the informational role of stock and bond volume in a kyle 1985 model the sign of the correlation between a firm s debt and equity returns is the same as the sign of the cross market kyle s lambda the sign is positive negative if private information concerns the mean risk of the firm s assets we show empirically that information conveyed by order flows is primarily about asset means the cross market lambdas are quite large consequently the portions of bond and stock returns explained by order flows are highly correlated even though the order flows themselves are virtually uncorrelated

efficient and durable decision rules with incomplete information we compare six concepts of efficiency for economies with incomplete information depending on the stage at which individuals welfare is evaluated and on whether incentive constraints are recognized an example is shown in which an incentive efficient decision rule may be unanimously rejected by the individuals in the economy we define durable decision rules which can resist such unanimous rejection and show that efficient durable decision rules exist

option pricing with an illiquid underlying asset market abstract we examine how price impact in the underlying asset market affects the replication of a european contingent claim we obtain a generalized black scholes pricing pde and establish the existence and uniqueness of a classical solution to this pde unlike the case with transaction costs we prove that replication with price impact is always cheaper than superreplication compared to the black scholes case a trader generally buys more stock and borrows more shorts and lends more to replicate a call put furthermore price impact implies endogenous stochastic volatility and an out of money option has lower implied volatility than an in the money option this finding has important implications for empirical analysis on volatility smile

sovereign default risk and the u s equity market i develop a two country general equilibrium model with firms governments and endogenous default decisions this paper shows that the risk of sovereign default abroad is important in the explanation of the level and the volatility of u s equity returns the intuition is that negative economic shocks deteriorate the fiscal situation of foreign governments thereby increasing the risk of a sovereign default that would trigger a local contraction in economic growth the rise in the risk of an economic slowdown abroad amplifies the direct eect of these shocks on the level and the volatility of equity returns in the u s through i a decrease in the present value of future firm earnings due to the unfavorable adjustment of the real exchange rate for u s exporters and ii a fall in u s equity prices that originates from the investors incentive to rebalance their portfolio towards risk free securities the amplification eect is strongest during periods of financial distress when the risk of corporate default is high in the u s a structural estimation of the model provides strong support for this prediction using monthly data for brazil and the u s over the period 1994 2008

the many faces of information disclosure in this article we ask what kind of information and how much of it should firms voluntarily disclose three types of disclosures are considered one is information that complements the information available only to informed investors to be processed complementary information the second is information that is orthogonal to that which any investor can acquire and thus complements the information available to all investors preprocessed complementary information and the third is information that substitutes for the information of the informed investors in that it reveals to all what was previously known only by the informed substitute information our main results are as follows first in equilibrium all types of firms voluntarily disclose all three types of information second in contrast to the existing literature complementary information disclosure by firms strengthens investors private incentives to acquire information substitute information disclosure weakens private information acquisition incentives third while complementary information disclosure has an ambiguous effect on financial innovation incentives substitute information disclosure weakens those incentives

digital contracts and price manipulation corporate insiders holding derivative contracts on their firm s stock have an incentive to engage in stock price manipulation i examine several derivative contracts susceptible to manipulation and the price impact of the insiders strategic behavior digital contracts the basic building blocks for valuing complex financial derivatives are vulnerable to manipulation the impact of the strategies from holding digital contracts is consistent with an implied volatility skew and volatility clustering even seemingly innocuous derivatives such as ordinary bull spreads generate these manipulation incentives this has strong implications for corporate policy since firms often use option spreads in their stock repurchase programs

investor flows and the 2008 boom bust in oil prices this paper explores the impact of investor flows and financial market conditions on returns in crude oil futures markets i argue that informational frictions and the associated speculative activity may induce prices to drift away from fundamental values and may result in price booms and busts particular attention is given to the interplay between imperfect information about real economic activity including supply demand and inventory accumulation and speculative activity in oil markets furthermore i present new evidence that there were economically and statistically significant effects of investor flows on futures prices after controlling for returns in the united states and emerging economy stock markets a measure of the balance sheet flexibility of large financial institutions open interest the futures spot basis and lagged returns on oil futures the largest impacts on futures prices were from intermediate term growth rates of index positions and managed money spread positions moreover my findings suggest that these effects were through risk or informational channels distinct from changes in convenience yield finally the evidence suggests that hedge fund trading in spread positions in futures impacted the shape of term structure of oil futures prices this paper was accepted by wei xiong finance

the usefulness of the wind up measure of pension liabilities a labor market perspective financial economists have long favored the use of a wind up measure of the firm s pension liabilities yet the pension liabilities of the firm also represent the pension wealth of its workers it is reasonable to presume that workers and shareholders have a common view of the pension contract if the wind up measure depicts the true pension liabilities of the firm then the wage concession granted by its workers must reflect the fact that the firm may choose to terminate the plan at any time data on the wageservice characteristics of the membership of a sample of final earnings plans in canada suggest contrary to the implications of the wind up measure that workers wages do not internalize accruing pension benefits on a year to year basis instead the data suggest that pension plans may be a vehicle through which a significant portion of the total compensation of individual employees is deferred until their later work years and that the wind up measure may well understate the pension liabilities of an on going firm the financial accounting standards board 4 or fasb recently proposed that net pension assets or liabilities appear on the corporate balance sheet in order to make operational the concept of the augmented balance sheet one must construct measures of both pension assets and pension liabilities the noncontroversial view at least among economists is that pension assets be valued at market the fasb endorses this view the measurement of pension liabilities on the other hand remains controversial financial economists such as sharpe 10 have traditionally advocated a market or wind up measure of the firm s pension liabilities the pensions due under the terms of the plan if it were to be immediately terminated are calculated and these pensions are then costed at current annuity rates the accrued benefit method without salary projection is the actuarial valuation method used in the calculation the wind up measure is the market value of the firm s pension liabilities since it identifies the precise amount that the firm would require to discharge its legal obligation if the plan were terminated 1 yet the fasb now rejects the use of this method of calculating the firm s

financial innovation and information the role of derivatives when a market for information exists we study the effects of financial innovation in a model of endogenous information acquisition we determine the conditions under which the introduction of a derivative written on an existing stock increases or decreases the incentive to purchase information we show that financial innovation produces some effects which hold across informational structures and others which differ the former coincide with the few empirical results that are robust in the literature effects on prices risk premia and volatility while the latter coincide with the ones that differ experiment by experiment effects on volume correlation between volume and volatility and market informational efficiency copyright 2002 oxford university press

consensus consumer and intertemporal asset pricing with heterogeneous beliefs le fichier attache est egalement edite dans les cahier de la chaire les particuliers face aux risques de l institut de finance de dauphine cahier n 7 mars 2007

a comment on excess asset reversions and shareholder wealth this study re examines the earlier finding of alderson and chen 1986a that financial markets do not consider excess pension assets in determining share prices and that significant increases in shareholder wealth occur when an overfunded pension plan is terminated the results document that specific event time contamination corporate restructuring announcements provides the driving force for all the earlier findings alderson and chen ac 1986a attempt to empirically determine whether the reversion of the excess pension assets represented by overfunded definedbenefit pension plans leads to increases in the market value of the reverting firms ac s results suggest support for those who maintain that the assets of a firm s pension funds are separate and distinct from the assets of the sponsoring firm the separation hypothesis rather than those who maintain that pension assets are priced prior to reversion the integration hypothesis this comment modifies ac s study for the purpose of strengthening their approach in terms of its agreement with both known corporate behavior and conventional event study methodology following these modifications no evidence remains that share prices are significantly affected by pension terminations

the effect of derivative assets on information acquisition and price behavior in a rational expectations equilibrium this article shows that introducing derivative assets increases incentives to collect information about asset payoffs the increase in information collection makes the price of the underlying asset more informative and causes the expected price to increase extending the model to a dynamic setting with multiple risky assets we find the introducing derivative assets for one asset increases the expected prices of positively correlated assets and reduces price reaction to future earnings announcements these findings are consistent with the bulk of the empirical evidence on the relationship between the introduction of derivative assets and the behavior of asset prices article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

asymmetric information and options in an extension of the kyle 1985 model of continuous insider trading it is shown that asymmetric information can make it impossible to price options by arbitrage even when an option would appear to be redundant its introduction into the market can cause the volatility of the underlying asset to become stochastic this eliminates the potential for dynamically replicating the option the change in the price process of the asset reflects a change in the information transmitted by volume and prices when the option is traded article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

bond ladders and optimal portfolios we analyze complex bond portfolios within the framework of a dynamic general equilibrium asset pricing model equilibrium bond portfolios are nonsensical and imply a trading volume that vastly exceeds observed trading volume on financial markets instead portfolios that combine bond ladders with a market portfolio of equity assets are nearly optimal investment strategies the welfare loss of these simple investment strategies when compared to the equilibrium portfolio converges to zero as the length of the bond ladder increases this article therefore provides a rationale for naming bond ladders as a popular bond investment strategy

commodity trade and international risk sharing how much do financial markets matter abstract this paper evaluates the social gains from international risk sharing in some simple general equilibrium models with output uncertainty a simulation model calibrated to selected moments of u s and japanese data estimates the incremental loss from a ban on international portfolio diversification to be on the order of 0 20 percent of output per year even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology the paper argues that the small magnitude of potential trade gains may help explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility

dynamic equilibrium with liquidity constraints this article studies an intertemporal economy with liquidity constrained and unconstrained individuals we use a stopping time approach to solve the finite horizonconstrained consumption portfolio problem with constant relative risk aversion and to examine the structure of equilibrium the impact of the constraint on the optimal consumption and the financing portfolio is assessed the equilibrium state price density is related to the exercise boundary of an american style contingent claim with nonlinear payoff this stopping time characterization enables us to prove the existence of an equilibrium and can be implemented numerically properties of equilibrium bond and stock returns are examined copyright 2003 oxford university press

excess asset reversions and shareholder wealth the ownership of pension assets in a defined benefit pension plan is an unresolved issue in corporate finance the issue is important because it defines the appropriate investment policy for a pension fund in this paper we summarize the ownership debate in the form of two mutually exclusive theories we then focus on a recently popular event in pension finance excess asset reversions our paper demonstrates the valuation effects associated with this event in a stochastic dominance framework under certain conditions a reversion constitutes an expropriation of wealth from the participants and beneficiaries of the plan to the firm using data provided by the pension benefit guaranty corporation and the center for research in security prices tape we examine the returns to the shareholders of 58 companies which conducted excess asset reversions between 1980 and 1984 our results show that large abnormal returns accrued to these shareholders around the time of the reversion these findings have implications both for the appropriate investment policy of pension funds and for public policy with respect to plan terminations

a welfare criterion for models with distorted beliefs this paper proposes a welfare criterion for economies in which agents have heterogeneously distorted beliefs instead of taking a stand on whose belief is correct our criterion asserts an allocation to be belief neutral ine cient if it is ine cient under any convex combination of agents beliefs while this criterion gives an incomplete ranking of social allocations it can identify negative sum speculation in a broad range of prominent models with distorted beliefs

information revelation through option exercise in many real world situations agents must formulate option exercise strategies with imperfect information in such a setting agents may infer the private signals of other agents through their observed exercise strategies the building of an office building the drilling of an exploratory oil well and the commitment of a pharmaceutical company toward the research of a new drug all convey private information to other market participants this article develops an equilibrium framework for option exercise games with asymmetric private information many interesting aspects of the patterns of equilibrium exercise are analyzed in particular informational cascades where agents ignore their private information and jump on the exercise bandwagon may arise endogenously article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

disagreement and learning dynamic patterns of trade we study volume dynamics when there are disagreements among investors for that purpose we develop a dynamic model in which differences in the interpretation of public information lead to trade we obtain a simple linear equilibrium in closed form in which risk averse agents take into account future trading opportunities when solving for their optimal portfolio allocation using this framework we then study what restrictions on the disagreement process are needed to generate empirically observed patterns in volume and prices we show that having infrequent but major disagreements leads to autocorrelation in volume and correlation between volume and absolute price changes when agents disagree on past news but agree on the interpretation of current news there is learning and the convergence of agents opinions leads to trade

option volume and stock prices evidence on where informed traders trade this paper investigates the informational role of transactions volume in options markets we develop an asymmetric information model in which informed traders may trade in option or equity markets we show conditions under which informed traders trade options and we investigate the implications of this for the linkage between markets our model predicts an important informational role for the volume of particular types of option trades we empirically test our model s hypotheses with intraday option data our main empirical result is that negative and positive option volumes contain information about future stock prices the information content of trading activity is a subject of widespread interest if trades are correlated with private information then the outcome of the transaction process may portend future movements in price the extension of trading to different venues or to derivative instruments however means that this link between transactions and information need not be easily discernible if there are alternative markets in which informed traders can profit from their information then where informed traders choose to trade may have important implications not only for security p rice movements but for the behavior of related prices as well this suggests that transactions in derivative markets may be an important predictor of future security price movements in this paper we investigate the informational role of transactions volume in options markets for some readers this focus may seem puzzling an option is a derivative security so its price should be dictated unilaterally by the behavior of the stock price this unidirectional linkage is only true however in complete markets if information is impounded into prices by trading then the ability of informed traders to transact in options markets mearns

heterogeneous beliefs and the effect of replicatable options on asset prices we present two ways in which trading in a replicatable option can affect the price process of the underlying asset in the first situation trading an option that each investor views as pay off redundant breaks a non fully revealing equilibrium that exists when the option market is absent the second situation involves a market that is dynamically complete without options but in which introducing an option market allows self confirming conjectures of additional uncertainty about the future price of the underlying asset heterogeneous beliefs play important though different roles in both situations article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

imperfect competition in a multi security market with risk neutrality the central purpose of this paper is to develop a model of insider trading i e trading based on private information in the context of an imperfectly competitive multi security market with risk neutral agents imperfect competition allows us to consider strategic behavior and a multi security market lets us study the effect of a correlated environment on equilibrium we employ the informational assumption that market makers can observe all order flows and so portfolio diversification arises in this model for strategic reasons given correlated fundamentals market makers can potentially learn about every security from each order flow this causes even a risk neutral trader who does not face short selling restrictions to refrain from determining the demand for each security independently this contrasts with traditional multi asset models which focus on the incentive to reduce portfolio variance or the effect of short selling restrictions or budget constraints under imperfect competition correlation has two effects one ceteris paribus it allows the uninformed to learn from additional variables since each order flow could potentially have information about all payoffs on the other hand it creates an incentive for informed traders to restrict what others can learn from public information thus our analysis can be viewed as an application to the multi security heterogeneous information model in admati 1985 of the imperfectly competitive equilibrium concept which kyle 1985 first applied to the single security homogeneous information model of grossman and stiglitz 1980 our principal results include an explicit characterization of a linear equilibrium as a function of three general covariance matrices associated with payoffs noise trading and errors in private signals under general covariance structures we show that there always exists an equilibrium in which the relationship between the vector of prices and the vector of order flows is governed by a symmetric positive definite matrix the plan of the paper is as follows in section 2 we introduce our model we derive the equilibrium in section 3 and section 4 comments on the properties of the equilibrium the proofs of the results are in the appendix

differences in beliefs and currency risk premiums this paper studies the importance of heterogeneous beliefs for the dynamics of asset prices we focus on currency markets where the absence of short selling constraints allows us to perform sharper tests of theoretical predictions using a unique data set with detailed information on foreign exchange forecasts we construct an empirical proxy for differences in beliefs we show that this proxy has a strong effect on the implied volatility of currency options beyond the volatility of macroeconomic fundamentals we document that differences in beliefs impact also on the shape of the implied volatility smile on the volatility risk premiums and on future currency returns

option smiling when investors estimates of asset volatility disagree this study sheds light on why heterogeneous beliefs in volatility manifest the smile effect of options and how the degree of belief disagreement influences option implied volatility it is found that when investors level of heterogeneous beliefs increases agents who over estimate volatility raise their subjective probability about those outer dividend states and hence increase more consumption to those states as a result an increase of consumption causes a decrease of their marginal rate of transformation in outer states the raising subjective probability increases the prices of outer states while the lower marginal rate of transformation decreases the prices of that however the influence of the former dominates the latter causing a fatter tail of the state price density as a consequence the values increase for those call options with high strike prices and put options with low strike prices leading to a u shaped implied volatility and hence causes a smell effect

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

information expected utility and portfolio choice we study the consumption investment problem of an agent with a constant relative risk aversion preference function who possesses noisy information about the future prospects of a stock we also solve for the value of information to the agent in closed form we find that information can significantly alter consumption and asset allocation decisions for reasonable parameter ranges information increases consumption in the vicinity of 25 information can shift the portfolio weight on a stock from 0 to around 70 thus de pending on the stock beta the weight on the market portfolio can be considerably reduced with information causing the appearance of underdiversification the model indicates that stock holdings of informed agents are positively related to wealth unrelated to systematic risk and negatively related to idiosyncratic uncertainty we also show that the dollar value of information to the agent depends linearly on his wealth and decreases with both the propensity to intermediate consumption and risk aversion

asset prices and exchange rates in this paper we study the implications of introducing demand shocks and trade in goods into an otherwise standard international asset pricing model trade in goods gives rise to an additional channel of international propagation through the terms of trade absent in traditional single good asset pricing models the inclusion of demand shocks helps overturn many unrealistic implications of existing international flnance models in which productivity shocks are the sole source of uncertainty our model generates a rich set of implications on how stock bond and foreign exchange markets co move we solve the model in closed form which yields a system of equations that can be readily estimated empirically our estimation validates the main predictions of the theory

learning from prices and the dispersion in beliefs i study whether investors use an asset s price to update their beliefs about its payos i show that in a dynamic economy the relationship between the dispersion in investor beliefs and returnvolume characteristics can be used to empirically answer this question when investors have rational expectations re and condition on the price i show that belief dispersion is positively related to expected returns return volatility and correlation between volume and absolute returns but negatively related to return autocorrelation when investors do not use the price as in a dierence of opinions do model these relationships are reversed i test these predictions using the crosssection of returns volume and analyst forecast dispersion over dierent horizons the results are consistent with the re model at quarterly and longer horizons but reject both models at the monthly horizon i show that a hybrid model with some do investors and some re investors can match the short horizon evidence the empirical results are consistent with the idea that while some investors do not use the price in the short run they increase their conditioning on the price over time

spinoff terminations and the value of pension insurance this paper derives the value of pension benefit guarantee corporation pbgc pension insurance under two scenarios of interest the first allows for voluntary plan termination which appears to be legal under current statutes in the second scenario termination is prohibited unless the firm is bankrupt empirical estimates of pbgc liabilities are calculated these show that prospective pbgc liabilities greatly exceed current reserves for plan terminations that even under a bankruptcy only termination rule pbgc liabilities still would be quite sensitive to discretionary funding policy and that the increasingly common practice of pension spinoff terminations substantially increases the present value of the pbgc s contingent liabilities the pension benefit guarantee corporation pbgc was established by the employee retirement income security act of 1974 erisa to guarantee the benefits of workers who belong to defined benefit pension plans if a pension plan is terminated with insufficient assets to pay guaranteed benefits the pbgc assumes responsibility for those benefits the pbgc can take some comfort from the fact that most large pension plans are currently overfunded surplus plan assets provide a cushion for adverse investment experience that reduces the value of pbgc contingent liabilities recently however terminations of overfunded plans have become more common 7 these spinoff terminations typically allow firms to split their pension plans into two parts one for active employees and one for retirees to place all surplus assets into the retiree plan and then to terminate that plan thereby recapturing the entire surplus the pbgc is left insuring a continuing plan that has been stripped of surplus assets the current value of pbgc contingent liabilities obviously increases under spinoff terminations one approach to valuing pbgc liabilities is provided by the options pricing framework several authors 3 4 5 6 9 11 12 17 and 19 already have used option pricing methodology to study the valuation of pbgc insurance the provisions of erisa allow firms to transfer their pension liabilities to the pbgc in return for pension fund assets plus 30 percent of the market value of the firm s net worth thus viewing pbgc insurance as a put option the pension liabilities play the role of the exercise price while the fund assets plus 30 percent of net worth play the role of the underlying asset or stock price however while the analogy between put options and the option to terminate a pension plan appears straightforward the correspondence between the two is not at all clear with respect to the effective time to maturity of the pension put

a characterization of the daily and intraday behavior of returns on options the daily and intraday behavior of returns on chicago board options exchange options is examined option returns contain systematic patterns even after adjusting for patterns in the means and variances of the underlying assets this is consistent with the hypothesis that informed trading in options can make the order flow in the options market informative about the value of the underlying asset making options nonredundant the intraday patterns in adjusted option return variances are further consistent with a model of strategic trading by informed and discretionary liquidity traders this paper examines the daily and intraday behavior of returns on options we have two goals our first objective is to identify systematic patterns in the means and variances of daily and intraday returns on options our second objective is to decompose option returns into patterns that are related to the means and variances of the underlying stocks and by inference those patterns that are independent of patterns in the means and variances of the underlying assets 1 our work is important for a number of reasons first options have become as important as common stocks yet there is no detailed investigation of the behavior of returns on options second it is important to identify similarities and differences in return patterns across different securities and market structures an understanding of these similarities and differences would allow us to develop better models of returns that capture these properties closely related to this it is instructive to examine option returns in light of the partial equilibrium models we use to value them specifically are the return patterns in options driven exclusively by the underlying stocks or do option returns contain patterns of their own identifying independent yet similar patterns in options returns may lead to an identification of factors that are common across two different market structures the new york

international business cycles with endogenous incomplete markets backus kehoe and kydland 1992 baxter and crucini 1995 and stockman and tesar 1995 find two major discrepancies between standard international business cycle models with complete markets and the data in the models cross country correlations are much higher for consumption than for output while in the data the opposite is true and cross country correlations of employment and investment are negative while in the data they are positive this paper introduces a friction into a standard model that helps resolve these anomalies the friction is that international loans are imperfectly enforceable any country can renege on its debts and suffer the consequences for future borrowing to solve for equilibrium in this economy with endogenous incomplete markets the methods of marcet and marimon 1999 are extended incorporating the friction helps resolve the anomalies more than does exogenously restricting the assets that can be traded

forecasting stock return variance toward an understanding of stochastic implied volatilities we examine the behavior of measured variances from the options market and the underlying stock market under the joint hypotheses that markets are informationally efficient and that option prices are explained by a particular asset pricing model forecasts from time series models of the stockreturn process should not have predictive content given the market forecast as embodied in option prices both in sample and out of sample tests suggest that this hypothesis can be rejected using simulations we show that biases inherent in the procedure we use to imply variances cannot explain this result thus we provide evidence inconsistent with the orthogonality restrictions of option pricing models that assume that variance risk is unpriced these results also have implicationsfor optimal variance forecast rules

firm specific information and the correlation between individual stocks and bonds abstract this paper examines the correlation between the returns on individual stocks and the yield changes of individual bonds issued by the same firm and finds that they are negatively and contemporaneously correlated this suggests that individual stocks and bonds are driven by firm specific information that is predominantly related to the mean rather than the variance of the firm s underlying assets furthermore i find that lagged stock returns have explanatory power for current bond yield changes while current stock returns are unrelated to lagged bond yield changes this shows that stocks lead bonds in reflecting firm specific information

the informational role of stock and option volume this article analyzes the intraday interdependence of order flows and price movements for actively traded nyse stocks and their chicago board options exchange cboe traded options stock net trade volume buyer initiated volume minus seller initiated volume has strong predictive ability for stock and option quote revisions but option net trade volume has no incremental predictive ability this suggests that informed investors initiate trades in the stock market but not in the option market on the other hand both stock and option quote revisions have predictive ability for each other thus while information in the stock market is contained in both quote revisions and trades information in the option market is contained only in quote revisions copyright 2002 oxford university press

a general equilibrium analysis of option and stock market interactions the traditional pricing methodology in finance values derivative securities as redundant assets that have no impact on equilibrium prices and allocations this paper demonstrates that when the market is incomplete primary and derivative asset markets generically interact the valuation of derivative and primary security prices depend on the contractual characteristics of the derivative assets available in a version of the mossin mean variance model the authors analyze an equilibrium in which a call option derivative asset is traded and the equilibrium stock price primary asset increases when the options market is opened copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

an analysis of the implications for stock and futures price volatility of program trading and dynamic hedging strategies the notion that a real security is redundant when it can be synthesized by a dynamic trading strategy ignores the informati onal role of real securities markets portfolio insurance uses a dyna mic strategy to synthesize a european put the absence of trading in an appropriate real put option prevents the transmittal of informatio n to market participants about the future price volatility associated with current dynamic hedging strategies less information is transmi tted to potential liquidity providers it will therefore be more di fficult for the market to absorb the trades implied by the dynamic he dging strategies and the stocks future price volatility will rise copyright 1988 by the university of chicago

financial system architecture this article builds a theory of financial system architecture we ask what is a financial market what is a bank and what determines the economic role of each starting with basic assumptions about primitives the types of agents and the nature of the informational asymmetries we provide a theory that explains which agents coalesce to form banks and which trade in the capital market it is shown that borrowers of higher observable qualities access the financial market moreover a financial system in its infancy will be bank dominated and increased financial market sophistication diminishes bank lending article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

financial markets with trade on risk and return in this paper i develop a model in which risk averse investors possess private information regarding both a stock s expected payoff and its risk these investors trade in the stock and a derivative whose payoff is driven by the stock s risk in equilibrium the derivative is used to speculate on the stock s risk and to hedge against adverse fluctuations in the stock s risk i analyze the derivative price and variance risk premium that arise in this equilibrium and their predictive power for stock returns finally i examine the relationship between prices and trading volume in the stock and derivative received july 31 2017 editorial decision december 3 2018 by editor stijn van nieuwerburgh authors have furnished an internet appendix which is available on the oxford university press web site next to the link to the final published paper online

on corporate governance a study of proxy contests abstract this paper examines a sample of firms experiencing proxy contests for seats on their board of directors dissident shareholders usually fail to obtain a majority of board seats nevertheless they capture some seats via mechanisms such as cumulative voting in over half of the sample contests regardless of proxy contest outcome positive and statistically significant share price performance is associated with the contest that finding is predicted by the standard economic analysis of proxy contests in which the challenges benefit shareholders by improving corporate performance the finding runs counter to the claim of berle 1962 that the economists view of proxy contests is a wholly imaginary picture a portion of the positive share price changes taking place in the early stages of some proxy contests is not permanent however and as suggested by manne 1962 is at least partially attributable to temporary increases in the market value of the vote attached to corporate shares

rational asset pricing bubbles and portfolio constraints this article shows that portfolio constraints can give rise to rational asset pricing bubbles in equilibrium even if there are unconstrained agents in the economy who can benefit from the induced limited arbitrage opportunities furthermore it is shown that bubbles can lead to both multiplicity and real indeterminacy of equilibria the general results are illustrated by two explicitly solved examples where seemingly innocuous portfolio constraints make bubbles a necessary condition for the existence of an equilibrium c 2012 elsevier inc all rights reserved

reversions of excess pension assets after takeovers this article evaluates pension asset reversions as a source of takeover gains in our sample of 413 takeovers pension funds were reverted by 15 1 of acquirers in the two years following hostile takeovers compared to 8 4 in the two years following friendly takeovers reversions following takeovers tend to occur in unit benefit plans where the potential for wealth transfer is the greatest these results are consistent with the view that hostile takeovers breach implicit contracts between firms and employees we estimate that the reversions can on average explain approximately 11 of the takeover premium in cases where they actually occur reversions are too small to be the sole or even dominant source of takeover gains

intertemporal asset pricing with heterogeneous beliefs abstract we examine the behaviour of the interest rate asset prices and asset holdings in an economy with heterogeneous rationally updated beliefs about the expected rate of production growth the equilibrium interest rate is a weighted average of the interest rates that would prevail in economies populated by homogeneous agents with the beliefs of the respective agents in the heterogeneous model the weights are given by the fractions of total wealth held financial innovation affects the dynamics of allocations and prices but preserves the aggregate output process and the structure of equilibrium asset prices also display the wealth weighted average characterization journal of economic literature classification numbers c60 d52 d91 g12

pricing credit default swaps with option implied volatility using the industry benchmark creditgrades model to analyze credit default swap cds spreads across a large number of companies during the 2007 09 credit crisis the authors demonstrate that the performance of the model can be significantly improved by calibrating it with option implied volatility rather than with historical volatility moreover the advantage of using option implied volatility is greater among companies with more volatile cds spreads more actively traded options and lower credit ratings

stock market quality in the presence of a traded option we use an economic experiment to examine the implications of asymmetric information for linkages between a stock and a traded option we find the presence of the option splits price discovery across markets and changes the process by which conditional expectations are updated the time series properties of the stock price depend directly on the intrinsic value of the option when the intrinsic value of the option is positive informational efficiency is higher in the market for the stock and volatility is lower we provide evidence that the introduction of an option improves market quality in the underlying asset

miller s equilibrium shareholder leverage clienteles and optimal capital structure the purpose of this paper is twofold first we examine the individual portfolio decisions when income from stocks and bonds is taxed at different rates second a rationale for the existence of risky debt in the presence of leverage related costs and differential personal income taxation is provided previous studies on capital structure with differential personal income taxation have ignored either the portfolio risk consideration and or the possibility of losing personal and corporate interest tax shields due to insufficient taxable earnings e g 8 2 3 14 13 6 7 1 9 19 20 21 23 in section i of this paper both the portfolio risk consideration and the possibility of losing personal and corporate interest tax shields are explicitly introduced this enables us to provide a rationale for the shareholder leverage clientele phenomenon within a mean variance framework we also demonstrate a non corner solution for the optimal corporate capital structure in a tax environment similar to that of miller s debt and taxes 14 in sections ii and iii of this paper miller s world is further modified to include risky debt and the attendant costs we re examine and synthesize recent studies on the theory of optimal capital structure which have appeared since the publication of debt and taxes e g 4 6 7 13 19 20

the effect of voluntary sell off announcements on shareholder wealth sell off activities arise when a firm sells part of its assets e g a segment a division etc but continues to exist in essentially the same form this study investigates the effect of voluntary sell offs on stock returns from a sample of over 1000 sell off events first public announcements the evidence shows that both sellers and buyers earn significant positive excess returns from these transactions the excess returns earned by buyers are smaller than those earned by sellers there is also evidence that sell off announcements are preceded by a period of significant negative returns for the sellers which suggests that the sellers on average performed poorly prior to their sell off activities substantial research has been undertaken in recent years on mergers acquisitions tender offers capital structure changes and other financial planning topics this research has considerably expanded our knowledge about the association of these decisions with the welfare of the stockholders involved in these transactions selling a portion of the firm s assets is another important financial planning decision 2 this paper investigates the effect of voluntary sell off announcements on shareholder wealth a sell off is defined as selling part of a firm s assets e g a segment a division etc while the firm continues to exist in essentially the same form as that prior to the sell off this study does not examine the effects of involuntary ordered by the government sell offs and other similar activities such as spin offs leveraged buy outs liquidations reorganizations etc 3

two trees with heterogeneous beliefs spillover effect of disagreement in a model where investors disagree about the fundamentals of two stocks the state price density depends on investor disagreements for both stocks especially the larger stock this implies that disagreement among investors in a large firm has a spillover effect on the pricing of other stocks owned by these investors the pricing effects of investor disagreements crucially depend on the average belief biases empirical findings support the novel model prediction of a disagreement spillover effect and help reconcile some mixed evidence in the literature

equilibrium asset prices and exchange rates abstract in a two country two good world we construct an intertemporal international general equilibrium for two logarithmic representative agents financial markets are fully integrated and independently incomplete the equilibrium expected rate of change of the exchange rate increases with the differential of interest rates and the volatility of the domestic equity markets and decreases with the covariance between domestic and foreign equity markets the equilibrium volatility of the exchange rate is the sum of the volatilities due to idiosyncratic factors in the financial markets and a term that represents the difference of weights in the common international factor

information trade and derivative securities hellwig s 1980 model is used to analyze the value of improving trading opportunities by more frequent trading in the underlying asset or by trading in a derivative asset with multiple trading sessions uninformed investors behave as rational trend followers while more informed investors follow a contrarian strategy as trading becomes continuous pareto efficiency is achieved with trading in an appropriate derivative security pareto efficiency may be achieved in only a single round of trading all derivative claims are then priced on black and scholes 1973 principles and in the absence of further supply shocks no trading will take place in subsequent trading rounds article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

heterogeneous preferences and equilibrium trading volume abstract the representative agent lucas model stresses aggregate risk and hence does not allow us to study the impact of agents heterogeneity on the dynamics of equilibrium trading volume in this paper we investigate under what conditions non informational heterogeneity i e differences in preferences and endowments leads to nontrivial trading volume in equilibrium we present a non informational no trade theorem that provides necessary and sufficient conditions for zero equilibrium trading volume in a continuous time lucas market model with heterogeneous agents multiple goods and multiple securities we explain in detail how no trade equilibria are related to autarky equilibria portfolio autarky equilibria and peculiar financial market equilibria which play an important role in the literature on international risk sharing

trading breaks and asymmetric information the option markets abstract we find that weekend holiday and overnight trading breaks generate excessive perceived risk in the option markets presumably due to asymmetric information which in turn encourages uninformed option traders to postpone trading this perceived risk subsides after two days accompanied by an increase in the option trading volume and the underlying index s actual price volatility these results shed light on the informational role of index options and suggest that the theoretical models results regarding information processing and price discovery in the presence of private information are not limited to single stocks but also apply to the market as a whole

is there evidence of pessimism and doubt in subjective distributions implications for the equity premium puzzle abel 2002 shows that pessimism and doubt in the subjective distribution of the growth rate of consumption reduce the equity premium puzzle we quantify the amount of pessimism and doubt in survey data on us consumption and income individual forecasters are in fact pessimistic but show marked overconfidence rather than doubt however the implications for abel s model depend on how the empirically heterogeneous beliefs are mapped into beliefs of a representative agent we use an arrow debreu economy to show that disagreement increases the equity premium when incorporating this in our estimation we find little empirical evidence of either overconfidence or doubt

a model of competitive stock trading volume a model of competitive stock trading is developed in which investors are heterogeneous in their information and private investment opportunities and rationally trade for both informational and noninformational motives i examine the link between the nature of heterogeneity among investors and the behavior of trading volume and its relation to price dynamics it is found that volume is positively correlated with absolute changes in prices and dividends i show that informational trading and noninformational trading lead to different dynamic relations between trading volume and stock returns

sufficient and necessary conditions for information to have social value in pure exchange this paper extends corrects and unifies earlier statements concerning the social value of public information as well as the no trading conditions in pure exchange sufficient and necessary conditions are provided for both the single period and two period cases in a postsignal trading model the social value of information is shown to be closely linked to the allocational efficiency of the market the degree of homogeneity of prior beliefs and of information structures the time additivity of preferences and the efficiency of endowments we conclude that the case in favor of public information is much stronger than previously suggested

equilibrium open interest abstract this paper analyses what determines an individual investor s risk sharing demand for options and aggregating across investors what the equilibrium demand for options we find that agents trade options to achieve their desired skewness specifically we find that portfolio holdings boil down to a three fund separation theorem that includes a so called skewness portfolio that agents like to attain our analysis indicates also however that the common risk sharing setup used for option demand and pricing is incompatible with a stylized fact about open interest across strikes

the integration of insurance and taxes in corporate pension strategy this paper examines the implications of the joint effects of insurance and taxes for the optimal corporate pension strategy it is shown that neither the mini max nor the maxi min strategy advocated by previous authors is necessarily best in corporate pension management in the presence of capital market imperfections the analysis via a single period contingent claims model indicates that optimal corporate pension strategy in both asset allocation and funding decisions can be a noncorner interior solution since the passage of the employee retirement income security act erisa in 1974 considerable attention has been given to the development of optimal strategies for corporate pension management under erisa the corporate pension liabilities have become parts of corporate liabilities and consequently the management of corporate pension plans has become an integral dimension of the overall corporate financial policy at present corporate pensions are subject to special tax treatments in the internal revenue code as well as various erisa regulations therefore it is important to analyze the complex tradeoffs among various explicit and implicit benefits and costs in order to derive an optimal corporate pension strategy several important contributions in the area of corporate pension strategy have been developed in finance and economic literature for instance sharpe 18 has shown that in the absence of taxes and under the current structure of a fixed insurance premium charged by the pension benefit guaranty corporation pbgc the insurance effect calls for the mini max corporate pension strategy that involves a minimum level of pension plan funding and a maximum level of pension investment in risky assets conversely black 1 and tepper 19 have argued that in the absence of default risk and pension insurance the tax effect calls for the maxi min corporate pension strategy that suggests a maximum level of plan funding and a minimum level of investment in the lowtax risky assets in their recent work harrison and sharpe 8 and marcus 12 have shown that the corner solutions in pension strategy are optimal even when the insurance and tax effects are considered jointly the purpose of this study is to examine the joint insurance and tax effects on corporate pension strategies in the presence of some relevant market imperfections the single period contingent claim analysis is applied to examine these important effects on corporate pension strategies

complete markets informed trading and equity option introductions this paper proposes and tests a new hypothesis concerning the price impact of option introductions on the underlying asset we argue that the leverage properties of options induce a higher level of informed trading in the aggregate market underlying plus derivative resulting in excess listing day price movements in the newly optioned equity using an alternative dataset our results suggest that this may be an explanation for the observed positive than negative excess listing day returns of us optioned stocks over the past thirty years

pension plan terminations excess asset reversions and securityholder wealth abstract the total firm valuation impact of an excess pension asset reversion is an unresolved issue prior studies focusing on stockholder wealth provide varied evidence this study examines the valuation effects of excess asset reversions on bondholders straight and convertible and stockholders of the sponsoring firm the redeployment and the negative signalling hypotheses provide a framework for the analysis we provide evidence of wealth expropriation from straight bondholders to stockholders convertible debtholders are not impacted by plan terminations contingency table analysis also reveals evidence in support of the negative signalling hypothesis for a significant portion of the sample cross sectional regression identifies financial weakening of the firm reversions undertaken for restructuring purposes and takeover defense related terminations as significant determinants of bond holder excess returns

speculations in option markets enhance allocation efficiency with heterogeneous beliefs and learning abstract many studies investigate the impact of heterogeneous beliefs in the first moment while very few in the second moment this is partially due to continuous time setup which makes it difficult to incorporate heterogeneous beliefs in the second moment in a two period exponential normal model with bayesian learning i demonstrate that heterogeneous prior variances give rise to the economic value of option markets investors speculate in option market and public information improves allocation efficiency of markets only when there is heterogeneity in prior variances heterogeneity in mean is neither a necessary nor a sufficient condition for generating speculations in option markets with heterogeneous beliefs options are non redundant assets which can facilitate side betting and enable investors to take advantage of the disagreements and the differences in confidence this fact leads to a higher growth rate in the investors certainty equivalents and thus a higher equilibrium interest rate furthermore option exhibits a unique feature of enabling signal precision to affect the ex ante risk premium of underlying asset which quadratic derivative and stock do not have

an introduction to the theory of rational expectations under asymmetric information every good economics textbook contains the cliche that market prices provide signals which facilitate the allocation of resources to their best use in a world not subject to random shocks consumers and producers when faced with competitive prices need look no further than their own preferences or production technology to be able to make a decision they need give no thought to the tastes endowments or technology of other agents however in a world subject to random shocks this is no longer the case agents are faced with the problem of forecasting future states of nature and more importantly of forecasting the impact of these states on the actions of other agents rational expectations theories provide a model of how agents make those forecasts in a world subject to random shocks it will be the case that agents acquire or at least attempt to acquire information about the future realization of the shocks it will in general be the case that different agents have access to different information the fact that information is dispersed throughout the economy has the potential to cause a misallocation of resources relative to what would be the case if all agents knew everything an efficient allocation of resources will in general require the transfer of information from consumers who have some information about their future demands to producers who can take current actions to mitigate avoidable scarcities or surpluses though many classical and neo classical writers emphasize the informational role of prices the standard marshallian or walrasian model of competitive equilibrium does not involve prices transferring information across traders the purpose of this paper is to show that rational expectations models are radically different from walrasian models in an economy where traders have diverse information this is demonstrated by showing that unlike what occurs in a walrasian equilibrium of an economy with heterogeneous information if there is a complete set of insurance markets and utility is additively separable over time then there exists a rational expectations equilibrium which gives consumers the same allocation as if each consumer has access to all of the economy s information this implies that under the above assumptions a central planner with all the economy s information could not pareto dominate the competitive allocation achieved when traders have diverse information and rational expectations this paper makes no attempt to survey the literature on rational expectations the reader is referred to shiller 1978 barro 1981 for a survey of macroeconomics and rational expectations and radner 1980 for a survey of the microeconomics and mathematical theory of rational expectations this paper will however try to outline the evolution of the rational expectations concept from a notion of optimal forecasting to a virtually complete departure from the walrasian model of equilibrium the rest of this section is devoted to a discussion of pre rational expectations ideas

option and forward contracting with asymmetric information valuation issues in supply chains we investigate the role of forward commitments and option contracts between a seller supplier and a buyer retailer in the presence of asymmetric information in our case both parties face price and demand uncertainty but the retailer being closer to the market has additional information about the true demand and price the supplier aware of this asymmetry and acting as a stackelberg leader designs a contracting arrangement that best meet his interest we contrast the role of forward and option contracts in this environment and identify cases where combinations of the two are dominant finally we investigate how alternative contracting arrangements alter the expected value of obtaining information that eliminates asymmetric information

information quality and options microstructure researchers have long understood that information quality has an effect on price formation in the underlying asset market however option researchers have largely ignored the fact that information quality might also impact the options market this article characterizes the nature of the impact by showing how option prices and implied volatility levels are related to the forward looking information quality path this result follows from a noisy rational expectations model that abandons the normal distribution in favor of the gamma distribution but maintains the standard assumption of exponential utility thus the new model bridges the gap between the microstructure literature that relies so heavily on the normal exponential framework and the options literature that relies exclusively on models that are consistent with the limited liability of stock prices the model s tractability allows for a robustness check against the standard framework and provides a viable setting for analyzing the empirical implications of information quality for the options market jel d8 gl

security price reactions around corporate spin off announcements abstract we examine security price reactions around the announcements of 123 voluntary spin offs by 116 firms between 1963 and 1981 involving a pro rata distribution of the common stock of a subsidiary to the stockholders of the parent firm the median spin off in the sample is 6 6 of the original equity value and is associated with an abnormal return of 7 0 from 50 days prior to the announcement through completion of the spin off no evidence is found to indicate the gains to stockholders represent wealth transfers from senior securityholders over the entire event period we find positive gains for firms engaging in spin offs to facilitate mergers or to separate diverse operating units but negative returns to firms responding to legal and or regulatory difficulties in the two day interval surrounding the first press announcement we find positive average excess returns for all groups

multimarket trading and market liquidity when a security trades at multiple locations simultaneously an informed trader has several avenues in which to exploit his private information the greater the proportion of liquidity trading by large traders who can split their trades across markets the larger is the correlation between volume in different markets and the smaller is the informativeness of prices we show that one of the markets emerges as the dominant location for trading in that security when informed traders can use their information for more than one trading period the timely release of price information by market makers at one location adversely affects the profits informed traders expect to make subsequently at other locations market makers competing to offer the lowest cost of trading at their location consequently deter informed trading be voluntarily making the price information public and by cracking down on insider trading article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

are more risk averse agents more optimistic insights from a rational expectations model we analyze the link between pessimism and risk aversion we consider a model of partially revealing competitive rational expectations equilibrium with diverse information in which the distribution of risk aversion across individuals is unknown we show that when a high individual level of risk aversion is taken as a signal for a high average level of risk aversion more risk averse agents are more optimistic this correlation between individual risk aversion and optimism leads to a pessimistic consensus belief hence to an increase in the market price of risk risk sharing schemes and welfare implications are analyzed we show that agents welfare may increase upon the receipt of more precise information

an empirical test of the redistribution effect in pure exchange mergers merger transactions involve differing degrees of change in capital structure and asset distribution as a result different forms of merger could have different effects on security values of the firms involved previous empirical studies primarily used samples that included all types of mergers the present study examines the effect of one type of merger pure stock exchange on the values of the debt and equity of the firms involved

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite

speculation spillovers this paper demonstrates that speculative activities can be contagious and spill over across markets specifically we test the hypothesis that during china s warrants bubble period speculative activities in the warrants market grabbed investors attention and caused them to trade more speculatively in the underlying stocks consistent with this hypothesis we find that turnover and return volatility of the underlying stocks are positively associated with the warrants unexpected turnover and price deviation from their fundamental values during the previous day controlling for information driven trading and hedging motives and that such a spillover effect is more pronounced when warrants attract more investor attention data as supplemental material are available at http dx doi org 10 1287 mnsc 2014 1914 this paper was accepted by wei xiong finance

risk aversion market liquidity and price efficiency a model of a noncompetitive speculative market is analyzed in which privately informed traders and market makers are risk averse market liquidity is found to be nonmonotonic in the number of informed traders their degree of risk aversion and the precision of their information it is also shown that increased liquidity trading leads to reduced price efficiency and that under endogenous information acquisition market liquidity may also be nonmonotonic in the variance of liquidity trades article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

on trees and logs abstract in this paper we contrast the main workhorse model in asset pricing theory the lucas 1978 tree model lt model to a benchmark model in financial equilibrium theory the real assets model ra model it is commonly believed that the two models entail similar conclusions since the lt model is a special case of the ra model but this is simply wrong implications of these models can be strikingly at odds indeed under the widely used log linear specification of households preferences we show that for a large set of initial endowments the lt model even with potentially complete financial markets admits only peculiar financial equilibria in which the stock market is completely degenerate in that all stocks offer the same investment opportunity and yet allocation is pareto optimal we investigate why the lt model is so much at variance with the ra model and uncover new results on uniqueness of financial equilibria and introduction of portfolio constraints obtaining in the lt model but not in the ra model