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

fundamental indexation via smoothed cap weights if prices of individual stocks are unbiased but noisy approximations to fundamental values there will be a gap in returns between the standard cap weighted market portfolio and the one based on fundamentals the discrepancy occurs because relative to fundamentals cap weights are too large small for stocks with positive negative deviations from fundamental values it follows that the usual cap weighted portfolio will underperform relative to the fundamental based portfolio as long as prices revert to fundamental values this has led arnott et al to propose new market indices based on a firm s fundamental size as measured by its revenues number of employees and so on in this paper we follow the same principle but propose to estimate fundamental weights using a smoothed average of standard cap weights since the putative excess returns of a fundamentalsweighted portfolio requires reversion to fundamental values and because fundamental values are likely to change slowly we can estimate current fundamentals by smoothing the time series of a stock s noisy prices the determination of fundamental size in terms of accounting data is thereby replaced by a simple estimate based on price history we derive expressions for expected returns of the market capitalization based and fundamentals based portfolios under various assumptions about i the random deviations from fundamental values and ii the change in fundamentals over time we present empirical comparisons between portfolios and find the returns of the fundamentalsbased portfolios exceed the standard indices by an amount comparable to the prior estimates that used accounting data to determine size 2007 elsevier b v all rights reserved

do markets overreact international evidence abstract in this paper using the conrad and kaul s methodology we test for the overreaction hypothesis which maintains that stock prices systematically overshoot and therefore their reversal can be predicted from past performance in seven industrialized countries consistent with the findings of conrad and kaul we see no evidence of overreaction in the us however returns to long term contrarian strategies in other countries seem to be generally significant moreover we find that in the majority of the countries while returns to arbitrage portfolios based on price are higher than those based on size the latter generally outperform the winner loser arbitrage portfolios

market behavior in the presence of costly imperfect information experimental evidence abstract we investigate the effects of imperfect private information on prices in an experimental asset market we compare bayesian predictions with market prices examine information dissemination and consider the value of imperfect information we find some evidence that market prices are consistent with bayes rule we also find that non bayesian prices are more likely to arise as the degree of uncertainty associated with private information increases imperfect information is disseminated in our experimental markets and traders perceive that imperfect information has value

on the measurement of risk aversion from experimental data attitudes towards risk are measured for households in northern zambia using an experimental gambling approach with real payoffs that at maximum were equal to 30 of average total annual income per capita the results of the experiment show decreasing absolute risk aversion and increasing partial risk aversion determinants of risk aversion are investigated using random effects interval regression model exploiting the panel data structure of the repeated experiments wealth indicator variables are found to be significant and partial relative risk aversion decreases as wealth increases females are found to be more risk averse than males

can tax loss selling explain the january seasonal in stock returns this paper analyzes the tax loss selling hypothesis as an explanation of the january seasonal in stock returns and argues that rational tax loss selling implies little relation between the january seasonal and the long term loss empirical results show that the january seasonal is as strongly related to the long term loss as it is to the short term loss the evidence is inconsistent with a model that explains the january seasonal by optimal tax trading

value line rank and firm size this paper studies the relation between value line s successful record in predicting relative stock price movements and the firm size effect the data suggest little direct relation between the two phen omena value line tends not to rank small firm stocks and small firm stocks that are ranked are more likely to receive a low rank than la rge firm stocks within each size sorted quintile of the market the mean payoffs on costless positions constructed according to value lin e s recommendations are positive copyright 1987 by the university of chicago

empirical estimation and use of risk preferences discussion in 1976 a number of people present today attended a conference in mexico which has since then 1978 resulted in a state of the arts volume edited by roumasset boussard and singh on risk uncertainty and agricultural development the papers presented today convey the feeling that since that time there has been little progress in measuring risk aversion or in discriminating between alternative theories of behavior under risk i will argue that this is because the papers concentrate on approaches to measurement of risk aversion and testing of theories which hold little promise of fast progress please excuse that i will be somewhat partisan in the remarks and rely heavily on studies with which i have been involved i know them best

portfolio rebalancing and the turn of the year effect this paper finds that for the 1935 1986 period the market s risk return relation does not have a january seasonal the findings differ from those of other studies due to the use of value weighted rather than equally weighted portfolios inferences are sensitive to the weighting procedure because of the small firm return patterns in january in particular even in those januaries for which the market return is negative small firm returns are positive and they are more positive the higher is beta this is consistent with the portfolio rebalancing explanation of the turn of the year effect since at least 1926 the average return on small firms in january has been unusually high a phenomenon known as the turn of the year effect in this paper we present new evidence regarding the risk return characteristics of small firms in january we find that for small firms there is a positively sloped riskreturn relation in both up and down markets this pattern is difficult to reconcile with the belief that the high return on small firms in january is equilibrium compensation for risk bearing we show how these patterns in small firms returns have led others to conclude that the market s risk return relation has a january seasonal in particular rozeff and kinney 21 and tinic and west 22 23 among others using equally weighted portfolios formed on the basis of historical betas have found a steeper slope for the capm s risk return relation in january than in other months we demonstrate that this pattern exists only for small firms consequently statistical inferences about the risk return relation are heavily dependent upon whether equally weighted or value weighted portfolio returns are used in the estimation we show that for 1935 86 when monthly cross sectional regressions are estimated using value weighted portfolio returns there is no more of a statistically significant difference in the estimated return to risk bearing in january than in the other eleven months of the year the notion that there is a january seasonal in the capm s risk return relation for the us has rapidly become accepted knowledge for example corhay hawawini and michel 6 accept this conclusion and investigate whether other

size seasonality and stock market overreaction recent research finds that the prior period s worst stock return performers losers outperform the prior period s best return performers winners in the subsequent period this potential violation of the efficient markets hypothesis is labeled the overreaction phenomenon this paper shows that the tendency for losers to outperform winners is not due to investor overreaction but to the tendency for losers to be smaller sized firms than winners when losers are compared to winners of equal size there is little evidence of any return discrepancy and in periods when winners are smaller than losers winners outperform losers

risk taking preferences of farmers in northern thailand measurements and implications abstract risk taking preferences were elicited from small semi commercial farmers in northern thailand using an experimental procedure that included real monetary payoffs of meaningful magnitudes a total of five sets of lotteries with increasing payoffs were offered the farmers were found to be risk averters and their preferences conformed to the hypothesis of increasing nondecreasing partial relative risk aversion using regression analysis farmers expected variation of rice yields and farm size were found to be directly related to a decrease in risk aversion while the extent of multiple cropping availability of non land household assets and tested mathematical ability were found to be indirectly related to a decrease in risk aversion the variables expected variation of rice prices farmer s age and tested abstract ability scores were not related to risk taking preferences

seasonalities in security returns the case of earnings announcements abstract we document a seasonal pattern in stock returns around quarterly earnings announcement dates small firms show large positive abnormal returns and a sizable increase in the variability of returns around these dates only part of the large abnormal returns can be accounted for by the tendency of firms with good news to announce early large firms show no abnormal returns around announcement dates and a much smaller increase in variability

short term reaction of stock markets in stressful circumstances abstract in this paper we document the short term stock price behaviour following a period of stock market stress we focus on price behaviour using daily market indexes from 39 stock exchanges over the period 1989 1998 our results are not consistent with the overreaction hypothesis we find positive negative abnormal price performance in the short term window up to 10 days following positive negative price shocks our analysis also highlights differences between developed and emerging markets we show that the post shock abnormal performances are significantly larger for emerging markets but that this momentum behaviour is markedly less in the late 1990s we find the size of the after shock tremors to be related to market liquidity with larger post shock price changes in less liquid markets

what s causing overreaction an experimental investigation of recency and the hot hand effect a substantial body of empirical literature provides evidence of overreaction in markets past losers outperform past winners in stock markets as well as in sports markets two hypotheses are consistent with this observation the recency hypothesis states that traders overweight recent information they are too optimistic about winners and too pessimistic about losers according to the hot hand hypothesis traders try to discover trends in the past record of a firm or a team and thereby overestimate the autocorrelation in the series an experimental design allows us to distinguish between these hypotheses the evidence is consistent with the hot hand hypothesis

nonstationary expected returns abstract recent evidence reveals significant negative serial correlation in aggregate market wide stock returns we extend this result to relative market adjusted returns demonstrating negative serial correlation in five year returns we then test two competing explanations 1 market mispricing and 2 changing expected returns in an efficient market the tests are conducted using the capital asset pricing model to estimate relative returns the evidence suggests that negative serial correlation in relative returns is due almost entirely to variation in relative risks and therefore expected relative returns through time we document substantial relative risk shifts particularly for extreme performing stocks

measuring economic efficiency using inverse optimum weights abstract this paper provides a method to measure the traditional kaldor hicks notion of economic efficiency when taxes affect behavior in contrast to traditional unweighted surplus measuring efficiency requires weighting individual benefits or surplus by the marginal cost to the government of providing a 1 transfer at each income level these weights correspond to the solution to the inverse optimum program in the optimal tax literature they are the social planning weights that would rationalize the status quo tax schedule as optimal i estimate the weights using the universe of us income tax returns from 2012 the results suggest that measuring economic efficiency requires weighting surplus accruing to the poor roughly 1 5 2 times more than surplus accruing to the rich this is because 1 of surplus to the poor can be turned into roughly 1 5 2 of surplus to the rich by reducing the progressivity of the tax schedule following kaldor and hicks original applications i compare income distributions over time in the us and across countries the results suggest us economic growth is 15 20 lower due to increased inequality than is suggested by changes in gdp because of its higher inequality the u s is unable to replicate the income distribution of countries like austria and the netherlands despite having higher national income per capita

welfare analysis meets causal inference we describe a framework for empirical welfare analysis that uses the causal estimates of a policy s impact on net government spending this framework provides guidance for which causal effects are and are not needed for empirical welfare analysis of public policies the key ingredient is the construction of each policy s marginal value of public funds mvpf the mvpf is the ratio of beneficiaries willingness to pay for the policy to the net cost to the government we discuss how the mvpf relates to traditional welfare analysis tools such as the marginal excess burden and marginal cost of public funds we show how the mvpf can be used in practice by applying it to several canonical empirical applications from public finance labor development trade and industrial organization

moral hazard incentive contracts and risk evidence from procurement deadlines and late penalties are widely used to incentivize effort tighter deadlines and higher penalties induce higher effort but increase the agent s risk we model how these contract terms affect the work rate and time to completion in a procurement setting characterizing the efficient contract design using new micro level data on minnesota highway construction contracts that includes day by day information on work plans hours worked and delays we find evidence of ex post moral hazard contractors adjust their effort level during the course of the contract in response to unanticipated productivity shocks in a way that is consistent with our theoretical predictions we next build an econometric model that endogenizes the completion time as a function of the contract terms and the productivity shocks and simulate how commuter welfare and contractor costs vary across different terms and shocks accounting for the traffic delays caused by construction switching to a more efficient contract design would increase welfare by 22 5 of the contract value while increasing the standard deviation of contractor costs a measure of risk by less than 1 of the contract value

statistical arbitrage and securities prices this article introduces the concept of a statistical arbitrage opportunity sao in a finite horizon economy a sao is a zero cost trading strategy for which i the expected payoff is positive and ii the conditional expected payoff in each final state of the economy is nonnegative unlike a pure arbitrage opportunity a sao can have negative payoffs provided that the average payoff in each final state is nonnegative if the pricing kernel in the economy is path independent then no saos can exist furthermore ruling out saos imposes a novel martingale type restriction on the dynamics of securities prices the important properties of the restriction are that it 1 is model free in the sense that it requires no parametric assumptions about the true equilibrium model 2 can be tested in samples affected by selection biases such as the peso problem and 3 continues to hold when investors beliefs are mistaken the article argues that one can use the new restriction to empirically resolve the joint hypothesis problem present in the traditional tests of the efficient market hypothesis in a fairly general environment this article proposes a novel martingaletype restriction on the dynamics of securities prices this restriction has a number of important properties most notably the restriction may be viewed as model free because it requires no parametric assumptions about the true equilibrium model to derive the restriction we rely on the concept of statistical arbitrage a generalization of pure arbitrage a pure arbitrage opportunity pao is a zero cost trading strategy that offers the possibility of a gain with no possibility of a loss as is well known the existence of paos is incompatible with a competitive equilibrium in asset markets the fundamental theorem of the financial theory establishes a link between the absence of paos and the existence of a positive pricing kernel which supports securities prices while the absence of paos is a necessary condition for any equilibrium model this condition alone often yields pricing implications that are too weak to be practically useful for example when valuing options in incomplete markets the no arbitrage bounds on option prices are typically very wide to strengthen pricing implications several recent articles

introduction to the stability of rational expectations equilibrium abstract this paper surveys the literature which examines the stability of the expectations that agents are assumed to have in a rational expectations equilibrium ree this issue is more complex than the usual statistical estimation problem because the relationship between observable variables and payoff relevant variables is endogenous one approach taken in the literature yields convergence to a ree but requires agents to have extensive knowledge about the structure and dynamics of the model that prevails while they learn a second approach does not assume that agents have correctly specified likelihood functions and finds that ree may not be stable

farmers subjective probabilities in northern thailand an elicitation analysis the ability of agricultural decision makers to formulate logical expectations about the outcome of risky events in crop production and marketing is investigated measures of northern thailand farmers perceptions of yield price and net income are attempted using an elicitation approach which includes a significant monetary reward this approach is found to be feasible the expectations derived are logical and consistent when compared to harvest results and farmers actual production practices farmers expectations about sources of risk and the correlation of socioeconomic characteristics with expectation accuracy are analyzed economic decision theory recognizes the importance of decision makers expectations about future uncertain events these expectations often are expressed as subjective probability distributions dillon roumasset however they have not been widely used in empirical analyses because they are difficult to observe and measure this paper discusses an empirical elicitation approach the accuracy and consistency of the elicited expectations and various relationships in the results specifically the paper reports an experiment in thailand to elicit farmers subjective probability distributions of price yield and net income of selected crops first the concept of subjective probability is discussed followed by a description of the study area and the elicitation procedure then elicited expectations are compared to the actual harvest results using the stochastic dominance criterion we analyze the elicited net income distributions to determine if actual production plans were consistent with stated beliefs third we hypothesize and test the following relationships using expected values and variance measures of the distributions a the correlation between the expected value of prices and yields b comparison of the coefficients of variation of expected prices and yields c correlation between the expected values and variances of the distributions and d comparison of the sample cross section variance of actual prices and yields with the average variance of the price and yield distributions finally the absolute difference between the actual results and the expected value of rice prices and yields are regressed on socioeconomic characteristics of the decision

the effects of school spending on educational and economic outcomes evidence from school finance reforms since the coleman report many have questioned whether public school spending affects student outcomes the school finance reforms that began in the early 1970s and accelerated in the 1980s caused dramatic changes to the structure of k 12 education spending in the united states to study the effect of these school finance reform induced changes in public school spending on long run adult outcomes we link school spending and school finance reform data to detailed nationally representative data on children born between 1955 and 1985 and followed through 2011 we use the timing of the passage of court mandated reforms and their associated type of funding formula change as exogenous shifters of school spending and we compare the adult outcomes of cohorts that were differentially exposed to school finance reforms depending on place and year of birth event study and instrumental variable models reveal that a 10 increase in per pupil spending each year for all 12 years of public school leads to 0 31 more completed years of education about 7 higher wages and a 3 2 percentage point reduction in the annual incidence of adult poverty effects are much more pronounced for children from low income families exogenous spending increases were associated with notable improvements in measured school inputs including reductions in student to teacher ratios increases in teacher salaries and longer school years jel codes j10 i20 h7

what affects the market s ability to adjust for optimistic forecast bias evidence from experimental asset markets abstract this study uses experimental asset markets to investigate the effects of experience and common knowledge on a market s ability to adjust for optimistic forecast bias as a baseline we find that period end prices reflect unbiased forecasts in markets with private information and inexperienced traders with low bias forecasts traders need experience before price adjusts for the bias with high bias forecasts traders need experience and public forecast releases before price adjusts for the bias overall our findings provide insight into identifying conditions that are critical for the full revelation of biased imperfect forecasts and provide direction for future theoretical work

rational expectations and the aggregation of diverse information in laboratory security markets the idea that markets might aggregate and disseminate information and also resolve conflicts is central to the literature on decentralization hurwicz 1972 and rational expectations lucas 1972 we report on three series of experiments all of which were predicted to have performed identically by the theory of rational expectations in two of the three series one in which participants trade a complete set of arrow debreu securities and a second in which all participants have identical preferences double auction trading leads to efficient aggregation of diverse information and rational expectations equilibrium failure of the third series to exhibit such convergence demonstrates the importance of market institutions and trading instruments in achievement of equilibrium

exploring the consistency of higher order risk preferences this study measures higher order risk preferences and their consistency we explore the role of country differences the variation of stakes and the framing of lotteries we observe a robust dichotomous pattern of choice behavior in china in the usa and in germany the majority of choices are consistent with mixed risk aversion or mixed risk loving behavior we also find this pattern after a tenfold increase in the stakes finally our results reveal that this pattern is strengthened if the lotteries are displayed in compound rather than reduced form in a follow up study we explore potential explanations for this framing effect

market for information experimental evidence predictions of the noisy rational expectations equilibrium ree model are found to be relatively accurate for both asset and information markets in the laboratory when information about an asset s uncertain dividend is sold to a fixed number of highest bidders prices allocations efficiency and distribution of profit predictions of the full revelation ree model in the asset market dominate the predictions of the walrasian model demand for information shifts to the left and its price declines close to zero when the price of information is fixed at a relatively high level the number of informed agents and the informativeness of the asset market tends to adjust to permit the informed agents to recover their investment in information

the rate of return to the high scope perry preschool program abstract this paper estimates the rate of return to the highscope perry preschool program an early intervention program targeted toward disadvantaged african american youth estimates of the rate of return to the perry program are widely cited to support the claim of substantial economic benefits from preschool education programs previous studies of the rate of return to this program ignore the compromises that occurred in the randomization protocol they do not report standard errors the rates of return estimated in this paper account for these factors we conduct an extensive analysis of sensitivity to alternative plausible assumptions estimated annual social rates of return generally fall between 7 and 10 with most estimates substantially lower than those previously reported in the literature however returns are generally statistically significantly different from zero for both males and females and are above the historical return on equity estimated benefit to cost ratios support this conclusion

intertemporal profitability and the stability of technical analysis evidences from the hong kong stock exchange this study investigates the impact of market integration on the profitability of two simple and popular technical trading rules the simple moving average sma and the trading range break trb in hong kong using data from 1972 to 2006 we find that the sma 1 50 consistently outperforms the market before the integration of stock exchanges in 1986 under the 1 50 rule a variable length moving average performs better than the fixed length moving average rule by 2 5 to 5 annual before transaction costs because it includes the information of the first 9 days into investors decision the results are robust to the out of sample tests for the validity of the profitability of the trading rules the returns of the trading range break rules are insignificant over the 35 year span our results support the conjecture that stock market integration may lead to better information efficiency the findings of significant pre 1986 profits and insignificant post 1986 profits contradict previous findings that r

the credibility revolution in empirical economics how better research design is taking the con out of econometrics since edward leamer s memorable 1983 paper let s take the con out of econometrics empirical microeconomics has experienced a credibility revolution while leamer s suggested remedy sensitivity analysis has played a role in this we argue that the primary engine driving improvement has been a focus on the quality of empirical research designs the advantages of a good research design are perhaps most easily apparent in research using random assignment we begin with an overview of leamer s 1983 critique and his proposed remedies we then turn to the key factors we see contributing to improved empirical work including the availability of more and better data along with advances in theoretical econometric understanding but especially the fact that research design has moved front and center in much of empirical micro we offer a brief digression into macroeconomics and industrial organization where progress by our lights is less dramatic although there is work in both fields that we find encouraging finally we discuss the view that the design pendulum has swung too far critics of design driven studies argue that in pursuit of clean and credible research designs researchers seek good answers instead of good questions we briefly respond to this concern which worries us little

long term market overreaction the effect of low priced stocks conrad and kaul 1993 report that most of de bondt and thaler s 1985 long term overreaction findings can be attributed to a combination of bid ask effects when monthly cumulative average returns cars are used and price rather than prior returns in direct tests we find little difference in test period returns whether cars or buy and hold returns are used and that price has little predictive ability in cross sectional regressions the difference in findings between this study and conrad and kaul s is primarily due to their statistical methodology they confound cross sectional patterns and aggregate time series mean reversion and introduce a survivor bias their procedures increase the influence of price at the expense of prior returns

the value of medicaid interpreting results from the oregon health insurance experiment we develop frameworks for welfare analysis of medicaid and apply them to the oregon health insurance experiment across different approaches we estimate low income uninsured adults willingness to

the marginal cost of public funds hours of work versus labor force participation this paper extends the theory and measurement of the marginal cost of public funds mcf to account for labor force participation responses our work is motivated by the emerging consensus in the empirical literature that extensive participation responses are more important than intensive hours of work responses in the modelling of extensive responses we argue that it is crucial to account for the presence of non convexities created by fixed work costs in a non convex framework tax and transfer reforms give rise to discrete participation responses generating first order effects on government revenue these revenue effects make the marginal cost of funds higher and we show numerically that the implications for mcf tend to be substantial

is the market surprised by poor earnings realizations following seasoned equity offerings we examine the stock price reaction to earnings announcements in the five years following seasoned equity offerings seos on average post seo earnings announcements are met with a significantly negative abnormal stock price reaction although this negative reaction accounts for a disproportionately large portion of long run post seo abnormal stock returns on average abnormal stock price reactions to post seo earnings announcements are reliably negative only within the smallest quartile of equity issuers for small firms therefore these findings are broadly consistent with the hypothesis that firms issue equity when the market overestimates the firm s future earnings perfomance

market behavior in the presence of divergent and imperfect private information experimental evidence from canada china and the united states abstract we conduct 27 asset markets to examine market behavior when traders have divergent and imperfect information each market consists of well informed wi and less informed li agents nine markets each are conducted in canada china and the us we find that wi agents private information is partially but not fully reflected in prices we also document cross country differences in the degree to which private information is reflected in prices lastly we find that wi agents are able to exploit their informational advantage and outperform li agents this result holds across countries

underreaction to fundamental information and asymmetry in mispricing between bullish and bearish markets an experimental study abstract in contrast to existing literature we implement experimental asset markets with fluctuating fundamental values following a stochastic process therefore we can measure traders behavior in both bullish and bearish markets we observe underreaction of price changes to changes in fundamental value which induces overvaluation in bearish and undervaluation in bullish markets we also find an asymmetry between markets with bullish fundamental values and those with bearish ones as the former markets show a higher degree of informational efficiency the reason for the observed underreaction lies in the relatively large volatility of the underlying fundamental value process

measuring abnormal performance do stocks overreact abstract a highly controversial issue in financial economies is whether stocks overreact in this paper we find an economically important overreaction effect even after adjusting for size and beta in portfolios formed on the basis of prior five year returns extreme prior losers outperform extreme prior winners by 5 10 per year during the subsequent five years although we find a pronounced january seasonal our evidence suggests that the overreaction effect is distinct from tax loss selling effects interestingly the overreaction effect is substantially stronger for smaller firms than for larger firms returns consistent with the overeaction hypothesis are also observed for short windows around quarterly earnings announcements

an appraisal of expected utility hypothesis tests constructed from responses to hypothetical questions and experimental choices a decision problem exists when the possible consequences of a decision are important and the best choice is not obvious anderson dillon hardaker moreover when the consequences of each choice are described in probabilistic terms the decision problem is said to exist under uncertainty the expected utility hypothesis euh characterizes the following solution for an uncertain decision problem a identify the action choices available a

a dynamic model of expectations equilibrium abstract this paper describes a dynamic information adjustment process which achieves rational expectations equilibria for stochastic exchange environments an informational temporary equilibrium is an exchange equilibrium in which agents expectations are conditioned on their initial information and market data generated in previous informational temporary equilibria an equilibrium is a temporary equilibrium which reveals no further information this process leads to an equilibrium even when the data observed by agents is insufficient to permit the existence of an expectations equilibrium

overreaction and insider trading evidence from growth and value portfolios insider transactions are not random across growth and value stocks we find that insider buying climbs as stocks change from growth to value categories insider buying also is greater after low stock returns and lower after high stock returns these findings are consistent with a version of overreaction which says that prices of value stocks tend to lie below fundamental values and prices of growth stocks tend to lie above fundamental values do market prices reflect investor overreaction 1 the purpose of this paper is to provide evidence on this question however new evidence is unlikely to change many minds if the findings depend on the newly controversial capital asset pricing model capm or multifactor models or if they involve datasnooping 2 we bypass these problems by not using capm or a benchmark model and by examining a new set of data we measure insider buying and selling in stocks that are ranked by measures such as the ratio of cash flow per share to price per share cf p 3 current practice refers to stocks with low cf p as growth stocks and to stocks with high cf p as value stocks we examine the direction of insider trades along the growth value spectrum to see if they are consistent with attempts to profit from market overreaction by overreaction we mean price movements that predictably reverse this experiment does not require an asset pricing model because we do not examine the returns accruing to insider trades 4

price trends and patterns in technical analysis a theoretical and empirical examination while many technical trading rules are based upon patterns in asset prices we lack convincing explanations of how and why these patterns arise and why trading rules based on technical analysis are profitable this paper provides a model that explains the success of certain trading rules that are based on patterns in past prices we point to the importance of confirmation bias which has been shown to play a key role in other types of decision making traders who acquire information and trade on the basis of that information tend to bias their interpretation of subsequent information in the direction of their original view this produces autocorrelations and patterns of price movement that can predict future prices such as the head and shoulders and double top patterns the model also predicts that sequential price jumps for a particular stock will be positively autocorrelated we test this prediction and find that jumps exhibit statistically and economically significant positive autocorrelations

a unified welfare analysis of government policies we conduct a comparative welfare analysis of 133 historical policy changes over the past half century in the united states focusing on policies in social insurance education and job training taxes and cash transfers and in kind transfers for each policy we use existing causal estimates to calculate both the benefit that each policy provides its recipients measured as their willingness to pay and the policy s net cost inclusive of long term impacts on the government s budget we divide the willingness to pay by the net cost to the government to form each policy s marginal value of public funds or its mvpf comparing mvpfs across policies provides a unified method of assessing their impact on social welfare our results suggest that direct investments in low income children s health and education have historically had the highest mvpfs on average exceeding 5 many such policies have paid for themselves as governments recouped the cost of their initial expenditures through additional taxes collected and reduced transfers we find large mvpfs for education and health policies amongst children of all ages rather than observing diminishing marginal returns throughout childhood we find smaller mvpfs for policies targeting adults generally between 0 5 and 2 expenditures on adults have exceeded this mvpf range in particular if they induced large spillovers on children we relate our estimates to existing theories of optimal government policy and we discuss how the mvpf provides lessons for the design of future research

risk and return abstract this paper examines the seasonality in the basic relationship between expected return and risk during 1935 82 the results reveal that the positive relationship between return and risk is unique to january the risk premiums during the remaining eleven months are not significantly different from zero

the welfare implications of increasing disability insurance benefit generosity abstract in order to evaluate whether workers are over or under insured through the disability insurance di program we develop a framework that allows us to simulate the benefits as well as the costs associated with marginal changes in payment generosity from a representative cross sectional sample of the population under the assumption that individuals are reasonably risk averse we find that the typical worker would value increased benefits somewhat above the average costs of providing them however whether the benefit increases tend to lower or raise utility when we average across all individuals in our sample is sensitive to assumptions that affect the relative marginal utility of income to disabled individuals

efficiency of experimental security markets with insider information an application of rational expectations models the study reports on the ability of competing models of market information integration and dissemination to explain the behavior of simple laboratory markets for a one priced security returns to the security depended upon a randomly drawn state of nature some agents insiders whose identity was unknown to other agents knew the state before the markets opened with replication of market conditions the predictions of a fully revealing rational expectations model are relatively accurate prices adjusted immediately to near rational expectations prices profits of insiders were virtually indistinguishable from non insiders and efficiency levels converged to near 100 percent

price conveyed information versus observed insider behavior a note on rational expectations convergence in a recent paper on behavior in experimental securities markets plott and sunder 1982 concluded that the rational expectations re model was superior to the traditional prior information pl model in predicting equilibrium prices and holdings in particular given a market with one commodity three possible states of the world and three groups of trader types each with differing valuations on the commodity per state initially uninformed traders were able to infer the underlying state from the current market price and act accordingly in a related paper friedman harrison and salmon 1984 observed that given the existence of a futures market the re model outperformed the pi model in multiperiod single commodity markets as well one source of potential misinterpretation however comes from the fact that although one half of the traders of each type were informed of the true state at the beginning of each period in plott and sunder 1982 and one third of the traders of each type in friedman harrison and salmon 1984 the same traders were informed in almost every period in a more recent paper plott and sunder 1983 constructed markets where all traders received partial information i e given possible states x y and z a trader s private information would be either not x or not y if the state were z yet the combinations of traders receiving a certain message in any period were determined randomly

are stock price reversals really asymmetric a note abstract one of the enigmatic findings about the stock market overreaction effect is that it is asymmetric we argue that this apparent anomaly may be entirely illusory resulting from the peculiar properties of returns the test period return on a contrarian portfolio is not always a satisfactory measure of the strength of price reversals this also renders interportfolio comparisons about the symmetry of reversals more difficult we develop an alternative measure the reversal coefficient which takes account of this deficiency some empirical corroboration is also provided

tax avoidance and the deadweight loss of the income tax traditional analyses of the income tax greatly underestimate deadweight losses by ignoring its effect on forms of compensation and patterns of consumption the full deadweight loss is easily calculated using the compensated elasticity of taxable income to changes in tax rates because leisure excludable income and deductible consumption are a hicksian composite good microeconomic estimates imply a deadweight loss of as much as 30 of revenue or more than ten times harberger s classic 1964 estimate the relative deadweight loss caused by increasing existing tax rates is substantially greater and may exceed 2 per 1 of revenue

event study methodologies and the size effect abstract this study of 862 press recommendations demonstrates that the size effect can distort longer term performance measures and hence event studies relative to similar sized companies post publication performance is neutral however market adjustments the capm and market model with equally or capitalization weighted indexes all produce biased results event studies are most exposed to such bias when the measurement interval is long event securities differ systematically in size or weighting from the index constituents the size effect is large and or volatile and when capm type methodologies are used these distortions are avoided by explicitly controlling for size

overreaction underreaction and the low p e effect although earnings surprises have been studied extensively they have not been examined in the context of contrarian strategies positive and negative earnings surprises affect best high p e and worst low p e stocks in an asymmetric manner that favors worst stocks long term reversion to the mean in which worst stocks display above market returns while best stocks show below market results regardless of the sign of the surprise continues for at least 19 quarters following the news these results are consistent with mispricing overreaction to events prior to the surprise and a corrective price movement after the surprise is consistent with extant research on underreaction the mispricing correction hypothesis explains the superior returns of contrarian strategies noted here and elsewhere in the literature

evaluating agricultural energy policies under uncertainty the case of electricity in south india abstract farmers attitude towards risk associated with the availability of energy inputs will influence their investment behavior and demand for energy inputs in order to analyze policies that reduce the risk in energy availability some modifications in methods are required this study using a mean variance framework demonstrates how cross sectional data and time series data on crop yields and prices can be used to analyze agricultural energy policies under uncertainty in a developing country context it is argued that the farmers risk attitudes their crop allocation behavior changes in the demand for energy inputs and the stochastic relationship between various forms of energy inputs can be explained by the various energy constraints faced by them furthermore using the same methods the impact of policies which affect these constraints can be analyzed

information dissemination and the distribution of wealth evidence from experimental asset markets abstract we conduct 24 experimental asset markets to investigate the effects of differentially informed and experienced agents on information dissemination and the distribution of wealth in our markets private information is incomplete in that it reduces but does not eliminate state uncertainty private information is not fully disseminated even in markets with experienced traders informed agents exploit their informational advantage and earn greater profit than uninformed agents but only in markets with inexperienced traders lastly uninformed agents earn greater profit when some agents are informed but only in markets with experienced traders overall uninformed agents benefit from design specific trading experience

empirical estimation and use of risk preferences an appraisal of estimation methods that use actual economic decisions the topic addressed in this paper concerns the conceptual basis estimation procedures and resources required for implementation of methods for estimating risk preferences by observing behavior an attempt is made to review and appraise previous literature as well as to explore some alternative approaches to begin it is important to contrast four general types of empirical settings of interest these are micro farm level macro market or other aggregations descriptive positivistic and prescriptive normative studies the prescriptive or conditionally normative studies seemingly have dominated agricultural economic studies of risk these generally have been micro in nature and have focused on

the market value of information some experimental results the authors examine the price and allocation of purchased information and of the underlying asset in eight double auction asset market experiments observed outcomes support fully revealing rational expectations in simple environments in which uninformed traders can easily infer the private information of informed traders but support nonrevealing rational expectations in more complex environments the private value of information is positive in the more complex noisy environments but competition forces the information price to its nash equilibrium value and the net gain by purchasers is approximately zero copyright 1992 by university of chicago press

household s risk attitudes in indonesian villages this paper estimates attitudes towards risk using data obtained through interviews of 400 households in villages in indonesia participants were invited to play investment games in order to identify household risk attitudes the game result supports the hypothesis of non decreasing partial relative risk aversion using an ordered probit model the determinants of risk attitude were investigated the results show that the variable of co residence is important an individual living with his or her parents is less risk averse than an individual in a nuclear household co residence can be viewed as a type of security blanket partial relative risk aversion decreases with the level of education and wealth

overreaction in the brazilian stock market abstract the overreaction hypothesis on a new set of data for the brazilian stock market over the period 1970 1989 is investigated both market adjusted returns and the standard sharpe lintner capm adjusted returns are used price reversals in 2 year returns are detected and the results contrast with the u s evidence in that the magnitude of the effect is more pronounced than in the u s the results also suggest that differences in risk as measured by capm betas using the method suggested by chan chan k c 1988 on the contrarian investment strategy journal of business 61 147 163 cannot account for the overreaction effect i also examine the issue of asymmetry versus symmetry in the overreaction effect using the criterion proposed by dissanaike dissanaike g 1992 are stock price reversals really symmetric university of cambridge department of applied economics discussion paper af series no 4 i find evidence that the price reversals are asymmetric

experiments on percolation of information in dark markets in dark markets order submissions are bilateral and transaction prices are known only to the trading counterparties here we study to what extent the information aggregation theory proposed by duffie and collaborators predicts outcomes in a laboratory version of such markets we find that prices aggregate the available information but not in the strict sense of the theory where prices converge exponentially fast to average private signals prices instead fluctuate within bands around this average the band widths reflect in the best case the precision of the average signal and otherwise the precision of a single private signal

on back testing zero investment strategies zero investment strategies typically involve forming a long portfolio in one set of securities and a short portfolio in another with the two identified by the use of some trading rule when back testing such strategies the ex post difference in their abnormal returns represents an unbiased estimate of their economic profitability in perfect markets and thus serves as an indication of market efficiency however regulation t s short selling constraints are a potentially significant imperfection facing retail and institutional investors after development of a procedure that recognizes these constraints in measuring returns the impact of these constraints on economic profitability is analyzed copyright 2000 by university of chicago press