further results on asset pricing with incomplete information abstract this paper extends the analysis of asset pricing when information is incomplete by relaxing some of the restrictive assumptions of the gaussian model studied earlier in the literature for the information structure considered the posterior beliefs of the investor the conditional distribution of the current state given the past observations are characterized by two sets of sufficient statistics implementable in the form of a filter i the vector of conditional means and ii a set of sufficient statistics for the conditional variance covariance matrix a separation theorem is demonstrated and used to produce a closed form solution for the interest rate process when the investor s utility function is logarithmic in this context we examine the informational efficiency properties of the interest rate and analyze the stochastic shifts in the volatility of the interest rate process

do cigarette producers price discriminate by state an empirical analysis of local cigarette pricing and taxation abstract this study analyzes the interactive effects of oligopoly pricing state taxation and anti smoking regulations on retail cigarette prices by state using panel data for the 50 us states between 1960 and 1990 the results indicate that cigarette producers do price discriminate by state though the effect is not large relative to the final retail price there are two further results 1 state taxes are more than passed on a 1 cent state tax increase results in a price increase of 1 11 cents and 2 sellers offset state and local anti smoking laws with lower prices thereby blunting effects of the regulations

housing wealth and consumption growth evidence from a large panel of households this article uses a large panel dataset that tracks the housing wealth and credit card spending of 12 793 individuals in hong kong to study the relationship between housing wealth and household consumption i identify a significant effect of housing wealth on consumption a pure wealth effect can explain part of the sensitivity households with multiple houses have much stronger consumption responses consistent with a relaxation of the credit constraints mortgage refinancing significantly increases households consumption sensitivities however for the majority of the households that do not refinance consumption sensitivity appears to be due to a reduction in precautionary saving jel e21 g21

financial market innovation and security design an introduction abstract the article describes in the context of theory and practice this special issue of the journal of economic theory on financial market innovation and security design the main focus is on security design in incomplete financial markets possibly with asymmetrically informed traders we first survey the general equilibrium literature which emphasizes the spanning role of securities we then provide a unified framework encompassing the literature that employs a cara guassian setting to study the impact of financial innovation on risk sharing and information aggregation journal of economic literature classification numbers g10 d52

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

effects of financial innovations on market volatility when beliefs are heterogeneous abstract consider a model with two logarithmic utility maximizer agents that observe aggregate consumption but disagree about its expected rate of change markets are incomplete we first show that volatility of the interest rate in an economy with additional information is higher in a complete markets economy with no additional information there are two differences in volatility with the previous the first one due to the increase in volatility of the wealth share of the individuals is always positive the second difference is the change in covariance between the components of the interest rate volatility and can be positive or negative

optimal innovation of futures contracts this article presents a simple model of the innovation of new futures contracts by transaction volume maximizing futures exchanges in incomplete markets under uncertainty with mean variance preferences and proportional transactions costs we characterize the set of nash equilibria for a number of exchanges simultaneously or sequentially choosing contracts the optimal monopolistic contract design is shown to be pareto optimal an example shows the failure of pareto optimality for aparticularnash equilibrium likewise in a monopolistic multiperiod setting an example shows the failure of pareto optimality given an incentive for the exchange to induce turnover

is addiction rational theory and evidence this paper makes two contributions to the modeling of addiction first we provide new and convincing evidence that smokers are forward looking in their smoking decisions using state excise tax increases that have been legislatively enacted but are not yet effective and monthly data on consumption second we recognize the strong evidence that preferences with respect to smoking are time inconsistent with individuals both not recognizing the true dife culty of quitting and searching for self control devices to help them quit we develop a new model of addictive behavior that takes as its starting point the standard rational addiction model but incorporates time inconsistent preferences this model also exhibits forward looking behavior but it has strikingly different normative implications in this case optimal government policy should depend not only on the externalities that smokers impose on others but also on the internalities imposed by smokers on themselves we estimate that the optimal tax per pack of cigarettes should be at least one dollar higher under our formulation than in the rational addiction case

tax incidence in differentiated product oligopoly abstract we analyze the incidence of ad valorem and unit excise taxes in an oligopolistic industry with differentiated products and price setting bertrand firms both taxes may be passed on to consumers by more than 100 percent and an increase in the tax rate can increase short run firm profits and hence the long run number of firms we provide summary conditions for these effects to arise the conditions depend on demand curvatures and are written in elasticity form surprisingly the analysis largely corroborates cournot results with homogeneous demand

the impacts of borrowing constraints on home ownership in australia the analysis reported in this article incorporates direct measures of borrowing constraints into an otherwise standard model of the home ownership decision in australia borrowing constraints take into account mortgage underwriting criteria household incomes and wealth and the household s optimal level of consumption of housing services models containing borrowing constraint measures are estimated for households with heads ages 25 34 the age group that is most likely to be moving into home ownership consistent with previous findings in the us and canada borrowing constraints are significant determinants of the probability of ownership including borrowing constraints in the tenure choice model results in a reduction in the independent impacts of household income and the relative costs of owning and renting implying that in the standard model these variables are at least in part proxies for borrowing constraints as wealth is the binding constraint for most constrained renters the article concludes

measurement of monopoly behavior an application to the cigarette industry a simple scheme is proposed to measure monopoly pricing behavior the coefficient of the tax rate term in a price equation identifies the ratio of price to marginal cost no direct measurement of costs is required so a major problem for other empirical studies of monopoly is avoided empirical results for cross section time series data support rejection of atomistic competition but also provide evidence against the operation of an effective cartel in the cigarette industry the model represents an alternative interpretation of related results in a recent paper by barzel application of the methodology to other markets is feasible

divergence of opinion in complete markets a note we consider an arrow debreu model with agents who have different subjective probabilities in general asset prices will depend only on aggregate consumption and the distribution of subjective probabilities in each state of nature if all agents have identical preferences then an asset with more dispersed subjective probabilities will have a lower price than an asset with less dispersed subjective probabilities if risk aversion does not decline too rapidly it seems that this condition is likely to be met in practice so that increased dispersion of beliefs will generally be associated with reduced asset prices in a given arrow debreu equilibrium there have been several recent investigations concerning the effect of heterogeneous probability beliefs on asset prices most of these investigations have taken place in the context of capm like mean variance models see for example lintner 5 miller 7 williams 10 jarrow 4 and mayshar 6 comparatively little has been done in the analysis of differences of opinion in an arrow debreu contingent claims context rubinstein 8 breeden and litzenberger 2 and breeden 1 have presented nice analyses of asset price determination in an arrow debreu model but most of their results have assumed commonly held probability beliefs in this paper we analyze the impact of divergence of opinion on asset prices in an arrow debreu economy the results serve to generalize the findings of rubinstein and breeden litzenberger to the case of different probability beliefs among the results we establish are 1 in equilibrium asset prices depend only on aggregate consumption and the distribution of subjective probability beliefs 2 asset values are an increasing function of any one individual s probability beliefs 3 an increase in the spread of the probability beliefs of investors may increase or decrease equilibrium asset values depending on the value of a parameter of the utility function however the most likely effect is to decrease the asset values these results are especially interesting in light of the recent empirical work of cragg and malkiel 3 they studied the relationship between ex post return and various measures of risk for common stocks and found that the measure of risk that performed best in their analysis was a measure of divergence of opinion

predatory pricing and the acquisition cost of competitors this paper investigates whether predatory price cutting reduces a trust s cost of acquiring its competitors a variant of the litzenberger rao valuation model is estimated with the expenditures for 43 rival firms purchased by the old american tobacco company between 1891 and 1906 the coefficient estimates indicate that ceteris paribus alleged predation significantly lowered the acquisition costs of the tobacco trust both for asserted victims and through reputation effects for competitors that sold out peacefully although qualified by data limitations these results support the classical view of predatory pricing as a systematic business practice

litigation and the value of tobacco companies this study determines how the recent wave of litigation affected returns and systematic risk in the tobacco industry we test for changes in stock prices coinciding with litigation announcements using a difference in difference event study methodology unfavorable information concerning litigation reduced tobacco returns we find a decline in systematic risk as traditionally measured by the covariance between industry returns and returns to a diversified efficient portfolio this decline may imply a substantial decline in the cost of equity capital of at least 2 2 after the period of litigation which we attribute to common cost shocks experienced by the companies participating in the master settlement agreement combined with the oligopolistic structure of the industry

the persistence of risk adjusted mutual fund performance the authors examine predictability for stock mutual funds using risk adjusted returns they find that past performance is predictive of future risk adjusted performance applying modern portfolio theory techniques to past data improves selection and allows the authors to construct a portfolio of funds that significantly outperforms a rule based on past rank alone in addition they can form a combination of actively managed portfolios with the same risk as a portfolio of index funds but with higher mean return the portfolios selected have small but statistically significant positive risk adjusted returns during a period where mutual funds in general had negative risk adjusted returns copyright 1996 by university of chicago press

low income homeownership american dream or delusion summary this paper is a critical analysis of recent us policy to promote low income homeownership it examines the ideology and assumptions buttressing this policy evidence on the effects of low income homeownership and the viability of homeownership as a strategy for low income families evidence suggests that the prospect for sustained growth in low income homeownership may be limited research does not provide uniform support for it as a tool for asset accumulation neighbourhood economic development or other social and political goals alleged effects of homeownership may be artefacts of self selection and the conflation of homeownership with unobserved characteristics coincident with buying homes what homeownership does and why are not well understood because of difficulties disentangling what homeownership means the elevation of low income homeownership to its current status has deflected political attention away from alternative policies for affordable housing

market timing and mutual fund performance an empirical investigation the evaluation of investment performance is of importance for allocating investment funds efficiently and setting appropriate management fees because actively managed mutual funds are an important form of investment in the united states a valid question is whether the active management has achieved a sufficient increase in returns to offset the associated costs of information and transactions as well as the management fees charged as a corollary the ability to earn superior returns based on superior forecasting ability would be a violation of the efficient markets hypothesis and would have far reaching implications for the theory of finance 2 henriksson and merton 1981 present statistical techniques for testing forecasting ability with a particular emphasis on the market timing ability of investment managers the tests are derived from the basic model of market timing developed by merton 1981 where the forecaster predicts when stocks will outperform riskless securities and when riskless securities will outperform stocks but does not predict the magnitude of the relative returns the evaluation of the performance of investment managers is a topic of considerable interest to practitioners and academics alike using both the parametric and nonparametric tests for the evaluation of forecasting ability presented by henriksson and merton the market timing ability of 116 open end mutual funds is evaluated for the period 1968 80 the empirical results do not support the hypothesis that mutual fund managers are able to follow an investment strategy that successfully times the return on the market portfolio

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

equilibrium interest rates and multiperiod bonds in a partially observable economy this paper analyzes the market for financial assets in a production and exchange economy with several realized outputs and a single unobservable source of nondiversifiable risk the paper demonstrates that for a large class of diffusion outputs and preferences optimizing consumers first estimate the realizations of the unobservable factor and then use these estimates to determine portfolio and consumption rules moreover the explicit consideration of this unobservable productivity factor affects equilibrium demands and prices the equilibrium spot rate of interest emerges as the best estimate of the unobservable factor and multiperiod default free bonds arise as the optimal hedge for the unobservable changes of the stochastic investment opportunity set this paper analyzes the market for financial assets in a production and exchange economy with several realized outputs and a single unobservable source of nondiversifiable risk the paper poses and answers three questions 1 how do consumers determine equilibrium demands and prices when their investment opportunities are unobservable 2 in equilibrium what financial assets provide an optimal hedge for the

market and industry structure and corporate cost of capital the impact of the structural attributes of industries on the cost of capital to constituent firms is examined within the framework of the capital asset pricing model capm the relationship between industry structure and systematic risk which the capm posits as the sole determinant of security returns is investigated using regression methodology the results show that industry characteristics such as capital intensity capital to labour ratio and entry barriers such as advertising have a significant influence on systematic risk and hence on the cost of capital to firms recent us studies e g sullivan 1982 have investigated the relationship between market power and the stock market return on equity using the capital asset pricing model capm within the capm framework investor required return is a linear function of systematic risk the impact of industry structure on expected return is therefore likely to be transmitted through investors perceptions of the relationship between the structural variables and firm systematic risk some recent theoretical studies have attempted to model such a relationship this paper reports an empirical examination of the predictions resulting from these and other related models for a sample of uk firms our results show that industry structural characteristics e g capital intensity have a significant influence on systematic risk and hence cost of capital of firms although the predictions of the extant theoretical models are only partly confirmed the next section identifies a number of microeconomic determinants of corporate systematic risk section iii discusses the methodology employed in the study section iv describes the sampling procedure and explanatory variables results are discussed in section v the final section provides a summary and the conclusions

the cost of capital and the market power of firms reply and correction elements which can be specified when equation 4 was tested the variables used to measure financial leverage size operating leverage and growth were all significant at least at the 5 level in the expected direction but the market power variable then lost significance in the absence of an integrated theoretical model the relationship between market power and systematic risk can only be studied empirically the statistical results reported here suggest that powerful firms do not have any unusual ability to influence their cost of equity capital market power appears to have an impact on equity yields because of investors rational evaluation of managers operating and financial policies

of tournaments and temptations an analysis of managerial incentives in the mutual fund industry we test the hypothesis that when their compensation is linked to relative performance managers of investment portfolios likely to end up as losers will manipulate fund risk differently than those managing portfolios likely to be winners an empirical investigation of the performance of 334 growth oriented mutual funds during 1976 to 1991 demonstrates that mid year losers tend to increase fund volatility in the latter part of an annual assessment period to a greater extent than mid year winners furthermore we show that this effect became stronger as industry growth and investor awareness of fund performance increased over time

efficiency with costly information a study of mutual fund performance 1965 1984 if information is costly to collect and implement then it is efficient for trades by informed investors to occur at prices sufficiently different from full information prices to compensate them for the cost of becoming informed this notion is tested by evaluating investment performance in the mutual fund industry over a 20 year period the study finds evidence that is consistent with optimal trading in efficient markets risk adjusted returns in the mutual fund industry net of fees and expenses are comparable to returns available in index funds and portfolio turnover and management fees are unrelated to fund performance

portfolio performance evaluation old issues and new insights this article presents a model that provides insights about various measures of portfolio performance the model explores several criticisms of these measures these include the problem of identifying an appropriate benchmark portfolio the possibility of overestimating risk because of market timing ability and the failure of informed investors to earn positive risk adjusted returns because of increasing risk aversion the article argues that these need not be serious impediments to performance evaluation

the consumption based capital asset pricing model the paper provides conditions on the primitives of a continuous time economy under which there exist equilibria obeying the consumption based capital asset pricing model ccapm the paper also extends the equilibrium characterization of interest rates of cox ingersoll and ross 1985 to multi agent economies we do not use a markovian state assumption this work provides sufficient conditions on agents primitives for the validity of the consumption based capital asset pricing model ccapm of breeden 1979 as a necessary condition breeden showed that in a continuous time equilibrium satisfying certain regularity conditions one can characterize returns on securities as follows the expected instantaneous rate of return on any security in excess of the riskless interest rate the security s expected excess rate of return is a multiple common to all securities of the instantaneous covariance of this excess return with aggregate consumption increments this common multiple is the arrow pratt measure of risk aversion of a representative agent rubinstein 1976 published a discrete time precursor of this result the exis tence of equilibria satisfying breeden s regularity conditions had been an open issue we also show that the validity of the ccapm does not depend on breeden s assumption of markov state information and present a general asset pricing model extending the results of cox ingersoll and ross 1985 as well as the discrete time results of rubinstein 1976 and lucas 1978 to a multi agent environment since the ccapm was first proposed much effort has been directed at finding sufficient conditions on the model primitives the given assets the agents preferences the agents consumption endowments and in a production econ omy the feasible production sets conditions sufficient for the existence of continuous time equilibria were shown in duffie 1986 but the equilibria demonstrated were not shown to satisfy the additional regularity required for the ccapm in particular breeden assumed that all agents choose pointwise interior consumption rates in order to characterize asset prices via the first order conditions of the bellman equation interiority was also assumed by huang 1987 in demonstrating a representative agent characterization of equilibrium an approach exploited here the use of dynamic programming and the bellman equation aside from the difficulty it imposes in verifying the existence of interior 1 financial support from the national science foundation is gratefully acknowledged we thank

optimal consumption and portfolio policies when asset prices follow a diffusion process abstract we consider a consumption portfolio problem in continuous time under uncertainty a martingale technique is employed to characterize optimal consumption portfolio policies when there exist nonnegativity constraints on consumption and on final wealth we also provide a way to compute and verify optimal policies our verification theorem for optimal policies involves a linear partial differential equation unlike the nonlinear partial differential equation of dynamic programming the relationship between our approach and dynamic programming is discussed we demonstrate our technique by explicitly computing optimal policies in a series of examples in particular we solve the optimal consumption portfolio problem for hyperbolic absolute risk aversion utility functions when the asset prices follow a geometric brownian motion the optimal policies in this case are no longer linear when nonnegativity constraints on consumption and on final wealth are included by these examples one can see that our approach is much easier than the dynamic programming approach

efficiency with costly information a reinterpretation of evidence from managed portfolios we investigate the informational efficiency of mutual fund performance for the period 1965 84 results are shown to be sensitive to the measurement of performance chosen we find that returns on s p stocks returns on non s p stocks and returns on bonds are significant factors in performance assessment once we correct for the impact of non s p assets on mutual fund returns we find that mutual funds do not earn returns that justify their information acquisition costs this is consistent with results for prior periods coauthors are martin j gruber sanjiv das and matthew hlavka article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

intertemporal asset pricing with heterogeneous beliefs abstract we examine the behaviour of the interest rate asset prices and asset holdings in an economy with heterogeneous rationally updated beliefs about the expected rate of production growth the equilibrium interest rate is a weighted average of the interest rates that would prevail in economies populated by homogeneous agents with the beliefs of the respective agents in the heterogeneous model the weights are given by the fractions of total wealth held financial innovation affects the dynamics of allocations and prices but preserves the aggregate output process and the structure of equilibrium asset prices also display the wealth weighted average characterization journal of economic literature classification numbers c60 d52 d91 g12

a note on the benefits of homeownership abstract this brief note adds to recent work that attempts to identify externalities associated with homeownership the results suggest that some of the homeownership effect found by green and white is driven by family characteristics associated with homeownership especially residential stability however as much as homeownership increases residential stability it appears to be correlated with higher school attainment attempts to control for endogeneity cannot eliminate this finding

an intertemporal general equilibrium asset pricing model the case of diffusion information this paper provides sufficient conditions for the equilibrium price system and a vector of exogenously specified state variable processes to form a diffusion process in a pure exchange economy the conditions involve smoothness of agents utility functions and certain nice properties of the aggregate endowment process and the dividend processes of traded assets in place of the dynamic programming a martingale representation technique is utilized to characterize equilibrium portfolio policies this technique is useful even when there does not exist a finite dimensional markov structure in the economy and thus the markovian stochastic dynamic programming is not applicable a gents are shown to hold certain hedging mutual funds and the riskless asset in contrast to earlier results the market portfolio does not have a special role in hedging since the markets are dynamically complete when there exists a finite dimensional markov system in the economy the dimension of the hedging demand identified through the markovian dynamic programming may be much larger than that identified by the martingale method copyright 1987 by the econometric society

hot hands in mutual funds short run persistence of relative performance 1974 1988 the relative performance of no load growth oriented mutual funds persists in the near term with the strongest evidence for a one year evaluation horizon portfolios of recent poor performers do significantly worse than standard benchmarks those of recent top performers do better though not significantly so the difference in risk adjusted performance between the top and bottom octile portfolios is six to eight percent per year these results are not attributable to known anomalies or survivorship bias investigations with a different previously used data set and with some post 1988 data confirm the finding of persistence

optimal portfolio choice under incomplete information models of asset pricing generally assume that the variables which characterize the state of the economy are observable however the distributional properties of asset prices that are relevant for portfolio decisions are in general not observable and therefore must be estimated the estimation of expected returns is a particularly difficult problem and estimation errors are likely to be substantial in this light it is reasonable to examine whether the assumption of observability of expected returns and other relevant state variables causes significant mis specification in equilibrium models of asset prices this paper has three main objectives first to derive optimal estimators for the unobservable expected instantaneous returns using observations of past realized returns second to establish that estimation and portfolio choice can be solved in two separate steps third to analyze the impact of estimation error on investment choices the estimators of expected returns are in general not consistent i e the estimation error does not tend to disappear asymptotically the effects of the estimation error therefore cannot be ignored even if realized returns are observed continuously over an infinite time period

the socioeconomic impact of shared appreciation mortgages on borrowers empirical evidence from south australia shared appreciation mortgages sams realign traditional incentives in the lender borrower relationship by substituting future capital gains for interest income this makes them a potentially innovative solution to affordability and other homeownership crises taxation and regulatory barriers have impeded sam development limiting empirical studies of their impact on households this has not been the case in south australia where state government implementation of sams has made available a unique and detailed dataset of low income sam financed households examining this population it is found that sam borrowers benefit from increased budgetary expenditure on discretionary items following take up while simultaneously saving on some non discretionary items relative to a control sample furthermore sam homeownership also seems associated with increased borrower levels of neighbourhood satisfaction and community involvement overall these results indicate that sam financed homeownership leads to changes in borrower behaviour and deserves further consideration by the housing industry and research community

the social and private micro level consequences of homeownership abstract this paper reviews the literature that describes the micro level economic and social consequences of homeownership we adopt an interdisciplinary approach and include studies from economics sociology geography political science psychology and other disciplines our focus is on the set of consequences of homeownership in developed countries our list of potential outcomes of homeownership includes the impact on household wealth and portfolio choice mobility labor force participation urban structure and segregation home maintenance political and social activities health demographics self esteem and child outcomes there is substantial evidence that homeownership has important effects on some household behaviors and outcomes however we find that much of the past 30 year s literature on consequences of homeowning is deficient from a theoretical or econometric perspective we suggest solutions and identify research gaps present in the literature

a theory of optimal timing and selectivity abstract we solve an extended optimal portfolio problem in continuous time for any horizon where we allow the mean and variance of returns to be stochastic introduce fund flows to and from the portfolio permit differential investor preferences for dividend versus growth stocks and allow the investor to buy costly information on the random mean and variance of the portfolio to improve his portfolio choice set this model provides analytical results especially useful in understanding the expenditure on timing and selection information a mutual fund undertakes in attempting to improve performance relative to a benchmark we examine this proposition for growth and income funds long and short investment horizons and also account for fund inflows and outflows we also combine our model of costly learning with the traditional model of incomplete information to understand the interaction between costly and costless learning the approach taken is a purely theoretical one and in this regard the paper is normative in spirit we anticipate that the propositions in this paper will provide two byproducts i a framework for fund managers to think about how to allocate information expenses between timing and selection skills and ii give academics especially empirical researchers a theoretical backdrop against which to examine the mutual fund industry

cost of capital to the hospital sector this paper provides estimates of the cost of equity and debt capital to for profit and non profit hospitals in the u s for the years 1972 83 the cost of equity is estimated using alternatively the capital asset pricing model and arbitrage pricing theory we find that the cost of equity capital using either model substantially exceeded anticipated inflation the cost of debt capital was much lower accounting for the corporate tax shield on debt and capital paybacks by cost based insurers lowered the net cost of capital to hospitals

firm behavior in a market with addiction the case of cigarettes abstract this paper investigates firm behavior when demand is linked over time among other things the theoretical section shows that if firms are forward looking anticipated future events can affect current consumption of an addictive good even when consumers are completely myopic the empirical part of the paper reports a simulation of the 1983 federal cigarette excise tax increase both myopic and rational models of consumer demand give roughly the same predictions for per capita consumption but neither model does very well predicting actual consumption the problem appears to lie in the prediction of price suggesting that supply considerations are important

a model of competitive stock trading volume a model of competitive stock trading is developed in which investors are heterogeneous in their information and private investment opportunities and rationally trade for both informational and noninformational motives i examine the link between the nature of heterogeneity among investors and the behavior of trading volume and its relation to price dynamics it is found that volume is positively correlated with absolute changes in prices and dividends i show that informational trading and noninformational trading lead to different dynamic relations between trading volume and stock returns

on the risk of stocks in the long run a familiar proposition is that investing in common stocks is less risky the longer an investor plans to hold them if this proposition were true then the cost of insuring against earning less than the risk free rate of interest should decline as the investment horizon lengthens this paper shows that the opposite is true even if stock returns are mean reverting in the long run the case for young people investing more heavily than older people in stocks cannot therefore rest solely on the long run properties of stock returns for guarantors of money fixed annuities the proposition that stocks in their portfolios are a better hedge the longer the maturity of their obligations is unambiguously wrong

the role of prices in measuring the poor s living standards in this paper we revisit two pieces of conventional wisdom in the current debate about poverty paying close attention to the price data underlying these findings that the poor pay more than households of higher income for the goods and services they purchase and that poverty rates at least as measured by the u s census have remained essentially flat since the late 1960s raising questions about the success of the policies implemented to reduce poverty by examining scanner data on thousands of household purchases we find that the poor pay less not more for the goods they purchase and by extending the advances on price measurement in the recent decade back to the 1970s we find that current poverty rates are less than half of the official numbers

tourism and discretionary income allocation heterogeneity among households tourism expenditures have been much researched in the past at the aggregate level to evaluate national benefit of the tourism industry and at the disaggregate level to evaluate the attractiveness of tourist market segments past studies however fail to take into account that tourism expenditures are affected by the plethora of other expenditures households make and that households are heterogeneous in allocating discretionary funds to alternative spending options the present study fills this gap by investigating heterogeneity in household discretionary expenditures derived from a realistic choice task in doing so it challenges the implicit paradigm of prior research into tourism expenditures in which the context of the household tradeoff in allocating income is ignored the results highlight the importance of studying tourism expenditure in the context of other household expenditure decisions demonstrate the high level of heterogeneity between individuals with respect to their spending preferences and illustrate the value of this knowledge for tourism destination management as well as government policy in being able to assess the competition between expenditure categories and identify market segments most suitable for the product category offered

arbitrage short sales and financial innovation the authors describe a model of general equilibrium with incomplete markets in which firms can innovate by issuing arbitrary costly securities when short sales are prohibited firms behave competitively and equilibrium is efficient when short sales are allowed these classical properties may fail if unlimited short sales are allowed imperfect competition may persist even when the number of potential innovators is large if limited short sales are allowed perfect competition may obtain in the limit but equilibrium can be inefficient because of the presence of an externality the private benefits of innovation for firms differ from the social benefits copyright 1991 by the econometric society

market timing selectivity and mutual fund performance an empirical investigation this article empirically examines market timing and selectivity performance of a sample of mutual funds it uses a very simple regression technique to separate stock selection ability from timing ability this technique first suggested by treynor and mazuy and later refined by bhattacharya and pfleiderer uses a modified security market line approach to produce individual measures of timing and stock selection ability the inputs to the model are only the returns earned on the fund and those earned on the market portfolio the empirical results indicate that at the individual fund level there is some evidence of superior micro and macroforecasting ability on the part of the fund manager copyright 1990 by the university of chicago

asset pricing in a production economy with incomplete information this paper analyzes an economy in which investors operate under partial information about technology relevant state variables it is shown that for gaussian information structures under incomplete observations the consumer s problem can be transformed into an equivalent program with a completely observed state the conditional expectation of the underlying unobservable state variables a consequence of this transformation is that classic results in finance remain valid under an appropriate reinterpretation of the state variables the static capital asset pricing model capm of sharpe 24 lintner 16 and mossin 20 states that the expected premium on any risky asset is proportional to the premium on the market as a whole this theoretical linear relationship however is subject to criticisms on two grounds first it does not seem to be supported by the empirical evidence second it is based on the premises of a constant opportunity set merton 19 subsequently relaxes this assumption and shows that when the opportunity set fluctuates over time due to changes in the state of the economy individual securities are also priced with respect to selected portfolios funds providing a hedge against unanticipated fluctuations 2 more recently breeden 3 has extended merton s results by emphasizing the role of aggregate consumption in pricing relationships in this paper we seek to further our understanding of asset pricing by relaxing the assumption that investors observe the state of the economy in the mertonbreeden framework observed state variables affect the means and variances of asset returns implying deformations of the opportunity set over time from a practical point of view it seems that this complete information assumption is violated investors in financial markets operate under partial knowledge of the microvariables which influence production and the returns on assets their decisions rely mostly on information through noisy channels such as newspapers technical reviews or weather reports in this paper we attempt to model such

consumption and portfolio policies with incomplete markets and short sale constraints the infinite dimensional case abstract we employ a martingale approach to study a dynamic consumption portfolio problem in continuous time with incomplete markets and short sale constraints we introduce a notion of minimax local martingale and transform the dynamic problem into a static problem of maximizing expected utility over the consumption bundles that satisfy a single budget constraint formed using that measure we establish the existence of and characterize the minimax local measure provide sufficient conditions for the dynamic consumption portfolio problem to have a solution and relate the optimal policies to the solution of quasi linear partial differential equation