bubbles and experience an experiment we investigate the occurrence of bubble crash pricing patterns in laboratory financial markets with a mixture of experienced and inexperienced traders we find that even with a minority of experienced traders bubbles are substantially abated

the role of feelings in investor decision making abstract this paper surveys the research on the influence of investor feelings on equity pricing and also develops a theoretical basis with which to understand the emerging findings of this area the theoretical basis is developed with reference to research in the fields of economic psychology and decision making recent advancements in understanding how feelings affect the general decision making of individuals especially under conditions of risk and uncertainty e g loewenstein et al 2001 psychological bulletin 127 267 286 are covered by the review the theoretical basis is applied to analyze the existing research on investor feelings e g kamstra et al 2000 american economic review forthcoming hirshleifer and shumway 2003 journal of finance 58 3 1009 1032 this research can be broadly described as investigating whether variations in feelings that are widely experienced by people influence investor decision making and consequently lead to predictable patterns in equity pricing the paper concludes by suggesting a number of directions for future empirical and theoretical research

do bond credit ratings lead to excess comovement abstract we investigate whether non fundamental comovement results from investors using credit ratings to group assets into different styles we find that bonds that join a new rating class start comoving more with the bonds in this class even when fundamental factors suggest otherwise we show that this comovement effect varies according to the nature of the bond considered and the modalities of the rating action downgrades have a larger impact than upgrades and rating reviews matter as much as actual movements finally rating changes between grades bbb and bb which lead bonds to be reclassified as either high yield or investment grade assets seem to be of particular importance

the labor market status of immigrants effects of the unemployment rate at arrival and duration of residence combining current population survey samples from november 1979 april 1983 june 1986 and june 1988 all of which included data on country of birth and year of immigration the authors examine pat

are the discounts on closed end funds a sentiment index in investor sentiment and the closed end fund puzzle charles lee andrei shleifer and richard thaler 1991 claim to solve not one but two longstanding puzzles discounts on closed end funds and the small firm effect both according to lee et al are driven by the same waves of small investor sentiment killing two such elusive birds with one stone would be a neat trick indeed if lee et al could bring it off but they can t measured properly the comovement between fund discounts and small firm returns is neither strong enough nor robust enough to support their common sentiment story the case of lee et al rests mainly on their key table iv in which monthly returns for 10 separate size grouped portfolios are regressed on monthly changes in the discount of a value weighted portfolio of closed end funds avwd and the monthly return on a value weighted portfolio of nyse firms vwny for their twenty year sample period running from july 1965 to december 1985 lee et al find changes in the value weighted discount holding market returns constant to be positively related to the returns of the largest firms decile 10 but negatively related to those of all other size deciles the negative coefficient is largest for the very small firms in decile 1 leading lee et al to conclude that when individual investors become optimistic about closed end funds and smaller stocks these stocks do well and discounts narrow and when individual investors become pessimistic about closed end funds and smaller stocks smaller stocks do badly and discounts widen pp 94 95 could the observed relation between fund discounts and small firm returns be just a chance sampling fluctuation lee et al checked for robustness by dividing their sample in half and rerunning their regressions on each half separately their table vii they found the coefficient of avwd in the decile 1 regression dropped in the second subperiod by 80 percent and in absolute size fell to barely one standard error from zero similar attenuation in size and significance was noted for all other size groups the virtual disappearance of the relation between the discounts and small firm returns after 1975 might have led other researchers to abandon a common sentiment hypothesis but not lee shleifer and thaler they see

where does price discovery occur for stocks traded in multiple markets evidence from hong kong and london using a sample of hong kong listed stocks that are also traded on the london stock exchange we document the following results first london market makers use hong kong s closing prices as the benchmark for setting the opening prices in london second trading in the london market plays only a limited role in price discovery in the hong kong market third the stock returns from london trading are closely correlated with those of the hong kong market the above findings are consistent with the explanation that london trading is predominantly liquidity driven but not information driven

international corporate diversification and the cost of equity european evidence abstract this paper analyzes the impact of corporate international diversification cid on domestic and world betas through the notion of psychic distance between countries using a large european sample of 598 firms our findings indicate that this dimension significantly influences corporate risk exposure by isolating three additive components of the foreign sales ratio fsr we obtain the most significant results by geographically partitioning the sample provided that firms are further classified by sector our framework sheds new light on how the cid of firms belonging to sweden and the united kingdom as well as the consumer cyclical consumer non cyclical and information technology sectors sometimes can reduce and sometimes increase firm betas

risk aversion and the earnings of us immigrants and natives the literature on the earnings of natives and immigrants has heretofore ignored differences in compensating wages for job risks it is possible that the risk involved in migration may indicate a greater willingness on the part of immigrants to accept riskier jobs than natives alternatively immigrants may attempt to protect their migration investment by choosing occupations with less risk indicating a higher degree of risk aversion this paper examines differences in risk aversion between us immigrants and natives and corresponding differentials in wage premiums for job risk our analysis suggests that on average immigrants are exposed to 21 less risk than natives but receive a 25 higher risk premium the higher degree of risk aversion of immigrants and their lower exposure to risk and thus lower earnings explains 5 of the higher observed earnings of natives we also find that earlier immigrant cohorts pre 1970 are employed in riskier jobs than are recent cohorts but the difference accounts fo

probability judgment error and speculation in laboratory asset market bubbles in 12 sessions conducted in a typical bubble generating experimental environment we design a pair of assets that can detect both irrationality and speculative behavior the specific form of irrationality we investigate is the probability judgment error associated with lowprobability high payoff outcomes independently we test for speculation by comparing prices of identically paying assets in multiperiod versus single period markets we establish that aggregate irrationality measured in one dimension probability judgment error is associated with aggregate irrationality measured in another bubble formation

global pricing of equity global equity management has historically been structured around country asset allocation this approach was supported by the observations that the country factor is the major source of influence on stock price behavior and that the correlation between equity and currency is close to zero and unstable if a corporation is regarded as a portfolio of international activities however its stock price should be influenced by international factors in relation to the geographical breakdown of its activities rather than where its headquarters is located or its stock is traded we examined a large cross section of security prices and found that regional factors and currency factors have a strong influence on asset returns beyond that of domestic factors moreover the sensitivity of individual company returns to nondomestic factors is closely related to the extent of their international activities as proxied by the relative importance of foreign sales to total sales we review the implications of these findings

it is not just confusion strategic uncertainty in an experimental asset market to what extent is the observed mispricing in experimental asset markets caused by strategic uncertainty and by confusion we address this question by comparing subjects initial price forecasts in two market environments one with six human traders and the other with one human and five computer traders we find that both strategic uncertainty and confusion contribute equally to the median initial forecast deviation from the fundamental value the effect of strategic uncertainty is greater for subjects with a perfect score in the cognitive reflection test and it is not significant for those with low scores

risk in dynamic arbitrage the price effects of convergence trading i develop an equilibrium model of convergence trading and its impact on asset prices arbitrageurs optimally decide how to allocate their limited capital over time their activity reduces price discrepancies but their activity also generates losses with positive probability even if the trading opportunity is fundamentally riskless moreover prices of identical assets can diverge even if the constraints faced by arbitrageurs are not binding occasionally total losses are large making arbitrageurs returns negatively skewed consistent with the empirical evidence the model also predicts comovement of arbitrageurs expected returns and market liquidity many hedge funds and other financial institutions attempt to exploit the relative mispricing of assets however from time to time the prices of the assets diverge forcing these institutions whom i will refer to as convergence traders or arbitrageurs to unwind some of their positions at spectacular losses the near collapse of the long term capital management ltcm hedge fund in 1998 is frequently cited as an example of this phenomenon 1 to what extent can these losses be attributed to the actions of arbitrageurs as opposed to unforeseen shocks why do other institutions with liquid capital not eliminate the abnormal returns around these events in this paper i develop a theoretical model to address these questions i show that such losses can occur in the absence of any shock i also show that even if the constraints faced by

industry window dressing we explore a new mechanism by which investors take correlated shortcuts and present evidence that managers using sales management take advantage of these shortcuts specifically we exploit a regulatory provision wherein a firm s primary industry is determined by the highest sales segment exploiting this regulation we provide evidence that investors classify operationally nearly identical firms as starkly different depending on their placement around this sales cutoff moreover managers appear to exploit this by manipulating sales to be just over the cutoff in favorable industries further evidence suggests that managers engage in activities to realize large tangible benefits from this opportunistic action

thar she bursts reducing confusion reduces bubbles to explore why bubbles frequently emerge in the experimental asset market model of smith suchanek and williams 1988 we vary the fundamental value process constant or declining and the cash to asset value ratio constant or increasing we observe high mispricing in treatments with a declining fundamental value while overvaluation emerges when coupled with an increasing c a ratio a questionnaire reveals that the declining fundamental value process confuses subjects as they expect the fundamental value to stay constant running the experiment with a different context stocks of a depletable gold mine instead of stocks significantly reduces mispricing and overvaluation as it reduces confusion jel c91 d14 g11 g12

long term spread option valuation and hedging this paper investigates the valuation and hedging of spread options on two commodity prices which in the long run are in dynamic equilibrium i e cointegrated the spread exhibits properties different from its two underlying commodity prices and should therefore be modelled directly this approach offers significant advantages relative to the traditional two price methods since the correlation between two asset returns is notoriously hard to model in this paper we propose a two factor model for the spot spread and develop pricing and hedging formulae for options on spot and futures spreads two examples of spreads in energy markets the crack spread between heating oil and wti crude oil and the location spread between brent blend and wti crude oil are analyzed to illustrate the results

traders expectations in asset markets experimental evidence we elicit traders predictions of future price trajectories in repeated experimental markets for a 15 period lived asset we find that individuals beliefs about prices are adaptive and primarily based on past trends in the current and previous markets in which they have participated most traders do not anticipate market downturns the first time they participate in a market and when experienced they typically overestimate the time remaining before market peaks and downturns occur when prices deviate from fundamental values belief data are informative to an observer in predicting the direction of future price movements and the timing of market peaks

how are stock prices affected by the location of trade abstract we examine pairs of large siamese twin companies whose stocks are traded around the world but have different trading and ownership habitats twins pool their cash flows so with integrated markets twin stocks should move together however the difference between the prices of twin stocks appears to be correlated with the markets on which they are traded most i e a twin s relative price rises when the market on which it is traded relatively intensively rises we examine several explanations of this phenomenon including the discretionary use of dividend income by parent companies differences in parent expenditures voting rights currency fluctuations ex dividend date timing issues and tax induced investor heterogeneity only the last hypothesis can explain some but not all of the empirical facts we conjecture that a country specific sentiment shocks might affect share intensity b investors are rational but markets are segmented by frictions other than international transactions costs such as agency problems

the earnings of male immigrants in england evidence from the quarterly lfs in this paper we estimate earnings functions for native born and foreign born white and non white males in the english labour market using data from the quarterly labour force survey our results highlight the importance of distinguishing between native born and foreign born males when investigating the labour market experience of ethnic minorities furthermore the earnings performance amongst white immigrants varies considerably

further evidence on closed end country fund prices and international capital flows using cointegration analysis i establish a long run relationship between country fund premiums and international capital flows in six out of 10 emerging markets and in two out of seven developed markets examined this relationship is explored to derive an intuitive measure of capital market segmentation that accounts for investment barriers and does not rely on a specific asset pricing model i find that most emerging markets are segmented but some exhibit a clear trend toward integration whereas most developed countries exhibit no evidence of segmentation the segmentation measure reveals that the process toward integration is gradual and can be reversed

gibrat s law for all cities two empirical regularities concerning the size distribution of cities have repeatedly been established zipf s law holds the upper tail is pareto and city growth is proportionate census 2000 data are used covering the entire size distribution not just the upper tail the nontruncated distribution is shown to be lognormal rather than pareto this provides a simple justification for the coexistence of proportionate growth and the resulting lognormal distribution an equilibrium theory of local externalities that can explain the empirical size distribution of cities is proposed the driving force is a random productivity process of local economies and the perfect mobility of workers

information markets and the comovement of asset prices traditional asset pricing models predict that covariance between prices of difierent assets should be lower than what we observe in the data this model generates high covariance within a rational expectations framework by introducing markets for information about asset payofis when information is costly rational investors will not buy information about all assets they will learn about a subset because information production has high flxed costs competitive producers charge more for low demand information than for high demand information a price that declines in quantity makes investors want to purchase a common subset of information if investors price many assets using a common subset of information then a shock to one signal is passed on as a common shock to many asset prices these common shocks to asset prices generate excess covariance the cross sectional and time series properties of asset price covariance are consistent with this explanation

the relative pricing of high yield debt the case of rjr nabisco holdings capital corporation the authors derive and investigate empirically arbitrage pricing restrictions among three bonds of rjr nabisco holdings capital corporation the three rjr bonds are virtually identical in all respects except for the form in which interest is paid the authors document large and persistent errors in the market pricing of the three bonds over a two year period the cash paying bond was consistently more expensive than either the pay in kind or deferred coupon bonds the magnitude of the pricing errors is too large to be explained by market imperfections copyright 1993 by american economic association

investor mood and financial markets abstract numerous studies in recent decades have linked investor mood and financial market behavior but most works have been empirical investigations this paper bridges the gap between empirical findings and financial theory by slightly modifying the lucas lucas r e 1978 asset prices in an exchange economy econometrica 46 1429 1445 model this study shows how investor mood variations affect equilibrium asset prices and expected returns analysis results indicate that both equity and bill prices correlate positively with investor mood with higher asset prices associated with better mood conversely expected asset returns correlate negatively with investor mood further the mood effect on asset prices increases when investors are in a good mood and mood variations exhibit a greater influence on equity markets than on bill markets results of this study suggest that investor mood is a vital factor in equilibrium asset prices and returns and integrating investor mood into asset pricing models helps to interpret the growing body of seemingly anomalous evidence regarding investor behavior

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

experimental tests of the separation theorem and the capital asset pricing model a computer controlled multistage portfolio selection task was devised to test experimentally basic assumptions underlying the separation theorem and the capital asset pricing model although most of the subjects diversified among the three risky assets the introduction of a riskless asset did not have the effect predicted by the separation theorem nor were the subjects affected by systematic changes in the variance covariance matrix of the risky returns however performance improved as the reward was increased tenfold the capital asset pricing model capm proposed by william sharpe 1964 john lintner 1965 and jan mossin 1966 has been the predominant normative as well as positive theory for determining assets returns and prices in financial markets the capm has a wide range of implications for various financial issues including the allocation of risky assets price predictions performance indices and market efficiency tests as well as tools for corporate finance decisions such as capital structure costs of financial sources and prices of new issues during the last decade numerous theoretical studies have examined and extended the capm a most recent development is the

the dynamics of financially constrained arbitrage we develop a model of financially constrained arbitrage and use it to study the dynamics of arbitrage capital liquidity and asset prices arbitrageurs exploit price discrepancies between assets traded in segmented markets and in doing so provide liquidity to investors a collateral constraint limits their positions as a function of capital we show that the dynamics of arbitrage activity are self correcting following a shock that depletes arbitrage capital profitability increases and this allows capital to be gradually replenished spreads increase more and recover faster for more volatile trades although arbitrageurs cut their positions in these trades the least when arbitrage capital is more mobile across markets liquidity in each market generally becomes less volatile but the reverse may hold for aggregate liquidity because of mobility induced contagion

pairs trading performance of a relative value arbitrage rule we test a wall street investment strategy pairs trading with daily data over 1962 2002 stocks are matched into pairs with minimum distance between normalized historical prices a simple trading rule yields average annualized excess returns of up to 11 for self financing portfolios of pairs the profits typically exceed conservative transaction cost estimates bootstrap results suggest that the pairs effect differs from previously documented reversal profits robustness of the excess returns indicates that pairs trading profits from temporary mispricing of close substitutes we link the profitability to the presence of a common factor in the returns different from conventional risk measures wall street has long been interested in quantitative methods of speculation one popular short term speculation strategy is known as pairs trading the strategy has at least a 20 year history on wall street and is among the proprietary statistical arbitrage tools currently used by hedge funds as well as investment banks the concept of pairs trading is disarmingly simple find two stocks whose prices have moved together historically when the spread between them widens short the winner and buy the loser if history repeats itself prices will converge and the arbi

the seemingly anomalous price behavior of royal dutch shell and unilever n v plc abstract we examine two anglo dutch groups the shares of whose parents trade on several international exchanges within each group the parents corporate charters mandate the division of cash flows available for distribution this implies a specific ratio for the market prices of their securities we document persistent deviations from these ratios on both the new york and london exchanges the direction and magnitude of the mispricing are common to both pairs of stocks and both markets nevertheless we find no evidence of profitable intra or intermarket trading rules

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

do incentives matter managerial contracts for dual purpose funds we examine the contracts used to compensate the managers of the seven dual purpose investment companies that existed between 1967 and 1985 to determine whether financial incentives in fluence real behavior in the predicted way the compensation contracts for these funds provided explicit incentives for the production of both capital gains and current income we model the behavior that an expected compensation maximizing agent would exhibit when faced with such contracts and derive several testable implications our empirical results are consistent with the theoretical predictions and so we are able to use this relatively clean setting to contribute to the growing literature concerned with determining the impact of incentive contracts on behavior a unique and interesting aspect of this study is that the nature of these organizations allows us to provide evidence that the market understood and priced the behavior induced by these contracts

nonparametric methods and local time based estimation for dynamic power law distributions summary this paper introduces nonparametric econometric methods that characterize general power law distributions under basic stability conditions these methods extend the literature on power laws in the social sciences in several directions first we show that any stationary distribution in a random growth setting is shaped entirely by two factors the idiosyncratic volatilities and reversion rates a measure of cross sectional mean reversion for different ranks in the distribution this result is valid regardless of how growth rates and volatilities vary across different economic agents and hence applies to gibrat s law and its extensions second we present techniques to estimate these two factors using panel data third we describe how our results imply predictability as higher ranked processes must on average grow more slowly than lower ranked processes we employ our empirical methods using data on commodity prices and show that our techniques accurately describe the empirical distribution of relative commodity prices we also show that rank based out of sample forecasts of future commodity prices outperform random walk forecasts at a 1 month horizon

culture and r2 abstract consistent with predictions from the psychology literature we find that stock prices co move more less in culturally tight loose and collectivistic individualistic countries culture influences stock price synchronicity by affecting correlations in investors trading activities and a country s information environment both market wide and firm specific variations are lower in tighter cultures individualism is mostly associated with higher firm specific variations trade and financial openness weakens the effect of domestic culture on stock price comovements these results hold for various robustness checks our study suggests that culture is an important omitted variable in the literature that investigates cross country differences in stock price comovements

on the dual characteristics of closed end country funds abstract in a mildly segmented world market closed end country fund cecf returns and premiums or discounts would be determined by factors due mainly to market segmentation and investor sentiment the role of these two types of factors has been debated we reexamine this issue by examining the relative importance of us market returns and foreign market returns in determining cecf returns by employing time series empirical methods we find that cecf returns are more heavily influenced by their local foreign market returns than by us market returns which implies that there remains a substantial diversification benefit from investing in cecfs

the impact of host country schooling on earnings a study of male immigrants in the united states immigrants in the united states who acquire u s schooling earn higher wages than other immigrants using data from the u s censuses and the national longitudinal survey of youth we show that this wage advantage results from both greater educational attainment and higher returns to education the higher returns are not the consequence of ability bias or greater english proficiency of those who acquire u s schooling returns to years of non u s education are higher for immigrants who complete their schooling in the united states consistent with the view that u s schooling upgrades or certifies education received in the source country for those without u s schooling returns are higher for immigrants from highly developed countries and countries for which english is an official language

the effect of short selling on bubbles and crashes in experimental spot asset markets a series of experiments illustrate that relaxing short selling constraints lowers prices in experimental asset markets but does not induce prices to track fundamentals we argue that prices in experimental asset markets are influenced by restrictions on short selling capacity and limits on the cash available for purchases restrictions on short sales in the form of cash reserve requirements and quantity limits on short positions behave in a similar manner a simulation model based on delong et al 1990 generates average price patterns that are similar to the observed data asset market bubbles are persistent deviations of prices from fundamentals to the extent that bubbles exist they can influence investment levels and the allocation of capital and thereby have considerable economic effects in recognition of their potential importance the question of the existence and pervasiveness of bubbles has been a focus of extensive empirical investigation see e g shiller 1981 blanchard and watson 1982 diba and grossman 1988 and west 1988 these studies yield mixed results regarding the empirical relevance of bubble phenomena one source of the differences in conclusions may be that because the fundamental value of the assets cannot be observed tests of the presence of bubbles are joint tests with the particular specification of the process guiding the evolution of fundamentals also being tested the availability of short selling is widely believed to make bubble formation less likely one rationale for such a belief is the notion that the cause of asset market bubbles is a constraint on the ability of traders to speculate on future downward price movements see e g miller 1977 jarrow 1980 diamond and verrecchia 1987 or figlewski and webb 1993 in the absence of short sales traders may sell only the shares in their portfolios the availability of short sales relaxes this constraint in this paper we study empirically the effect of allowing short sales on both the incidence and magnitude of market bubbles we choose a setting in which the fundamental value of the asset is clearly and unambiguously defined and known at all times and bubbles typically occur namely we use the experimental environment that smith suchanek and williams 1988 introduce while

zipf s law for cities an explanation zipf s law is a very tight constraint on the class of admissible models of local growth it says that for most countries the size distribution of cities strikingly fits a power law the number of cities with populations greater than s is proportional to 1 s suppose that at least in the upper tail all cities follow some proportional growth process this appears to be verified empirically this automatically leads their distribution to converge to zipf s law

are investors rational choices among index funds s p 500 index funds represent one of the simplest vehicles for examining rational behavior they hold virtually the same securities yet their returns differ by more than 2 percent per year although the relative returns of alternative s p 500 funds are easily predictable the relationship between cash flows and performance is weaker than rational behavior would lead us to expect we show that selecting funds based on low expenses or high past returns outperforms the portfolio of index funds selected by investors our results exemplify the fact that in a market where arbitrage is not possible dominated products can prosper

the market valuation of cash dividends abstract this paper re examines the case of citizens utilities a firm with one class of common stock which pays stock dividends and one which pays taxable cash dividends john long s 1978 study of the two shares relative prices suggests that investors may prefer cash dividends to equal sized stock dividends this paper finds that the cash dividend share s ex day price decline is less than their dividend payment stock dividend shares fall by nearly their full dividend the disparity between ex day dividend valuation and the observed prices of the two shares is inconsistent with some explanations of the demand for cash dividends

the distribution of wealth and fiscal policy in economies with finitely lived agents we study the dynamics of the distribution of wealth in an overlapping generation economy with finitely lived agents and intergenerational transmission of wealth financial markets are incomplete exposing agents to both labor and capital income risk we show that the stationary wealth distribution is a pareto distribution in the right tail and that it is capital income risk rather than labor income that drives the properties of the right tail of the wealth distribution we also study analytically the dependence of the distribution of wealth of wealth inequality in particular on various fiscal policy instruments like capital income taxes and estate taxes and on different degrees of social mobility we show that capital income and estate taxes can significantly reduce wealth inequality as do institutions favoring social mobility finally we calibrate the economy to match the lorenz curve of the wealth distribution of the u s economy

nonspeculative bubbles in experimental asset markets lack of common knowledge of rationality vs actual irrationality we report the results of an experiment designed to study the role of speculation in the formation of bubbles and crashes in laboratory asset markets in a setting in which speculation is not possible bubbles and crashes are observed the results suggest that the departures from fundamental values are not caused by the lack of common knowledge of rationality leading to speculation but rather by behavior that itself exhibits elements of irrationality much of the trading activity that accompanies bubble formation in markets where speculation is possible is due to the fact that there is no other activity available for participants in the experiment

price based return comovement abstract similarly priced stocks move together stocks that undergo splits experience an increase in comovement with low priced stocks and a decrease in their comovement with high priced stocks price based comovement is not explained by economic fundamentals firm size or changes in liquidity or information diffusion the shift in comovement following splits is greater for large stocks high priced stocks and when investor sentiment is high in the full cross section price based portfolios explain variation in stock level returns after controlling for movements in the market and industry portfolios as well as portfolios based on size book to market transaction costs and return momentum the results suggest that investors categorize stocks based on price

excess covariance and dynamic instability in a multi asset model the presence of excess covariance in financial price returns is an accepted empirical fact the price dynamics of financial assets tend to be more correlated than their fundamentals would justify we advance an explanation of this fact based on an intertemporal equilibrium multi assets model of financial markets with an explicit and endogenous price dynamics the market is driven by an exogenous stochastic process of dividend yields paid by the assets that we identify as market fundamentals the model is rather flexible and allows for the coexistence of different trading strategies the evolution of assets price and traders wealth is described by a high dimensional stochastic dynamical system we identify the equilibria of the model consistent with a baseline assumption of procedural rationality we show that these equilibria are characterized by excess covariance in prices with respect to the dividend process moreover we show that in equilibrium there is a positive expected marginal profit in choosing more risky portfolios as a consequence the evolutionary pressure generates a trend towards more remunerative strategies which in turn increase the variance of prices and the dynamic instability of the system

do when and where matter initial labor market conditions and immigrant earnings this article investigates the long term effects on immigrant earnings and employment of labour market conditions encountered upon arrival we find that early earnings assimilation depends crucially on a favourable national labour market exposure to high local unemployment rates also affects individuals for at least ten years to handle the issue of selective migration we compare refugees entering sweden during a severe and unexpected recession to refugees arriving during a preceding economic boom the analysis of effects at the local level exploits a governmental refugee settlement policy to get exogenous variation in local labour market conditions

lost in translation delayed ex dividend price adjustments of hong kong adrs abstract previous research documents that hong kong stocks have a full ex dividend price adjustment consistent with dividends and capital gains being tax free we examine ex dividend price behavior of hong kong adrs to assess the impact of differing tax environments in us and hong kong these adrs typically go ex dividend before their underlying stock they experience significant abnormal returns of 1 16 on their ex day the average ex day price drop is only 30 of the dividend however adr prices drop when the underlying stock goes ex dividend subsequently the cumulative adr price drop is equal to the dividend thus the adr ex dividend adjustment resembles that of the underlying stock consistent with home country tax laws governing adr price behavior neither liquidity nor transaction costs can explain the anomalous delayed ex dividend adjustment of adrs

top incomes in the long run of history a recent literature has constructed top income shares time series over the long run for more than twenty countries using income tax statistics top incomes represent a small share of the population but a very significant share of total income and total taxes paid hence aggregate economic growth per capita and gini inequality indexes are sensitive to excluding or including top incomes we discuss the estimation methods and issues that arise when constructing top income share series including income definition and comparability over time and across countries tax avoidance and tax evasion we provide a summary of the key empirical findings most countries experience a dramatic drop in top income shares in the first part of the twentieth century in general due to shocks to top capital incomes during the wars and depression shocks top income shares do not recover in the immediate postwar decades however over the last thirty years top income shares have increased substantially in english speaking countries and in india and china but not in continental european countries or japan this increase is due in part to an unprecedented surge in top wage incomes as a result wage income comprises a larger fraction of top incomes than in the past finally we discuss the theoretical and empirical models that have been proposed to account for the facts and the main questions that remain open

explaining differences in job retention between alien and nonalien workers after an in company training this study focuses on the job retention of unemployed workers after they attended a subsidized in company training programme in flanders using a new large scale dataset of the flemish labour exchange we look for differences in the probability of employment between aliens and nonaliens during the 36 months following their on the job training we further investigate whether differences persist after controlling for several socio economic characteristics and labour market related variables estimating a modified probit model we find that on average being an alien lowers the probability of employment after training by approximately 15 this effect reduces to 10 when controlling for other variables the effect of education on a trainee s employment chances differs for aliens and nonaliens aliens have a markedly lower return on investment in education good language skills and a longer in company training period also increase employment probability but more so for aliens other control variables do not

a factor model for co movements of commodity prices abstract we fit a factor model to two monthly panels of deflated prices of energy metals and agricultural commodities prices consistently display a tendency to revert towards the factor though the speed of reversion to the factor is slow using both in and out of sample metrics we compare the factor model to that of a no change model and to two simple models that tie changes in commodity prices to percentage change in either global industrial production or the u s dollar the factor model does relatively well at long 12 month horizons in terms of commodities the factor model s performance is best for energy prices worst for metals with agricultural prices falling in between

are refugees different from economic immigrants some empirical evidence on the heterogeneity of immigrant groups in the united states this paper analyzes how the implicit difference in time horizons between refugees and economic immigrants affects subsequent human capital investments and wage assimilation the analysis uses the 1980 and 1990 integrated public use samples of the census to study labor market outcomes of immigrants who arrived in the united states from 1975 to 1980 i find that in 1980 refugee immigrants in this cohort earned 6 less and worked 14 fewer hours than economic immigrants both had approximately the same level of english skills the two immigrant groups had made substantial gains by 1990 however refugees had made greater gains in fact the labor market outcomes of refugee immigrants surpassed those of economic immigrants in 1990 refugees from the 1975 1980 arrival cohort earned 20 more worked 4 more hours and improved their english skills by 11 relative to economic immigrants the higher rates of human capital accumulation for refugee immigrants contribute to these findings

the effect of naturalization on wage growth a panel study of young male immigrants for young male immigrants naturalization facilitates assimilation into the u s labor market following naturalization immigrants gain access to public sector white collar and union jobs and wage growth accelerates consistent with removal of employment barriers the faster wage growth of immigrants who naturalize might alternatively result from greater human capital investment prior to naturalization stemming from a long term commitment to u s labor markets but there is no evidence that wage growth accelerates or the distribution of jobs improves until citizenship is attained finally the gains from naturalization are greater for immigrants from less developed countries and persist when we control for unobserved productivity

modeling earnings dynamics in this paper we use indirect inference to estimate a joint model of earnings employment job changes wage rates and work hours over a career we use the model to address a number of important questions in labor economics including the source of the experience profile of wages the response of job changes to outside wage offers and the effects of seniority on job changes we also study the dynamic response of wage rates hours and earnings to various shocks and measure the relative contributions of the shocks to the variance of earnings in a given year and over a lifetime we find that human capital accounts for most of the growth of earnings over a career although job seniority and job mobility also play significant roles unemployment shocks have a large impact on earnings in the short run as well as a substantial long term effect that operates through the wage rate shocks associated with job changes and unemployment make a large contribution to the variance of career earnings and operate mostly through the job specific error components of wages and hours

a case study of short sale constraints and limits to arbitrage this paper uses a unique data set of trades in a unique pair of securities that enables the precise identification of individual broker activity and the trade direction of that activity we find direct evidence that the imposition removal of short sale constraints limits generates trading activity consistent with brokers exploiting apparent mispricing

the on the run liquidity phenomenon abstract we test the implications of a model of multi asset speculative trading in which liquidity differentials between on the run and off the run u s treasury bonds ensue from endowment shocks in the presence of two realistic market frictions information heterogeneity and imperfect competition among informed traders and a public signal our evidence suggests that i off on the run liquidity differentials are economically and statistically significant even after controlling for several of the bonds intrinsic characteristics such as duration convexity repo rates or term premiums and ii off on the run liquidity differentials are smaller immediately following bond auction dates and larger when the uncertainty surrounding the ensuing auction allocations is high when the dispersion of beliefs across informed traders is high and when macroeconomic announcements are noisy consistent with our model

futures contracting and dividend uncertainty in experimental asset markets prices in experimental asset markets tend to bubble and then crash to dividend value at the end of the asset s useful life explanations for this phenomenon are 1 that participants cannot form reliable future price expectations or 2 dividend risk aversion we report the results of experiments to test these hypotheses in one experimental series a futures market is introduced so that participants can obtain information on future share prices in another series of experiments the per period dividend is known with certainty the futures market treatment reduced the bubble the certain dividend treatment had little effect on the character of bubbles with inexperienced traders copyright 1995 by university of chicago press

the dynamics of inequality the past forty years have seen a rapid rise in top income inequality in the united states while there is a large number of existing theories of the pareto tail of the long run income distributions almost none of these address the fast rise in top inequality observed in the data we show that standard theories which build on a random growth mechanism generate transition dynamics that are too slow relative to those observed in the data we then suggest two parsimonious deviations from the canonical model that can explain such changes scale dependence that may arise from changes in skill prices and type dependence that is the presence of some high growth types these deviations are consistent with theories in which the increase in top income inequality is driven by the rise of superstar entrepreneurs or managers

excess comovement in international equity markets evidence from cross border mergers we examine the changes in betas from international mergers we find that the beta with respect to the acquirer s home market rises and that with respect to the target s home market falls the effect is large and robust with respect to controls for changes in the operations of the companies involved such an effect can occur only if international equity markets are not integrated we also find that the effect has not reduced over time that cross listings do not generally have a significant effect on international betas and that the u s and u k are more integrated internationally than other markets

why has house price dispersion gone up we calibrate a dynamic general equilibrium island model to investigate the 30 year increase in the level of house prices and their dispersion across u s metropolitan areas the model is based on two main assumptions households o w in and out metropolitan areas in response to local productivity shocks and the housing supply cannot adjust instantly because of technological and regulatory constraints the calibration reveals that the observed tightening of housing supply regulation cannot quantitatively account for the rise in the level and dispersion of house prices in equilibrium workers o w out of tightly regulated towards less regulated metropolitan areas undoing most of the price impact of local supply restrictions in contrast the observed increase in wage dispersion across metropolitan areas does create the observed increase in the level and dispersion of house prices workers o w towards exceptionally productive metropolitan areas and drive house prices up the calibration also suggests that the welfare eects of housing supply regulation are large when wages become more dispersed

new evidence on the economic progress of foreign born men in the 1970s and 1980s this study examines the economic progress of foreign born men in the united states europeans entered the united states with relatively high wages and earned wages comparable to natives over their life course japanese korean and chinese men entered with lower wages but quickly caught up with u s born workers mexicans and central americans entered with low wages and the wage gap between themselves and u s born workers has not shrunk disparities in completed years of education and whether education was received in the united states can explain a large share of the differences in the level of wages for immigrants from some countries it is found that more highly educated men assimilate more quickly the rate of economic progress has not improved for more recent arrivals from any country but this is most problematic among mexicans and central americans because of their relatively low rates of wage growth excerpt

differentiated assets an experimental study on bubbles i introduction the bubble and crash phenomenon in experimental asset markets first reported in smith suchanek and williams 1988 has been shown to be rather robust to various manipulations in the experimental design see e g king et al 1993 porter and smith 1995 van boening williams and lamaster 1993 1 in all these markets an asset with a life of 15 or 30 periods is traded the asset pays a common dividend to all holders at the end of each trading period and the dividend structure is common knowledge to all traders rather than tracking the fundamental value which is derived from the expected dividend for the number of periods remaining prices tend to exhibit a prolonged boom and crash pattern in a vast majority of the markets studied in the literature note that the bubble and crash phenomenon has also been observed in a setting where two assets are traded in two separate double auction markets simultaneously fisher and kelly 2000 study rate of return parity in such an environment the main treatment variable that they consider is the expected dividends of the assets in some treatments the two assets pay exactly the same expected dividend whereas in some others one asset pays twice as much they find that bubbles not only exist in both markets but also positively correlate with each other childs and mestelman 2006 manipulate the expected dividend as well as the variance of the dividends their findings are consistent with fisher and kelly s in that bubbles occur in both markets and that rate of return parity receives less support as the assets become more differentiated the main objective of this paper is to continue the research line initiated by fisher and kelly 2000 and investigate if and how differences in assets characteristics affect investors trading strategies and as a result the magnitude of bubbles motivated by empirical evidence which suggests that bond markets are in general less susceptible to the dramatic boom and crash price pattern we first construct a bond market like laboratory environment where investors are free to trade assets that can be differentiated not only from their dividend payments but also from their maturity periods 2 the research questions we ask are as follows does the existence of multiple assets that can be differentiated from their dividends and or maturities help reduce mispricing and if so why to tackle these questions we adopt a 2 x 2 design in which an asset called x has a 30 period life duration and pays on average 7 francs per period as a dividend these intrinsic characteristics are fixed in all treatments the characteristics of an alternative asset called y on the other hand vary depending on the treatment it pays either the same expected dividend as x or twice as much in terms of its life duration it lasts either 30 or 15 periods as a result we have the following four treatments for this set of the experiment sdursdiv baseline sdurddiv ddursdiv and ddurddiv where s d dur and div stand for same different duration and dividend respectively if we assume that traders have common and rational expectations we would expect prices to follow fundamental values in both markets but since the evidence of the bubble and crash phenomenon is so overwhelming in the literature we feel that evaluating a hypothesis of no bubbles is a bit insensitive instead we propose the following hypothesis for evaluation hypothesis 1 price deviations from the fundamental in either x or y market do not depend on if and how the two assets are intrinsically different we also evaluate the relative price between the two assets against the prediction of rate of return parity as in fisher and kelly 2000 and childs and mestelman 2006 the null hypothesis that we advance for evaluation is stated as follows hypothesis 2 deviations from the prediction of rate of return parity do not depend on if and how the two assets are intrinsically different

allocative efficiency of markets with zero intelligence traders market as a partial substitute for individual rationality we report market experiments in which human traders are replaced by zero intelligence programs that submit random bids and offers imposing a budget constraint i e not permitting traders to sell below their costs or buy above their values is sufficient to raise the allocative efficiency of these auctions close to 100 percent allocative efficiency of a double auction derives largely from its structure independent of traders motivation intelligence or learning adam smith s invisible hand may be more powerful than some may have thought it can generate aggregate rationality not only from individual rationality but also from individual irrationality

job search and immigrant assimilation an earnings frontier approach this study examines labor market assimilation by measuring the information utilized by immigrants during job search assimilation is assumed to occur whenever such information increases with length of residence in the united states and repeated job searches the authors assert that information utilized during job search reduces differentials between actual and potential maximum attainable earnings coauthors are henry w herzog jr richard a hofler and alan m schlottmann copyright 1992 by mit press

the cost of capital in international financial markets local or global abstract this paper analyzes to what extent international and domestic asset pricing models lead to a different estimate of the cost of capital for an individual firm under the maintained assumption of perfect international financial integration we distinguish between i the multifactor solnik sercu icapm including both the global market portfolio and exchange rate risk premia and ii the single factor domestic capm we use a sample of 3 293 stocks from nine countries in the period 1980 1999 the domestic capm yields a significantly different estimate of the cost of capital from the multifactor icapm for only five percent of the firms in our sample we attribute the close correspondence between local and global pricing to strong country factors in individual stock returns which are probably due to lack of real integration our results reinforce the home bias puzzle

the more we know about the fundamental the less we agree on the price i allow trading horizon heterogeneity across groups in a standard differential information model of a financial market this approach can explain the well established phenomenon that after a public announcement trading volume increases more private information is incorporated into prices and volatility increases in such environments public information has the important secondary role of helping agents learn about the information of other agents therefore whenever the correlation between the private information of different groups is sufficiently low a public announcement increases disagreement among short horizon traders regarding the expected selling price even as it decreases disagreement about the fundamental value of the asset additional testable implications are also suggested

instability and concentration in the distribution of wealth abstract we consider a setup in which infinitely lived households face idiosyncratic investment risk and show that in this case the equilibrium distribution of wealth becomes increasingly right skewed over time until wealth concentrates entirely at the top the households in our setup are identical in terms of their patience and their abilities and we assume that there are no redistributive mechanisms neither explicit in the form of government tax or fiscal policies nor implicit in the form of limited intergenerational transfers our results demonstrate that the presence of such redistributive mechanisms alone ensures the stability of the distribution of wealth over time

yes discounts on closed end funds are a sentiment index chen kan and miller 1993 best pronounced chek m provide a detailed critique of our earlier paper lee shleifer and tlialer 1991 ckm accuse lee et al of trying to kill two birds the closed end fund puzzle and the small firm effect with one stone and missing both their approach is to throw at lee et al every stone they can presumably hoping that one will hit this reply shows that none does ckm focus on four empirical issues 1 the role of utilities in the lee et al sample of small institutional ownership firms 2 the robustness of the relationship between fund discounts and the returns on high versus low ownership firms their table i 3 the appropriate way to specify the regression in table iv of lee et al their table ii and 4 the regressions using one closed end fund tricontinental their table iii we address these criticisms in turn ckm begin with the finding of lee et al that even during the second half of their sample when the relationship between closed end fund discounts and small firm returns weakens there is a significant relationship between return on stocks with low institutional ownership and changes in discounts ckm describe as a concession the finding of lee et al that most of these low ownership stocks are public utilities however this finding makes even more vivid the main claim of lee et al that stocks with similar ownership structures but very different fundamentals move together in the market after all what do public utilities have in common with closed end funds other than a similar ownership structure the one plausible common factor that might similarly affect closed end fund discounts and prices of public utility stocks is small investor sentiment ckm also say that they tested a portfolio of nyse public utility firms with more than 10 percent institutional ownership and that their results were essentially the same as for the sample with less than 10 percent ownership they do not report these results but have kindly provided us with their data to investigate their claim we divided all utilities into three groups of equal numbers of firms with high low and medium institutional ownership we then ran regressions like those in table viii of lee et al for each group the results in table i of this paper show that low institutional

wealth inequality in the united states since 1913 evidence from capitalized income tax data this paper combines income tax returns with flow of funds data to estimate the distribution of household wealth in the united states since 1913 we estimate wealth by capitalizing the incomes reported by individual taxpayers accounting for assets that do not generate taxable income we successfully test our capitalization method in three micro datasets where we can observe both income and wealth the survey of consumer finance linked estate and income tax returns and foundations tax records wealth concentration has followed a u shaped evolution over the last 100 years it was high in the beginning of the twentieth century fell from 1929 to 1978 and has continuously increased since then the rise of wealth inequality is almost entirely due to the rise of the top 0 1 wealth share from 7 in 1979 to 22 in 2012 a level almost as high as in 1929 the bottom 90 wealth share rst increased up to the mid 1980s and then steadily declined the increase in wealth concentration is due to the surge of top incomes combined with an increase in saving rate inequality top wealth holders are younger today than in the 1960s and earn a higher fraction of total labor income in the economy we explain how our ndings can be reconciled with survey of consumer finances and estate tax data

exchange rate expectations and the pricing of chinese cross listed stocks abstract i show that the price discounts of chinese cross listed stocks american depositary receipts adrs and h shares to their underlying a shares indicate the expected yuan us dollar exchange rate the forecasting models reveal that adr and h share discounts predict exchange rate changes more accurately than the random walk and forward exchange rates particularly at long forecast horizons using panel estimations i find that adr and h share investors form their exchange rate expectations according to standard exchange rate theories such as the harrod balassa samuelson effect the risk of competitive devaluations relative purchasing power parity uncovered interest rate parity and the risk of currency crisis

a review of bubbles and crashes in experimental asset markets this paper discusses the literature on bubbles and crashes in the most commonly used experimental asset market design introduced by smith et al it documents the main findings based on the results from 41 published papers 3 book chapters and 20 working papers

a test of the modigliani miller invariance theorem and arbitrage in experimental asset markets modigliani and miller show that the total market value of a firm is unaffected by a repackaging of asset return streams to equity and debt if pricing is arbitrage free we investigate this invariance theorem in experimental asset markets finding value invariance for assets of identical risks when returns are perfectly correlated however exploiting price discrepancies has risk when returns have the same expected value but are uncorrelated in which case the law of one price is violated discrepancies shrink in consecutive markets but persist even with experienced traders in markets where overall trader acuity is high assets trade closer to parity