what uip tests on extreme samples reveal about the missing variable abstract in their uip regressions huisman et al 1998 extreme support for uncovered interest parity journal for international money and finance 17 211 228 focus on extreme forward premia and find much higher coefficients we show that for such results the expectation signal needs to be thicker tailed than the missing variable transaction costs may produce the right sort of bias it is i bounded i e it has no tails at all ii wide i e it may generate betas below 1 2 and iii u distributed which makes an extreme sample quite effective we derive theoretical and numerical results in the direction of what huisman et al observe we also tighten fama s moment conditions

bank lending and commercial property cycles some cross country evidence abstract we investigate determination of commercial property prices and their interaction with aggregate bank lending an illustrative model suggests that lending is closely related to property prices and property markets can develop cycles given plausible assumptions cross country empirical analysis confirms its predictions property prices show particularly strong links to credit in countries that experienced banking crises linked to property losses in 1985 1995 studies of dynamic interaction suggest that variance in commercial property prices is largely explicable by lagged shocks in the variable itself while gdp and bank credit also have an important influence implications arise for risk managers and regulators

international direct real estate investment a review of the literature this paper provides a critical review of research on international direct real estate investment issues to date no review article has explored the various findings of studies completed on the benefits of international real estate diversification in the past 10 years the quantity and variety of work have increased dramatically the paper is organised by how investing in a real estate asset is analysed in a mixed asset portfolio context or a real estate only portfolio context a fourth section focuses on research that has explored currency risk one of the prevailing risks associated with international investing the last section provides conclusions about the research and offers ideas for future research in this growing area of real estate investment

program trading and expiration day effects the arbitrage between index futures and the underlying cash index and the cash settlement feature of index futures contracts which requires arbitrageurs to unwind positions in the stock market are thought to be at the heart of the abnormal stock price movements during the triple witching hour the last hour of trading on days on which index futures index options and options on index futures expire simultaneously during 1984 and 1985 volume was substantially higher than normal in the last hour of trading on those quarterly fridays open interest in the expiring futures contracts on the expiration day amounted to about 40 per cent of the average month end open interest the incremental stock market volume however was approximately one third the volume that would be inmplied if the entire expiration day open interest were traded in the stock market analysis of stock market price changes in the last hour of expiration days and the first halfhour of the following day indicates that the volatility of price changes was significantly higher on expiration days with the stock market tending to fall stocks not in the sp index option expirations themselves did not lead to abnormal market movements when the magnitude of price effects was measured by the degree of reversal in prices on the morning after the expiration day the average magnitude of the price effect in the 10 most recent quarterly futures contract expirations examined was about 0 4 per cent of the closing index value at expiration the average expiration day price effect of 0 4 per cent is not large considering that a price impact of approximately 0 25 per cent of the value of the transaction can be expected on the basis of the bid ask spread once this market impact cost is drawn out the average expiration day price impact falls to about 0 15 per cent of the value of the transaction an amount representing the additional cost of liquidity furthermore price impacts in excess of those found on expiration days are frequently encountered in large block transactions where the cost of providing liquidity also increases on expiration days however transactions in many stocks occur simultaneously so the market as a whole is affected

costly arbitrage through pairs trading abstract we study the optimal trading policy of an arbitrageur who can exploit temporary mispricing in a market with two convergent assets we build on the model of liu and timmermann 2013 and include transaction costs which impose additional limits to the implementation of such convergence trade strategy we show that the presence of transaction costs could reveal an endogenous stop loss concern in a certain economy which affects the optimal policy of the arbitrageur in significant ways using pairs of dual listed chinese stock shares as samples and a pairs trading strategy based on standard deviation of the spread as benchmark we demonstrate the efficiency of the strategy implied by our model several extensions of our model are also discussed

u s reits as an asset class in international investment portfolios an examination of u s real estate investment trust reit efficiency as a portfolio component from the perspective of all g 7 countries for the period 1985 through 1994 indicates that u s reits offer both an inflation hedge and diversification nevertheless including reits in test portfolios did not yield statistically significant increases in risk adjusted return over the period as a whole subperiod analyses indicated large temporal differences in reit efficiency as a portfolio component

trying to explain home bias in equities and consumption investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest a phenomenon called equity home bias in the absence of this bias investors would optimally diversify domestic output risk using foreign equities therefore consumption growth rates would tend to co move across countries even when output growth rates do not empirically however consumption growth rates tend to have a lower correlation across countries than do output growth rates a phenomenon i call consumption home bias in this paper i discuss these two biases and their potential relationship as suggested by the literature

industry rotation in the u s stock market 1934 1986 returns on passive semi passive and active strategies abstract this paper compares the returns to three distinct sets of approaches to industry rotation in the u s stock market passive semi passive and active using the 12 industry breakdown of breeden gibbons and litzenberger 1989 the passive strategies are based on the up and down levered value weighted industry indices and the semi passive strategies are similarly constructed from the equal weighted industry indices the active strategies are based on multiperiod investment theory and the empirical probability assessment approach applied to past realized returns the semi passive and active strategies performed well in both the full 1934 1986 period and in the 1966 1986 subperiod achieving statistically significant excess returns in several instances

stock volatility and the levels of the basis and open interest in futures contracts this article tests a theoretical model of the basis and open interest of stock index futures the model is based on the differences between stock and futures in terms of investors ability to customize stock portfolios and liquidity empirical evidence confirms the model s prediction that increased volatility decreases the basis and increases open interest copyright 1995 by american finance association

does international diversification work better for real estate than for stocks and bonds international diversification is now an established fact for stock and bond portfolios for real estate shares however this acceptance has so far not been the case this study is an investigation of the effectiveness of international real estate diversification relative to international diversification of stock and bond portfolios tests of international correlation matrixes of real estate returns common stock returns and bond returns indicate significantly lower correlations between national real estate returns than between common stock or bond returns the implication is that international diversification reduces the risk of a real estate portfolio more than that of common stock and bond portfolios

a transactions data test of stock index futures market efficiency and index arbitrage profitability this paper investigates the efficiency of the market for stock index futures and the profitability of index arbitrage for the chicago board of trade s major market index contracts the spot value of the index is computed with transactions prices for the component shares of the index obtained from the fitch database the tests account for transaction costs execution lags and the uptick rule for short sales of stocks results indicate that the size and frequency of boundary violations are substantially smaller than those reported by earlier studies and have declined sharply with time index arbitrage is a strategy whereby institutions brokerage houses or other large investors seek to profit from the spread between prices in the spot and futures markets for stock indices for example an investor might purchase predetermined baskets of stocks on the floor of the new york stock exchange and simultaneously sell a related index futures contract on the floor of the chicago board of trade hoping to profit from the price differences on the two exchanges computer programs constantly monitor stock and futures prices and automatically execute buy and sell orders when it appears that a profit is possible stock index futures can be priced by a simple arbitrage argument if the dividends paid by the underlying basket of shares and interest rates are nonstochastic markets are perfect and there are no taxes the pricing equation is

sets arbitrage activity and stock price dynamics this paper provides an empirical description of the relationship between the trading system operated by a stock exchange and the trading behaviour of heterogeneous investors who use the exchange the recent introduction of sets in the london stock exchange provides an excellent opportunity to study the impact of an electronic trading system upon traders who use the exchange using the cost of carry model of futures prices we estimate non linearly the transaction costs and trade speeds faced by arbitragers who take advantage of mispricing of ftse100 futures contracts relative to the spot prices of the stocks that make up the ftse100 stock index we divide the sample period into pre sets and post sets sample periods and conduct a comparative study of arbitrager behaviour under different trading systems the results indicate that there has been a significant reduction in the level of transaction costs faced by arbitragers and in the degree of transaction cost heterogeneity finally generalised impulse response functions show that both spot and futures prices adjust more quickly in the post sets period these results suggest that both spot and futures markets have become more efficient under sets

home bias in equity portfolios inflation hedging and international capital market equilibrium we test whether the home bias in equity portfolios is caused by investors trying to hedge inflation risk the empirical evidence is consistent with this motive only if investors have very high levels of risk tolerance and equity returns are negatively correlated with domestic inflation we then develop a model of international portfolio choice and equity market equilibrium that integrates inflation risk and deadweight costs using this model we estimate the levels of costs required to generate the observed home bias in portfolios consistent with different levels of risk aversion for a level of risk aversion consistent with standard estimates of the domestic equity market risk premium these costs are about a few percent per annum greater than observable costs such as withholding taxes thus the home bias cannot be explained by either inflation hedging or direct observable costs of international investment unless investors have very low levels of risk aversion article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

massaging mean variance inputs returns from alternative global investment strategies in the 1980s this paper explores the impact of adjustments to the inputs on total returns terminal wealth and portfolio turnover in an unconstrained monthly mean variance mv asset allocation over time it is well known that mv allocations are very sensitive to small forecast errors in the means and covariances this sensitivity is especially pronounced for errors in means one way to control this sensitivity to forecast errors is to use stein estimation we examined three naive applications of stein estimation for six individual country stock indexes five country bond indexes and five cash indexes this study has two major conclusions first any of the suggested adjustments to inputs dominate the results of an unadjusted input mv optimization adjusted input portfolios have higher mean return less variance and greater terminal wealth than unadjusted input portfolios second these improvements become even greater with transaction costs

unemployment insurance and unemployment over time an analysis with event history data using event history data this paper analyzes the distribution of reemployment spell durations conditional on the completed length of the preceding contiguous spell of unemployment the model is used to infer how unemployment insurance through unemployment duration may affect the likelihood of reentering unemployment special attention is paid to the endogeneity between unemployment and reemployment duration and the sample information contained in the fact that some individuals obtain reemployment by recall as opposed to acceptance of a new job copyright 1995 by mit press

unemployment insurance and male unemployment duration in canada a model of unemployment duration is estimated with weekly micro data on canadian men entitlement provisions in the unemployment insurance program and demand conditions are found to have a significant effect on the probability of leaving unemployment the probability of a worker leaving unemployment declines with the duration of unemployment holding unemployment insurance entitlement constant when entitlement is allowed to vary the probability of leaving first falls and then generally rises with unemployment duration these results are robust with respect to allowing for person specific unobserved heterogeneity and alternative specifications of duration dependence

immigration and equity home bias abstract why do investors hold such large positions in domestic equity when there are gains to be made from international diversification this equity home bias puzzle has received considerable attention in the literature with asymmetric information on domestic and foreign assets whether by individual choice or by market imperfection emerging as the most plausible explanation what happens when we consider a subset of investors whose information sets are closer to investors in foreign countries i assess the relationship between immigration and equity home bias and find that inward migration is positively correlated with increased foreign equity positions and reduced home bias looking across income groups outward migration reduces home bias for relatively rich countries but may actually increase home bias when migration occurs to or from a developing country these results suggest that immigration generates a positive externality of increased information flows for developed countries but not for developing nations the effects of immigration on investment are strongest within the euro zone suggesting that this positive externality of immigration is largest when barriers to portfolio diversification such as currency risk are lowest

unemployment insurance recall expectations and unemployment outcomes this paper empirically examines the importance of explicitly accounting for the layoff rehire process in the analysis of unemployment outcomes in the united states we find that the spells of individuals who initially expect to be recalled account for much more of the unemployment of unemployment insurance ui recipients than do spells actually ending in recall our results indicate that the recall and new job escape rates from unemployment have quite different time patterns and are often affected in opposite ways by explanatory variables we also find that the probability of leaving unemployment both through recalls and new job finding increases greatly around the time that ui benefits lapse over the past fifteen years many studies have empirically analyzed the determinants of individual unemployment spell durations in the united states much of this literature has used a job search framework in which the unemployed are viewed as permanently displaced workers who are unattached to jobs the possibility of recall to a former job a process not requiring search has been omitted from explicit consideration in the majority of these studies 2 an explicit treatment of the layoff rehire process is necessary for a proper understanding of the determinants of unemployment durations and of the impacts of unemployment policies in the united states for at least three reasons first temporary layoffs in which workers are often rehired by their original employers are a quantitatively quite important feature of the u s labor market 3 second expectations concerning the likelihood of recall are likely to affect the responses of employers and unemployed workers to labor market interventions such as reemployment bonuses and subsidies

portfolio turnpike theorems risk aversion and regularly varying utility functions models which incorporate both uncertainty and the dynamic behavior of economic agents are difficult to analyze 2 moreover even when a solution is obtained it can seldom be simply stated and rarely lends itself to straightforward interpretations an example of an appealingly understood result is a turnpike theorem which states that if the planning horizon is distant then the optimal policy can be approximated by a wealth independent policy our paper develops an analogous result in a stochastic intertemporal model of portfolio selection in fact we obtain necessary and some sufficient conditions for a turnpike the problem considered in this essay is that of an investor a von neumannmorgenstern expected utility maximizer who invests for a finite horizon and consumes only his terminal wealth at the beginning of the first period the investor allocates his wealth w among various assets and at the end of the first

commercial real estate prices and stock market returns an international analysis the movement toward globalization of institutional investments requires an understanding of the historical relationship between international commercial real estate price changes and stock returns previous studies have focused on the time series of stock and real estate returns using data from a single country by necessity these studies examined returns and price changes over short intervals creating a bias when property values are smoothed from year to year this study examines the relation between stock returns and changes in property values and rents based on data from 17 countries although we find no relation between real estate values and rents and stock returns in the united states we find significant relations in a number of other countries when the data are pooled the relation between stock returns and both value changes and changes in rental rates is very strong

a half century of returns on levered and unlevered portfolios of stocks bonds and bills with and without small stocks in two earlier papers grauer and hakansson 1982 grauer and hakansson 1984 we applied the multiperiod portfolio theory of mossin 1968 hakansson 1971 1974 leland 1972 ross 1974 and huberman and ross 1983 to the construction and rebalancing of portfolios composed of u s stocks corporate bonds government bonds and a risk free asset borrowing was ruled out in the first article while margin purchases were permitted in the second the probability distributions used were naively estimated from past realized returns in ibbotson this paper applies multiperiod portfolio theory to the construction and rebalancing of portfolios composed of u s stocks corporate bonds government bonds and a risk free asset with small stocks included as a separate investment vehicle probability assessments are based on the past joint empirical distribution our principal findings are 1 small stocks while totally ignored at times entered even the most riskaverse portfolios most of the time and 2 small stocks when chosen tended to replace common stocks except in the 1970s and early 1980s when they were primarily held in lieu of the risk free asset presented at the australian graduate school of management and at macquarie university both in sydney southern methodist university duke university the university of southern california the london graduate school of business and the annual meeting of the western financo association in scottsdale arizona the authors thank the participants of these seminars especially michael brennan and ehud ronn for helpful comments financial support from the social sciences and humanities research council of canada and the financial research foundation of canada is gratefully acknowledged the authors also wish to thank changwoo lee for research assistance and are greatly indebted to frederick shen for computational assistance

global property investment and the costs of international diversification there is a trade off between the costs and benefits of international diversification this paper shows that the costs for property investors can be reduced substantially through investments in public real estate companies which concentrate on their local domestic market we compare the performance of 18 international operating property companies over the sample period 1984 through 1995 with the performance of property companies operating on their domestic market we find that the international companies underperform the domestic companies we also find this difference is not due to factors such as transaction costs leverage and currency

capital market integration in the pacific basin region an impulse response analysis abstract we examine the extent of capital market integration in a group of pacific basin countries following the deregulation of their markets and explore whether the financial influence of japan in the region has overtaken that of the us looking at long run comovements of real interest rates through the use of cointegration and using impulse response analysis to examine the speed of adjustment of real interest rates to long run equilibrium following a shock in one of the markets which is another indicator of the degree of capital market integration we find that these countries are closely linked with world financial markets and more so with japan than with us

optimal trading with mean reverting prices switching between foreign stocks and closed end country funds we develop a model based on options theory which shows the optimal trading strategy for switching between two similar assets when the difference in their prices is mean reverting statistical tests indicate that most closed end country funds discounts are mean reverting using empirical estimates of the volatility and rate of mean reversion of these funds we derive the optimal switch points and simulate the trading profits associated with switching between country funds and their foreign equities and vice versa whenever the optimal switch points are reached

a comparison of futures and forward prices abstract this paper uses the pricing models of cox ingersoll and ross 1981 richard and sundaresan 1981 and french 1982 to examine the relation between futures and forward prices for copper and silver there are significant differences between these prices the average differences are generally consistent with the predictions of the futures and forward price models however these models are not helpful in describing intra sample variations in the futures forward price differences this failure is apparently caused by measurement errors in both the price differences and in the explanatory variables

modelling price movements in housing micro markets identifying long term components in local housing market dynamics this study identifies housing sub markets micro markets that may be price leaders within local housing market areas and relates their performance to potentially relevant economic factors this ca

basis convergence and long memory in volatility when dynamic hedging with futures abstractwhen market returns follow a long memory volatility process standard approaches to estimating dynamic minimum variance hedge ratios mvhrs are misspecified simulation results and an application to the s p 500 index document the magnitude of the misspecification that results from failure to account for basis convergence and long memory in volatility these results have important implications for the estimation of mvhrs in the s p 500 example and other markets as well

international transmission mechanisms and contagion in housing markets this paper explores international transmission mechanism and its role in contagion effect in the housing markets across six major asian cities the analysis is based on the identification of house price diffusion effects through a global vector autoregressive gvar model estimated using quarterly data for six major asian cities hong kong tokyo seoul singapore taipei and bangkok from 1991q1 to 2011q2 the empirical results indicate that the open economies heavily relying on international trade such as singapore japan tokyo taiwan taipei and thailand bangkok show positive correlations between the economy s openness and house prices which is consistent with the balassa samuelson hypothesis interestingly some region specific conditions also appear to play important roles as determinants of house price movements which may be driven by restrictive housing policies and demand supply imbalances such as singapore and bangkok these results are reasonably robust across several model specifications the findings bear significant implications for formulation of investment strategy and public policies

do constraints improve portfolio performance the discrete time dynamic investment model using only historical data in various asset allocation settings often produces significant abnormal returns however the model does not choose the diversified portfolios that theory suggests it should therefore in this paper we compare the investment policies and returns of the model with and without constraints on the mix of risky assets the constraints lead to appreciably more diversification and less realized risk but only at the cost of less realized return visual comparisons of compound return standard deviation plots and statistical comparisons of jensen s alpha suggest that the reduction in return is not worth the reduction in risk for more risk averse investors ex post utility and certainty equivalent returns suggest that it is the results however illustrate the problems associated with using ex post utility to measure performance 2000 elsevier science b v all rights reserved

the money and bond markets in france abstract when rates of return on bonds are computed over extremely short holding periods the ex post cross sectional relationship between realized return and risk is linear it is therefore possible at any time to extrapolate the cross sectional relationship to a zero risk level and thus to determine the implied instantaneous riskless rate of interest we apply this technique to french bond price data using a rather unique data set in which prices are sampled daily we are able to compare the overnight rate implied in bond price data to the actual overnight money market rate we conclude that the two rates are significantly different which is evidence of segmentation between the two markets the institutional set up prevailing in france during the sample period explains the segmentation result

explaining the early discounts on stock index futures the case for disequilibrium 1984 explaining the early discounts on stock index futures the case for disequilibrium financial analysts journal vol 40 no 4 pp 43 47 67

index arbitrage with heterogeneous investors a smooth transition error correction analysis abstract the traditional index arbitrage model assumes a constant threshold mispricing between the futures and cash prices for all investors allowing for heterogeneity in investors transaction costs objectives and capital constraints we model the intraday mispricing of djia futures as a smooth transition autoregressive star process with the speed of adjustment toward equilibrium varying directly with the mispricing we show that the observed mean reversion in mispricing changes is induced by heterogeneous arbitrageurs instead of a statistical illusion infrequent trading of index portfolio stocks we further use a star error correction model to describe the nonlinear dynamics between the djia futures and index this model describes not only which market is more informationally efficient than the other but also the legging process the nonsimultaneous establishing of cash and futures positions

filtering risk away global finance capital transcalar territorial networks and the un making of city regions an analysis of business property development in bangalore india halbert l and rouanet h filtering risk away global finance capital transcalar territorial networks and the un making of city regions an analysis of business property development in bangalore india regional studies this paper contributes to ongoing debates on the landing or anchoring of global finance capital into the urban built environment inspired by recent advances from the school of territorial economics it develops the concept of transcalar territorial networks ttns to explain the processes that result in fixing foreign financial capital into business properties the paper demonstrates that ttns contribute to filter away the risks that foreign investors associate with the complexity of local regional property markets it also highlights the potential consequences on the spatial economic and social dynamics of city regions

index arbitrage and nonlinear dynamics between the s p 500 futures and cash we use a cost of carry model with nonzero transaction costs to motivate estimation of a nonlinear dynamic relationship between the s p 500 futures and cash indexes discontinuous arbitrage suggests that a threshold error correction mechanism may characterize many aspects of the relationship between the futures and cash indexes we use minute by minute data on the s p 500 futures and cash indexes the results indicate that nonlinear dynamics are important and related to arbitrage and suggest that arbitrage is associated with more rapid convergence of the basis to the cost of carry than would be indicated by a linear model article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

stock index futures mispricing profit opportunities or risk premia this paper reports empirical evidence on stock index futures pricing based on about four years of synchronous hourly data from the uk reported index values are based on firm quotes identified arbitrage opportunities are therefore actually exploitable and economically significant the analysis controls for cash market settlement procedures the results show that ex ante trading rules would have generated attractive profits after transaction costs and after the risks of dividend uncertainties marking to market and possible delays in execution are considered the far contract and the near contract tend to be mispriced in the same direction the mild tendency of futures to be overpriced in rising markets and underpriced in falling markets appears to be unimportant finally significant positive relationships are observed between the absolute magnitude of mispricing and time to maturity and between mispricing and index option implied volatility

information and index arbitrage a random cash futures basis is derived in a dynamic multimarket learning game with sequential information shocks and strategic arbitrageurs who trade to exploit gaps in the basis statistical properties of the authors theoretical basis are derived both with and without index arbitrage the authors find that basis volatility a measure of intermarket mispricing may initially increase even as individual prices become more precise and that arbitrage reduces basis volatility the model is also used to analyze regulatory issues such as the possible impact of circuit breakers on the quality of the trading process copyright 1994 by university of chicago press

the benefits from international diversification for nordic investors abstract in this paper we investigate the magnitude of the benefits from international diversification from the nordic point of view special attention is paid to whether potentially increased co movement of stock markets together with more volatile nordic currencies have resulted in decreased benefits from international diversification towards the end of the 1980s moreover the paper presents evidence on the benefits from international diversification for a currency which has recently started its free float the finnish markka fim we find significant increases in stock market co movement both unhedged ex ante strategies as well as strategies hedged for exchange rate risk are investigated revealing substantial benefits from international diversification for the nordic countries however we obtain mixed results concerning the question of the optimality of hedging

arbitrage in stock index futures the textbook description of arbitrage suggests that it is a straightforward matter of taking offsetting positions in different securities and realizing the arbitrage profit such descriptions however typically ignore the transaction costs that give rise to the arbitrage opportunity in the first place taking proper account of these transactions costs may considerably complicate the problem particularly when as is usually the case the arbitrage potential is restricted this article is concerned withoptimal arbitrage strategies with transaction costs when the arbitrage potential is restricted by position limits the particular case we shall analyze is the standard and poor s sp the corresponding figure for the s p 500 portfolio for the same period was

hedging performance and basis risk in stock index futures in early 1982 trading began at three different exchanges in futures contracts based on stock indexes stock index futures were an immediate success and quickly led to a proliferation of new futures and options markets tied to various indexes one reason for this success was that index futures greatly extended the range of investment and risk management strategies available to investors by offering them for the first time the possibility of unbundling the market and nonmarket components of risk and return in their portfolios many portfolio management and other hedging applications in investment banking and security trading have been described elsewhere1 ranging from use by a passive fund manager to reduce risk over a long time horizon to use by an underwriter to hedge the market risk exposure in a stock offering for one or two days in considering the potential applications of index futures it is clear that in nearly every case a cross hedge is involved that is the stock position that is being hedged is different from the underlying portfolio for the index contract 2 this means that return and risk for an index futures hedge will depend upon the behavior of the basis i e the difference between the futures price and the cash price hedging a position in stock will necessarily expose it to some measure of basis risk risk that the change in the futures price over time will not track exactly the value of the cash position basis risk can arise from a number of different sources and is a more significant problem for stock index contracts than for other financial futures like treasury bills and bonds 3 the most apparent cause of basis risk is the nonmarket component of return on the cash stock position since the index contract is tied to the behavior of an underlying stock market index nonmarket risk cannot be hedged this is the essential problem of a cross hedge however basis risk can be present even when the hedge involves a position in the index portfolio itself and there is no nonmarket risk for one thing returns to the index portfolio include dividends while the index and the index future only track the capital value of the portfolio any risk associated with dividends on the portfolio will become basis risk in a hedged position still dividends are fairly low and also quite stable so this may not be a terribly important shortcoming

structural breaks and diversification the impact of the 1997 asian financial crisis on the integration of asia pacific real estate markets abstract currently there exists relatively little research on the influence that the 1997 asian financial crisis has had upon capital flows within the property market and the associated long run implications of it this paper examines the impact that the crisis has had upon the integration and dynamic links between a number of asia pacific real estate markets the results show that asia pacific property markets are integrated despite a structural shift occurring at the time of the crisis these results are a particularly important finding for fund managers concerned with the impact of globalization on the performance of their real estate portfolios showing that in the asia pacific region diversification benefits are actually less than that suggested by an analysis incorrectly ignoring the crisis

work incentive effects of taxing unemployment benefits before 1979 unemployment insurance ui benefits were not treated as taxable income in the united states several economists criticized this policy on the ground that not taxing ui benefits while taxing earned income allegedly encourages unemployed persons to conduct longer than socially optimal job searches since 1979 however ui benefits received by persons in higher income families have been subject to income tax this paper investigates whether the introduction of benefit taxation has had the predicted effect of reducing unemployment duration the study uses data on a sample of persons that filed for ui in 1978 or 1979 to examine whether high income claimants collected benefits for shorter periods after the tax change than they did before benefits became taxable as part of the empirical analysis the paper develops a generalization of the weibull distribution and applies a limited dependentvariable technique for this distribution similar to the tobit technique for the normal distribution despite some variation in the results from different model specifications the analysis presents persuasive evidence of a tax effect on unemployment duration the 1979 policy change is estimated to have reduced average compensated unemployment duration among the sampled high income claimants by about one week

sensitivity analysis for mean variance portfolio problems this paper shows how to perform sensitivity analysis for mean variance mv portfolio problems using a general form of parametric quadratic programming the analysis allows an investor to examine how parametric changes in either the means or the right hand side of the constraints affect the composition mean and variance of the optimal portfolio the optimal portfolio and associated multipliers are piecewise linear functions of the changes in either the means or the right hand side of the constraints the parametric parts of the solution show the rates of substitution of securities in the optimal portfolio while the parametric parts of the multipliers show the rates at which constraints are either tightening or loosening furthermore the parametric parts of the solution and multipliers change in different intervals when constraints become active or inactive the optimal mv paths for sensitivity analyses are piecewise parabolic as in traditional mv analysis however the optimal paths may contain negatively sloping segments and are characterized by types of kinks i e points of nondifferentiability not found in mv analysis

intraday relationships among index arbitrage spot and futures price volatility and spot market volume a transactions data test abstract this paper examines intraday temporal relationships among arbitrage spreads cash and futures price volatility and cash trading volume using transactions data for the major market index futures contracts and the component stocks of the index results indicate that changes in the spread have a significant impact on cash and futures price volatility as well as on cash trading volume the impact of the spread however is attenuated by the short sale restriction in the cash market contrary to popular beliefs a more volatile market leads to subsequent decreases in the spread probably because of increases in the supply of arbitrage services or faster price adjustments

common trends and convergence south east asian equity markets 1988 1999 abstract this paper uses two different estimation approaches to demonstrate that equity markets in south east asia have shown signs of converging during the 1990s according to the haldane and hall economic journal 101 436 443 1991 method of measuring convergence a subset of asian markets had converged by mid 1997 this process appears to have been abruptly halted and somewhat reversed by the recent financial crisis we find that in general there are two common trends present in the eight asian equity market indices modeled here and also two trends when the us market is additionally included in a johansen var

short sale restrictions implications for stock index arbitrage abstract this paper offers a study of relevant transaction costs when examining the efficiency of stock index futures markets we suggest that a different transaction cost estimate should be used when testing the upper side of the cost of carry model than when testing the lower side of the model empirical evidence indicates that this explains most of the underpricing observed in the finnish stock index futures market

index futures arbitrage and the behavior of stock index futures prices this article examines intraday transaction datafor s p 500 stock indexfutures prices and the intraday quotes for the underlying index the data indicate that thefutures price changes are uncorrelated and that the variability of these price changes exceeds the variability ofprice changes in the s p 500 index this excess variability of the futures over the index remains even after controlling for the nonsynchronous prices in the index quotes which induces autocorrelation in the index changes we advance and examine empirically two hypotheses regarding the difference between the futures price and its theoretical value that this mispricing increases on average with maturity and that it is path dependent evidence supporting these hypotheses is presented

asset pricing in partially segmented markets evidence from the finnish market this paper analyzes asset pricing in a partially segmented market where citizens of a small country are allowed to hold only their domestic securities whereas the rest of the investors foreigners are essentially allowed to hold all securities in this market setting it may occur that the citizens of the small country are willing to pay less for their domestic securities than are the foreign investors the paper derives equilibrium required rates of return for different investors in this market setting which perfectly occurred in finland and tests this equilibrium model using data from the finnish stock market empirical results are consistent with the hypotheses derived from the model several studies see e g solnik 1974a and grauer and hakansson 1987 have shown that investors should diversify internationally as by so doing they can reduce the risk of their portfolio without lowering the expected return this implies that if the citizens of a certain country are by legal restrictions prohibited from holding foreign securities they may require a higher rate of return on the domestic securities than the foreign investors do this may happen because the domestic investors cannot diversify away the specific country risk in the same way that the foreign investors can thus if we could observe the prices which the foreign and domestic investors are willing to pay for these domestic securities we would expect them to differ because of this diversification effect the finnish law prohibited finnish investors from investing in foreign securities until 1986 while simultaneously allowing foreign investors to own up to 20 of the shares of any finnish company moreover since 1984 the helsinki stock exchange hse has separately quoted the prices for the unrestricted shares which can be owned both by foreign and domestic investors and for the restricted shares owned solely by domestic investors thus the market setting depicted in the previous paragraph occurred perfectly in finland during the years 1984 and 1985 in this paper our objective is to develop and test an asset pricing model which takes into account the legal restrictions in the finnish stock market in section i we specify the market structure in the finnish stock market in more detail by explaining the relevant legal restrictions affecting the market we also present some descriptive statistics on the prices of the restricted and the unrestricted on

limiting losses may be injurious to your wealth abstract theory tells us that if return distributions are independent over time an expected utility maximizing logarithmic utility investor will almost surely accumulate the most long run wealth this paper examines the robustness of the result specifically it examines the expected and unexpected long run and short run consequences of imposing value at risk and other loss constraints on power utility investors with a numerical example and empirically in an asset allocation setting covering the 1934 2008 period in addition it examines the expected and unexpected long run consequences of imposing conditional value at risk constraints on power utility and prospect theory kinked linear utility investors

a rational explanation for home country bias abstract while modern portfolio theory predicts that investors should diversify across international markets corporate equity is essentially held by domestic investors french and poterba 1991 french k poterba j 1991 investor diversification and international equity markets american economic review 81 222 226 suggest that in order for this bias to be justified investors must hold optimistic expectations about their domestic markets and pessimistic expectations about their foreign markets tesar and werner 1995 tesar l l werner i m 1995 home bias and high turnover journal of international money and finance 14 467 492 find existing explanations for the home equity bias unsatisfactory and conclude that the issue poses a challenge for portfolio theory we develop a model that incorporates both the foregone gains from diversification and the informational constraints of international investing and shows that home equity bias is consistent with rational mean variance portfolio choice specifically we prove that the nature of estimation risk in international markets can be responsible for this phenomenon we show that when the cross market variability in the estimation errors of international markets means far exceeds the cross market variability in the means themselves domestic dedication dominates international diversification an examination of 11 international markets returns over the last 25 years from the perspective of german japanese and us investors provides evidence consistent with this explanation

the secondary circuit of capital reconsidered globalization and the u s real estate sector1 the author examines the u s real estate sector to show how the state shapes global real estate flows and networks of activity through the creation and control of liquid resources the analysis focuses on the role of state laws and regulations in the expansion of the mortgage backed securities markets and the development of real estate investment trusts reits these institutional developments represent a series of ad hoc state efforts to delocalize residential and commercial property and embed real estate financing within global capital markets rather than viewing globalization as weakening the state the author argues that the u s state s capacity to influence the degree and development of liquidity is a powerful mechanism of globalization

is unemployment insurance addictive evidence from the benefit durations of repeat users the author finds evidence that the past occurrence of a spell of insured unemployment lengthens the duration of future spells descriptive statistics from canadian administrative data covering mid 1971 to early 1990 suggest that unemployment insurance ui claimants tend to spend a longer and longer time collecting benefits with each additional claim they make this finding contradicts the implication of static neoclassical models that successive ui spells should be of the same length the author hypothesizes that the stigma attached to receiving unemployment benefits erodes with each new ui claim an individual files

risk reduction by diversification in the nordic stock markets empirical examination of the ex post potential gains of risk reduction through international portfolio diversification started with grubel 1968 levy and sarnat 1970 solnik 1974 and lessard 1974 in their survey of international finance adler and dumas 1983 p 938 summed up the results the potential for international diversification to reduce risk seems unquestionable in the wake of increasing liberalization for international portfolio investment more recent contributions include jorion 1985 1989 grauer and hakansson 1987 and levy and lerman 1988 the results of the pioneers have been corroborated by contemporary research and according to jorion 1989 p 54 international diversification extolled by grubel as early as 1968 seems to have delivered on its promises despite the long tradition of studies in international portfolio diversification there has been no such work regarding the nordic markets this paper fills the gap through an analysis of potential gains from international diversification for different nordic investors danish finnish norwegian and swedish if they invest in all the nordic equity markets until the beginning of the 1980s nordic investors particularly in finland and sweden faced legal restrictions on investment abroad see nordiska radet 1987 adler and dumas 1983 have pointed out that such restrictions would lead to partially or fully segmented markets and hietala 1989 has shown the existence of premiums in the finnish stock market in our study we do not make any direct test of whether the nordic equity markets have been segmented or integrated but our results might provide some indirect evidence the nordic countries are generally viewed as fairly homogeneous from a social political and economic point of view while international diversifi

home bias in open economy financial macroeconomics standard theory would predict that investors hold a well diversified portfolio of equities across the world but despite the process of financial globalization investors still hold a disproportionate share of local equities in their portfolio the equity home bias french and poterba 1991 we review the various explanations of this puzzling phenomenon in the context of recent developments in macroeconomic modelling that have allowed to incorporate sophisticated international portfolio choices in standard two country general equilibrium models we refer to this literature as open economy financial macroeconomics we focus on three broad classes of explanations i hedging motives in frictionless financial markets real exchange rate and non tradable income risk ii asset trade costs in international financial markets such as transaction costs differences in tax treatments between national and foreign assets iii informational frictions and behavioural biases these recent developments raise the need for new portfolio facts beyond the equity home bias and we will present some new evidence on cross border asset holdings across different types of assets equities bonds and bank lending we also present some new micro data on institutional holdings of equity at the fund level these data should inform macroeconomic modelling of the open economy and a growing literature of models of delegated investment

international portfolio diversification with estimation risk international portfolio diversification has long been advocated as a way of enhancing average returns while reducing portfolio risk for the investor who considers diversifying into foreign securities this proposition however relies on the assumption that the required inputs to the classical mean variance analysis are known with certainty typically expected returns variances and covariances are simply replaced by their ex post sample values and the optimal portfolio is derived without mentioning the uncertainty inherent in these parameter values but the rational investor should take this uncertainty into account when forming expectations and probably will consider estimators that are less subject to estimation error than the classical sample mean this paper investigates alternative estimators of expected returns and their implications for the alleged gains from diversification an important observation is the crucial influence that errors in estimating expected returns have on portfolio analysis a closer examiprevious studies of international portfolio diversification have relied on ex post meanvariance analysis without considering the problem of estimation risk typically past averages are substituted for expected returns and no allowance is made for the uncertainty inherent in these parameter values first i demonstrate the shortcomings of such an approach and second i investigate another method of estimating expected returns initially proposed by stein by shrinking the sample averages toward a common mean i find that the out of sample performance of the optimal portfolio is substantially increased one of the implications of this method is that the classical conclusions vastly overestimate the possible gains in average returns instead benefits from diversification are more likely to accrue from a reduction in risk this paper draws on part of my dissertation at the university of chicago i am grateful to arnold zellner michael mussa george constantinides and especially john bilson for useful discussions and comments numerous improvements were also suggested by the referee this research received the generous financial support of the college interuniversitaire d etudes doctorales dans les sciences du management

unemployment insurance and unemployment spells this paper tests the effects of the level and length of unemployment insurance benefits on unemployment durations the paper particularly studies individual behavior during the weeks just prior to when benefits lapse higher unemployment insurance benefits are found to have a strong negative effect on the probability of leaving unemployment however the probability of leaving unemployment rises dramatically just prior to when benefits lapse individual data are used with accurate information of spell durations and the level and length of benefits the semiparametric estimation techniques used in the paper yield more plausible estimates than conventional approaches and provide useful diagnostics copyright 1990 by the econometric society

back testing the performance of an actively managed option portfolio at the swedish stock market 1990 1999 we build an investment model based on stochastic programming in the model we buy at the ask price and sell at the bid price we apply the model to a case where we can invest in a swedish stock index call options on the index and the risk free asset by reoptimizing the portfolio on a daily basis over a ten year period it is shown that options can be used to create a portfolio that outperforms the index with ex post analysis it is furthermore shown that we can create a portfolio that dominates the index in terms of mean and variance i e at given level of risk we could have achieved a higher return using options

some estimates of the effects of unemployment insurance on re employment duration abstract this paper examines how re employment spell durations are affected by the potential unemployment benefit period an ex ante notion and benefit exhaustion an ex post notion the extent to which benefit duration affects re employment duration is found to depend on the nature of the separation

direct tests of index arbitrage models previous tests of stock index arbitrage models have rejected the no arbitrage constraint imposed by these models this paper provides a detailed analysis of actual s p 500 arbitrage trades and directly relates these trades to the predictions of index arbitrage models an analysis of arbitrage trades suggests that i short sale rules are unlikely to affect the cashfutures mispricing ii the opportunity cost of arbitrage funds exceeds the treasury bill rate and iii the average price discrepancy captured by arbitrage trades is small tests of the models provide some support for a version ofthe arbitrage model that incorporates an early liquidation option the ability of these models to explain arbitrage trades however is surprisingly low

the asian financial crisis and international reserve accumulation a robust control approach abstract standard macroeconomic models have difficulties accounting for the surge in international reserves of asian countries in the aftermath of the asian financial crisis of 1997 we propose precautionary demand for saving generated by model uncertainty as an important driver of this phenomenon using korean data we estimate a simple permanent income model augmented with model uncertainty find a structural break at the point of the asian financial crisis and identify a rise in concern for model misspecification which is distinct from an increase in income volatility the post crisis concern for model misspecification implies a reasonable detection error probability we also show that learning serves as an additional powerful amplification mechanism in our framework

computing optimal multi currency mean variance portfolios abstract the paper provides an exact and computable solution to the general quadratic mean variance problem with exchange rate and return uncertainties multiple currencies are considered with multiple investments in each currency the classical mean variance formulation is augmented with currency risk the overall risk is hence the multiplicative effect of return risks within a currency and the currency risk currency risk may be interpreted in terms of though not restricted to past forecast errors we provide a framework within a general structure for return and exchange rate forecasts and risks we show that the quadratic mean variance structure is maintained and provide solutions to computational questions in the evaluation of the optimal portfolio by extending conventional analysis we arrive at a surprisingly simple solution which may be a useful addition to the arsenal of finance techniques

the relation between forward prices and futures prices abstract this paper consolidates the results of some recent work on the relation between forward prices and futures prices it develops a number of propositions characterizing the two prices these propositions contain several testable implications about the difference between forward and futures prices many of the propositions show that equilibrium forward and futures prices are equal to the values of particular assets even though they are not in themselves asset prices the paper then illustrates these results in the context of two valuation models and discusses the effects of taxes and other institutional factors

liquidity and the law of one price the case of the futures cash basis deviations from no arbitrage relations should be related to market liquidity because liquidity facilitates arbitrage at the same time a wide futures cash basis may trigger arbitrage trades and in turn affect liquidity we test these ideas by studying the dynamic relation between stock market liquidity and the index futures basis there is evidence of two way granger causality between the short term absolute basis and liquidity and liquidity granger causes longer term absolute bases shocks to the absolute basis predict future stock market liquidity the evidence suggests that liquidity enhances the efficiency of the futures cash pricing system copyright 2007 by the american finance association

on the empirical relationship between unemployment duration unemployment insurance and voluntary unemployment abstract this paper is concerned with the detection of the empirical consequences of nonstationarity in the search behavior of the unemployed initially workers are laid off and forced to search while unemployed upon re employment individuals may choose an employment search strategy continue search for better offers or initiate unemployment voluntarily by quitting their job if it is optimal to do so we refer to this strategy as voluntary unemployment we analyze how this decision is related to benefit exhaustion or more generally to the completed duration of unemployment and we are therefore able to find a relationship between unemployment duration and the incidence of voluntary unemployment the model is estimated from a panel of young canadian labor force participants

the saga of the first stock index futures contract benchmarks models and learning in the presence of imperfect or perturbed benchmarks pricing based on relative valuation or arbitrage can be affected adversely this study highlights persistent pricing irregularities in the kansas city value line kcvl stock index futures market this contract is especially interesting because the underlying benchmark underwent a midstream change in definition from a complex equally weighted geometric index to an equally weighted arithmetic index empirical analysis reveals that during a four year period the market displayed herd like behavior and priced the kcvl geometric contract using the simple but wrong cost of carry benchmark model a dramatic change occurs around the publication of the eytan harpaz 1986 model when the market turns efficient from the perspective of this new model the market appears to have succumbed initially to a bad information cascade primarily because arbitrage was difficult to understand and carry out under complex benchmarking the evidence provides empirical extension to the observational social learning paradigms of simon 1955 banerjee 1992 and bikhchandani hirshleifer and welch 1992 that lead to behavioral herding and information cascades

the integration of direct real estate and stock markets in asia currently there exists relatively little research investigating the long term association between stock and direct real estate markets using appropriate transaction based property indices this study focuses on the relationship between stock and direct real estate markets in nine asian countries from the period 1980 to 2012 through both linear and nonlinear cointegration techniques we find empirical evidence of linear cointegration of stock and property markets in taiwan fractional cointegration in singapore and hong kong and no evidence of cointegration in china japan thailand malaysia indonesia and south korea it is concluded that segmentation of property markets from stock markets does not appear to be linked to the differences in the maturity of national financial markets and that the differing degrees of integration across asia may instead be reflective of a range of factors impacting upon the underlying economic structures in each country

gains from international diversification 1968 85 returns on portfolios of stocks and bonds this paper applies the multi period investment model to a universe of international securities on the basis of the simple probability assessment approach our principal findings are 1 the gains from including non u s asset categories in the universe were remarkably large in some cases statistically significant especially for the highly risk averse strategies 2 the gains from removing the no leverage constraint were more substantial than they were in the absence of non u s securities and 3 there is strong evidence of market segmentation in that the optimal levels of investment in u s securities were mostly zero in the presence of the non u s asset categories

international diversification with securitized real estate and the veiling glare from currency risk this paper analyzes diversification benefits from international securitized real estate in a mixed asset context we apply regression based mean variance efficiency tests conditional on currency unhedged and fully hedged portfolios to account for foreign exchange risk exposure from the perspective of a us investor it is shown that first international diversification is superior to a us mixed asset portfolio second adding international real estate to an already internationally diversified stock and bond portfolio results in a further significant improvement of the risk return trade off and third considering unhedged international assets could lead to biased asset allocation decisions not realizing the true diversification benefits from international assets our in sample results are quite robust in out of sample analysis and when investment frictions like short selling constraints are introduced