market efficiency and insider trading new evidence that corporate insiders earn profits from stock trading does not surprise most financial economists but that outsiders can earn abnormal returns by using pub licly available insider trading data constitutes a serious exception to stock market efficiency the authors show that this anomaly conti nues to exist despite the publication of studies attesting to its exi stence they suggest that the anomalous profits to outsiders are a ma nifestation of the size and earnings price ratio effects controlling for these factors reduces outsider profits by half the additional a ssumption of a 2 percent transactions cost makes outsider profits zer o or negative insider profits after an assumed 2 percent transactio ns cost are a moderate 3 percent per annum for annual holding period s copyright 1988 by the university of chicago

a comparative study of efficiency in european banking this paper investigates whether there has been an improvement in and convergence of productive efficiency across european banking markets since the creation of the single internal market using efficiency measures derived from dea estimation the determinants of european bank efficiency are evaluated using the tobit regression model approach the established literature on modelling the determinants of bank efficiency is then extended by recognizing the problem of the inherent dependency of dea efficiency scores when used in regression analysis to overcome the dependency problem a bootstrapping technique is applied overall the results suggest that since the eu s single market programme there has been a small improvement in bank efficiency levels although there is little evidence to suggest that these have converged the results also suggest that inference on the determinants of bank efficiency drawn from non bootstrapped regression analysis may be biased and misleading

dynamic asset allocation with event risk major events often trigger abrupt changes in stock prices and volatility we study the implications of jumps in prices and volatility on investment strategies using the event risk framework of duffie pan and singleton 2000 we provide analytical solutions to the optimal portfolio problem event risk dramatically affects the optimal strategy an investor facing event risk is less willing to take leveraged or short positions the investor acts as if some portion of his wealth may become illiquid and the optimal strategy blends both dynamic and buy and hold strategies jumps in prices and volatility both have important effects

motivations for aid to developing countries abstract this paper attempts to identify the underlying principles of aid allocation and particularly the balance of motivations as between the needs of recipient countries and the interests of donor countries two alternative models are fitted by cross country regressions to bilateral and multilateral aid flows to some 80 developing countries in 1969 1970 and 1978 1980 the first recipient need model assumes that all aid is given to compensate for shortfalls in domestic resources this model provides a reasonable explanation for the distribution of multilateral aid but it is clearly not applicable for bilateral aid flows the second donor interest model assumes that all aid serves only donor interests defined to cover political security investment and trade interests this model gives generally good explanations of bilateral aid but is a poor fit for multilateral aid the relative importance of the various donor interests differs sharply among donors the paper ends with an analysis of the shift in the balance of aid over the 1970s towards the recipient need element and with a reference to the sharp change in policy in the 1980s towards increasing emphasis on donor interest aid

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

relative wealth concerns and financial bubbles we present a rational general equilibrium model that highlights the fact that relative wealth concerns can play a role in explaining financial bubbles we consider a finite horizon overlapping generations model in which agents care only about their consumption though the horizon is finite competition over future investment opportunities makes agents utilities dependent on the wealth of their cohort and induces relative wealth concerns agents herd into risky securities and drive down their expected return even though the bubble is likely to burst and lead to a substantial loss agents relative wealth concerns make them afraid to trade against the crowd

partial information about contagion risk self exciting processes and portfolio optimization abstract this paper compares two classes of models that allow for additional channels of correlation between asset returns regime switching models with jumps and models with contagious jumps both classes of models involve a hidden markov chain that captures good and bad economic states the distinctive feature of a model with contagious jumps is that large negative returns and unobservable transitions of the economy into a bad state can occur simultaneously we show that in this framework the filtered loss intensities have dynamics similar to self exciting processes besides we study the impact of unobservable contagious jumps on optimal portfolio strategies and filtering

optimal convergence trade strategies convergence trades exploit temporary mispricing by simultaneously buying relatively underpriced assets and selling short relatively overpriced assets this paper studies optimal convergence trades under both recurring and nonrecurring arbitrage opportunities represented by continuing and stopped cointegrated price processes and considers both fixed and stochastic poisson horizons conventional long short delta neutral strategies are generally suboptimal and it can be optimal to simultaneously go long or short in two mispriced assets optimal portfolio holdings critically depend on whether the risky asset position is liquidated when prices converge our theoretical results are illustrated on pairs of chinese bank shares traded on both the hong kong and china stock exchanges the author 2013 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

paper millionaires how valuable is stock to a stockholder who is restricted from selling it abstract many firms have stockholders who face severe restrictions on their ability to sell their shares and diversify the risk of their personal wealth we study the costs of these liquidity restrictions on stockholders using a continuous time portfolio choice framework these restrictions have major effects on the optimal investment and consumption strategies because of the need to hedge the illiquid stock position and smooth consumption in anticipation of the eventual lapse of the restrictions these results provide a number of important insights about the effects of illiquidity in financial markets

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

foreign aid and domestic savings in less developed countries some tests for causality abstract the negative correlation between foreign aid and domestic savings rates in less developed countries is an accepted fact in the existing literature the direction of causality however remains a subject of dispute in this paper we use time series data to investigate causal relationships we conclude that causal relationships are not universal and it is suggested that in those countries where they do hold the direction of causality may depend upon the proportions of aid from bilateral and multilateral sources

information aggregation in a noisy rational expectations economy abstract this paper analyzes a general equilibrium model of a competitive security market in which traders possess independent pieces of information about the return of a risky asset each trader conditions his estimate of the return both on his own private source of information and price which in equilibrium serves as a noisy aggregator of the total information observed by all traders a closed form characterization of the rational expectations equilibrium is presented a counter example to the existence of fully revealing equilibrium is developed

why european banks are less profitable than u s banks a decomposition approach abstract the low profitability of european banks relative to their u s counterparts has recently raised concerns among policy makers and researchers this paper attempts to shed light on this issue by using the o donnell 2012 decomposition approach this approach enables us to decompose the relative profitability of european banks into an output input price index and a total factor productivity index with the former further decomposed into two price indexes and the latter further into four productivity and efficiency measures our results show that european banks profitability was not only weak but also deteriorated over time our further analysis shows that the decline in the output input price index was due to declines in relative lending rate and relative return on securities and an increase in funding costs while the decline in the productivity index was driven by declines in technical efficiency scale efficiency and residual mix efficiency

the effectiveness of aid on savings and investment in sub saharan africa do volatility and institutional quality matter abstractthe effectiveness of aid is somewhat subject to its volatility this study investigates the impact of aid volatility especially on savings and investment with a particular focus on the role of institutional quality in 45 sub saharan african ssa countries over the period from 1990 to 2013 we used the generalized method of moments gmm technique combined with a measure of volatility namely an averaged data method involving six 4 year sub periods our results suggest that while aid is positively associated with savings and investment its volatility is harmful to savings and investment however when higher quality institutions exist the volatility of aid has a less negative impact on savings and investment the policy implications are diverse first donors and ssa aid dependent countries need to take into account the diversity of shocks to which aid can respond in mitigating its unpredictability secondly ssa countries should be encouraged to establish the conditions for better quality inst

direct and indirect sale of information the authors compare two methods for a monopolist to sell information to traders in a financial market in a direct sale information buyers observe versions of the seller s signal while in an indirect sale the seller sells shares in a portfolio based on his private information it is shown that when traders are identical and pricing is linear there is a trade off between optimal surplus extraction that is possible under direct sale and more effective control of the usage of information that is possible under indirect sale the optimal selling method depends on how much information is revealed by equilibrium prices copyright 1990 by the econometric society

aid governance and private foreign investment some puzzling findings for the 1990s does official aid pave the road for private foreign investment or does it suffocate private initiative by diverting resources towards unproductive activities we explore this question using panel data covering a large number of developing and emerging economies during the 1990s controlling for countries institutional environment we find that evaluated at the mean the marginal effect of aid on private foreign investment is close to zero surprisingly however the effect is strictly positive for countries in which private agents face a substantial regulatory burden this result is robust across a wide range of specifications samples and estimation methods

testing agency theory with entrepreneur effort and wealth we develop a principal agent model in an entrepreneurial setting and test the model s predictions using unique data on entrepreneurial effort and wealth in privately held firms accounting for unobserved firm heterogeneity using instrumental variables techniques we find that entrepreneurial ownership shares increase with outside wealth and decrease with firm risk effort increases with ownership and effort increases firm performance the magnitude of the effects in the cross section of firms suggests that agency costs may help explain why entrepreneurs concentrate large fractions of their wealth in firm equity

risk aversion imperfect competition and long lived information abstract this paper presents a methodology for characterizing the optimal dynamic behavior of risk averse strategic agents with private information by building on kyle econometrica 1985 53 1315 1335 it is shown that both monopolistic and competing informed traders choose to exploit rents rapidly causing market depth to be low in the initial periods and high in later periods and causing information to be revealed rapidly unlike in the case of a risk neutral monopolist considered by kyle

the macroeconomic impact of development aid a critical survey the early literature explained aid s macroeconomic impact in the context of the dual gap model showing a clear link between aid and growth many now believe that the empirical evidence shows there to be no such relationship this paper critically reviews the different theoretical perspectives the dual gap model the savings debate recipient fiscal response and aid as dutch disease and the empirical debates on aid savings and growth the basis for denying a relationship between aid and growth is shown to be weak though more recent areas of research offer promising directions for future work

ownership liquidity and investment this article documents a nonlinear relationship between insider shareholdings and the sensitivity of a firm s investment to its cash flow as insider holdings increase from zero investment cash flow sensitivities rise sharply this relationship weakens at higher levels of insider ownership and i find some evidence that investment cash flow sensitivities decrease slowly with insider holdings after a certain point i argue that these results are inconsistent with the hypothesis that free cash flow problems cause the widely noted sensitivity of investment to cash flow the results are consistent with the presence of asymmetric information problems in the capital markets that are heightened when managers have a strong incentive to maximize shareholder returns

insider trading in a rational expectations economy it is often argued that efficiency considerations require society to freely permit insider trading in this article an opposing efficiency argument is formalized the model incorporates an investment stage followed by a trading stage if outsiders expect insiders to take advantage of them in trading outsiders will reduce their investment the insiders loss from this diminished investor confidence may more than offset their trading gains consequently a prohibition on insider trading may effect a pareto improvement insiders are made better off if they can precommit not to trade on their privileged information govemment regulation accomplishes exactly this jel 022 026 313 the traditional rationale articulated for insider trading regulation and other securities law is that such rules promote confidence in markets indeed president franklin d roosevelt justified the first major u s securities legislation by saying it should give impetus to honest dealing in securities and thereby bring back public confidence similar language is still invoked half a century later in connection with enforcement efforts against insider trading and in proposals for tightened stock

how did bank holding companies prosper in the 1990s abstract this paper examines the improved performance of us bank holding companies bhcs from 1991 to 1997 analysis of cost and profit functions using several alternative output specifications suggests that the gains were primarily due to productivity growth and changes in scale economies various econometric methodologies yield productivity growth of about 0 4 per year and the optimal size seems to have increased in the 1990s era of deregulation technological change and financial innovation estimates of both productivity growth and economies of scale are robust across traditional and non traditional output specifications despite the overall success however substantial cost and profit inefficiency existed for bhcs of all sizes in the 1990s these efficiency estimates are particularly sensitive to the output specification and failure to account for non traditional activities like off balance sheet obs items leads profit efficiency but not cost efficiency to be understated for the largest bhcs

economic growth export and external debt causality the case of african countries empirical investigation of the export driven economic growth hypothesis has provided mixed results in a bivariate causality framework the problem with such bivariate causality analysis is that there can be an omitted variable which could adversely affect the results this paper looks at the trivariate causality analysis of african countries by introducing external deby servicing as a third variable in the export economic growth analysis the results indicate that there is a feedback or bidirectional causality between external debt servicing economic growth and exports evidence of the 1983 90 subperiod is consistent with the argument that the structural adjustment programmes which were designed to remove economic distortions promote exports and encourage external debt management increased growth in the countries involved

viable allocations of information in financial markets abstract we study in the context of a financial market allocations of information that are consistent with endogenous information acquisition we focus on whether information is concentrated within a fraction of the market or is diffuse the aggregation of information in prices tends to make signals more complementary than they would be if considered in isolation favoring concentration of information however the ability to use some signals together with prices to predict other signals may increase the degree of substitutability among signals we present conditions under which each of these effects is particularly strong

foreign aid and domestic savings a spurious correlation in the harrod domar atmosphere of the 1950s and 1960s foreign aid was expected to have a positive effect on saving the thinking at the time was that aid inflows would cause investment to increase this would generate subsequent increases in income which in turn would raise domestic savings k griffin and j enos pointed out however that the empirical correlation between foreign aid and savings across countries is negative not positive 1 to explain this they advanced the revisionist hypothesis that foreign aid actually discourages domestic savings aid receiving countries were seen as engaging in aidswitching increasing their government consumption expenditures reducing their efforts to collect taxes and so on contributions by a rahman t weisskopf and h chenery and p eckstein appeared to lend support to this point of view 2 the scenario was not universally accepted however several critics of the revisionist position advanced the hypothesis that negative association between savings and aid is the spurious result of omitted variables a plausible candidate is per capita income pci f stewart pointed out that high pci countries tend to have higher savings ratios and smaller current account deficits implying smaller aid inflows than low pci countries if aid were distributed according to need and per capita income were used by donors as an index of need aid and savings would have a spurious negative correlation because low pci countries simultaneously experience low savings rates and large aid inflows based on need 3 other possibly important omitted variables were cited by g papanek wars political disturbances sudden terms of trade changes natural disasters any of these variables could lower domestic savings and raise foreign aid receipts at the same time and they might or might not be correlated with per capita income 4 other studies

a new approach to the allocation of aid among developing countries is the usa different from the rest summary this paper attempts to explain the factors that determine the geographical allocation of foreign aid its novelty is that it develops a rigorous theoretical model and conducts the corresponding empirical investigations based on a large panel dataset we run regressions for different major donors united states canada france italy japan united kingdom and multilateral organizations with the explicit objective of establishing whether the united states in light of its geopolitical hegemony behaves differently from others we find that all the donors respond to recipient need in their allocation of aid but that the united states puts less emphasis on this than the other donors with the exception of japan we also find that the united states puts more emphasis on donor recipient linkages than do the other donors suggesting that the united states attaches greater importance to issues of donor interest for example geopolitical commercial and other links with specific recipients

wealth information acquisition and portfolio choice i solve with an approximation a grossman stiglitz economy under general preferences thus allowing for wealth effects because information generates increasing returns decreasing absolute risk aversion in conjunction with the availability of costly information is sufficient to explain why wealthier households invest a larger fraction of their wealth in risky assets one no longer needs to resort to decreasing relative risk aversion an empirically questionable assumption furthermore i show how to distinguish empirically between these two explanations finally i find that the availability of costly information exacerbates wealth inequalities copyright 2004 oxford university press

firm characteristics and analyst following abstract this paper examines the major determinants of the number of analysts following a firm a simple model of analyst following is proposed and several firm characteristics are suggested that are likely to influence the extent of a firm s analyst following by either affecting the aggregate demand for or supply of analyst services or both for the firm almost all of these characteristics are found to be strongly significant in affecting the extent of analyst following of firms and the empirical results generally accord well with economic intuition

savings rates and income distribution further evidence from ldcs a cross country test for the existence of kaldor effects in less developed countries is developed earlier attempts have been inconclusive and have led to a perception that the effect is unimportant it is argued that previous tests may have ben misspecified within a standard life cycle framework a savings rate function that also incorporates two distribution variables one involving measures of income inequalities across income classes and the other a broad measure of inequalities among sectors was specified and estimated the results indicate that regardless of the inequality measure employed some sort of kaldor effect may be at work this suggests that the traditional conflect between growth and equity warrants continued investigation

what do we know about global income inequality in this paper we review the recent literature on global interpersonal income inequality while all estimates agree that the level is very high with a gini of between 0 630 and 0 686 in the 1990s there is no consensus regarding the direction of change we discuss methodological issues including the use of national accounts versus survey based estimates of mean income or consumption and the choice of purchasing power parity exchange rates findings of a rise or fall in global income inequality are not robust across different estimation methods and datasets given the diversity of estimates and various sources of uncertainty including gaps and errors in the underlying data we conclude there is insufficient evidence to determine the direction of change in global interpersonal inequality in recent decades

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