speculative investor behavior and learning as traders learn about the true distribution of some asset s dividends a speculative premium occurs as each trader anticipates the possibility of reselling the asset to another trader before complete learning has occurred small differences in prior beliefs lead to large speculative premiums during the learning process this phenomenon helps explain a paradox concerning the pricing of initial public offerings the result casts light on the significance of the common prior assumption in economic models

the behavior of risk and market prices of risk over the nasdaq bubble period we exploit the information in the options market to study the variations of return risk and market prices of different sources of risk during the rise and fall of the nasdaq market we specify a model that accommodates fluctuations in both risk levels and market prices of different sources of risk and we estimate the model using the time series returns and option prices on the nasdaq 100 tracking stock our analysis reveals three key variations during the period from march 1999 to march 2001 first return volatility increased together with the rising nasdaq index level even though the two tend to move in opposite directions second although the market price of diffusion return risk averages around 1 82 over the whole sample the estimates reached negative territory at the end of 1999 the estimates reverted back to highly positive values after the collapse of the nasdaq market third the market price of jump risk increased with the rising nasdaq valuation and this increase in market price coincided with an increased imbalance in open interest between put and call options

ipos signalling effects for speculative stock detection evidence from the stock exchange of thailand abstractusing a unique data set from the thai stock market about the so called turnover list tol of speculative stocks spanning the period 2004 2012 we investigate and provide new evidence on the relationship between ipos pricing effects and subsequent classification as speculative investments to be more specific we examine the signalling effects for the detection of speculative stocks in relation to the degree of their prior ipos underpricing we also employ the market feedback hypothesis to investigate this signalling process our results reveal a significant positive relationship between the magnitudes of the ipo underpricing and the probability of an ipo firm being classified officially as speculative on the tol furthermore we find that a 6 month abnormal return after going public increases the probability of speculative dealing in the ipos next we consider all listed firms in the thai stock market and highlight the role of both abnormal return and trading volume in the transmission of pr

the role of lockups in initial public offerings in a sample of 2 794 initial public offerings ipos we test three potential explanations for the existence of ipo lockups lockups serve as i a signal of firm quality ii a commitment device to alleviate moral hazard problems or iii a mechanism for underwriters to extract additional compensation from the issuing firm our results support the commitment hypothesis insiders of firms that are associated with greater potential for moral hazard lockup their shares for a longer period of time insiders of firms that have experienced larger excess returns are backed by venture capitalists or go public with high quality underwriters are more likely to be released from the lockup restrictions an initial public offering ipo often represents the first opportunity that a firm s founders and initial investors have to begin the process of realizing the value for their ownership stake in the firm 1 we explore one particular aspect that regulates this cashing out by insiders namely the structure of the price reaction to and the compliance with investment banker lockups which restrict the ability of the firm s management and prepublic investors from selling their stock in the aftermarket for a period of time after the ipo our article provides three contributions on going public and financial markets first we explore why prepublic insiders agree to long holding periods after the ipo we test three potential explanations i lockups as a signal of quality ii as a commitment device to alleviate moral hazard problems and iii as a means for investment banks to extract additional compensation from issuing firms our analysis supports the commitment hypothesis specifically investment banks impose longer lockups when the moral hazard in the aftermarket is higher we conduct several tests of the signaling hypothesis and find no support for the idea that insiders signal their quality by locking

how are derivatives used evidence from the mutual fund industry we investigate investment managers use of derivatives by comparing return distributions for equity mutual funds that use and do not use derivatives in contrast to public perception derivative users have risk exposure and return performance that are similar to nonusers we also analyze changes in fund risk in response to prior fund performance changes in risk are substantially less severe for funds using derivatives consistent with the explanation that managers use derivatives to reduce the impact of performance on risk we provide new evidence regarding the implications of cash flows and managerial gaming for the relation between performance and risk

religious beliefs gambling attitudes and financial market outcomes this study investigates whether geographic variation in religion induced gambling norms affects aggregate market outcomes we conjecture that gambling propensity would be stronger in regions with higher concentrations of catholics relative to protestants consistent with our conjecture we show that in regions with higher catholic protestant ratios investors exhibit a stronger propensity to hold lottery type stocks broad based employee stock option plans are more popular the initial day return following an initial public offering is higher and the magnitude of the negative lottery stock premium is larger collectively these results indicate that religion induced gambling attitudes impact investors portfolio choices corporate decisions and stock returns

a welfare criterion for models with distorted beliefs this paper proposes a welfare criterion for economies in which agents have heterogeneously distorted beliefs instead of taking a stand on whose belief is correct our criterion asserts an allocation to be belief neutral ine cient if it is ine cient under any convex combination of agents beliefs while this criterion gives an incomplete ranking of social allocations it can identify negative sum speculation in a broad range of prominent models with distorted beliefs

the chinese warrants bubble in 2005 2008 over a dozen put warrants traded in china went so deep out of the money that they were almost certain to expire worthless nonetheless each warrant was traded more than three times each day at substantially inflated prices this bubble is unique in that the underlying stock prices make warrant fundamentals publicly observable and that warrants have predetermined finite maturities this sample allows us to examine a set of bubble theories in particular our analysis highlights the joint effects of short sales constraints and heterogeneous beliefs in driving bubbles and confirms several key findings of the experimental bubble literature jel g12 g13 o16 p34

inflation bets on the long bond the liquidity premium theory of interest rates predicts that the treasury yield curve steepens with inflation uncertainty as investors demand larger risk premiums to hold long term bonds by using the dispersion of inflation forecasts to measure this uncertainty we find the opposite since the prices of long term bonds move more with inflation than short term ones investors also disagree and speculate more about long maturity payoffs with greater uncertainty shorting frictions measured by using treasury lending fees then lead long maturities to become overpriced and the yield curve to flatten we estimate this inflation betting effect using time variation in inflation disagreement and treasury supply

liquidity premia in dynamic bargaining markets abstract this paper develops a search theoretic model of the cross sectional distribution of asset returns abstracting from risk premia and focusing exclusively on liquidity in contrast with much of the transaction cost literature it is not assumed that different assets carry different exogenously specified trading costs instead different expected returns due to liquidity are explained by the cross sectional variation in tradeable shares the qualitative predictions of the model are consistent with much of the empirical evidence

differential interpretation of public signals and trade in speculative markets most models of trade in speculative markets assume that agents interpret public information identically we provide empirical evidence on the relation between the volume of trade and stock returns around public announcements and we argue that the evidence is inconsistent with this assumption we then develop a model of trade around public announcements that incorporates differential interpretations and is consistent with the observed volume return relation then we test the standard model of belief revision underlying most models of trade using stock brokerage research analysts earnings forecasts the hypthesis of identical interpretations seems inconsistent with the forecast revisions in these data

rational asset pricing bubbles this paper provides a fairly systematic study of general economic conditions under which rational asset pricing bubbles may arise in an intertemporal competitive equilibrium framework our main results are concerned with nonexistence of asset pricing bubbles in those economies these results imply that the conditions under which bubbles are possible including some well known examples of monetary equilibria are relatively fragile this paper is concerned with the conditions under which asset prices in an intertemporal competitive equilibrium are equal to the present value of the streams of future dividends to which each asset represents a claim according to a central result of the theory of finance this is very generally true in the case of economies with trading at only a finite sequence of dates as long as there are no restrictions upon transactions other than that associated with possible incom pleteness of the set of securities that are traded the result is sometimes called the fundamental theorem of asset pricing here we consider the extent to which such a result continues to be valid in the case of trading over an infinite horizon it has often been observed in the econometric literature on asset pricing bubbles that it is possible in principle for the price of a perpetuity and the dividends on that security to satisfy at all times a present value relation for one period holding returns while the security s price nonetheless does not equal the present value of the stream of dividends expected over the infinite future in such a case the price of the perpetuity is said to involve a bubble component 2 joint stochastic processes for which this component is nonzero are sometimes argued to characterize existing assets for a recent example see froot and obstfeld 1991 but such an inference depends upon aspects of the stochastic

trading frequency and volatility clustering abstract volatility clustering with autocorrelations of the hyperbolic decay rate is unquestionably one of the most important stylized facts of financial time series this paper presents a market microstructure model that is able to generate volatility clustering with hyperbolically decaying autocorrelations via traders with multiple trading frequencies using bayesian information updates in an incomplete market the model illustrates that signal extraction which is induced by multiple trading frequencies can increase the persistence of the volatility of returns furthermore we show that the volatility of the underlying time series of returns varies greatly with the number of traders in the market

universal pre school education the case of public funding with private provision this article studies the effect of free pre school education on child outcomes in primary school we exploit the staggered implementation of free part time pre school for three year olds across local education authorities in england in the early 2000s the policy led to small improvements in attainment at age 5 with no apparent benefits by age 11 we argue that this is because the expansion of free places largely crowded out privately paid care with small changes in total participation and was achieved through an increase in private provision where quality is lower on average than in the public sector

price convexity and skewness this paper develops a model in which investors who are prohibited from short selling agree to disagree on the precision of a publicly observed signal the model implies that the equilibrium price is a convex function of the public signal the model predicts that 1 the stock price reacts more to good news than to bad news 2 the skewness of stock returns is positively correlated with contemporaneous returns but negatively correlated with lagged returns 3 short sale constraints increase rather than decrease skewness and 4 disagreement about information precision increases skewness empirical tests conducted find supportive evidence for all these predictions

equilibrium unemployment with internal labour markets the flow approach to the labour market is based on a clear distinction between trade and production this paper argues that this separation is not realistic because many firms in developed economies usually fill an important share of their vacancies by upgrading incumbent employees the implications of the existence of internal labour markets are explored with the help of a simple model that extends the well known pissarides setup the main result is that the distribution of unemployment by education is correlated with the relative importance of internal labour markets in particular i show that more internalization is associated both with more inequality in the distribution of unemployment with the burden falling mainly on the less educated and with less inequality in the distribution of wages by education the model also generates in a simple way upward sloping wage profiles which are offered by firms with internal labour markets to their recruits who face a nonzero probability of promotion to a skilled job

how do we know that real wages are too high it is common belief that the wages that we observe are above the level that would prevail in a competitive labour market and also it is common to believe that wage moderation should be encouraged as a way to keep unemployment down this paper considers whether we can have confidence in these beliefs it presents a number of models designed to cast doubt on the conventional wisdom first we show that in an efficiency wage model in which there is involuntary unemployment a binding minimum wage may increase employment we then present a general equilibrium matching model in which there is involuntary unemployment but wages are below market clearing levels and raising wages can reduce unemployment we then consider the empirical evidence on employment and wage determination to argue that it is just as consistent with this model as with models in which wages are at or above market clearing levels

can a financial transaction tax prevent stock price booms we present a stock market model that quantitatively replicates the joint behavior of stock prices trading volume and investor expectations stock prices in the model occasionally display belief driven boom and bust cycles that delink asset prices from fundamentals and redistribute considerable amounts of wealth from less to more experienced investors although gains from trade arise only from subjective belief differences introducing financial transactions taxes ftts remains undesirable while ftts reduce the size and length of boom bust cycles they increase the likelihood of such cycles thereby overall return volatility and wealth redistribution contingent ftts which are levied only above a certain price threshold give rise to problems of equilibrium multiplicity and non existence

finite bubbles with short sale constraints and asymmetric information abstract we present a finite period general equilibrium model of an exchange economy with asymmetric information we say that a rational expectations equilibrium exhibits a strong bubble if the price is higher than the dividend with probability one we show that necessary conditions for a strong bubble to occur are that 1 each agent must have private information in the period and state in which the bubble occurs 2 each agent must be short sale constrained at some period in the future with positive probability and 3 agents trades are not common knowledge we present examples of bubbles when the necessary conditions are satisfied journal of economic literature classification numbers c72 d52 d82 d84 g12 g14

asset float and speculative bubbles we model the relationship between asset float tradeable shares and speculative bubbles investors with heterogeneous beliefs and short sales constraints trade a stock with limited float because of insider lockups a bubble arises as price overweighs optimists beliefs and investors anticipate the option to resell to those with even higher valuations the bubble s size depends on float as investors anticipate an increase in float with lockup expirations and speculate over the degree of insider selling consistent with the internet experience the bubble turnover and volatility decrease with float and prices drop on the lockup expiration date

speculating on home improvements we develop a speculation based theory of home improvements housing services are produced from a mix of land and structures homeowners have an option to increase their structures i e make improvements holding xed their land speculative improvements arise because overcondent homeowners mistakenly believe they can add to structures for a lower cost than a competitive construction industry improvements are increasing and convex in home prices there is excessive home remodeling in equilibrium and the change in the recoup ratio the ratio of resale value of improvements to construction costs is negatively correlated with construction cost growth controlling for home price appreciation we provide evidence consistent with our theory using data on the costs and recoup values of remodeling projects across u s cities

speculation spillovers this paper demonstrates that speculative activities can be contagious and spill over across markets specifically we test the hypothesis that during china s warrants bubble period speculative activities in the warrants market grabbed investors attention and caused them to trade more speculatively in the underlying stocks consistent with this hypothesis we find that turnover and return volatility of the underlying stocks are positively associated with the warrants unexpected turnover and price deviation from their fundamental values during the previous day controlling for information driven trading and hedging motives and that such a spillover effect is more pronounced when warrants attract more investor attention data as supplemental material are available at http dx doi org 10 1287 mnsc 2014 1914 this paper was accepted by wei xiong finance

future lending income and security value i test the duffie g rleanu and pedersen hypothesis that security prices incorporate expected future securities lending income to determine whether institutional investors anticipate gains from future lending of securities i examine their trading behavior around loan fee increases the evidence suggests that institutions buy shares in response to an increase in lending fees and that this could explain the premium associated with high lending fee stocks expected future lending income affects stock prices although the effect seems to be attenuated by the negative information that arises from short selling