mean reversion in short horizon expected returns this article develops and estimates a simple model for monthly expected stock returns that relies on the rapidly decaying structure of shorter horizon weekly expected returns the most striking aspect of our findings is that the rapid mean reversion in short horizon expected returns implies much greater variation through time in monthly expected returns than has been documented in earlier studies for instance during the 1962 to 1985 period over 25 percent of the return variance of small firms can be explained by time variation in expected returns article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

volatility forecasting with range based egarch models we provide a simple yet highly effective framework for forecasting return volatility by combining exponential generalized autoregressive conditional heteroscedasticity models with data on the range using standard and poor s 500 index data for 1983 2004 we demonstrate the importance of a long memory specification based on either a two factor structure or fractional integration that allows for some asymmetry between market returns and volatility innovations out of sample forecasts reinforce the value of both this specification and the use of range data in the estimation we find substantial forecastability of volatility as far as 1 year from the end of the estimation period contradicting the return based conclusions of west and cho and of christoffersen and diebold that predicting volatility is possible only for short horizons

portfolio return autocorrelation abstract this paper investigates whether portfolio return autocorrelation can be explained by time varying expected returns nontrading state limit orders market maker inventory policy or transaction costs evidence is consistent with the hypothesis that transaction costs cause portfolio autocorrelation by slowing price adjustment i develop a transaction cost model which predicts that prices adjust faster when changes in valuation are large in relation to the bid ask spread cross sectional tests support this prediction but time series tests do not

conditional heteroscedasticity in time series of stock returns evidence and forecasts this article presents new evidence about the time series behavior of stock prices daily return series exhibit significant levels of second order dependence and they cannot be modeled as linear white noise processes a reasonable return generating process is empirically shown to be a first order autoregressive process with conditionally heteroskedastic innovations in particular generalized autoregressive conditional heteroskedastic garch 1 1 processes fit to data very satisfactorily various out of sample forecasts of monthly return variances are generated and compared statistically forecasts based on the garch model are found to be superior copyright 1989 by the university of chicago

an empirical examination of information differences of opinion and trading activity abstract we investigate the relations between trading volumes and our proxies for information flows and divergences in opinions we view s p 500 index futures open interest as a useful proxy for divergences of traders opinions and find that volumes are higher on days when open interest increases than on days with declines volume in individual equities is more closely related to firm specific information flows while equity basket volume is more closely associated with market information this differential impact is greatest for small capitalization stocks where market wide news has no explanatory power

some relations between volatility and serial correlations in stock market returns this article explores the relation between serial correlation and volatility for several different stock return series at daily and weekly frequencies it is found that serial correlations are changing over time and are related to stock return volatility an extension to the garch model is proposed and estimated revealing parameters consistent with other findings in this article copyright 1992 by university of chicago press

correlations in price changes and volatility across international stock markets the short run interdependence of prices and price volatility across three major international stock markets is studied daily opening and closing prices of major stock indexes for the tokyo london and new york stock markets are examined the analysis utilizes the autoregressive conditionally heteroskedastic arch family of statistical models to explore these pricing relationships evidence of price volatility spillovers from new york to tokyo london to tokyo and new york to london is observed but no price volatility spillover effects in other directions are found for the pre october 1987 period article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the threshold effect in expected volatility a model based on asymmetric information this article develops theoretical insight into the threshold effect in expected volatility which means that large shocks are less persistent in volatility than small shocks the model uses the kyle admati pfleiderer setup with liquidity traders informed traders and a market maker information is modeled as a garch process it is shown that the garch process for information is transformed into a tarch process for threshold garch for the market price changes working with information flows allows one to derive implications for trading volume and market liquidity which provide the basis for a more complete test of the model article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

monitoring of performance in organizational contracting the case of defense procurement this paper contains an agency theoretic analysis of procurement contracts in which the government designs optimal linear contracts for a risk averse supplier in the presence of moral hazard private information and imperfect monitoring optimal contracts deviate from first best risk sharing the direction of the deviation depends on the relative severity of the moral hazard and private information problems and on the precision of the monitor in contrast to the usual result in the moral hazard literature the government may in some cases prefer that the effort of the supplier be taxed choice of the precision of the monitor and the categories of costs covered by the monitor are also studied

volume and autocovariances in short horizon individual security returns this article tests for the relations between trading volume and subsequent returns patterns in individual securities short horizon returns that are suggested by such articles as blume easley and o hara 1994 and campbell grossman and wang 1993 using a variant of lehmann s 1990 contrarian trading strategy we find strong evidence of a relation between trading activity and subsequent autocovariances in weekly returns specifically high transaction securities experience price reversals while the returns of low transactions securities are positively autocovarying overall information on trading activity appears to be an important predictor of the returns of individual securities

procurement and renegotiation parties bound by an incomplete contract have an incentive to renegotiate after acquiring new information the issue of the parties investment in the relationship before renegotiation is analyzed in a simple two period procurement model the firm invests in the first period it then learns its production cost and the sponsor learns its value for the project williamson s underinvestment presumption is shown to hold under very general assumptions about bargaining and about the ex post asymmetry of information as long as the firm s investment is not observable by the sponsor the introduction of a cancellation fee may well lead to even less investment contrary to what is sometimes argued the role of ex ante price fixing as an alternative way to reintroduce some form of commitment and the problem of cost overruns are discussed last it is shown that if investment is observable by the sponsor andthus may become a joint decision variable the two parties may choose to under or overinvest

asymmetric predictability of conditional variances we show that there is an asymmetry in the predictability of the volatilities of large versus small firms using both univariate and multivariate arma garch m parameterizations we find that volatility surprises to large market value firms are important to the future dynamics of their own returns as well as the returns of smaller firms conversely however shocks to smaller firms have no impact on the behavior of either the mean or the variance of the returns of larger capitalization companies article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

intraday volatility in the stock index and stock index futures markets we examine the intraday relationship between returns and returns volatility in the stock index and stock index futures markets our results indicate a strong intermarket dependence in the volatility of the cash and futures returns price innovations that originate in either the stock or futures markets can predict the future volatility in the other market we show that this relationship persists even during periods in which the dependence in the returns themselves appears to weaken the findings are robust to controlling for potential market frictions such as asynchronous trading in the stock index our results have implications for understanding the pattern of information flows between the two markets article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

mending the broken link heterogeneous bank lending rates and monetary policy pass through abstract we analyse the pass through of monetary policy measures to lending rates to households and firms in the euro area using novel bank level datasets banks characteristics such as the capital ratio exposure to domestic sovereign debt percentage of non performing loans and stability of funding structure are responsible for the heterogeneity in the pass through of conventional monetary policy changes the location of a bank is irrelevant non standard measures reduce lending rate heterogeneities banks located in financially stressed countries and with weak balance sheets are most affected banks lending margins have fallen considerably

trading asymmetric trend and volatility by leverage trend garch in taiwan stock index this article develops a leverage trend generalized autoregressive conditional heteroscedasticity garch model by incorporating asymmetric trend of returns of the exponential autoregressive and asymmetric volatility of garch models to study the asymmetric effects using in sample daily data of taiex over the period 4 january 1980 to 25 august 1997 and postsample daily data over the period 26 august 1997 to 10 september 2007 the evidence reveals that a curvaceous risk return relationship and both asymmetric volatility and asymmetric trend of returns are significant in taiex the episode of asymmetric trend of returns is that the positive information creates a higher return trend than the negative information of the same amount while similarly to most studies the evidence of asymmetric volatility appears that the negative information makes a higher volatility than the positive information of the same size most remarkably we evidence that the volatility asymmetry effect is a conservative trading factor

incentives in incentive contracting an application of the mimic model a handful of empirical studies have endeavoured to analyse the cost containment effectiveness of the incentive contracts that the department of defence has used for its acquisition of weapon systems a serious omission from all of these studies has been a consideration of the motivation of contractors to renegotiate these contracts many times since contract modification is an important and recognized part of incentive contracting it is surprising that so little attention has been paid to the contractor s incentive to seek these modifications the purpose of this paper is to examine empirically the effects of incentive contract cost sharing provisions and contract renegotiations on contractor cost savings effort

a new view of the market structure performance debate ion typically considered in market structure performance studies data on cross sections of firms or industries are unlikely to be sufficiently 2 the question of data selection has been discussed fairly thoroughly by weiss 44 and demsetz i 5 among others although there appears to be little agreement on the direction of bias in the most commonly used samples the question of exogeneity has been less thoroughly discussed although in specific instances e g schmalensee 37 martin 27 it has been dealt with explicitly this content downloaded from 157 55 39 35 on sat 03 sep 2016 05 57 53 utc all use subject to http about jstor org terms 400 james l bothwell thomas f cooley and thomas e hall informative to make such empirical analysis useful it may therefore be more productive to return to industry specific analysis there will undoubtedly be some who are unconvinced by this argument and for them we offer the observation that further empirical studies based on weak deductive foundations are likely to be convincing only to the extent that they account explicitly for the role of prior beliefs and specification uncertainty ii determinants of profitability the conventional market structure conduct performance paradigm has guided vast amounts of empirical research in the field of industrial organization for the past three decades like empirical research in other areas of economics the maintained hypotheses that are considered reflect to a large extent the prior beliefs of the researchers the result is that there is always a suspicion that what is being engaged in is more advocacy than objective empirical analysis in the market structure performance literature the most important alternative prior beliefs maintained hypotheses appear to fall into six categories which we characterize as follows i seller concentration explains profits high rates of return are thought to be caused by monopoly power conferred by high degrees of seller concentration this is the basic collusion specification of bain i 2 seller concentration and entry barriers explain profits high rates of return are thought to reflect monopoly power resulting from both high seller concentration and high barriers to entry this prior comes from the traditional market structure performance paradigm of industrial organization and accounts for the peristence of collusive gains it is prevalent in the work of mann 26 weiss 45 46 comanor and wilson i i qualls 34 1j35 and many other researchers 3 absolute or relative firm size explain profits this prior reflects the demsetz i4 i5 and peltzman 133 notion that high rates of return result from superior firm efficiency or innovativeness and not from oligopolistic collusion and joint profit maximization this prior has also been adopted by others e g shepherd 39 gale i7 who assume that high market shares indicate high barriers to entry 4 risk differentials explain profitability differences this reflects the notion that high rates of return reflect neither monopoly power nor superior efficiency but the payment of positive risk premiums to risk averse investors it underlies much of the work of stigler 4i fisher and hall i6 cootner and holland i3 and many others there are however considerable differences in beliefs about which measure of risk variability of return over time financial leverage or nondiversifiable risk is relevant this content downloaded from 157 55 39 35 on sat 03 sep 2016 05 57 53 utc all use subject to http about jstor org terms the market structure performance debate 40i 5 advertising intensity explains profits this reflects the notion of bloch 4 and others that differences in reported accounting profit rates result from differences in the amounts of omitted intangible capital resulting from advertising expenditures because advertising is assumed by some to be a source of product differentiation this prior also may reflect the belief that the extent of product differentiation is a major determinant of profitability comanor i o schmalensee 13 7 6 growth explains profits this reflects brozen s 6 7 disequilibrium hypothesis that profitability differences result not from monopoly power but from adjustments in capacity lagging behind changes in demand given a particular maintained hypothesis about the most important determinant of profitability there remains uncertainty about the rest of the specification of the model if the results are not robust with respect to uncertainty about the conditioning set of variables then it cannot be concluded that the data are very informative about the hypothesis in question the next section discusses the methodology used to determine whether the results are robust to such specification uncertainty iii specification uncertainty the hypotheses discussed in the previous section all specify the primary determinants of profitability in each case however the investigator must have in mind a set of possible conditioning variables that may or may not belong in the regression although uncertainty about the inclusion or exclusion of such variables is not often explicitly acknowledged it is an inevitable and important aspect of virtually all empirical investigations the primary concern for the problem at hand is the extent to which this specification uncertainty leads to uncertainty in the estimated parameters of primary interest consider the regression model

alaska north slope crude oil price and the behavior of diesel prices in california abstract in this paper we analyze the price dynamics of alaska north slope crude oil and l a diesel fuel prices we employ var methodology and bivariate garch model to show that there is a strong evidence of a uni directional causal relationship between the two prices the l a diesel market is found to bear the majority of the burden of convergence when there is a price spread this finding may be seen as being consistent with the general consensus that price discovery emanates from the larger more liquid market where trading volume is concentrated the contestability of the west coast crude oil market tends to cause it to react relatively competitively while the lack of contestability for the west coast diesel market tends to limit its competitiveness causing price adjustment to be slow but to follow the price signals of crude oil our findings also suggest that the derived demand theory of input pricing may not hold in this case the alaska north slope crude oil price is the driving force in changes of l a diesel price

trading activity dealer concentration and foreign exchange market quality abstract we study the relation between foreign exchange market quality and both trading activity and dealer concentration by considering two currency pairs with significant differences along both dimensions the euro us dollar and canadian dollar us dollar a variance ratio test reveals over reaction in currency prices but that this is smallest when trading activity is high and dealer concentration at its peak a garch model shows that over reaction declines as trading activity and dealer concentration increase with the results being stronger for the euro our results confirm that trading activity is an important determinant of market quality but also point to a significant role for dealer concentration

a tale of three schools insights on autocorrelations of short horizon stock returns this article reexamines the autocorrelation patterns of short horizon stock returns we document empirical results which imply that these autocorrelations have been overstated in the existing literature based on several new insights we provide support for a market efficiency based explanation of the evidence our analysis suggests that institutional factors are the most likely source of the autocorrelation patterns

components of short horizon individual security returns abstract in this paper we present a simple model which relates security returns to three components an expected return a bid ask error and white noise the relative importance of the various components is empirically assessed and the model s ability to explain the various time series properties of individual security and portfolio returns is tested time varying expected returns and bid ask errors are found to explain substantial proportions up to 24 of the variance of security returns we also reconcile the typically negative autocorrelation in security returns with the strong positive autocorrelation in portfolio returns

modeling asymmetric comovements of asset returns existing time varying covariance models usually impose strong restrictions on how past shocks affect the forecasted covariance matrix in this article we compare the restrictions imposed by the four most popular multivariate garch models and introduce a set of robust conditional moment tests to detect misspecification we demonstrate that the choice of a multivariate volatility model can lead to substantially different conclusions in any application that involves forecasting dynamic covariance matrices like estimating the optimal hedge ratio or deriving the risk minimizing portfolio we therefore introduce a general model which nests these four models and their natural asymmetric extensions the new model is applied to study the dynamic relation between large and small firm returns article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies