilibrium prices in a consumer durables market we model the link between prices and an observable quality index on the basis of the user cost approach using cross section data of the west german automobile market we show that the hypothesis of information efficiency cannot be rejected

dividend capture in nasdaq stocks abstract we examine the importance of dividend capture trading in nasdaq stocks by testing for cross sectional relations between ex day abnormal returns and bid ask spreads throughout we find that ex day returns and spreads are positively related the relation increases across dividend yield quintiles and is strongest in high yield stocks the relation does not appear in a sample of non ex dividend days these findings indicate that dividend capture trading affects the ex day returns of at least some particularly high yield nasdaq stocks and that dividend capture trading is important for understanding ex dividend day returns

variances of security price returns based on high low and closing prices in a recent paper garman and klass 1980 studied the problem of estimating capital asset price volatility parameters developing an idea first introduced by parkinson 1980 they argue that improved volatility measures can be obtained by taking into account the daily high low and opening prices in addition to the traditionally used closing prices this paper is concerned mainly with testing the empirical validity of different volatility estimators based on high low and closing prices

option arbitrage and strategy with large price changes abstract arbitrage pricing theorems are derived for options on stocks with jumps as a well as local movements the resulting valuation formulas depend on observable variables only closed form valuation expressions are obtained in the case of large positive and negative jumps these results translate into a simple algebra for characterizing the risk of arbitrage and investment portfolios a continuous time formulation of the infinite variance hypothesis leads to isomorphic pricing expressions

reason and rationality during energy crises this paper develops a technique for extracting the expectations embedded in the current prices of energy using durable goods and applies it to used car markets during the two energy crises of the 1970s the resulting estimates indicate that consumers took the energy crises seriously and formed expectations about future gasoline prices that appear rational when compared with the historical gasoline price series with the forecasts of specialists and experts or with the actual postsample behavior of gasoline prices the evidence therefore supports the view that consumers are able to make rather complex choices with a great deal of rationality and casts doubt on the wisdom of policies based on assumptions to the contrary

the effects of living wage laws evidence from failed and derailed living wage campaigns abstract living wage campaigns have succeeded in about 100 jurisdictions in the united states but have also been unsuccessful in numerous cities these unsuccessful campaigns provide a better control group or counterfactual for estimating the effects of living wage laws than the broader set of all cities without a law and also permit the separate estimation of the effects of living wage laws and living wage campaigns we find that living wage laws raise wages of low wage workers but reduce employment among the least skilled especially when the laws cover business assistance recipients or are accompanied by similar laws in nearby cities

option pricing and implicit volatilities abstract this paper demonstrates that black scholes implied volatilities can be used to value options in many situations where the assumptions of the black scholes model are violated including i alternative stock processes ii stochastic interest rates and iii market frictions given its computational simplicity this procedure provides an attractive alternative to the more complex models with a direct estimation procedure

a note on a simple accurate formula to compute implied standard deviations abstract we derive a simple accurate formula to compute implied standard deviations for options priced in the classic framework developed by black and scholes 1973 and merton 1973 when a stock price is equal to a discounted strike price this formula reduces to a formula provided by brenner and subrahmanyam 1988 however their formula s accuracy is sensitive to stock price deviations from a discounted strike price the formula derived here extends the range of accuracy to a wide band of option moneyness

standard deviations implied in option prices as predictors of future stock price variability abstract standard deviations implied in option prices have recently been introduced as being better than average predictors of future stock price variability this article specifically studies the predictive ability of implicit standard deviations taking into account the dividend problem and the problem of optimal weighting schemes of the standard deviations when there are several options on the same stock transaction data information was used to study the importance of non simultaneities in observing stock and option prices

valuation of american call options on dividend paying stocks empirical tests abstract this paper examines the pricing performance of the valuation equation for american call options on stocks with known dividends and compares it with two suggested approximation methods the approximation obtained by substituting the stock price net of the present value of the escrowed dividends into the black scholes model is shown to induce spurious correlation between prediction error and 1 the standard deviation of stock return 2 the degree to which the option is in the money or out of the money 3 the probability of early exercise 4 the time to expiration of the option and 5 the dividend yield of the stock a new method of examining option market efficiency is developed and tested