international trade and 1992 an overview this paper considers the impact of completing the european internal market 1992 in a convenient short hand on the ec s international trade it concentrates on quantifying the positive aspects of the trade in goods particularly with non ec countries it considers the issue in terms of the traditional concepts of customs union theory discusses what does or does not constitute a 1992 effect and briefly surveys some of the few estimates extant

the pricing and performance of leveraged exchange traded funds abstract leveraged etfs are a recent and very successful financial innovation they provide daily returns that are in a multiple or a negative multiple of the daily returns on a market benchmark in this paper we examine the characteristics trading statistics pricing efficiency and tracking errors of a sample of leveraged etfs we find that these etfs are traded mainly by retail traders with very short holding periods price deviations from nav are small on average but large premiums and discounts are prone to occur more interestingly the behavior of premiums is different between bull i e those with a positive multiple and bear etfs i e those with a negative multiple our findings are consistent with the argument that the end of day rebalancing of the funds exposures increases market volatility at the close of a trading day as for tracking errors they are small for holding periods of up to a week but become increasingly larger for longer horizons

estimation risk when theory meets reality estimation risk occurs in the almost universal situation where parameters of importance for decision making are not known with certainty bayes criterion is the procedure consistent with expected utility maximization in the presence of estimation risk three interrelated problems in the presence of estimation risk are analyzed i the choice of the utility maximizing decision rule in a mean variance framework ii the calculation of certainty equivalent returns and iii the valuation of additional sample information

efta and the internal european market efta and the internal european market victor norman the efta countries must come to grips with the ec s single market this article contrasts two options under the first option the efta countries do not change their current arrangements with the ec under the second option they join the ec s common market since the ec is the efta countries main trading partner significant changes in cost demand and market structures within the ec must substantially affect efta the simulation results focusing on the motor vehicle and pharmaceutical industries confirm that 1992 is important for efta countries not so much because of the threat that an internal ec market represents but rather because of the opportunities that a larger european market offers generally the efta countries would not seem to lose much if they decided to stay outside the internal market but they could share much of the gains if they chose to integrate themselves quantitatively the gain accruing to efta is likely to be greater than the gain to the typical ec country this is because efta home markets are small so that the tradeoff between scale economies and competition is more severe than for the larger ec countries

arbitrage pricing with estimation risk this paper considers the arbitrage pricing theory when investors have incomplete infor mation on the parameters generating asset returns each asset in the economy may have a different amount of information available on it bayesian investors use their prior beliefs in conjunction with the total available information to assign an expected return and a set of factor betas to each asset the assigned expected returns are shown to be linear in their associated factor betas however the factor betas and prices of assets differ from those under complete information specifically risky assets with high low information are priced relatively higher lower on the other hand factor betas of high low information assets are relatively lower higher the analysis has econometric implications for testing the apt in this paper s framework maximum likelihood estimates of factor betas which are based on normality assumptions are too high low for high low information assets in addition sequentially increasing the sample size by adding new securities to a factor analysis procedure can result in the detection of apparent additional priced factors when they do not really exist

european integration and trade flows abstract the objective of this paper is to assess the extent to which the four large european countries are already integrated we study trade flows in the manufacturing sector disaggregated in 29 industries for the period 1975 1985 within the ec and between ec members and the rest of the world first we do not find any strong evidence that integration has receded rather we tentatively conclude that integration has proceeded alongside integration with the rest of the world except for the food industry second we estimate an econometric model which accounts for trade flows within the ec and with the rest of the world we observe that non tariff barriers hamper trade between europe and the rest of the world significantly more than intra european trade

economic integration inter and intra industry trade the case of sweden and the ec when trade is heavily restricted a small country may show a false comparative disadvantage in differentiated products at an early stage in the life cycle because firms are confined to a small domestic market an analysis of changes in the pattern of trade between sweden and the ec after the establishment of free trade in manufactures shows that the swedish net export position improved in industries with high rates of growth in demand and turnover of technology the results provide some support for the hypothesis that an initial swedish disadvantage in product cycle goods caused by the limitations of the domestic market was reduced by the free trade agreement i background the decision to create the ec internal market and the recent eea agreement according to which the efta countries are given an opportunity to participate in the european integration process raises questions regarding the integration effects on trade and specialization this process implies the elimination of a number of nontariff barriers such as border controls discrimination against imports in public procurement and technical barriers to trade as well as general deregulation and promotion of competition swedish participation in the internal market will change the volume and structure of swedish trade with the ec it is not clear however precisely what these effects would be would further integration with the common market result in more inter industry trade and specialization according to

on the diversification observability and measurement of estimation risk this paper reexamines how risk return relationships are affected by investor uncertainty about the exact parameters of the joint rate of return distribution we attempt to clarify results relating to three central issues first we address the issue of diversification focusing on an apt factor model framework second we discuss the observability of estimation risk and describe research experimental designs that should encompass the existence of estimation risk and reveal it in the data finally we suggest exploiting contemporaneous return observations on high and low information securities to aid in the measurement of return parameters for low information securities

equilibrium pricing and portfolio composition in the presence of uncertain parameters abstract we analyze the effect of parameter uncertainty on equilibrium asset prices for the symmetric case when the amount of estimation risk is the same for all securities the existing literature argues that parameter uncertainty is largely irrelevant for equilibrium our results differ we find that symmetric estimation risk affects equilibrium values of relative asset prices expected returns market weights and betas

information and diversity of analyst opinion this paper examines problems in the use of divergence of analyst opinion as a proxy for estimation risk in empirical studies of security returns and asset pricing models we demonstrate that diversity of opinion can increase even though the amount of private information increases and we show that diversity of opinion may overstate estimation risk if the capital market aggregates the information held by investors we produce empirical results consistent with our conclusions specifically we find that divergence of opinion can produce measures of estimation risk that are inconsistent with a received proxy for estimation risk and with observed common stock returns

why do managers explain their earnings forecasts managers often explain their earnings forecasts by linking forecasted performance to their internal actions and the actions of parties external to the firm these attributions potentially aid investors in the interpretation of management forecasts by confirming known relationships between attributions and profitability or by identifying additional causes that investors should consider when forecasting earnings we investigate why managers choose to provide attributions with their forecasts and whether the attributions are related to security price reactions to management earnings forecasts using a sample of 951 management earnings forecasts issued from 1993 to 1996 we find that attributions are more likely for larger firms less likely for firms in regulated industries less likely for forecasts issued over longer horizons more likely for bad news forecasts and more likely for forecasts that are maximum type furthermore attributions are associated with greater absolute price reactions to management forecasts more negative price reactions to management forecasts forecast news held constant and a greater price reaction per dollar of unexpected earnings our findings hold after control for the aforementioned determinants of attributions and after control for other firm and forecast specific variables that are often associated with security prices

the risk and required return of common stock following major price innovations this paper presents empirical evidence demonstrating that the risk and expected returns of common stocks typically change in the aftermath of large price movements when temporary changes in uncertainty follow major financial events subsequent stock returns should be positively correlated with the shift in return volatility this prediction is strongly supported by the data on more than 9 100 daily price change events during 1962 1985 moreover the data also suggest that ex ante returns on common stocks may incorporate a premium for increases in parameter uncertainty associated with the events

costly search and mutual fund flows this paper studies the flows of funds into and out of equity mutual funds consumers base their fund purchase decisions on prior performance information but do so asymmetrically investing disproportionately more in funds that performed very well the prior period search costs seem to be an important determinant of fund flows high performance appears to be most salient for funds that exert higher marketing effort as measured by higher fees flows are directly related to the size of the fund s complex as well as the current media attention received by the fund which lower consumers search costs

the impact of fraudulent false information on equity values there are two types of stock price manipulation examined in the theoretical literature 1 insider trading which involves private information that is true and 2 the public spreading of fraudulent false information while there is a large empirical literature on insider trading this is the first empirical article to examine the impact of false fraudulent public information on stock prices and trading volume we find that such false information even after being denied by a credible source such as the sec generates both abnormal returns and abnormal trading volume we also find that the effects of the false information on security returns and volume can be persistent for at least 2 weeks in addition we show that perpetrators of false news attacks can make potentially large profits from such market manipulations

risk ambiguity and the exercise of employee stock options abstract we investigate the importance of ambiguity or knightian uncertainty in executives stock option exercise decisions we develop an empirical estimate of ambiguity and include it in regression models alongside the traditional measure of risk equity volatility we show that each variable has a significant effect on the timing of option exercises with volatility causing executives to hold options longer to preserve option value and ambiguity increasing the tendency for executives to exercise early

investment performance of shorted leveraged etf pairs abstractwe analyze investment strategies involving triple leveraged and inverse triple leveraged etf pairs by simulating daily returns over a 48 year period our results show that many such strategies significantly outperform the s p 500 on a risk adjusted basis for example when shorting the bear triple leveraged etf and the bull triple leveraged etf in a 2 1 proportion while going long treasuries we find that the average annual sharpe ratio is more than four times higher than for the s p 500 and that the strategy outperforms the s p 500 in 43 of the 48 years our results are robust to variations in bear bull proportions rebalance thresholds and underlying parameters

do leveraged exchange traded products deliver their stated multiples abstract using the longest history of a u s equity market index this paper simulates the return deviation and multiple deviation for leveraged exchange traded products letps with different rebalancing frequencies including daily monthly annually and every five years over various holding periods we find that the general perception that daily rebalanced letps are not suitable for long term strategies is not substantiated advancing the analysis we construct a comprehensive framework that determines the deviation of an letp s effective multiple from its stated product multiple under various rebalancing frequencies and holding period scenarios the empirical framework and results from this paper hold the promise of guiding regulators policy makers and investors in their understanding of the tracking performance of letps

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

religion ethics and stock trading the case of an islamic equities market islamic banking based on the prohibition of interest is well established throughout the muslim world attention has now turned towards applying islamic principles in equity markets the search for alternatives to western style markets has been given added impetus in muslim countries by the turmoil in asian financial markets in 1997 common stocks are a legitimate form of instrument in islam but many of the practices associated with stock trading are not in this paper the instruments traded and the structure and practices of stock markets are examined from an islamic perspective speculation is not acceptable in islam and measures would have to be taken to control speculative trading in addition short selling and margin trading are severely restricted the use of stock index and equity futures and options are also unlikely to be acceptable within an islamic market regulatory authorities in muslim countries will therefore find a vast array of problems in attempting to structure a trading system that will be acceptable

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

parameter based decision making under estimation risk an application to futures trading this study shows how the standard portfolio model of futures trading should be modified when there is less than perfect information about the relevant parameters estimation risk the standard and the optimal decision rules for futures trading in the presence of estimation risk are compared and discussed an operational model of futures trading for use under estimation risk is advanced in the presence of relevant prior and sample information the model can be used to optimally blend both types of information many of the contributions of economic theory to the study of financial markets involve the use of parameters that are assumed known or estimable by the economic agents examples include the risk premium coefficient 18 and the security market lines that underlie the capital asset pricing model the volatility measures required for option pricing and the minimum variance hedge ratio and expected basis used to construct portfolios of futures contracts and cash positions generally it is left to practitioners to provide estimates of these parameters which are then directly substituted for the actual parameter values of the theoretical model whenever textbooks demonstrate how these parameters can be estimated there is usually a cookbook formula provided that requires some relatively straightforward analysis of the relevant data e g marshall 1989 chapters 6 and 7 cox and rubinstein 1985 chapter 6 the problems with the procedure described above are twofold first the theory has been slow to acknowledge that the practical application of the model almost always involves parameter estimates generally the additional risk of not knowing the true parameters is completely neglected second practitioners or the market participants will often have some type of nonsample information such as insider information or subjective priors that seems relevant for decision making however this potentially important information is ignored altogether when only sample data are used to obtain the parameter estimates

the wandering weekday effect in major stock markets this paper reports a wandering weekday effect the pattern of day seasonality in stock market returns is not fixed as assumed in the monday or weekend effects but changes over time analysing daily closing prices in eleven major stock markets during 1993 2007 our results show that the wandering weekday is not conditional on average returns in the previous week the twist in the monday effect nor does it diminish through the period of analysis the results have important implications for market efficiency and help to reconcile mixed findings in previous studies including the reported disappearance of the weekday effect in recent years

daily momentum and contrarian behavior of index fund investors we use a two year panel of individual accounts in an s p 500 index mutual fund to examine the trading and investment behavior of more than 91 000 investors who have chosen a low cost passively managed vehicle for savings we identify classes of momentum investors and contrarian investors we use these classes to build up behavioral factors based on contrarian and momentum flows and we show that they are relevant for pricing they perform well against a benchmark of loadings on latent factors extracted from returns

empirical estimates of beta when investors face estimation risk we examine empirical implications of models of differential information that formalize the following intuition securities for which there is relatively little information are perceived as relatively more risky because of the greater uncertainty surrounding the exact parameters of their return distributions the implication that beta risk for low information firms should decline as information increases is confirmed with several data sets we find such a decline over the first geveral periods subsequent to initial public offerings and initial listings there is also an abrupt risk decline at the first annual earnings announcement this paper examines several empirical implications of security return models involving differential information these models formalize the following intuition securities for which there is relatively little information are perceived as relatively more risky because of the greater uncertainty surrounding the exact parameters of their return distributions the research relates to two streams of literature the first revolves around the new issues and new listings market it begins with ibbotson 1975 and includes for example ritter 1984 beatty and ritter 1986 mcconnell and sanger 1987 and muscarella and vetsuypens 1989 the second is the literature dealing with the effects of differential information on the risk assessment of low information firms this second literature is exemplified by the work of klein and bawa 1976 1977 and barry and brown 1984 1985 in our examination we focus on how increased risk associated with low information firms henceforth called estimation risk manifests itself in observed return data we explore how observed security returns to low information firms appear to researchers in relation to how they appear ex ante to investors who base their predictive distribution of security returns on incomplete information about the parameters of the return generating process we also examine data on new listings and new issues to exemplify some of the relationships the data support the most obvious and direct implication of the differential information model that the expected systematic risk of low information firms decreases as time passes and information increases our evidence as in ibbotson that risk declines with seasoning rejects a restrictive null hypothesis that information risk is diversifiable and the under

solving the return deviation conundrum of leveraged exchange traded funds the large deviation of the actual return of a leveraged exchange traded fund letf from the leveraged multiple of the underlying index return has drawn considerable attention from investors regulators and the financial media despite this attention the sources and fundamental determinants of the letf return deviation remain unidentified this study constructs a clear unified objective and executable framework that addresses the behaviors sources and determinants of the letf compounding and noncompounding deviations our theoretical predictions and empirical results hold the promise of guiding investors regulators financial advisors and portfolio managers toward a thorough understanding of the return behavior of letfs

efficiency and the bear short sales and markets around the world we analyze cross sectional and time series information from 46 equity markets around the world to consider whether short sales restrictions affect the efficiency of the market and the distributional characteristics of returns to individual stocks and market indices we find some evidence that prices incorporate negative information faster in countries where short sales are allowed and practiced a common conjecture by regulators is that short sales restrictions can reduce the relative severity of a market panic we find strong evidence that in markets where short selling is either prohibited or not practiced market returns display significantly less negative skewness

short sales and speed of price adjustment evidence from the hong kong stock market abstract we present empirical evidence that short sales contribute to market efficiency by increasing the speed of price adjustment to not only private public firm specific information but also market wide information shortable stocks are characterized by weaker trade continuity and stronger quote reversals they adjust faster to new information than non shortable counterparts these findings remain robust even in an up market condition in which short sales are not binding the amount of information incorporated in each trade is also significantly higher for shortable than non shortable stocks in both up and down market conditions after controlling for firm size trading volume liquidity price and option trading short sales stand out as one of the significant factors that speed up the price adjustment

exchange traded funds leverage and liquidity abstractthis paper examines the differences between leveraged and unleveraged exchange traded funds etfs particularly for liquidity and volatility characteristics the impact of leverage on intraday liquidity spread and depth is analysed in two periods one of normal volatility and the other of abnormal high volatility there is a significant difference in spread and depth of leveraged and unleveraged etfs in periods of both normal volatility and high volatility however this difference is more pronounced in higher volatility periods in high volatility periods liquidity typically diminishes in all etfs and this is even more so for the leveraged etfs when leveraged etfs are segregated into multiples based on their power to replicate the underlying benchmark i e multiples of 3 2 1 2 3 the difference in spreads between normal and high volatility periods is typically larger the double leveraged etf has the most significant difference between the positive and negative counter parts howe

the performance of us equity mutual funds the paper examines the performance of us no load equity mutual funds fund performance is derived using stochastic frontier analysis for a flexible functional form this analysis allows us to derive parametric estimates of efficiency scores for each fund in our sample for the first time in the literature our results indicate that us no load equity funds display varying levels of efficiency over time but also depending on size and on investment style robustness analysis reaffirm the efficiency scores remain consistent across different selections of inputs and outputs as well as the underlying distribution of the return having estimated each fund s efficiency in the sample we unveil their underlying dynamics also with respect to risk and operational characteristics such as flows assets and morningstar star ratings panel var estimations reveal that the response of funds efficiency to a shock in risk is positive and substantial some evidence of reverse causality is also observed finally we extend our analysis to investigate the relationship between funds performance and key covariates across subgroups defined by size

the pricing of convertible debt offerings abstract we present the first empirical evidence on the pricing of convertible debt offerings using a sample of 91 convertible debt offerings from the period 1988 1992 we show a significant mean initial excess return of 1 11 our underpricing result is invariant to zero nonzero coupons maturity issue size or bond ratings further analysis reveals that various types of risk inherent in the new convertible issues are useful in explaining the cross sectional variation in the initial excess returns we offer an explanation for our results based on the arguments of the differential information model

gambling and speculation this paper deals with an important policy issue concerning an individual s economic freedom and social justice the issue to be studied is related to gambling and speculative business activities it is argued that since certain speculative business prac tices such as futures trading speculative practices in the stock market etc resemble gambling they should be classified as a form of public gambling and abolished completely or else as a matter of social justice all public gambling should be legalized so that those individuals not having access to the speculative market could participate in public gambling also the following discussion focuses primarily on public gambling although the arguments presented apply to private gambling as well private gambling as distinguished from public gambling lacks an entrepreneur a formal organization free market competition among rival entrepreneurs mass par ticipation and large rewards the above policy issue rests on two key assump tions first it is assumed that speculative business practices and gambling are similar in nature and therefore can be treated as the same thing second there is the notion that gambling is socially undesir able and or immoral otherwise there would be no legal or religious sanctions against it it becomes

predictable events and excess returns the case of dividend announcements abstract this paper hypothesizes that the risk per unit of time and the required rate of return are higher than normal during an event period whose timing can be predicted consistent with this hypothesis this paper presents empirical evidence indicating that the unconditional mean rate of return the variance of stock returns and their systematic risk are higher than usual during dividend announcement periods however the documented increases in the systematic risk are not large enough to fully explain the excess returns this finding is puzzling and hard to reconcile with existing theory

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

options short sale constraints and market efficiency a new perspective this paper undertakes a new investigation of the potential for options to mitigate short sale constraints i find that option introduction alleviates 79 of the price adjustment efficiency disparity between short sale constrained and unconstrained stocks in relation to negative news no significant improvement in adjustment efficiency is found in response to positive information these results are robust to controls for endogeneity biases associated with the option introduction selection process further i find evidence that post option improvement in efficiency is similar in relation to private and public information this suggests that short sale constraint effects stem at least in part from an irrational optimism bias or another behavioral source as suggested theoretically by miller 1977 collectively these results suggest that options act as an effective substitute to short sales significantly contributing to the informational efficiency of the market

differential information and security market equilibrium we propose a simple model of equilibrium asset pricing in which there are differences in the amounts of information available for developing inferences about the returns parame ters of alternative securities in contrast with earlier work we show that parameter uncer tainty or estimation risk can have an effect upon market equilibrium under reasonable conditions securities for which there is relatively little information are shown to have relatively higher systematic risk when that risk is properly measured ceteris paribus the initially very limited model is shown to be robust with respect to relaxation of a number of its principal assumptions we provide theoretical support for the empirical examination of at least three proxies for relative information period of listing number of security returns observations available and divergence of analyst opinion

implications of the discreteness of observed stock prices stock prices on the organized exchanges are restricted to be divisible by 1 8 therefore the true price usually differs from the observed price this paper examines the biases resulting from the discreteness of observed stock prices it is shown that the natural estimators of the variance and all of the higher order moments of the rate of returns are biased an approximate set of correction factors is derived and a procedure is outlined to show how the correction can be made the natural estimators of the beta and of the variance of the market portfolio on the other hand are nearly unbiased the behavior of stock prices has been an issue of interest to the financial economist for many years this interest resulted in a growing number of empirical studies which attempt to estimate this behavior e g blattberg and gonedes 2 fama 6 fama and roll 7 8 barnea and downes 1 to date stock price behavior is estimated under the assumption that the observed trading price is the true equilibrium price however observed stock prices and stock price changes on the organized exchanges are restricted to multiples of 1 8 of a dollar 1 therefore if the true distribution of stock prices is continuous an observed trading price can be different from the true price this paper examines the biases in estimating the moments of stock price changes caused by the discreteness of observed stock prices the major focus of the paper is in noting this problem providing a model which explains the source of these biases and quantifying their size section i demonstrates that due to the discrete nature of observed stock prices the natural estimators for the variance and for the higher order moments of the rate of returns are biased upward this bias is larger for stocks with lower prices and smaller standard deviation for instance assuming that the standard deviation a is 0 001 the stock price is one dollar the true probability distribution of stock prices is lognormal and the observed prices are as close as possible to the true prices then the natural estimator of r has expectation 0 01400 hence it is biased upward by 1300 significant biases have important implications in option pricing we derive an approximate set of correction factors which can be applied to the

accounting information disclosure and the cost of capital in this paper we examine whether and how accounting information about a firm manifests in its cost of capital despite the forces of diversification we build a model that is consistent with the capital asset pricing model and explicitly allows for multiple securities whose cash flows are correlated we demonstrate that the quality of accounting information can influence the cost of capital both directly and indirectly the direct effect occurs because higher quality disclosures affect the firm s assessed covariances with other firms cash flows which is nondiversifiable the indirect effect occurs because higher quality disclosures affect a firm s real decisions which likely changes the firm s ratio of the expected future cash flows to the covariance of these cash flows with the sum of all the cash flows in the market we show that this effect can go in either direction but also derive conditions under which an increase in information quality leads to an unambiguous decline in the cost of capital

index composition changes and the cost of incumbency abstract this paper provides evidence of information effects and portfolio rebalancing effects that occur when stocks are added to or excluded from the sp however the portfolio rebalancing effects dominate the industry information effects

infrequent rebalancing return autocorrelation and seasonality a model of infrequent rebalancing can explain specific predictability patterns in the time series and cross section of stock returns first infrequent rebalancing produces return autocorrelations that are consistent with empirical evidence from intraday returns and new evidence from daily returns autocorrelations can switch sign and become positive at the rebalancing horizon second the cross sectional variance in expected returns is larger when more traders rebalance this effect generates seasonality in the cross section of stock returns which can help explain available empirical evidence

the empirical minimum variance hedge decision making under unknown true parameters estimation risk is discussed along with bayes and parameter certainty equivalent pce criteria bayes criterion incorporates estimation risk in a manner consistent with expected utility maximization the pce method which is the most commonly used is not consistent with expected utility maximization bayes criterion is employed to solve for the minimum variance hedge ratio empirical application of bayes minimum variance hedge ratio is addressed and illustrated simulations shoe that discrepancies between prior and sample parameters may lead to substantial differences between bayesian and pce minimum variance hedges

on the behavioral differences between professional and amateur investors after the weekend abstract this paper compares the trading patterns of amateur and professional investors during the days following the weekend the comparison is based on all the daily transactions of a large sample of both amateurs and professionally managed investors in a major brokerage house in israel from 1994 to 1998 we find that weekends influence both amateurs and professional investors however they affect them in opposite directions individuals increase both their buy and sell activities and their propensity to sell rises more than their propensity to buy professionals on the other hand tend to perform fewer buy as well as sell trades after the weekend but unlike individuals the drop in their activity is almost the same for buy trades and for sell trades the results agree with previous hypotheses raised in the literature which were not directly tested about the effects of the weekend on the predisposition to trade of individuals and institutions in other markets we also find that returns on the israeli stock market index are correlated in general with the behavioral patterns exhibited by the investors in our sample in particular the returns on the days following the weekend are lower than those in other weekdays in a manner consistent with the behavioral patterns we found

the effect of holdings data frequency on conclusions about mutual fund behavior abstract a number of articles in financial economics have used quarterly or semi annual mutual fund holdings data to test hypotheses about investment manager behavior this article reexamines four well known hypotheses in finance to determine whether the results of prior tests of these hypotheses remain valid when higher frequency monthly holdings data are employed the areas examined are momentum trading tax motivated trading window dressing and tournament behavior we find that the use of monthly holdings data rather than quarterly holdings data or in the case of tournament behavior holdings data rather than monthly return data change and in some cases reverse previous results this occurs because monthly holdings data capture a large number of trades missed by quarterly data 18 5 of the trades and permit a more precise estimation of the timing of trades

the dynamics of short term mutual fund flows and returns a time series and cross sectional investigation abstract this study analyzes the dynamics of daily mutual fund flows a vector auto regression var of flows and returns shows that the behavior of fund investors is more consistent with contrarian rather than momentum characteristics past fund flows have a positive impact on future fund returns with the long term information effect dominating the transient price pressure effect seasonality in daily flows such as day of week and day of month patterns are present and daily flows are generally mean reverting probit regressions indicate that fund investment objective marketing policy and level of active management explain cross sectional variation in the behavioral patterns displayed in daily flows our results are robust to the different methods of calculating daily flows based on whether or not the day end tna figures include the current day s flow throughout the analysis we contrast the dynamics of daily flows with established results for monthly fund flows and find important differences between the two

trade liberalization in a multinational dominated industry abstract existing theoretical models in the trade industrial organization literature assume almost exclusively that firms are national enterprises so that there is no international coordination by multinational firms we develop a model in which multinationals compete among themselves but coordinate production pricing and sales decisions across multiple plants and markets free entry and exit is assumed and cases in which the multinationals can and cannot segment markets are considered the model is simulated using data from the north american auto industry results are compared with a counter factual model calibrated to the same data which assumes national ownership of firms

on the perils of financial intermediaries setting security prices the mutual fund wild card option economic distortions can arise when financial claims trade at prices set by an intermediary rather than direct negotiation between principals we demonstrate the problem in a specific context the exchange of open end mutual fund shares mutual funds typically set fund share price nav using an algorithm that fails to account for nonsynchronous trading in the fund s underlying securities this results in predictable changes in nav which lead to exploitable trading opportunities a modification to the pricing algorithm that corrects for nonsynchronous trading eliminates much of the predictability however there are many other potential sources of distortion when intermediaries set prices copyright the american finance association 2001

an empirical analysis of the dynamic relationship between mutual fund flow and market return volatility abstract we study the dynamic relation between aggregate mutual fund flow and market wide volatility using daily flow data and a var approach we find that market volatility is negatively related to concurrent and lagged flow a structural var impulse response analysis suggests that shock in flow has a negative impact on market volatility an inflow outflow shock predicts a decline an increase in volatility from the perspective of volatility flow relation we find evidence of volatility timing for recent period of 1998 2003 finally we document a differential impact of daily inflow versus outflow on intraday volatility the relation between intraday volatility and inflow outflow becomes weaker stronger from morning to afternoon

on equilibrium pricing under parameter uncertainty prior theoretical work on estimation risk generally has been restricted to single period returns based models in which the investor must estimate the vector of expected returns but the covariance matrix is known this paper extends the literature on parameter uncertainty in several ways first we analyze asymmetric parameter uncertainty in a model based on payoffs second we explore the effects of both symmetric and asymmetric estimation risk on equilibrium asset prices when the covariance matrix for payoffs must also be estimated finally we investigate the effects on equilibrium of asymmetric parameter uncertainty in a simple multiperiod model

ethical issues related to the mass marketing of securities this paper examines ethical issues involved in the mass marketing of securities to individuals the marketing of products deemed socially questionable or sinful like tobacco and alcohol has long been recognized as posing special ethical challenges kotler p and s levy 1971 harvard business review 49 74 80 davidson d k 1996 selling sin the marketing of socially unacceptable products quorum press westport we contend that marketers should consider securities i e common stock options in a similar vein as a potentially dangerous product given the inherent volatility of equity prices responsible marketers need to exercise caution and restraint in promoting securities we evaluate whether the nyse s current guidelines adequately encourage ethical marketing practices and deter unethical ones using recent examples of controversial brokerage advertisements we expose weaknesses in the exchange s vague injunction that members not mislead reasonable people by making exaggerated claims in their communications from a moral perspective we find it troublesome that intentionality need not be present for a promotion to be considered misleading also problematic is the continued invocation of the reasonable person standard to judge the propriety of advertisements we close with some thoughts on improving the quality of securities marketing we suggest that the nyse in the interests of fostering higher ethical behavior among member marketers may need to revive a marketing code of conduct prevalent on wall street in an earlier era

equilibrium factor pricing with heterogeneous beliefs this paper develops an equilibrium factor pricing theory when investors have heterogene ous beliefs about asset payoffs generated by the ross linear factor model investors receive private information about the unknown parameters of the payoff process they use this private information and equilibrium prices to predict asset payoffs the paper de velops a closed form price function for a noisy rational expectations equilibrium and relates it to the general solution even though we allow for a large number of investors diversity of beliefs and parameter uncertainty both persist in equilibrium we show that investors beliefs about expected payoffs are approximately linear in the asset s betas thus establishing the apt as investors prefer to hold high information assets in equilib rium the relative weight of these assets in the apt pricing bound is higher the reverse is true for low information assets

the business ethics of short selling and naked short selling the controversy over short selling has continued unabated from the introduction of modern equity trading in amsterdam in 1610 to the present day nevertheless the business ethics literature has not really addressed short selling short sellers not only profit from the misery of others they also create it through their selling activities however they also provide a socially useful service by making prices better reflect true values protecting other investors from purchasing overpriced securities short sellers can also help to provide liquidity in the markets recently there has been a hue and cry against so called naked short selling which involves not delivering the shares that have been sold this gives manipulators a tool for depressing stock prices and deprives purchasers of voting rights and potential stock lending revenue naked short selling creates ethical issues for short sellers buyers brokers market makers and regulators is it ethical to exploit a legal loophole that permits sellers to sell stock and delay delivering shares indefinitely

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

comparative advantage terms of trade and welfare effects of european integration some preliminary assessments in this attempt at assessing general equilibrium effects of 1992 two kinds of general equilibrium effects are relevant one dampening effect stems from common resource constraints and the other is related to changes in the relative competitiveness of industries as a consequence of integration this paper focuses on the second type of general equilibrium effects the results show that there may be additional gains for the ec stemming from terms of trade improvements and reduced dependence on protected industries general equilibrium assessments for norway are also presented under various assumptions regarding norwegian participation in the integration process copyright 1992 by the editors of the scandinavian journal of economics

a bayesian approach to modeling stock return volatility for option valuation new measures of stock return volatility are developed to increase the precision of stock option price estimates with bayesian statistical methods volatility estimates for a given stock are developed using prior information on the cross sectional patterns in return volatil ities for groups of stocks sorted on size financial leverage and trading volume call option values computed with the bayesian procedure generally improve prediction accuracy for market prices of call options relative to those computed using implied volatility standard historical volatility or even the actual ex post volatility that occurred during each option s life although the bayesian methods produce biased call price estimators they do reduce the systematic tendency of standard pricing approaches to overprice underprice options on high low volatility stocks little bias improvement is observed with respect to the time to maturity and moneyness of the call options

does the buck stop here a comparison of withdrawals from money market mutual funds with floating and constant share prices recent reform proposals call for an elimination of the constant net asset value nav or buck in money market mutual funds to reduce the occurrence of runs outside the united states there are several countries that have money market mutual funds with and without constant navs using daily data on individual fund flows from these countries this paper evaluates whether the reliance on a constant nav is associated with higher fund redemptions the data suggest that funds with a constant nav experienced more negative net flows during the period of the run on the reserve primary fund even after controlling for measures of fund risk and risk aversion however i do not find convincing support for the hypothesis that the effect of sponsor strength on fund flows was stronger for constant nav money market funds