an empirical examination of the implications of arbitrage pricing theory abstract this paper presents a comprehensive set of tests of the implications of the arbitrage pricing theory we find unlike previously reported results a very limited relationship between the expected returns and the covariance factor loadings measures of risk furthermore unique variance measures of risk while generally making only small contributions to the explanation of asset returns turn out to be significant about as frequently as the coveriance measures of risk which is inconsistent with the arbitrage pricing theory model the intercept tests are more mixed but provide only limited support to the model

industry classifications and return comovement a company s industry affiliation is commonly used to construct homogeneous stock groupings for portfolio risk management relative valuation and peer group comparisons a variety of industry classification systems have been adopted however creating disagreements as to companies industry assignments this analysis of the global industry classification system gics and fama french system indicates that common movement in returns and operating performance resulting from industry effects is stronger for stocks of large companies than for those of small companies also increasingly fine levels of disaggregation improve discrimination up to six digit gics codes after which the benefits tail off stock groupings based on industry exhibit stronger out of sample homogeneity than groups formed from statistical cluster analysis

discrimination in the payment of full time wage premiums this study investigates how many hours must be worked per week in order for workers in different race and gender groups to receive a high hours full time wage premium an analysis of 1989 current population survey data shows that across occupations both white and black men received a full time wage premium for working at least 33 hours per week whereas white women had to work at least 37 hours and black women at least 39 hours to receive the premium controlling for occupation changes the threshold for black women to 33 hours but does not change the results for the other groups the authors find that the observed differences account for at most two percentage points of the wage differentials across race and gender

advertising strategies for new product diffusion in emerging markets propositions and analysis abstract we develop advertising strategies for a firm which has a new product for which demand exists in an emerging market however the primary channels for distribution of the firm s product do not exist because either the market has not been opened up or the firm has not entered the market therefore the consumers use the secondary channels in other markets the current research seeks to answer questions such as i is it beneficial to advertise for the product before the market opens ii what should be the difference in advertising before and after the market opens iii what is the effect of various parameters such as the likelihood of product adoption for the primary and secondary channels market potential and coefficient of innovation and imitation on the optimal advertising policies the above problem is relevant for the situation faced by japanese electronics goods manufacturers before they entered the indian market or a company which has regional presence in one part of a country say urban and gets access to another part later e g rural the problem is modeled as an optimal control problem relevant propositions are developed for optimal normative advertising policy numerical examples are provided to illustrate key policy results

assessing the financial performance of forestry related investment vehicles capital asset pricing model vs arbitrage pricing theory capital asset pricing model capm and arbitrage pricing theory apt are used to assess the financial performance of eight forestry related investment vehicles although results from apt support previous findings from capm about timberland investments three bodies of evidence show that apt findings are more robust the major conclusions are a institutional timberland investments and timberland limited partnerships have a low risk level and excess returns b forestry industry companies have not earned risk adjusted returns and the performance of medium forest industry firms is worse than that of large firms c stumpage price does not resemble the return generation process of timberland investments and d lumber futures have little excess return copyright 2001 oxford university press

multivariate tests of the zero beta capm abstract a cross sectional regression test csrt of the capm is developed and its connection to the hotelling t2 test of multivariate statistical analysis is explored algebraic relations between the csrt the likehood ratio test and the langrange multiplier test are derived and a useful small sample bound on the distribution function of the csrt is obtained an application of the csrt suggests that the crsp equally weighted index is inefficient but that the inefficiency is not explained by a firm size effect from february to december

introduction strategy for new products with positive and negative word of mouth existing innovation diffusion models assume that individual experience with the product is always communicated positively through word of mouth for certain innovations however this assumption is tenuous since communicators of the product experience may transfer favorable unfavorable or indifferent messages through word of mouth this paper examines a diffusion model for products in which negative information plays a dominant role discusses its implications for optimal advertising timing policy and presents an application to forecast attendance for the movie gandhi in the dallas area

formulating dynamic strategies using decision calculus abstract this paper presents an applied methodology to assist managers in strategically setting prices and allocating resources over the product brand or adoption diffusion life cycle while substantial theoretical work has been achieved in this area in the management science and operations research disciplines approaches which can be implemented as managerial tools are generally lacking our methodology which has been applied as a pc based decision support tool in the telecommunications industry marries the dynamic optimization literature with decision calculus approaches offering sufficient flexibility for applied contexts we discuss the approach and describe its use to derive optimal price and advertising policies strategies not commonly suggested using traditional formulations are also presented

the relative efficiency of slave agriculture a reply professors hofler and folland have written a very interesting paper which brings out several interesting ideas and is a contribution to the literature they argue that their results contradict those of our original paper concerning the relative efficiency of small versus large slave farms specifically they find that large slave farms are relatively more efficient however they have missed that main point of the original paper which was to compare the relative efficiency of slave and non slave farms on this issue the holfer and folland comment provides no additional insight thus their paper while interesting is not a comment on our original work

historical perspetives on the american economy explaining the relative efficiency of slave agriculture in the antebellum south the comments by paul david and others in the march 1979 issue of this review dealt mainly with technical issues related to the measurement of the relative efficiency of slave agriculture and so does this reply 1 the debate over these technical issues should not however obscure the marked shift in thought about the nature of the slave economy that has occurred during the past two decades until the mid 1950 s it was widely believed that the slave plantations were unprofitable and inefficient enterprises that were kept in operation by a class prepared to sacrifice its private economic interest enduring economic stagnation for the south in order to maintain its political and cultural hegemony the first critical blow to this thesis was delivered by the now famous 1958 essay of alfred conrad and john meyer marshalling the limited evidence available at that time and using a standard capital model to estimate the internal rate of return on an investment in slaves they concluded that rates of return on this form of capital compared favorably with rates on alternative investments this finding set off an extended debate that took more than a decade to resolve eventually refinements in the original capital model and a considerable expansion of the data base including the parker gallman sample of over 5 000 southern farms and large samples of slave prices and hire rates from probate and other records placed the rate of return in the 610 percent range thus demonstrating the allocative efficiency of the slave economy the second blow to the traditional thesis was delivered by richard easterlin s development of regional income estimates extending back to 1840 both these initial estimates and the subsequent refinements in them see our 1971a paper showed that the south experienced a high rate of growth in per capita income between 1840 and 1860 thus contradicting the view that the antebellum south was economically stagnant these twin blows to the traditional interpretation shifted cliometric attention to the question of the relative technical efficiency of slave and free agriculture in input utilization while it is obviously premature to declare this question settled a consensus has emerged on one critical point it is now clear that the previous view that slave agriculture was less efficient than free agriculture is incorrect what remains to be resolved is the exact margin of the advantage enjoyed by slave plantations and the explanation for this margin

application of a stochastic production frontier to slave agriculture an extension free small slave and large slave farms in the antebellum american south are compared using a stochastic production frontier approach which allows a distinction to be drawn between technological superiority and technical efficiency previous studies using this approach had only considered slave farms in addition cotton share is included as an independent variable in the production function in order to control for variations in crop mix across farm types that might make slave farms look more efficient i find that the gang system did make large slave farms technologically superior but that without the gang system slave agriculture was not superior in contrast to previous findings large slave farms were not less technically efficient than small slave farms overall slave farms were more efficient than free farms

free and slave labor in the antebellum south perfect substitutes or different inputs the substitutability between free and slave labor is examined and the permissibility of aggregating the two in to a single labor variab le is investigated using a translog production function slaves on large cotton farms worked in gangs free labor was not observed to do so despite this previous research has aggregated free and slave labor and employed functional forms imposing strong restrictions on substitution estimation of the translog function shows that simple additive aggregation is not acceptable on large farms slaves and free labor were complements while on small nongang farms they were substitutes copyright 1988 by mit press

dynamic optimal control models in advertising recent developments this paper presents a review of recent developments that have taken place in the area of dynamic optimal control models in advertising subsequent to the comprehensive survey of the literature by sethi in 1977 the basic problem underlying these models is that of determining optimal advertising expenditures and possibly other variables of interest over time for a firm or a group of competing firms under consideration this optimization is done subject to some dynamics that define how these variables translate into sales and in turn into profits the purpose of this update is twofold on the one hand new contributions in the areas already treated in the earlier survey are reviewed on the other hand new trends in the advertising literature since 1977 such as quality as an additional marketing instrument cumulative sales models pulsing advertising and advertising as a part of corporate models of the firm are discussed the models covered in this update are organized under six headings models with ca

the empirical foundations of the arbitrage pricing theory abstract this paper uses maximum likelihood factor analysis of large cross sections to examine the validity of the arbitrage pricing theory apt we are unable to explain the expected returns on firm size portfolios although we do explain the expected returns on portfolios formed on the basis of dividend yield and own variance where risk adjustment using the usual capm market proxies fails we also compare alternate versions of the apt and sharply reject the hypothesis that basis portfolios formed to mimic the factors span the mean variance frontier of the individual assets

the relative efficiency of slave agriculture a comment in their book time on the cross fogel and engerman fe present evidence that average factor productivity was greater for larger southern slave farms in 1860 than for both free farms and smaller slave farms in a recent article field 1988 lends support to the fe theory by finding that an upward shift in the production function occurs for slave farms at 15 slaves the size at which fe propose that gang labour became feasible in a more recent article grabowski and pasurka gp contradict both fe and field by finding that there was no relationship between the size of slave farms and their efficiency the present paper extends both gp s and field s work and refines a point made by fe we distinguish between a technological advantage due to the gang labour system and revenue inefficiency due both to the incentive structure of slavery and the repugnance of gang labour two factors which foster rational shirking and resistance by slaves that is we propose that relative to small slave farms large slave f

optimal starting times for end of season sales and optimal stopping times for promotional fares many industries face the problem of selling a fixed stock of items over a finite horizon these industries include airlines selling seats before planes depart hotels renting rooms before midnight theaters selling seats before curtain time and retailers selling seasonal goods such as air conditioners or winter coats before the end of the season given a fixed number of seats rooms or coats the objective for these industries is to maximize revenues in excess of salvage value when demand is price sensitive and stochastic pricing is an effective tool to maximize revenues in this paper we address the problem of deciding the optimal timing of a single price change from a given initial price to either a given lower or higher second price under mild conditions we show that it is optimal to decrease resp to increase the initial price as soon as the time to go falls below resp above a time threshold that depends on the number of yet unsold items

factor pricing in a finite economy abstract prior theoretical derivations of the arbitrage pricing theory apt bound an aggregate measure of the deviation of mean asset returns from that predicted by a linear pricing equation it is conceivable given this bound that some assets might be badly mispriced by the model in this paper a more intuitive derivation of the factor pricing equation is presented which describes the deviation on an asset by asset basis the deviation is shown to be small for assets in a realistic finite economy and is arbitrarily close to zero for those assets with arbitrarily small size relative to aggregate wealth it follows that the linear pricing equation provides a good approximation for the mean returns of all traded assets

multivariate proxies and asset pricing relations abstract a framework is developed in which inferences can be made about the validity of an equilibrium asset pricing relation even though the central aggregate in this relation is unobservable a multivariate proxy for the true market portfolio consisting of an equal weighted stock index and a long term government bond index is employed in an investigation of the sharpe lintner capm the empirical evidence suggests that we can reject the joint hypothesis that a capm is valid and b multiple correlation between the true market portfolio and proxy assets exceeds 0 7 connections to the equilibrium factor pricing literature are also explored

lead markets country specific drivers of the global diffusion of innovations abstract globally successful innovations have commonly been preferred first in one country or region before being adopted internationally countries that first adopt an internally successful innovation can be described as lead markets this paper presents the lead market concept of developing global innovations the lead role of a market is discussed first theoretically and then by use of a system of five country specific factors demand advantages price advantages export advantages transfer advantages and market structure advantages the applicability of this system of lead market factors is then evaluated in a detailed case study of the cellular mobile telephone industry it is finally suggested that companies can harness lead markets for the development of global innovations by developing and refining innovations in close interaction with the local environment of a lead market a company can focus on a narrow range of preferences and feedback lowering the risk of being locked into idiosyncratic environments and generate true global innovations a method for identifying potential lead markets is briefly discussed

a global stock and bond model six fundamental risk factors four for stocks and two for bonds explain most of the common volatility of individual stocks and bonds worldwide some of the risk factors have a strong international component and others are more purely national the cross national component of the risk factors tends to be stronger within the european union than worldwide the model proposed in this article can be used for integration of worldwide asset selection and asset allocation decisions

some empirical tests of the theory of arbitrage pricing we estimate the parameters of ross s arbitrage pricing theory apt using daily return data during the 1963 78 period we compare the evidence on the apt and the capital asset pricing model capm as implemented by market indices and find that the apt performs well the theory is further supported in that estimated expected returns depend on estimated factor loadings and variables such as own variance and firm size do not contribute additional explanatory power to that of the factor loadings

female labor force intermittency and current earnings a switching regression model with unknown sample selection using the health and retirement survey from the usa this paper finds a 16 selectivity corrected wage penalty among women who engage in intermittent labour market activity this penalty is experienced at a low level of intermittent activity but appears to not play an important role in a woman s decision to undertake such activity in addition employer preferences appear to play a larger role than human capital atrophy in the determination of the wage penalty

the definition of part time employment a switching regression model with unknown sample selection rejecting the standard less than thirty five hours per week categorization of part time workers this paper offers an empirically justified definition of the part time employed the definition is based on the distinction through wage payments that employers make between a high hours full time and a low hours part time group of workers a switching regression model of wage equations with deterministic but unknown sample selection is estimated resulting in a significant split between high hours and low hours workers that is higher than the standard definition wage differentials are calculated and decomposed and estimates from the structural choice model are presented copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

stochastic optimal budget decision for advertising considering uncertain sales responses abstract firms are faced with uncertain sales responses even though they advertise appropriately to help marketing managers make optimal budget decisions in this situation we develop a stochastic model depicting the problem of advertising budget decision as a special markov decision process where a new objective maximizing expected market utility is proposed in the model we introduce a two dimension state variable including accumulative sales which vary randomly with advertising budget and the predicted probability that an advertising campaign obtains a full sales response we make an analysis of the model on the premise of growing infinite market potential deriving the property of optimal policies and that of optimal value function these results are successfully used to make advertising budget decisions for a private university in xi an china

a simple examination of the empirical relationship between dividend yields and deviations from the capm abstract several papers have been published in recent years dealing with both the theoretical and the empirical impact of dividend yields on security returns dividends have been postulated as affecting stock returns because of tax effects agency costs and the wealth transfer hypothesis in this paper we perform a purely empirical examination of whether and to what extent deviations from the zero beta form of the capm are explained by divident yields the paper demonstrates that dividend yield has a large and statistically significant impact on return above and beyond that explained by the zero beta form of the capm this is consistent with the findings of litzenberger and ramaswamy in addition our results are consistent with the findings of small firm effects

idiosyncratic variation of the us dollar we address the role of the us dollar when constructing a set of systematic statistical factors from a group of us dollar exchange rates researchers usually regard the us dollar as wholly systematic in this paper however we are able to decompose the us dollar and other currencies into systematic and idiosyncratic factors using the global prices for currencies rather than us dollar exchange rates using monthly data over a period of more than 44 years we find that approximately 25 of the total variation for the us dollar can be attributed to idiosyncratic variation

an explicit bound on individual assets deviations from apt pricing in a finite economy abstract ross s arbitrage pricing theory apt is a tractible and reasonable alternative to the mean variance model nonetheless understanding of the theory has been obscured by the complexity of the sequence economy models used for motivation by contrast we give a simple and direct derivation of the apt in a finite economy using an explicit bound on the deviations from apt prices across assets a coarse calculation shows that theoretical deviations from apt pricing are negligible in our economy

multistage multiproduct advertising budgeting abstract we propose and analyze an effective model for the multistage multiproduct advertising budgeting problem this model optimizes the advertising investment for several products by considering cross elasticities different sales drivers and the whole planning horizon we derive a simple procedure to compute the optimal advertising budget and its optimal allocation the model was tested to plan a realistic advertising campaign we observed that the multistage approach may significantly increase the advertising profit compared to the successive application of the single stage approach

yes the apt is testable the arbitrage pricing theory apt has been proposed as an alternative to the meanvariance capital asset pricing model capm this paper considers the testability of the apt and points out the irrelevance for testing of the approximation error we refute shanken s objections including his assertion that roll s critique of the capm is applicable to the apt we also explain the testability of the apt on subsets and we explore the relationship between the apt and the capm the arbitrage pricing theory apt has been the subject of extensive research efforts since it was introduced by ross 36 37 the research has included theoretical papers and a growing empirical literature 2 nonetheless there seems to be some confusion in the literature about the relation between the theoretical underpinnings of the apt and its empirical tests this paper is an attempt to alleviate the confusion to illustrate the issues and to provide a focus section i of this paper is devoted to examining and refuting some points raised in shanken 40 which considers the testability of the apt the underlying premise of the apt is that asset returns ri are generated by a factor model of the form

the three types of factor models a comparison of their explanatory power multifactor models of security market returns can be divided into three types macroeconomic fundamental and statistical factor models macroeconomic factor models use observable economic time series such as inflation and interest rates as measures of the pervasive shocks to security returns fundamental factor models use the returns to portfolios associated with observed security attributes such as dividend yield the book to market ratio and industry identifiers statistical factor models derive their pervasive factors from factor analysis of the panel data set of security returns this paper compares the explanatory power of these three approaches for u s equity returns

dynamic advertising strategies of competing durable good producers this work develops a diffusion model which incorporates word of mouth and advertising effects for two firms introducing competing brands of a new durable product the competition between the two firms is formulated as a two player nonzero sum markovian game the firms are assumed to behave noncooperatively in choosing their advertising strategies and the solution concept is a nash noncooperative equilibrium optimal advertising policies for this stochastic closed loop control problem are obtained via dynamic programming our results indicate that both firms will start with high advertising outlays which will get reduced as the number of adopters increases this is similar to the result obtained previously for a monopolist further we find that there is a significant value in being the first brand to the market and the greater the intensity of word of mouth effects the greater the value in being first the first entrant advantage is due to the goodwill generated by its stock of previous adopters this first entrant advantage can only be overcome if the second entrant enters with a superior brand which is more enthusiastically endorsed by its adopters

optimal pricing and lot sizing under conditions of perishability and partial backordering we formulate a generalized model of dynamic pricing and lot sizing by a reseller who sells a perishable good we assume that when it is economic to backlog demand the reseller can plan for periods of shortage during which demand can be partially backordered when the good is highly perishable the reseller may need to backlog demand in order to market the good at a reasonable price we present a simple solution procedure for solving the optimization problem the procedure entails solving first a single nonlinear equation and then if required two nonlinear equations

recent developments in dynamic advertising research a variety of continuous time differential functions have been developed to investigate dynamic advertising problems in business and economics fields since major dynamic models appearing before 1995 have been reviewed by a few survey papers we provide a comprehensive review of the dynamic advertising models published after 1995 which are classified into six categories i nerlove arrow model and its extensions ii vidale wolfe model and its extensions iii lanchester model and its extensions iv the diffusion models v dynamic advertising competition models with other attributes and vi empirical studies for dynamic advertising problems for each category we first briefly summarize major relevant before 1995 models and then discuss major after 1995 models in details we find that the dynamic models reviewed in this paper have been extensively used to analyze various advertising problems in the monopoly duopoly oligopoly and supply chain systems our review reveals that the diffusion models have not been used to analyze advertising problems in supply chain operations which may be a research direction in the future moreover we learn from our review that very few publications regarding dynamic advertising problems have considered the supply chain competition we also find that very few researchers have used the diffusion model to investigate the dynamic advertising problems with product quality as a decision variable and the pricing decision has not been incorporated into any extant lanchester model the paper ends with a summary of our review and suggestions on possible research directions in the future

multi beta capm or equilibrium apt a reply in their influential empirical paper roll and ross 11 state we think that in many discussions of the capm scholars were actually thinking of the apt and of process 1 the factor model with just a single factor in light of recent developments in the asset pricing literature i think it can now meaningfully be suggested that in many discussions of the apt scholars may have actually been thinking of a multi beta interpretation of the capm indeed much can be said in support of each of these perspectives for a single paradigm is emerging which integrates fundamental aspects of both the capm and the apt broadly speaking the equilibrium capm paradigm emphasizes the role of covariance between asset returns and an endogenous preference based aggregate while the arbitrage apt paradigm focuses on the covariance between asset returns and factors in the return generating process the emerging equilibrium factor paradigm encompasses each of these relations as well as a third covariance between the factors and the equilibrium aggregate my thesis in shanken 17 was that i the arbitrage paradigm has not produced a refutable hypothesis and that ii recognition of the role of the factor aggregate covariance relation appears to be essential if positive economic significance is to be attributed to asset pricing empirical work dybvig and ross d r attempt to resolve the empirical indeterminacy of the arbitrage paradigm by appealing to the condition that residual variance should not be too large i explain in section ii that this condition is inherently ambiguous from an empirical perspective and does not permit the formulation of a precise testable implication the equilibrium factor models which d r discuss do yield testable restrictions on parameters in the return generating process however consistent with my second point above these restrictions involve joint hypotheses that cannot be verified without observing the entire universe of assets thus contrary to their claim considerations similar to those in roll s 10 critique are indeed relevant to the testing of these models this and other similarities between the equilibrium apt and the capm are discussed in section iii i begin by clarifying some basic terminology

oligopoly models for optimal advertising when production costs obey a learning curve business policy questions frequently involve competitive encounters among several different firms oligopoly theory in economics was devised to answer similar questions but its results so far are largely confined to cases of monopoly one firm duopoly two firms and many firms wheat farmers the cases with n firms where 3 n 10 are of great interest to business policy but are rarely treated in the economics literature because of their extreme difficulty the natural mathematical model for studying such questions is the theory of differential games originally devised by r isaacs isaacs r 1975 differential games robert e krieger publishing co huntington new york originally published by john wiley sons new york 1965 for pursuer evader games later it was extended by j case case j h 1979 economics and the competitive process new york university press new york to nonzero sum differential games for application to questions of economic competition the problem of characterizing an optimal advertising policy over time is an important question in the field of marketing it is especially important during the period of the introduction of a new product and it is also during this time that the production learning curve phenomenon is most pronounced in this paper we study oligopoly models which combine elements of bass s demand growth model bass f m 1969 a new product growth model for consumer durables management sci 15 january 215 227 the vidale wolfe vidale m l h b wolfe 1957 an operations research study of sales response to advertising oper res 5 370 381 and ozga ozga s 1960 imperfect markets through lack of knowledge quart j econom 74 29 52 advertising models with linear or quadratic costs and the production learning curve hirschmann w p 1964 profit from the learning curve harvard bus rev 42 january february 125 139 the boston consulting group 1972 perspectives on experience the boston consulting group boston in the monopoly case n 1 the optimal advertising function is derived by applying green s theorem in the duopoly n 2 and triopoly n 3 cases we use discrete differential game models and find nash equilibrium solutions in each of these models the form of the optimal policy is easy to find but because of the complicated nature of the resulting differential equations closed form solutions for the optimal state and control trajectories are impossible to find hence we use a computer to compute these optimal trajectories and plot them for various parameter settings because 13n parameters must be chosen to define a model with n players a complete search of the parameter space is clearly impossible we content ourselves in this paper with presenting computer plots of four different interesting encounters of the triopoly model our methods can be extended to work just as well for competitive encounters among n players where 1 n 10 we believe that in this paper we have opened up the way to studying oligopoly theory with a small number of participants and under widely varying conditions although the lack of closed form solutions may disappoint some readers we feel that the easy availability of graphical solutions is a more than adequate substitute

a dynamic model of manufacturing quality s effect on optimal advertising and pricing policies abstract this paper deals with the determination of optimal advertising and pricing policies when the influence of manufacturing quality on sales ra considered research to date has focused on the effect of advertising and pricing independently on the sales rate of a product under a variety of product and market conditions these studies have not considered the effect of product quality an important component of competitive strategy we develop a dynamic model to maximize discounted profits over a planning horizon in which sales rate is dependent on price advertising and product quality using standard methods of optimal control theory we characterize qualitatively the nature of optimal advertising quality and pricing policies under a variety of conditions