performance attribution using an apt with prespecified macrofactors and time varying risk premia and betas this paper assesses the selection and timing abilities of 130 equity mutual funds using a conditional apt model with specified macrofactors and time varying risk premia and betas for all fund categories based on investment objectives a significant proportion of the funds exhibits negative abnormal asset selection performance based on the unconditional jensen 1968 alpha and a reduced proportion of the funds in each category attempts to time the realizations of the macrofactors including those captured by the residual market factor the average selection performance of the mutual funds improves and the proportion of funds attempting to time macrofactor realizations declines when measured using the asset selection and factor timing models with time varying risk premia and betas

mimicking portfolios and exact arbitrage pricing we characterize the sets of mimicking positions with returns that can serve in place of factors in an exact k factor arbitrage pricing relation for a set of n assets all of the sets are k dimensional nonsingular linear transformations of each other we interpret three examples of such transformations and discuss empirical considerations we provide conditions under which the mimicking positions can be expressed as portfolios and we characterize the relation between mimicking portfolios and the minimumvariance frontier

political risk national defense and the dollar the federal reserve board s trade weighted real exchange rate index is highly correlated with the u s defense budget share of gnp this paper provides evidence that the correlation is not spurious political risk associated with holding wealth in the united states varies inversely with u s military security and due to the soviet military threat to the west is a major argument in foreign asset demand functions

risk and return in an equilibrium apt application of a new test methodology abstract we use an asymptotic principal components technique to estimate the pervasive factors influencing asset returns and to test the restrictions imposed by static and intertemporal equilibrium versions of the arbitrage pricing theory apt on a multivariate regression model the empirical techniques allow for fairly arbitrary time variation in risk premiums we find that the apt provides a better description of the expected returns on assets than the capital asset pricing model capm however some statistically reliable mispricing of assets by the apt remains

the effect of political risk on the forward exchange bias the case of elections abstract the unsuccesful search for explanations of the forward bias has concentrated on variables suggested by traditional models of risk political news although important to foreign exchange traders has not been considered as a determinant of the forward bias i present a model in which the forward bias changes when the governing party changes elections in major industrial countries provide a natural test of the model the forward bias changed as predicted after half of the 13 elections in canada france the united kingdom and the united states between 1973 and 1985 politics provides useful information for foreign exchange traders which economists should not ignore

using generalized method of moments to test mean variance efficiency this paper develops tests of unconditional mean variance efflciency under weak distributional assumptions using a generalized method of moments framework these tests are potentially more robust than commonly employed tests which rely on the assumption that asset returns are normally distributed and temporarily i i d using returns for size based portfolios from 1926 to 1988 we show that the conclusion concerning the mean variance effilciency of market indexes can be sensitive to the test considered the application of multivariate statistical techniques in financial economics has become common practice in recent years much of the development has been in the area of testing asset pricing models the assumption that asset returns follow a time invariant multivariate normal distribution permits tests of restrictions on model parameters in a pooled time series cross section framework these tests can be interpreted as tests of the mean variance efficiency of a portfolio or combination of portfolios gibbons 1982 jobson and korkie 1982 stambaugh 1982 shanken 1985 1987 kandel and stambaugh 1987 mackinlay 1987 and gibbons ross and shanken 1989 are examples of work presenting multivariate tests of the capital asset pricing model connor and korajczyk 1988 and lehmann and modest 1988 present multivariate tests of the arbitrage pricing model breeden gibbons and litzenberger 1989 present multivariate tests of the consumption based capm although these papers assume the normality of asset returns little analysis has been conducted to understand the sensitivity of the inferences to violations of this assumption 2 3

macroeconomic policy in a two party system as a repeated game this paper considers the interaction of two parties with different objectives concerning inflation and unemployment and rational and forward looking wage setters if discretionary policies are followed an economic cycle related to the political cycle results in equilibrium this cycle is significantly different from the traditional political business cycle reputational mechanisms due to the repeated interaction of the two parties and the public or commitments to a common policy rule can improve upon the discretionary outcome by reducing or eliminating the magnitude of the economic fluctuations

interest rate risk and the pricing of depository financial intermediary common stock empirical evidence abstract using the likelihood ratio test this paper presents evidence that interest rate risk is priced these results are consistent with earlier findings presented by sweeney and warga based on a different sample and methodology the statistical results further reveal that failure to discern significant interest rate premia is attributable to insufficient rate sensitivity rather than being an outcome of monetary policy i e inadequate rate volatility

further international evidence on asset pricing the case of the spanish capital market abstract a multivariate framework is used in order to study the price formation of risky assets in the spanish capital market issues regarding the efficiency of the spanish value weighted stock market index the validity of equilibrium considerations the size effect and the nature of the return generating process during january are analyzed

multivariate tests of the zero beta capm abstract a cross sectional regression test csrt of the capm is developed and its connection to the hotelling t2 test of multivariate statistical analysis is explored algebraic relations between the csrt the likehood ratio test and the langrange multiplier test are derived and a useful small sample bound on the distribution function of the csrt is obtained an application of the csrt suggests that the crsp equally weighted index is inefficient but that the inefficiency is not explained by a firm size effect from february to december

a joint test of market segmentation and exchange risk factor in international capital market market segmentation and exchange risk are two main factors that distinguish international financing and investment decisions from domestic ones existing studies of market segmentation have been conducted within a framework in which exchange risk is not explicitly recognized this paper performs a joint test of market segmentation and exchange risk pricing based on individual stock data from seven major countries outside of the u s for the period january 1981 to december 1989 the theoretical framework used is a multifactor model with domestic and world market factors and an exchange risk factor the maximum likelihood method is used to estimate risk premia and factor analysis is used to provide additional evidence on the pricing of risk factors the results indicate that a the factor structure of asset returns is internationally heterogeneous b many national capital markets can be described as partially segmented rather than the polar cases of complete segmentation or integration and c exchange risk is a significant factor affecting asset returns in addition to the domestic and world market risk factors

the statistical properties of daily foreign exchange rates 1974 1983 abstract this paper examines the statistical properties of daily rates of change of five foreign currencies from 1974 to 1983 the main purpose is to discriminate between two competing explanations for the observed heavy tails of the distribution that the data are independently drawn from a heavy tail distribution which remains fixed over time and that the data come from distributions which vary over time evidence point to the rejection of the first hypothesis further investigations show that the rejection can be attributed to changing means and variances in the data which can be described by a simple statistical model

external debt capital flight and political risk abstract this paper explains the simultaneous occurence of large external debts private capital outflows and low domestic capital formation we consider a general equilibrium model in which two government types with conflicting distributional goals randomly alternate in office uncertainty over the fiscal policies of future governments generates capital flight and small domestic investment and induces the government to overaccumulate external debt the model also predicts that left wing governments are more inclined to restrict capital outflows than right wing governments finally we examine how political uncertainty affects the risk premium and how debt repudiation may occur after a regime change

keeping up with the joneses and optimal diversification abstract peer effects have been shown to affect behavior and can generally lead to investments choices that are mean variance inefficient this paper analyzes optimal diversification with peer effects we show that if individuals have keeping up with the joneses preferences and they take their peer group reference as the market portfolio markowitz s mean variance efficiency analysis and the capm equilibrium are intact this holds for any keeping up preferences as well as heterogeneous combinations of such preferences these results also extend to the merton levy segmented market model

sensitivity of multivariate tests of the capital asset pricing model to the return measurement interval the capital asset pricing model s capm primary empirical implication is a positively sloped linear relation between a security s expected rate of return and its relative risk beta recent research indicates that inferences about the riskreturn relation are sensitive to the choice of the return measurement interval we perform multivariate tests of the sharpe lintner capm using monthly and annual returns on market value ranked portfolios the capm is rejected using monthly returns a result consistent with previous research in contrast we fail to reject the capm when annual holding period returns are used the capital asset pricing model s capm primary empirical implication is a positively sloped linear relation between a security s expected rate of return and its relative risk beta

do momentum based strategies still work in foreign currency markets this paper examines the performance of momentum trading strategies in foreign exchange markets we find the well documented profitability of momentum strategies during the 1970s and the 1980s has continued throughout the 1990s our approach and findings are insensitive to the specification of the trading rule and the base currency for analysis finally we show that the performance is not due to a time varying risk premium but rather depends on the underlying autocorrelation structure of the currency returns in sum the results lend further support to prior momentum studies on equities the profitability to momentum based strategies holds for currencies as well

on multivariate tests of the capm abstract this paper evaluates the power of multivariate tests of the capital asset pricing model the results indicate that when employing an unspecified alternative hypothesis the ability of the tests to distinguish between the capm and other pricing models is poor an upper bound is derived for the distance the alternative distribution of the test statistic can be from the null distribution when the deviations from the capm are due to missing factors this upper bound explains the low power of the tests

covered interest arbitrage and market turbulence the covered interest parity theorem states that the covered interest differential between two similar assets denominated in different currencies should be zero this paper utilizes high quality data recorded by the dealers at the bank of england to test covered interest parity during certain historical periods in which there is known to have been turbulence as well as during a relatively calm control period the data is high frequency and allowance is made for the bid offer spread brokerage costs and other considerations the results have three main implications firstly profitable arbitrage opportunities do occasionally occur and sometimes persist during turbulent periods secondly the degree of efficiency of the relevant markets appears to have increased over time thirdly there appears to be a maturity effect whereby the existence and size of profitable arbitrage opportunities appear to be positive functions of the length of maturity a rationalization of this phenomenon is offered in terms of the existence of credit limits copyright 1989 by royal economic society

a note on the geometry of shanken s csr t2 test for mean variance efficiency abstract shanken 1985 derives a test for the zero beta capital asset pricing model capm which as he points out is equivalent to a test of the mean variance efficiency of the market portfolio this note illustrates the geometry of shanken s test in the mean variance space

an empirical investigation of international asset pricing we investigate several asset pricing models in an international setting we use data on a large number of assets traded in the united states japan the united kingdom and france the models together with the hypothesis of capital market integration imply testable restrictions on multivariate regressions relating asset returns to various benchmark portfolios we find that multifactor models tend to outperform single index models in both domestic and international forms especially in their ability to explain seasonality in asset returns we also find that the behavior of the models is affected by changes in the regulatory environment in international markets

exchange rate exposure and industry characteristics evidence from canada japan and the usa abstract this paper examines industry level exchange rate exposures for canada japan and the usa measuring exposure by adding the change in the exchange rate to the domestic market model of industry portfolio returns some industries in all three countries display significant exposures moreover for each country the exchange rate is important for explaining industry returns at the economy wide level to explore whether exchange rate exposures are systematically linked to the activities of the industries we model exposure as a function of industry characteristics for all three countries the relation between exposure and industry characteristics is broadly consistent with economic theory jel f3

joint estimation of factor sensitivities and risk premia for the arbitrage pricing theory the apt is represented as a multivariate regression model with across equations restrictions both observed and unobserved latent macroeconomic factors are included thus generalizing and unifying two previous strands of literature large portfolios representing unobserved factors are treated as endogenous and nonlinear 3sls estimates are shown to differ sharply from estimates that ignore this endogeneity using monthly stock returns and six factors we cannot reject january effects the following results are invariant with respect to the inclusioh of january effects we reject the capm in favor of the apt however we cannot reject the apt restrictions on the linear factor model most empirical work on the arbitrage pricing theory apt has followed a factor analysis approach papers by burmeister and wall 5 chan chen and hsieh 7 chen roll and ross 9 and mcelroy and burmeister 22 represent some exceptions in which measured macroeconomic factors such as unexpected inflation are used to explain asset prices in an apt or multifactor model both the factor analysis approach and the measured macroeconomic factor approach have their merits the primary advantages of using measured economic factors are 1 the factors and their apt prices in principle can be given economic interpretations while with a factor analysis approach it is unknown what factors are being priced and 2 rather than using only asset prices to explain asset prices measured macroeconomic factors introduce additional information linking asset price behavior to macroeconomic events in this exploratory paper we investigate an apt or multifactor model in which there are both measured macroeconomic factors and other nonobserved factors we impose the nonlinear across equation apt pricing restrictions exactly by using three multivariate estimation methods iterated nonlinear weighted least squares itnlwls iterated nonlinear seemingly unrelated regressions itnlsur and iterated nonlinear three stage least squares itnl3sls see gallant 13 and discussion below the appropriate estimation method depends upon alternative assumptions about the error terms nonsystematic risk in the asset returns equations the primary objective of this work is to investigate whether or not certain apt tests are sensitive to these alternative error assumptions the details of which are given in the text our focus is on the interrelation

currency fluctuations in the post bretton woods era the international monetary landscape that has emerged since the felling of bretton woods is characterized by a hybrid exchange rate system that lies somewhere between the textbook polar cases of a gold standard and a pure float this system has relatively flexible exchange rates between major countries active central bank intervention in the market for the major currencies and predominantly fixed exchange rates relative to the dollar or to some basket of currencies for less developed countries and newly industrializing nations the majority of research on currency markets since the early 1970s has focused on the characteristics of flexible exchange rates under this hybrid regime my thesis is that this research has been unsuccessful the proportion of monthly or quarterly exchange rate changes that current models can explain is essentially zero even after the fact forecasts that use actual values instead of forecasted values of the explanatory variables cannot explain major currency movements over the post bretton woods era this result is quite surprising since exchange rate changes would be entirely unpredictable only in very special cases of the theoretical models discussed as the discussion below will argue it is not a general implication of market efficiency that exchange rates follow a random walk process 1

aggregation of test statistics an evaluation of the evidence on contracting and size hypotheses abstract more powerful tests of a theory of choice of accounting methods and the effect of changes in these choices on equity values are provided the power increase comes from efficiently aggregating results across studies one conclusion is that at least six variables common to more than one study have explanatory power these variables are managerial compensation leverage size risk and constraints on interest coverage and dividends another conclusion is that the posterior probability that the theory taken as a whole has explanatory power is close to one this conclusion includes the effect of variables that only appear in one study

an equity assessment of introducing uncertain forest carbon sequestration in eu climate policy large emissions of greenhouse gases are expected to cause major environmental problems in the future european policy makers have therefore declared that they aim to implement cost efficient and fair policies to reduce carbon emissions the purpose of this paper is to assess whether the cost of the eu policies for 2020 can be reduced through the inclusion of carbon sequestration as an abatement option while equity is also improved the assessment is done by numerical calculations using a chance constrained partial equilibrium model of the eu emissions trading scheme and national effort sharing targets where forest sequestration is introduced as an uncertain abatement option fairness is evaluated by calculation of gini coefficients for six equity criteria to policy outcomes the estimated gini coefficients range between 0 11 and 0 32 for the current policy between 0 16 and 0 66 if sequestration is included and treated as certain and between 0 19 and 0 38 when uncertainty about sequestration is taken into account and policy makers wish to meet targets with at least 90 per cent probability the results show that fairness is reduced when sequestration is included and that the impact is larger when sequestration is treated as certain

small sample tests of portfolio efficiency abstract this paper presents an eigenvalue test of the efficiency of a portfolio when there is no riskless asset complementing the test of gibbons ross and shanken 1989 besides optimal upper and lower bounds an easily implented numerical method is provided for computing the exact p value our approach makes it possible to draw statistical inferences on the efficiency of a given portfolio both in the context of the zero beta capm and with respect to other linear pricing models as an application using monthly data for every consecutive five year period from 1926 to 1986 we reject the efficiency of the crsp value weighted index for most periods

nonnormalities and tests of asset pricing theories the robustness of the multivariate test of gibbons ross and shanken 1986 to nonnormalities in the residual covariance matrix is examined after considering the relative performance of various tests of normality simulation techniques are used to determine the effects of nonnormalities on the multivariate test it is found that where the sample nonnormalities are severe the size and or power of the test can be seriously misstated however it is also shown that these extreme sample values may overestimate the population parameters hence we conclude that the multivariate test is reasonably robust with respect to typical levels of nonnormality in traditional hypothesis testing a nonrandom test maps the values of a random variable into a sample space dichotomized into regions where a hypothesis is either accepted or rejected there are three possible outcomes from this process 1 a correct decision 2 a false rejection type i error or 3 failure to reject the hypothesis when it is false type ii error of the latter two types of error an error of the first kind is usually considered less desirable so typically a level of significance is selected with low probability of type i error e g 0 05 or 0 01 and a test is chosen so as to maximize power minimize probability of type ii error for the specified level of type i error knowledge of the relative level of these two errors is critical in assimilating the results of an experiment for example if the power of a test is equal to its significance level i e a weak test rejection of the null contains zero information 2 additionally in constructing parametric tests of hypotheses it is necessary to assume some distribution for the underlying data consequently when using parametric tests rejection of the null is only equivalent to rejection of at least one of the underlying hypotheses i e the null hypothesis or the distributional assumption interestingly the size significance level and power of procedures used to test

lessons from the evolution of foreign exchange trading strategies abstract the adaptive markets hypothesis posits that trading strategies evolve as traders adapt their behavior to changing circumstances this paper studies the evolution of trading strategies for a hypothetical trader who chooses portfolios from foreign exchange forex technical rules in major and emerging markets the carry trade and us equities the results show that a backtesting procedure to choose optimal portfolios improves upon the performance of nonadaptive rules we also find that forex trading alone dramatically outperforms the s p 500 with much larger sharpe ratios over the whole sample but there is little gain to coordinating forex and equity strategies which explains why practitioners consider these tools separately forex trading returns dip significantly in the 1990s but recover by the end of the decade and have been markedly superior to an equity position since 1998 overall trading rule returns still exist in forex markets with substantial stability in the types of rules though they have migrated to emerging markets to a considerable degree

politics and exchange rate forecasts abstract standard exchange rate models perform poorly in out of sample forecasting when compared to the random walk model we posit part of the poor performance of these models may be due to omission of political factors we test this hypothesis by including political variables that capture party specific election specific and candidate specific characteristics surprisingly we find our political model outperforms the random walk in out of sample forecasting at 1 12 month horizons for the pound dollar mark dollar pound mark and the trade weighted dollar mark and pound exchange rates

hypothesis testing with the sharpe and treynor portfolio abstract using the scholes and williams 1977 model consistent estimates of the variances and covariances of security returns under conditions of non synchronous trading are derived the effects of using such corrected estimates on the measurement of portfolio performance are illustrated by assessing the performance of a value and equally weighted portfolio of all the stocks issued under the quebec stock savings plan qssp

capital flight and political risk abstract this paper provides the first serious attempt to examine the relationship between political risk and capital flight for a large set of developing countries the outcomes of the analysis show that in most cases political risk variables do have a statistically robust relationship to capital flight once domestic and international macroeconomic circumstances are added at least when the robustness test as proposed by sala i martin is applied we conclude that on the basis of the analysis in this paper we have found support for the hypothesis that political risk leads to increased capital flight

a critique of latent variable tests of asset pricing models abstract latent variable tests of asset pricing models make assumptions about the joint distribution of observable returns and unobservable benchmark returns these tests can falsely accept models when a mean variance efficient portfolio other than the benchmark satisfies the distributional assumptions imposed on the benchmark portfolio also because the assumptions are untestable there is no way to discover whether a model is being rejected because the assumptions are false without these assumptions however latent variable tests can be viewed only as tests of distributional hypotheses about mean variance efficient portfolios of unknown composition

asset pricing in a generalized mean lower partial moment framework theory and evidence a new asset pricing model that generalizes earlier results in the downside risk literature is developed and empirically tested using a multivariate approach by specifying risk as deviations below any arbitrary target rate of return the generalized mean lower partial moment mlpm model overcomes the limited appeal of earlier formulations and moreover a large class of extant pricing models using alternative risk measures variance semivariance semideviation probability of loss etc becomes special cases of the new framework empirical tests indicate that the new model cannot be rejected against an unspecified alternative for a large set of target rates of return the traditional capm on the other hand is rejected as a well specified alternative the mlpm target rates inferred from market data appear to be related to equity market mean returns rather than to the riskfree rate the target rate that is implicit in the capm and explicit in earlier downside risk formulations the attractiveness of downside risk measures for decision making purposes has been noted in the financial economic literature for over a quarter of a century 1 risk from this perspective is measured in terms of deviations below some exogenously prespecified target rate of return and a formal analysis of these risk measures for various utility functions has been presented by bawa 1975 in terms of the lower partial moment lpm of the asset distributions the appeal of these risk measures has been based in part on their consistency with the way individuals actually perceive risk notwithstanding its intuitive appeal this area of research has been virtually neglected in recent years we believe that this disaffection with downside risk models tends from two sources first earlier models of this genre exogenously specify the target rate to equal the risk free interest rate in the absence of a satisfactory theory for explaining how investors establish their target rates this assumption as argued herein has been motivated more by technical reasons than economic considerations second empirical tests

the likelihood ratio test statistic of mean variance efficiency without a riskless asset abstract the question whether a given porfolio is mean variance efficient is a basic problem of investment analysis mean variance efficiency is also the basis of the capital asset pricing model this paper presents the explicit form of the likelihood ratio test of the hypothesis that a given portfolio or a particular market index is ex ante mean variance efficient in the case where there is no riskless asset geometric relations are illustrated to provide intuition about the constrained maximum likelihood estimators and the test statistic and two simple economic interpretations of the test are given

subperiod aggregation and the power of multivariate tests of portfolio efficiency abstract when testing portfolio efficiency empiricists usually perform tests using subperiods and aggregate the results in some manner although the power of individual subperiod tests has been studied previously little is known about the power of the aggregate test power is evaluated here through simulations using two different aggregation techniques aggregate power is substantially higher than that for a single subperiod for example in one scenario the aggregate power is 0 77 over a sixty year period but only 0 17 for each five year subperiod in addition the level of power depends on the method of aggregation

information asymmetry and equilibrium monitoring in education abstract we develop a theoretical and computational model of school choice and achievement that embeds information asymmetries in the provision of education because school effort is unobservable to households and policymakers schools have an incentive to under provide effort this moral hazard affects both public and private schools although public schools are subject to an additional distortion because of limited competition and fixed funding household monitoring of schools can mitigate moral hazard but some households may free ride on the monitoring of others using our calibrated model we simulate two policies aimed at raising achievement public monitoring of public schools and private school vouchers our results indicate that in large scale settings no single tool may suffice the reason is twofold a no tool raises achievement or welfare for all households and b since the extent of moral hazard is endogenous the application of each tool has unintended consequences that limit its own effectiveness results also indicate that setting the policy parameters for public schools at the levels preferred by the majority of households may mitigate the distortions nonetheless the current actual values of these parameters seem to match more closely the preferences of public schools than the preferences of parents

economic performance voting and political support a unified approach a presidential vote function and a presidential approval ratings function are jointly estimated for u s postwar observations the estimation technique treats the two equations as seemingly unrelated regressions with unequal numbers of observations cross equation restrictions implying that voters and poll respondents use identical standards in judging the economic performance of incumbents are imposed and tested estimates show that both votes and approval ratings are influenced by gnp growth and inflation the results suggest that poll respondents are more inflation averse than voters however tests of this hypothesis are not conclusive copyright 1990 by mit press

government bond returns measurement of interest rate risk and the arbitrage pricing theory empirical tests are reported for ross arbitrage pricing theory using monthly data for u s treasury securities during the 1960 1979 period we find that mean returns on bond portfolios are linearly related to at least two factor loadings multivariate test results however are not consistent with the apt our sample data in the u s treasury securities market are also not consistent with either version of the capm one monthahead forecasts of excess returns using factor generating models are compared with corresponding naive predictions or predictions using the market model with various

equity development and climate change control the paper analyzes the effects of different equity principles on the decision of developing countries to join a world coalition whose aim is to control greenhouse gas emissions a game theoretic framework is proposed to assess the incentives for different countries to sign an international treaty on climate change control then the effects of different equity rules on these incentives are evaluated by using a dynamic integrated growth and climate model policy proposals based on transfers from developed to developing countries are also analyzed jel c7 h0 h3 q38

the empirical foundations of the arbitrage pricing theory abstract this paper uses maximum likelihood factor analysis of large cross sections to examine the validity of the arbitrage pricing theory apt we are unable to explain the expected returns on firm size portfolios although we do explain the expected returns on portfolios formed on the basis of dividend yield and own variance where risk adjustment using the usual capm market proxies fails we also compare alternate versions of the apt and sharply reject the hypothesis that basis portfolios formed to mimic the factors span the mean variance frontier of the individual assets

potential performance and tests of portfolio efficiency abstract the potential performance of an asset set may be obtained by choosing the portfolio proportions to maximize the sharpe 1966 performance measure if a portfolio has a sharpe measure equivalent to the potential performance of the underlying set of assets then it is efficient multivariate statistical procedures for comparing potential performance and testing portfolio efficiency are developed and then evaluated using simulations two likelihood ratio statistics are then used to compare stock and bond indices against sets of 20 and 40 portfolios the procedures are also compared to the gibbons 1982 methodology for testing financial models

international equity and differentiation in global warming policy ne of the major obstacles to reaching a comprehensive agreement on global warming is the setting of greenhouse gas emission reduction targets for individual countries long standing tensions between industrialized and developing countries have raised the issue of equity in burden sharing moreover individual industrialized nations have pleaded special circumstances and have sought differentiation in their obligations this paper analyzes alternative rules for distributing tradable carbon dioxide emissions permits a non linear programming model which distinguishes between allocation based and outcome based rules is used to analyze the relative welfare outcomes the model is applied to the world body of nations and yields several important policy implications

the relation between the return interval and betas abstract the size effect is sensitive to the length of the return interval used in estimating betas beta changes with the return interval because an asset s covariance with the market and the market s variance do not change proportionately as the return interval is changed we document beta sensitivity to the return interval evidence from cross sectional regressions of returns on monthly and annual betas is inconsistent with beta changes stemming only from the higher standard errors of the longer interval betas we provide evidence that the size effect becomes statistically insignificant when risk is measured by betas estimated using annual returns

anomalies foreign exchange most all behavior can be explained by assuming that agents have stable well defined preferences and make rational choices consistent with those preferences in markets that eventually clear an empirical result qualifies as an anomaly if it is difficult to rationalize or if implausible assumptions are necessary to explain it within the paradigm this column will present a series of such anomalies readers are invited to suggest topics for future columns by sending a note with some reference to or better yet copies of the relevant research comments on anomalies printed here are also welcome the address

multivariate proxies and asset pricing relations abstract a framework is developed in which inferences can be made about the validity of an equilibrium asset pricing relation even though the central aggregate in this relation is unobservable a multivariate proxy for the true market portfolio consisting of an equal weighted stock index and a long term government bond index is employed in an investigation of the sharpe lintner capm the empirical evidence suggests that we can reject the joint hypothesis that a capm is valid and b multiple correlation between the true market portfolio and proxy assets exceeds 0 7 connections to the equilibrium factor pricing literature are also explored

the number of factors in security returns both factor analysis of security returns and the analysis of eigenvalues seem to indicate that a market factor explains the major part of security returns we find that such evidence is consistent with an economy where there are in fact k equally important priced factors eigenvalue analysis in the context of such an economy will lead an investigator to the false inference that the one important factor is the return on an equally weighted market index this paper examines a particular exact k factor economy where each of the k factors is priced and contributes equally on average to the variance of returns we show analytically that for such an economy the approximate factor solution identifies the first factor as the return on an equally weighted market index and would lead to the inference that the remaining h 1 factors are not priced using a cross section regression technology our particular model is consistent with existing empirical work that has studied the number of factors in security markets these results suggest an important caveat to the interpretation of approximate factor solutions in an apt or multibeta pricing context one might also infer a capm bias in tests of the apt using the factor analysis technology on a more positive note the results suggest a simple rotation of the factor analysis solution that will lead to more powerful tests of the asset pricing relations to motivate this study consider the fact that the single factor market model suggested by markowitz 1959 and developed by sharpe 1963 remains one of the most popular empirical models of the return generating process the widespread acceptance of this model owes much to the work of king 1966 through a seven factor analysis of return data he concludes that one factor explains a large percentage of the variance of stock prices a factor on which each security tends to weight positively he interpreted this result to mean that there exists a basic market factor in operation which has a major effect on all securities this work supported the development of empirical research into the capital asset pricing model the model has been extensively applied in the event study context

competition in public service provision the role of not for profit providers abstract with public services such as health and education it is not straightforward for consumers to assess the quality of provision many such services are provided by monopoly not for profit providers and there is concern that for profit providers may increase profit at the expense of quality this paper explores the implications of entry by for profit providers when there is unobserved quality the model generates three key policy relevant insights first by developing a novel approach to competition between different organizational forms it frames the relevant trade offs precisely second it shows the value of keeping an incumbent not for profit as an active provider third it characterizes the optimal payment or voucher value to an entrant for each consumer who switches in a way that can be applied empirically

electoral and partisan cycles between us economic performance and presidential popularity empirical voting popularity research examines parameters that relate economic performance to voting and popularity not the interaction of these parameters with movements in economic performance which is what actually influences voting and popularity this paper examines that interaction for the usa from 1953 1 1990 4 by decomposing the response of popularity to economic performance by both political party and the quarter of the electoral term averaged over the electoral term economic performance increases the popularity of democrats but decreases it for republicans whereas near the election the opposite occurs overall the results appear consitent with a mix of partisan and electoral influences so that no single approach seems fully adequate

term premia and inflation uncertainty empirical evidence from an international panel dataset comment term premia implied by maximum likelihood estimates of affine term structure models are misleading because of small sample bias we show that accounting for this bias alters the conclusions about the trend cycle and macroeconomic determinants of the term premia estimated in wright 2011 his term premium estimates are essentially acyclical and often just parallel the secular trend in longterm interest rates in contrast bias corrected term premia show pronounced countercyclical behavior consistent with theoretical and empirical arguments about movements in risk premia jel e31 e43 e52 g12 h63 in an important recent paper wright 2011 presents a new international interest rate dataset and estimates term premia in far ahead forward rates using an affine gaussian dynamic term structure model dtsm as well as a survey based method he then relates these empirical term premia to macroeconomic conditions notably inflation uncertainty in particular he shows that the marked secular decline in estimated forward term premia across countries is correlated with decreases in measures of uncertainty around forecasts of future inflation in this comment we demonstrate that his model based term premium estimates are distorted by smallsample bias in the estimated model parameters accounting for this bias changes the behavior of the resulting term premium estimates in terms of their trend and cyclical behavior in an affine gaussian dtsm bond yields are determined by a small number of risk factors and the dynamic evolution of these risk factors follows a gaussian vector autoregression var if the risk factors in such a model are observable and if the model is maximally flexible i e if it has no parameter restrictions beyond those required for identification we know from joslin singleton and zhu 2011 that the maximum likelihood estimates of the var parameters can be found by

the use of technical analysis in the foreign exchange market abstract technica or chartist analysis of financial markets involves providing forecasts or trading advice on the basis of largely visual inspection of past prices without regard to any underlying economic or fundamental analysis this paper reports the results of a questionnaire survey conducted on behalf of the bank of england among chief foreign exchange dealers based in london in november 1988 amongst other findings it is revealed that at least 90 per cent of respondents place some weight on this form of non fundamental analysis when forming views at one or more time horizons there is also a skew towards reliance on technical as opposed to fundamentalist analysis at shorter horizons which becomes steadily reversed as the length of horizon considered is increased a very high proportion of chief dealers view technical and fundamental analysis as complementary forms of analysis and a substantial proportion suggest that technical advice may be self fulfilling jel f31

on the impact of infrequent trading on the apt systematic risk components evidence from a thin security market abstract the purpose of this note is to analyze the effects of infrequent trading on the apt systematic risk components using finnish data infrequent trading is reported to influence especially the first systematic risk component produced by factor analysis on stock returns

additional evidence on integration in the canadian stock market this paper reexamines the integration of the canadian and u s stock markets in the 1977 86 period that is relatively free from capital controls the study employs both the capm and the apt frameworks under both models the evidence is consistent with segmentation in the 1977 81 subperiod but supports integration in the 1982 86 subperiod using the apt framework we also find that the canadian stocks interlisted on the u s exchanges and nasdaq are priced in an integrated market and segmentation is predominant for the non interlisted canadian stocks in a study using an international capm framework jorion and schwartz 1986 find strong evidence of segmentation in the pricing of canadian stocks relative to a north american market comprising the canadian and u s stock markets the rejection of integration holds for canadian stocks that are interlisted on the u s stock exchanges and nasdaq as well as for domestic canadian stocks that are listed only on the canadian stock exchanges their results are surprising since the canadian and u s economies are highly integrated and the structure and regulation of security markets in the two countries are similar as well the canadian stocks interlisted on the u s stock exchanges list under the same regulation as the domestic u s stocks thus ex ante we would expect the canadian and u s stock markets to be integrated especially for the interlisted stocks 1 this study reexamines the integration in the canadian market employing both the capm and the apt frameworks since tests of market integration are joint tests of a specified model and market integration a relevant question is whether the two models produce different inferences pertaining to the integration issue in addition we explore this issue in a period that is

a unified beta pricing theory abstract this paper derives ross s mutual fund separation theory and a new equilibrium version of ross s arbitrage pricing theory as special cases of a general theory the paper also reveals that the two theories are identical in their predictions of asset prices and portfolio returns the capital asset pricing model a restricted case of the mutual fund separation theory receives special treatment

a monte carlo investigation of the accuracy of multivariate capm tests abstract in a multivariate regression model relating individual returns to the market return capm implies non linear restrictions on the parameters several asymptotically valid tests of these restrictions have been suggested the existing monte carlo evidence shows that some of these tests are unreliable for reasonable sample sizes but does not indicate well which tests are reliable this paper reports the results of an extensive monte carlo experiment shanken s csr test and jobson and korkie s corrected likelihood ratio test are quite accurate in all cases we consider

equity in climate change an analytical review how global emissions reduction targets can be achieved equitably is a key issue in climate change discussions this paper presents an analytical framework to encompass contributions to the literature on equity in climate change and highlights the consequences in terms of future emissions allocations of different approaches to equity progressive cuts relative to historic levels for example 80 percent by industrial countries and 20 percent by developing countries in effect accord primacy to adjustment costs and favor large current emitters such as the united states canada australia oil exporters and china in contrast principles of equal per capita emissions historic responsibility and ability to pay favor some large and poor developing countries such as india indonesia and the philippines but hurt industrial countries as well as many other developing countries the principle of preserving future development opportunities has the appeal that it does not constrain developing countries in the future by a problem that they did not largely cause in the past but it shifts the burden of meeting climate change goals entirely to industrial countries given the strong conflicts of interest in defining equity in emission allocations it may be desirable to shift the emphasis of international cooperation toward generating a low carbon technology revolution equity considerations would then play a role not in allocating a shrinking emissions pie but in informing the relative contributions of countries to generating such a pie enlarging revolution

analysis of the eu policy package on climate change and renewables abstract in 2009 the eu decided to reduce greenhouse gas emissions at least by 20 in 2020 compared to 1990 and to supply 20 of energy needs by 2020 from renewable energy sources this paper uses an energy model coupled with a non co 2 greenhouse gas model to assess the range of policy options that were debated to meet both targets policy options include trading of renewable targets carbon trading in power plants and industry and the use of the clean development mechanism to improve cost efficiency the models also examined fairness by analysing the distribution of emission reduction in the non emission trading sector the distribution of co 2 allowances in the emission trading sector and the reallocation of renewable targets across member states the overall costs of meeting both targets range from 0 4 to 0 6 of gdp in 2020 for the eu as a whole the redistribution mechanisms employed significantly improve fairness compared to a cost effective solution

the fundamentals of the future international emissions trading system the study aims to analyze the sectoral marginal abatements cost curves for a number of eu countries as well as to examine the efficiency aspects and the economic impacts for the major sectors of the ets under different carbon market configurations in 2010 and 2020 to produce a consistent and realistic assessment we employ sources such as ghg national inventories naps and poles world energy model to constitute the sectoral base year and 2010 2020 emission levels in different countries and regions we then use the market analysis tool aspen which enables to derive supply and demand from sectoral maccs produced with the poles model and to evaluate the economic impacts on the carbon market participants the paper shows that in compliance with the kyoto targets the benefits of an enlarged carbon market are significant since more than 50 of the abatement in the short term have to be achieved in ets sectors which may indeed use cdm or ji credits a second major conclusion is that in 2020 the new flexibility margins provided by the adjustment of investments in new capacities compensate for the increase in pressure towards stronger emission reductions this reduces the relative importance of the enlarged carbon market

a note on the behavior of stock returns around ex dates of stock distributions stock returns after the ex split date is significantly higher than the presplit volatility the increase in the standard deviation of daily returns is of the order of twenty eight to thirty five percent and persists for as long as a full year after the ex date even more interesting is their finding that there is no permanent change in the variance of returns at the announcement date they investigate several potential explanations for this aberration but are unable to find a satisfactory answer grinblatt masulis and titman 6 henceforth gmt examine the behavior of expected returns around announcement dates and exdates for stock distributions exceeding ten percent classifying stock distributions as either stock dividends split factors of twenty five percent or less or stock splits they conclude that return behavior differs across these two types of distributions with stock dividends exhibiting larger abnormal returns than splits this is interpreted by them as evidence in favor of the retained earnings hypothesis the dissimilar accounting treatment of these two types of stock distributions affects retained earnings in different ways and hence splits are not simply large stock dividends this paper extends the work of op to all types of stock distributions in section i postsplit variance is shown to be different from the presplit variance for small stock splits and stock dividends while small splits display an increase in volatility like large splits stock dividends are associated with a decrease in the volatility of returns this evidence also supports gmt s conclusions that stock splits and stock dividends are different types of events section ii investigates the volatility of returns for reverse splits and demonstrates that postsplit volatility decreases for these events this evidence is complementary to woolridge and chambers 9 findings that reverse splits are also associated with negative abnormal returns at their announcement and ex dates section iii concludes the paper

global political risk and currency momentum using a measure of political risk relative to the united states that captures unexpected political conditions we show that political risk is priced in the cross section of currency momentum and contains information beyond other risk factors our results are robust after controlling for transaction costs reversals and alternative limits to arbitrage the global political environment affects the profitability of the momentum strategy in the foreign exchange market investors following such strategies are compensated for the exposure to the global political risk of those currencies they hold that is the past winners and exploit the lower returns of loser portfolios the risk compensation is mainly justified by the different exposures of foreign currencies in the momentum portfolio to u s political shocks which is the main component of global political risk

on correlations and inferences about mean variance efficiency a framework is presented for investigating the mean variance efficiency of an unobservable portfolio based on its correlation with a proxy portfolio a sensitivity analysis derives the highest correlation between the proxy and a portfolio that reverses the inference of a test of sharpe lintner tangency for example the maximum correlation between the value weighted nyse amex portfolio and a portfolio inferred tangent ranges from 0 76 to 0 48 we also test whether the correlation between the proxy and the tangent portfolio exceeds a given level this hypothesis is often rejected for the nyse amex proxy at a correlation of 0 7

arbitrage pricing theory as a restricted nonlinear multivariate regression model iterated nonlinear seemingly unrelated regression estimates by replacing the unknown random factors of factor analysis with observed macroeconomic variables the arbitrage pricing theory apt is recast as a multivariate nonlinear regression model with across equation restrictions an explicit theoretical justification for the inclusion of an arbitrary well diversified market index is given using monthly returns on 70 stocks iterated nonlinear seemingly unrelated regression techniques are employed to obtain joint estimates of asset sensitivities and their associated apt risk prices without the assumption of normally distributed errors these estimators are strongly consistent and asymptotically normal with the additional assumption of normal errors they are also full information maximum likelihood estimators classical asymptotic nonlinear nested hypothesis tests are supportive of the apt with measured macroeconomic factors

orthogonal frontiers and alternative mean variance efficiency tests this paper catalogues properties of minimum norm orthogonal portfolios portfolios which minimize a quadratic objective function and have returns uncorrelated with those of a candidate portfolio that is not mean variance efficient the analysis shows that the dollar versions of these portfolios correspond to estimators of zero beta rates based on alternative statistical criteria and grouping procedures while costless orthogonal portfolios represent candidate mean variance efficiency tests it also develops inference procedures for zero and unit net investment portfolios of individual securities instead of grouped portfolios that have zero expected betas the resulting mean variance efficiency tests are reasonably insensitive to the underlying statistical assumptions i introduction most mean variance efficiency tests follow from the following simple intuition if a given portfolio p is mean variance efficient all portfolios that cost a dollar and have returns uncorrelated with those of p i e zero beta portfolios have identical expected returns hence all costless zero beta portfolios have expected returns of zero when p is mean variance efficient however the situation is altered considerably when p is not a mean variance efficient portfolio in this case roll 1980 has shown that there are portfolios that cost a dollar and have returns uncorrelated with those ofp at all levels of mean return as a consequence there are costless zero beta portfolios at all levels of expected return as well when p is inefficient mean variance efficiency tests typically involve asking whether particular costless zero beta portfolios have zero expected returns the translation of this intuition into operational test statistics is a problem in sampling theory for example when tests are based on costless portfolios with zero sample betas appropriate allowance must be made for the impact of sampling error in the sample betas on the distribution of its mean return such analysis is extremely complicated when the number of assets included in such portfolios exceeds the number of time series observations on asset returns hence previous investigations have restricted their attention to the special case where the number of assets is taken to be smaller than the number of time series observations an enormous amount has been learned about both the statistical properties and economic interpretation of two such tests in these circumstances shanken s 1985 csr test and the related likelihood ratio test of kandel 1984 a partial list of relevant papers includes roll 1979 1985 gibbons 1982 stambaugh

capital controls and international capital market segmentation the evidence from the japanese and american stock markets the paper focuses on two countries japan and the u s to test the integration of capital markets in japan the enactment of the foreign exchange and foreign trade control law in december of 1980 amounted to a true regime switch that virtually eliminated capital controls using multifactor asset pricing models we show that the price of risk in the u s and japanese stock markets was different before but not after the liberalization this evidence supports the view that governments are the source of international capital market segmentation the notion that world capital markets are perfectly integrated is central to most theoretical developments in both international finance and macroeconomics indeed it also lies behind much of the recent international policy discussion capital markets are integrated if assets with perfectly correlated rates of return have the same price regardless of the location in which they are traded 1 segmentation may arise either because of government impediments to capital movements or because of individuals attitudes or irrationality if the hypothesis that the international capital markets are integrated is rejected there is still an important empirical question left unanswered which is related to the source of segmentation while there is a rich body of theoretical research on international market integration only a few studies have tried to investigate this important question empirically a first group of empirical studies on market integration has generally adopted

multivariate tests of asset pricing the comparative power of alternative statistics this paper examines estimation issues associated with multivariate tests of asset pricing two issues are considered 1 the constraint that the sample size n must be less than the time series t and 2 the relative effect on power of using the multivariate statistic versus a univariate counterpart we find that an alternative statistic that allows for large n does not dominate the usual portfolio tests more notably we find that the power of a simple diagonal statistic usually dominates the multivariate statistic for cases considered inthis study

stochastic carbon sinks for combating carbon dioxide emissions in the eu abstract this paper carries out numerical calculations on the potential of carbon sinks in the eu emissions trading scheme ets and national commitments under conditions of stochastic carbon dioxide emissions from fossil fuels and carbon sequestration by forests chance constraint programming is used to analyze the role of stochastic carbon sinks for national and eu wide compliance costs the analytical results show that the inclusion of the carbon sink option can reduce costs for low enough marginal cost and risk discount but also that costless carbon sinks as by products from forestry are not part of a cost effective solution under a high reliability concern cost savings are reduced due to risk discounting under a reliability concern in particular when assigning chebyshev s inequality as compared with a normal probability distribution it is also shown that the supply of forest sinks on the market depends on the differences in marginal abatement cost between the trading and the non trading sectors and in risk discounting between achievements of the ets cap and the national commitment relatively low marginal abatement cost in the non trading sector and high risk discounting of national commitment achievements increase the supply of sinks in the market and hence reduces the equilibrium price the empirical application illustrates the importance of risk discounting for the magnitude of cost savings obtained from introducing forest carbon sinks in the eu ets and national commitments

the performance of cross sectional regression tests of the capm with non zero pricing errors abstract we show that in the presence of non zero pricing errors the fama macbeth fm cross sectional regression test is very likely to either reject the capital asset pricing model capm when it almost holds or accept the model when it grossly fails we investigate the case when pricing errors are correlated with betas and demonstrate that the test performance depends crucially on the correlation cross sectional distribution of betas and several other parameter values even when the capm holds exactly pricing errors are zero the fm test is equally likely to either reject or accept the model when typical sample sizes are used

coherence causality and effectiveness of the eu environmental policy system results of complementary statistical and econometric analyses this paper presents the first empirical test of coherence i e consistency of policies within a framework causality i e logical priority of objectives over policies and effectiveness i e ability of policies to tackle challenges as defined by objectives of the overall eu environmental policy system to do so i applied complementary statistical cross sectional and time series and econometric dynamic tri probit analyses to an original panel dataset based on addressed issues i e pollution vs resource trans boundary vs domestic flow vs stock rather than on implemented policies i e eu legislation aiming at optimal pollution production optimal resource use and market competition it would be impossible to perform similar analyses by referring to realized policies rather than tackled issues due to the unbalanced sample characterizing the former with respect to the latter as well as due to overlapping objectives interrelated policies and non univocal relationships between objectives and policies in contrast with previous studies of single eu environmental policies characteristics of the eu environmental policy or eu environmental objectives i found that the overall eu environmental policy system is internally coherent dynamically causal and ex ante effective moreover the evidence suggests that many issues are correlated trans boundary issues became more relevant in 2012 pollution production was more significant than resource use and flow issues were more important than stock issues from 1995 to 2010 finally i show that few objectives overlapped a safe environment objective 1987 1997 was preferred to a greenhouse gas ghg reduction objective 2003 2012 but pursued with a 2 year lag although the latter has recently become preferred to the former in addition a ghg reduction objective was preferred to a sustainable development objective 1998 2002

international diversification through closed end country funds abstract the primary objectives of this paper are to assess the potential of closed end country funds cecfs as vehicles for achieving international diversification at home and to examine the effect of the closed end status of these funds on their investment characteristics the main findings are first cecfs exhibit significant exposure to the u s market factor and act more like u s securities than do their underlying assets second despite these characteristics cecfs retain significant exposure to their local home market factors and provide u s investors with substantial diversification benefits emerging market funds such as brazil mexico and taiwan receive large weights in optimal international portfolios comprised of cecfs implying that these funds can play a unique role in spanning the opportunity set for u s investors third performance evaluations indicate that our sample cecfs generally did not offer significant overseas alphas fourth fund value and net asset value are found to be co integrated for the majority of cecfs from north america and europe but not for those representing the asian emerging markets

covered interest parity a high frequency high quality data study profitable deviations from covered interest parity cip represent riskless arbitrage opportunities and so indicate market ineffic iency previous empirical work on cip uses noncontemporaneously sampl ed data and reports mixed results this paper uses high frequency te n minute high quality data gathered personally by the author in th e london foreign exchange market to test the cip condition the resu lts overwhelmingly support the market efficiency hypothesis copyright 1987 by the review of economic studies limited

conditional coskewness in stock and bond markets time series evidence in the context of a three moment intertemporal capital asset pricing model specification we characterize conditional coskewness between stock and bond excess returns using a bivariate regime switching model we find that both conditional u s stock coskewness the relation between stock return and bond volatility and bond coskewness the relation between bond return and stock volatility command statistically and economically significant negative ex ante risk premiums the impacts of stock and bond coskewness on the conditional stock and bond premiums are quite robust to various model specifications and various sample periods and also hold in another major developed country the united kingdom the findings also carry important implications for portfolio management