variations in trading volume return volatility and trading costs evidence on recent price formation models patterns in stock market trading volume trading costs and return volatility are examined using new york stock exchange data from 1988 intraday test results indicate that for actively traded firms trading volume adverse selection costs and return volatility are higher in the first half hour of the day this evidence is inconsistent with the admati and pfleiderer 1988 model which predicts that trading costs are low when volume and return volatility are high interday test results show that for actively traded firms trading volume is low and adverse selection costs are high on monday which is consistent with the predictions of the foster and viswanathan 1990 model academics investors and regulators alike are now intensively focused upon understanding the volatility of asset returns and its relation to trading volume this interest was undoubtedly piqued by the market break of october 1987 a time during which volatility and trading volume reached unprecedented levels but even beforehand researchers observed regular differences in the return process for various hours of the day and days of the week research concerning temporal patterns in stock market volatility and volume falls in two groups studies that document observed patterns and studies that develop models to predict patterns among the studies in the first group are oldfield and rogalski 1980 french and roll 1986 stoll and whaley 1990 harris 1986 and wood mcinish and ord 1985 who report evidence on seasonalities in daily and weekly return variances among the regularities that have been documented using interday data is that volatility is higher when the market is open than when it is closed oldfield and rogalski 1980 french and roll 1986 and stoll and whaley 1990 for example point out significant differences in return volatility between trading

optimum distribution free tests and further evidence of heteroscedasticity in the market model in this paper several powerful distribution free tests for heteroscedasticity are introduced and are used to test the hypothesis of constant variance in the market model these tests are noted for their flexibility in specifying alternative hypotheses it is found that the assumption of homoscedasticity is untenable for the majority of stocks analyzed the implications of this finding for the efficient estimation of the parameters of the market model are also discussed

an examination of event dependency and structural change in security pricing models this paper considers two aspects of the tendency for systematic risk to change during the period surrounding a firm specific event first a statistic allowing for heteroskedasticity is presented as a means of more precisely testing for the incidence of structural change in the market model secondly the bias resulting from the imposition of a single arbitrary event period on every firm in a market efficiency study is formally demonstrated using a sample based upon stock splits the switching regression technique of quandt is then adapted to show that event intervals are more appropriately considered on a case by case basis a comparison of alternative residual measures illustrates these procedures

an analysis of bank risk and deposit rate ceilings abstract the effect of deposit rate regulation on bank solvency is an important and unresolved issue that has received only limited attention in this paper capital market data is used to assess changes in both systematic and non systematic risk of a portfolio of bank stocks at the time of deposit rate deregulation the evidence indicates that neither measure of capital market risk is significantly affected leading to the conclusion that bank solvency risk will not be increased by the deregulation of interest rates on deposits

the wealth effects of deregulation of canadian financial institutions abstract canada like other industrial countries recently introduced various financial reforms to remove the barriers separating the operations and ownership of banks from non bank financial institutions this study analyzes the wealth effects of the reforms on the banks and non bank financial institutions and the changes in their systematic risk resulting from financial deregulation over the period 1984 to 1991 the results indicate that while there was a significant cumulative gain for the insurance industry unlike a number of u s studies there was no evidence of wealth transfer among the institutions during the period of deregulation of the canadian financial system additional tests indicate that although the regulatory changes did not have a significant effect on the risk of the banks the systematic risk of the non bank financial institutions increased significantly during the period of regulatory reforms

measuring the effects of regulation with stock price data this article examines the usefulness of stock returns in measuring the effects of regulation when the dates on which market expectations change are not known and standard sources e g the wall street journal are used to choose announcement dates twenty major changes in regulatory constraint since 1887 are considered tests using either monthly or daily data are found to have surprisingly little ability to detect the effects of regulation the evidence shows that formal regulatory announcements are generally anticipated in cases where it is unclear when expectations change

market model stationarity of individual public utilities the search for an economically sound procedure for estimating an appropri ate rate of return on equity consistent with the supreme court s ruling in the hope case 13 has ied many economists financial experts and public service commissions to estimate the rate of return on equity with the capital asset pricing model capm see 30 19 and 21 the popularity of the capm in regu latory proceedings was reported by harrington 15 who in a survey of public service commissions found that 38 states were considering or had seen the capm used two jurisdictions preferred the capm oregon required the capm and south carolina would require the capm in all future cases hence given the popularity of the capm and the tremendous economic impact that out comes of regulatory proceedings have on the financial well being of both the regulated firm and the consumer it is critical that if the capm is used in regula tory proceedings that it be applied in the best manner possible and that any limitations associated with the capm be recognized fully a prime factor in the application of the capm is the estimation of the mar ket model 29 to obtain an estimate of the ex ante beta p the systematic risk of both the regulated firm in question and comparable nonregulated firms since the market model usually is estimated on the basis of ex post data a necessary condition for an accurate estimate of 3 is that the market model is stationary or unchanging over time hence the ability to assess systematically and accurately the stationarity of the market model is critical to the proper application of the capm the objectives of this study are 1 to use a more powerful statistical test the cusum of squares of recursive residuals to determine the stationarity of the market model of individual securities in a specified time period 2 to provide empirical evidence of the stationarity of the market model for regulated firms 3 to provide empirical evidence concerning the stationarity of the market model by industry and 4 to use quandt s log likelihood ratio for identifying when a secu

a new test of the relationship between regulatory change in financial markets and the stability of beta risk of depository institutions the us economy experienced major regulatory changes in the banking and finance industry with the passage of five major acts over the period 1980 to 1991 this has generated an extensive literature investigating the effects of these changes on the us banking industry in particular this body of research has examined the share market reaction to regulatory changes as well as their impact on the risk return market value and profitability of banking industry stocks generally it has been found that the regulatory changes have had a substantial impact although the effect has not been uniform across all depository institutions this paper extends this literature by analysing the stability of a sample of eighteen us banking industry stock betas across five periods a pre regulatory change period a monetary experiment period a deregulation period a reregulation period and a post regulatory change period based on an analysis of weekly returns we find that the level of bank risk has increased further we also find a tendency towards greater beta instability in both the monetary experiment and deregulation samples the degree of beta instability is lowest in the pre regulatory change and post regulatory change samples overall the monetary experiment and regulatory change coincided with an increased tendency towards beta instability we also compare our results to a randomly selected control sample of non banks and find some more general effects of regulatory change on individual stock betas

small sample analysis of performance measures in the asymmetric response model this paper reviews and extends definitions and properties of the three classical performance statistics the sharpe ratio the treynor index and jensen s alpha by locating them in a more general framework the asymmetric response mode this allows various notions of beta which can be related to downside risk to be employed and includes as special cases a market timing model and the mean variance capm due to the general lack of data on fund performance in practice our emphasis is on small sample analysis where possible we illustrate our results empirically using data on 15 u s based emerging markets investment funds

timing decisions and the behavior of mutual fund systematic risk the investment performance of professionally managed portfolios in general and mutual funds in particular has been the subject of considerable attention in finance fama 9 has suggested that overall portfolio performance be broken down in such a manner that the individual sources of performance can be identified two basic sources are 1 the ability of the portfolio manager to forecast price movements of individual common stocks relative to stocks in general selectivity or microforecasting and 2 the ability to forecast the direction of the stock market relative to fixed income securities timing or macroforecasting

an empirical investigation of the possibility of stochastic systematic risk in the market model in most empirical work on the market model the parameters of that model are estimated by ordinary least squares effectively assuming that the systematic risk of an asset or portfolio is constant through time however a plausible alternative hypothesis would allow the systematic risk of the stock of a company to vary through time such variation may arise through the influence of either microeconomic factors such as operational changes in the company or changes in the business environment peculiar to the company or macroeconomic factors such as the rate of inflation general business conditions and expectations about relevant future events a detailed discussion of these points is provided by rosenberg and guy 1976a 1976b support for the hypothesis that systematic risk varies through time is provided in the studies by jacob 1971 blume 1975 and fabozzi and francis 1978 in this paper we allow the possibility that systematic risk of an asset is stochastic in principle an attempt to model this stochastic behavior could be made through allowing systematic risk to follow a member of the general arima class of models of box and jenkins 1970 ideally the available data would be employed to suggest a specific model from this general class however this approach has to face very serious we discuss the market model in which the possibility is allowed that beta is stochastic and obeys a first order autoregressive process following a brief discussion of methodological issues in the estimation and testing of such models results are reported on an empirical study of a large sample of monthly returns of common stock we find strong evidence indicating stochastic systematic risk but relatively little evidence against the random coefficient model

stock market reactions to the depository institutions deregulation and monetary control act of 1980 abstract this paper evaluates the effects of events leading to the passage of the depository institutions deregulation and monetary control act of 1980 the evidence suggests that the initial proposal of the act by then president carter and the final passage of the act by the house of representatives produced positive abnormal returns to stockholders of large commercial banks stockholders of small commercial banks and small savings and loans on the other hand generally experienced negative abnormal returns furthermore when hopes of passage of the act faced significant negative positive abnormal returns were experienced by stockholders of large small commercial banks

migration equilibrium with price rigidity the harris and todaro model revisited abstract the classical harris todaro model may be viewed as explaining the formation of supply in a dual economy hence as definining a partial equilibrium the aim of this paper is to build a general equilibrium model with migration possibilities where all the agents have explicit maximizing behaviour assumptions on wage price rigidities allow consideration of various supply demand configurations one of the most interesting results is that policy recommendations derived from the usual harris todaro model are not valid when excess supply prevails

rationing macroeconomics a graphical exposition the paper provides a graphical exposition of the most significant results of comparative statics obtained in a four market macroeconomic model with fixed commodity prices and wages the main tool of analysis remains the usual is lm apparatus modified to account for the possibility of rationing on the goods as well as on the labour market

risk aversion in inventory management traditional inventory models focus on risk neutral decision makers i e characterizing replenishment strategies that maximize expected total profit or equivalently minimize expected total cost over a planning horizon in this paper we propose a framework for incorporating risk aversion in multiperiod inventory models as well as multiperiod models that coordinate inventory and pricing strategies we show that the structure of the optimal policy for a decision maker with exponential utility functions is almost identical to the structure of the optimal risk neutral inventory and pricing policies these structural results are extended to models in which the decision maker has access to a partially complete financial market and can hedge its operational risk through trading financial securities computational results demonstrate that the optimal policy is relatively insensitive to small changes in the decision maker s level of risk aversion

risk measurement for event dependent security returns financial economists often test security pricing models for the destabilizing effects of informational uncertainty in particular bar yosef and brown 1977 examined the market model and concluded that systematic risk is concave during stock split event periods unsystematic risk however was assumed constant further steps are taken in this article a generalization of the random coefficients model of hildreth and houck 1968 is conducted and case by case testing for event period concavity of both systematic and unsystematic risk is conducted in contrast to past findings the results support concavity for unsystematic risk not systematic risk

american presidential elections and returns of defence industry stocks 1988 american presidential elections and returns of defence industry stocks applied economics vol 20 no 7 pp 985 993

a shifting regimes approach to the stationarity of the market model parameters of individual securities recent studies indicate that the widespread assumption of parameter stationarity in empir ical applications of asset pricing models may be inappropriate this paper investigates the feasibility of modeling parameter instability as a sequence of persistent stable regimes reeursive residual and log likelihood techniques are combined to detect and locate shift points the results indicate that regime shifts are widespread frequent and often large enough to significantly effect empirical findings the nature of the shifts appears to be a rotation of the regression line indicating that correction of both alpha and beta parameters is required

dynamic capacity management with uncertain demand and dynamic price inspired from practices of chinese real estate firms we study dynamic capacity management problems for a firm that sells homogeneous goods over a finite or infinite selling horizon provided that demand is uncertain retail price is exogenous but changes according to an auto regressive process and there is holding cost for remaining inventory in each period the capacity problems facing the firm include to determine an initial stock at the beginning of the selling season and to allocate the remaining quantity for the current and future sale in each period to maximize the firm s total expected discounted profit by using markov decision processes we show the optimality of a so called save up to level policy i e it is optimal to allocate as much as the save up to level to future periods if possible in each period and the existence of the optimal initial stock moreover we characterize monotone properties of the optimal save up to level and the optimal initial stock numerical analysis shows that compared to the policy with zero save up to level i e always allocating all the remaining inventory to the current period the advantage of the policy proposed in the present paper is significant when price rising trend is large holding cost is low initial price is high or demand variation is either high or low

rational expectations econometric analysis of changes in regime an investigation of the term structure of interest rates abstract this paper is of interest both for its methodological contribution of new tools for analyzing rational expectations models and for its substantive conclusions concerning the term structure of interest rates during the monetary experiment of october 1979 the paper studies systems subject to changes in regime interpreted here as occasional discrete shifts in the parameters governing the time series behavior of exogenous economic variables the specification is shown to be quite tractable both theoretically and empirically the technique is used to analyze yields on three month treasury bills and ten year treasury bonds during 1962 to 1987 a constant parameter linear model for short term rates is shown to be inconsistent both with the univariate time series properties of short rates and with the observed bivariate relation between long and short rates under the expectations hypothesis of the term structure an alternative nonlinear model that admits the possibility of changes in regime affords a much better description of the univariate process for short rates moreover the cross equation restrictions implied by the expectations hypothesis of the term structure are consistent with the nonlinear specification indeed the residuals of the restricted relation have a standard error of only 0 8 basis points this is a third less than that of a completely unrestricted linear regression of long rates on short rates and compares with an unconditional standard deviation of long rates of 142 basis points i conclude that once the recognition by bond traders of changes in regime is taken into account the expectations hypothesis of the term structure of interest rates holds up fairly well for these data

inventory control with an exponential utility criterion a base stock policy is shown to be optimal when a dynamic version of the news vendor model is optimized with respect to an exponential utility criterion

an examination of risk return relationship in bull and bear markets using time varying betas security behavior in bull and bear markets has received some attention in recent years fabozzi and francis 5 first documented evidence that security betas are not influenced by the alternating forces of bull and bear markets their subsequent study of mutual fund betas also indicated that mutual funds generally respond indifferently to bull and bear market conditions using the concept of bull and bear market variations kim and zumwa1t 9 developed and tested the risk premiums associated with the upside and the downside portions of returns variation they concluded that investors expect to receive a risk premium for downside risk and pay a premium for upside variation of returns from their results kim and zumwalt 9 suggested that the down market beta measuring downside risk downside variation of returns may be a more appropriate measure of portfolio risk than the single beta in the market model

beta nonstationarity portfolio residual risk and diversification over the past years the beta coefficient has been widely used as a measure of systematic risk in investment and portfolio analysis the validity of using the beta coefficient as the proper measure of systematic risk is dependent upon the assumption that the beta coefficient is stationary over time unfortunately this assumption has been challenged by a number of empirical studies which have found the beta coefficient to be unstable over time examples of such empirical investigations are those documented by blume 4 levy 12 levitz 11 baesel 2 altman jacquillat and levasseur 1 and roenfelt griepentrong and pflaum 16 most recently fabozzi and francis 9 reported that some security beta coefficients tend to be random over time their findings also support the regression tendency of the beta coefficients towards the mean over time as found by blume 4 thus because the beta coefficient is changing over time the use of the ordinary least squares ols method in investment and portfolio analysis will yield an inefficient estimate of systematic risk furthermore the ols estimates of security and portfolio residual risks will be influenced by the variability of beta coefficient therefore the purpose of this paper is to investigate the relationship between the variability of the beta coefficient and portfolio residual risk and hence to provide a real picture of the process of portfolio diversification under the condition of beta nonstationarity it is shown that the use of the ols method to estimate security and portfolio residual risks will produce an incorrect conclusion that larger residual risks tend to be associated with higher variability in the beta coefficient

risk decomposition and portfolio diversification when beta is nonstationary a note the process of diversification and the subsequent reduction in portfolio risk have received considerable attention in the financial literature 5 7 9 10 14 16 25 king 9 in his pioneering work on diversification used multivariate statistical methods to decompose risk on a sample of 63 nyse firms from six industries over the period 1927 to 1960 from this sample he concluded that on the average about half of a stock s variance could be explained by market behavior later evans and archer 5 examined the effect of naive diversification on portfolio risk using semi annual data for the period 1958 to 1967 they examined diversification among 470 securities listed in the standard and poor s index by constructing 60 randomly selected portfolios which varied in size from 1 to 40 stocks they then calculated the portfolio return s mean standard deviation and estimated the level of systematic or undiversifiable risk by estimating the asymptote to which the mean standard deviation decreased the results of heir study showed that the majority of risk reduction is accomplished through randomly diversifying among only 10 securities while these studies served to define the speed and limits of random diversification other studies 7 10 14 16 have shown that systematic attempts to select stocks can result in inefficiencies in diversification as the capm has gained in popularity it has become increasingly common to examine the level of diversification and decompose risk through the use of ordinary least squares o l s regressions in which the variability explained by the market is designated systematic risk and the variability of the error term is used as a measure of unsystematic risk inherent in this dichotomization is the assumption that the beta or relationship between the market s returns and the individual stock s returns is stationary in the present study we shall show that while the use of o l s to partition risk is commonplace it can lead to incorrect conclusions due to error introduced by the violation of this assumption that is the nonstationarity of security betas the existence of instability of beta coefficients has been pointed out in studies by altman jacquillat and levasseur 1 baesel 2 fabozzi and francis 6 levitz 11 levy 12 and roenfelt griepentrog and pflaum 19 fabozzi and francis 6 for example found that many beta coefficients move randomly through time rather than remaining stable as assumed by the o l s model the result of this nonstationarity is that the o l s technique not only provides an inefficient estimate of systematic risk but it also allows the nonstationarity of beta to be reflected in the estimate of unsystematic risk thus the o l s

evidence of the duration dependence from the stock markets in the pacific rim economies this article investigates the duration dependent feature of five pacific rim economies the duration dependent markov switching model is employed to achieve this objective the savage dickey density ratio is also computed in support of the duration dependent markov switching model the possible bull and bear market dates for each stock market are also identified by the posterior probability from the empirical model it is unambiguous that japan south korea and hong kong are all characterized by duration dependence in a bear market but no duration dependence in a bull market in the case of taiwan and singapore the duration dependence feature holds for both the bear and bull markets

didmca and bank market risk theory and evidence abstract this paper examines the theoretical and empirical consequences of the depository institutions deregulation and monetary control act of 1980 on the market risk of the us banking industry we survey several theoretical arguments linking deregulation of deposit interest rates to market based measures of bank risk capital market data for a sample of large commercial bank holding companies provides evidence that deregulation has accompanied increases in both systematic and nonsystematic measures of bank risk

the three regimes of the is lm model a non walrasian analysis abstract three different versions of the is lm model are generally found in the literature a first version assumes both price and wage rigid and excess supply on the two markets a second version assumes a rigid wage but a flexible price clearing the goods market finally a third version assumes that both markets are cleared we develop in this paper a synthetic model which displays the three above cases as particular regimes of the same model by formalizing the implicit assumption of keynesian models that the price and wage levels are rigid downwards but flexible upwards the resulting non walrasian equilibria can be of three types which correspond to the three versions of the is lm model described above in each case we show how production and employment are determined and compute the multipliers for fiscal and monetary policy finally the parameter space is partitioned into three subregions corresponding to each regime

a non walrasian model of the business cycle abstract this paper shows how the dynamic evolution of a short run non walrasian equilibrium can generate cycles the cyclic behavior of the system results from the combination of an unstable accelerator and of stabilizing price effects the novelties of the model presented in this paper with respect to previous contributions in non linear cycle theory are the use of a non walrasian equilibrium structure in the short run and the fact that a cycle is obtained without having to assume any ad hoc shape for the various functions involved moreover the model bridges the gap between cycle theory and the traditional short run is lm analysis

uk unit trust performance 1980 1989 a passive time varying approach abstract this paper indirectly tests the efficient markets hypothesis by analysing the performance of 30 authorised unit trusts from 1980 through 1989 the risk return relationship of the funds is allowed to vary in a generalised manner thus allowing for passive structural change in underlying economic relationships our findings suggest that 21 of the 30 trusts in the sample were able to supply investment opportunities to the individual investor which were superior to a buy and hold strategy

some further evidence on the stochastic properties of systematic risk although there is consensus in the finance literature that the beta risk of equity securities is stochastic there is considerable disagreement as to whether the var iation is purely random or exhibits autocorrelation through time to investigate this issue the authors employ a model that allows beta t o exhibit both random and autoregressive behavior simultaneously the y test this model against alternative specifications on a large sampl e of individual securities and randomly formed portfolios comprising 10 50 and 100 securities results are also presented for portfolios formed according to firm size copyright 1987 by the university of chicago

the effects of a shift in monetary policy regime on the profitability and risk of commercial banks abstract this paper examines the effects of the fed s october 6th 1979 change in monetary policy regime on the profitability and risk of commercial banks using capital market data and an event study methodology it was found that bank stocks exhibited significant abnormal returns during the announcement week of the policy change when these abnormal returns were decomposed into a part related to unexpected interest rate changes and a part assumed to reflect increased rate variability the results were consistent with a negative relationship between bank returns and interest rate surprises as well as between bank returns and rate variability

optimal market making with risk aversion market makers have the obligation to trade any given amount of assets at quoted bid or ask prices and their inventories are exposed to the potential loss when the market price moves in an undesirable direction one approach to reduce the risk brought by price uncertainty is to adjust the inventory at the price of losing potential spread gain using stochastic dynamic programming we show that a threshold inventory control policy is optimal with respect to an exponential utility criterion and a mean variance trade off model symmetric and monotone properties of the threshold levels are also established