estimation methods in portfolio selection and the effectiveness of short sales restrictions uk evidence forecasting the mean returns vector and the covariance matrix is a key feature in implementing portfolio theory the performance of the bayes stein method for forecasting these parameters for use in the markowitz model with and without short sales was compared with that of seven other estimation methods and three alternative portfolio selection techniques this paper represents the first large scale empirical investigation of the usefulness of the bayes stein approach using historical data this data was drawn from the london stock exchange in contrast to earlier studies the relative performance of bayes stein was mixed while it produced reasonable estimates of the mean returns vector there were superior methods e g overall mean for estimating the covariance matrix when short sales were permitted when short sales were prohibited actual portfolio performance was clearly improved although there was little to choose between the various estimation methods

a stylized model of home buyers and bankers behaviours during the 2007 2009 us subprime mortgage crisis a predatory perspective abstractwe examine the behaviour of market agents during the years leading to the 2008 us subprime mortgage crisis using a stylized capital asset pricing model model in our study an average investor eager to make money by flipping houses meets a banker who offers him subprime mortgage deals we refer to recent research that shows the mechanics of the psychological and behavioural components of these two market agents in particular much in line with the famous stanford experiment it is assumed that investors adopt a predator or a prey position our analysis shows that given a historical tendency towards financial predatory acts on the part of market agents including buyers government regulations should be adapted and strengthened to face this dooming reality

more on estimation risk and simple rules for optimal portfolio selection for the risk averse investor consideration of estimation risk is important in selecting an expected utility maximizing portfolio it has previously been shown that the composition of the tangency portfolio is unaffected by the recognition of estimation risk if the full covariance model is used alternatively if the market model is used the composition of the tangency portfolio has been shown to be affected by the recognition of estimation risk however as is demonstrated in this paper the effect will generally not be as substantive as previously believed and in many situations can be safely ignored in order to determine the composition and location of an efficient frontier from which an optimal portfolio will be selected the investor must employ estimates of expected returns variances and covariances for the set of securities under consideration if the investor simply treats the estimated parameter values for the securities as true parameter values then estimation risk will have been ignored and as shown by barry 1 and klein and bawa 14 15 a suboptimal portfolio will most likely have been selected bawa brown and klein 6 and klein and bawa 14 discuss the effects of estimation risk on the selection of an optimal portfolio from a set of risky assets and note that the location but not the composition of the efficient frontier changes when estimation risk is recognized if security returns are generated by a stationary multivariate normal distribution for which the investor has a diffuse prior furthermore brown 8 has shown these results to be robust for severe misspecification of the underlying multivariate distribution of returns e g assuming it to be normal when in actuality it is student t with small degrees of freedom this paper is concerned with the effects of estimation risk on the composition of the tangency portfolio derived from a set of risky assets and a risk free asset under the assumption that the investor has a diffuse prior 1 barry 2 bawa and brown 4 and brown 7 have shown analytically that the composition of the tangency portfolio is unaffected by estimation risk if the full covariance model is used chen and brown 10 have expanded upon the work of brown 9 and have argued that if security returns are generated by the market model then the composition of the tangency portfolio will be substantively different when estimation risk is recognized

short sales are almost instantaneously bad news evidence from the australian stock exchange this paper investigates the market reaction to short sales on an intraday basis in a market setting where short sales are transparent immediately following execution we find a mean reassessment of stock value following short sales of up to 0 20 percent with adverse information impounded within fifteen minutes or twenty trades short sales executed near the end of the financial year and those related to arbitrage and hedging activities are associated with a smaller price reaction trades near information events precipitate larger price reactions the evidence is generally weaker for short sales executed using limit orders relative to market orders this article analyzes the intraday price behavior surrounding short sales executed using market and limit orders within a transparent setting a number of recent studies have focused on daily or monthly stock price behavior surrounding short selling activity in u s markets e g senchack and starks 1993 figlewski and webb 1993 conrad 1994 hanley and seyhun 1994 asquith and meulbroek 1996 and dechow et al 1997 this research has been motivated by the continued interest of market regulators i n short selling activity and the controversy surrounding the desirability restrictions and disclosure requirements related to short selling see janvey 1992 and ramsay 1993 in particular several studies such as that by figlewski and webb 1993 have examined the relationship between short positions and subsequent abnormal returns without finding a strong relationship asquith and meulbroek 1996 in contrast focus on firms with large short positions and find a strong and consistent relationship dechow et al 1997 find a correlation between short selling strategies and strategies based on fundamental analysis these results are consistent with short sellers being able to identify

a critical appraisal of the effectiveness of uk perennial energy crops policy since 1990 abstract energy crops are cultivated primarily for bioenergy production but can also have wider benefits to agriculture and the environment policies put in place in the uk and europe have promoted bioenergy and the growth of energy crops despite the various policy support mechanisms the cultivation of perennial energy crops has proceeded at a low rate this study rigorously analyses some of the key uk bioenergy policies since 1990 to assess why perennial energy crops have not fulfilled their potential the uk energy crops market is scrutinised and shows the industry is still nascent compared to government aspirations case studies of both successful and unsuccessful projects are evaluated to reveal how effective different policies have been in establishing uk perennial energy crops this original review shows significantly that none of the projects initiatives or schemes described can be viewed as an absolute success the main obstacles that have hindered progress include the lack of long term supportive energy crops policy the failure of headline projects and organisations the lack of competitiveness of long term perennial crop options compared to annual crops bureaucracy of schemes over ambitious projects and large scale support schemes tending to favour imported biomass rather than support domestic supply 25 years of failed energy crops policy suggests there needs to be a long term strategy future support for the sector must join up policy between different government departments to recognise multi functional benefits of perennial energy crops support mechanisms could aim to provide a competitive advantage for local supply and use and improve management of cashflows during establishment the risk burden should be shared between suppliers and end users smaller scale projects using established technologies are required with energy crops introduced in a phased manner supply side measures need to be balanced with demand side incentives to link supply with end user markets

cautious risk takers investor preferences and demand for active management actively managed mutual funds have distinct return distributions from their passive benchmarks and our theoretical analysis using tail sensitive risk preferences suggests that active value and growth funds may serve to reduce downside risk and capture upside potential respectively furthermore tail sensitivity measures estimated from the empirical pricing kernel have significant explanatory power for active fund flows even after controlling for business cycles and market wide sentiment finally active funds unlike their passive counterparts have exposures to option strategies hedging downside risk or capturing upside potential

portfolio optimization with tracking error constraints this article explores the risk and return relationship of active portfolios subject to a constraint on tracking error volatility tev which can also be interpreted in terms of value at risk such a constrained portfolio is the typical setup for active managers who are given the task of beating a benchmark the problem with this setup is that the portfolio manager pays no attention to total portfolio risk which results in seriously inefficient portfolios unless some additional constraints are imposed the development in this article shows that tev constrained portfolios are described by an ellipse on the traditional mean variance plane this finding yields a number of new insights because of the flat shape of this ellipse adding a constraint on total portfolio volatility can substantially improve the performance of the active portfolio in general plan sponsors should concentrate on controlling total portfolio risk

comparisons and combinations of long and long short strategies market neutral long short strategies get their returns from alphas and short rebates long strategies get their returns from alpha and the market differing return and risk sources complicate their comparison partly because of the strong market referenced focus of conventional performance analysis compelling theoretical advantages of active return per unit of active risk suggest that long short strategies are better able to deliver excess return than are conventional institutional long strategies long short strategies even with tiny positive alphas are seen to improve investors efficient frontiers when added to a traditional t bill long portfolio mix mostly because their risk sources are uncorrelated surprisingly the improvement occurs even if long short strategies are sharpe ratio inferior to long strategies these results provide theoretical support for including long short strategies in most investors mix of assets

portfolio analysis with factors and scenarios recently there has been a growing interest in the scenario model of covariance as an alternative to the one factor or many factor models we show how the covariance matrix resulting from the scenario model can easily be made diagonal by adding new variables linearly related to the amounts invested note the meanings of these new variables note how portfolio variance divides itself into within scenario and between scenario variances and extend the results to models in which scenarios and factors both appear where factor distributions and effects may or may not be scenario sensitive

determinants of technical efficiency in the bioenergy industry in the eu28 region most previous bioenergy industry research has concentrated on how to implement a certain level of yield however few articles have paid attention to rational resource allocation to increase efficiency to enhance bioenergy production through proper use of available resources this study identified the effects of internal country specific and external macroeconomic determinants of technical efficiency level in the bioenergy industry for the eu28 region the study was established based on a conceptual framework suggesting a correlation between input use and level of technical efficiency a panel data analysis method was employed for the analysis and a panel regression analysis framework based on the fixed effect fe model and random effect re model was used to examine the potential determinants of technical efficiency level in the bioenergy industry for the eu28 region for the period between 1990 and 2013 the results indicate that the technical efficiency level of the bioenergy industry in developing countries is higher than in developed countries the empirical findings also suggest that technical efficiency has greater influence on pure technical efficiency levels capital input labor input gross domestic product inflation and interest rate significantly affected the technical efficiency of the bioenergy industry in the developing and developed countries in the eu28 region during the period of this study the findings clearly call for regulators and decision makers to review the technical efficiency level of the bioenergy industry within the eu28 region this study also provides better information and guidance to the boards of the bioenergy industry as they need to have a clear understanding of the influence technical efficiency has on bioenergy production performance moreover the results of this study have implications for investors who focus mainly on profits from their investments

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

exploring the determinants of emerging bioenergy market participation abstract individual biomass producers will play a strong role in the emergence of robust and sustainable bioenergy markets research on what drives their participation however is substantial but fragmented despite a recognition of producer heterogeneity there have also been few comparative analyses of drivers of bioenergy market participation across feedstock types producer groups and geographic regions through narrative review and network analysis the following review of the bioenergy market participation literature generates both an increased appreciation of how bioenergy market participation is assessed in existing research and how social network analysis may be further employed as a tool for literature review across 41 studies selected for qualitative review and a subset of 22 selected for quantitative review the analysis reaches two central conclusions the first pertains to the findings of the literature itself suggesting that a variety of non production objectives structural and social constraints and market related attributes influence bioenergy market participation decisions a second conclusion is that the assessment of these factors varies significantly across the literature for both user group and feedstock type further examination of the individual variables within these segments of the literature as well as of authorship patterns across them suggests that this variation may rise from differences in the subject matter itself and not from differing perspectives of the researchers undertaking the work should disparities in the literature be reflective of actual socio economic differences in their respective markets policies or programs targeted to individual feedstock types or user groups may be more effective in encouraging participation than uniform national policy initiatives

portfolio selection under institutional procedures for short selling normative and market equilibrium considerations abstract in view of the acceptance of short selling of stocks as an investment tool in the portfolio context by a growing number of institutional investors in recent years the present study considers both normative and market equilibrium aspects of portfolio selection with short selling under the full information covariance structure of security returns the study accurately captures institutional procedures for short selling without sacrificing analytical tractability while short selling enhances the portfolio s risk return trade off from a normative perspective the equilibrium analysis reveals that there is a continuum of market clearing prices within two boundaries for each security economic implications of the equilibrium pricing relationship are also explored in the study

on optimal production and the market to book ratio given limited shareholder diversification our purpose is to examine a firm s optimal output decision and valuation when its shareholders hold a limited number of risky assets the primary theoretical result indicates that the market to book ratio is a function of the degree of shareholder diversification our theory suggests a negative relationship between a firm s market to book ratio and shareholder diversification

the optimal selection of small portfolios portfolios that are risk return efficient in the sense of markowitz sometimes contain too many securities to be attractive to the small investor an optimal portfolio subject to a size constraint can be found by an implicit enumeration algorithm that is much faster than a previous approach and moreover allows the inclusion of securities whose coefficient is negative a simple and computationally very efficient heuristic method that almost always produces optimal portfolios is described as well

the capital gain lock in effect and perfect substitutes abstract this paper analyses the effect of investors accrued capital gains on optimal portfolio composition and equilibrium returns under the assumption that investors are able to re balance with perfect substitute securities no dominance arguments are used to show that pricing differences because of accrued capital gains do not arise among securities which are perfect substitutes these arguments are insufficient however to prevent pricing differences because of accrued capital gains among securities which are not perfect substitutes trading rules are developed which outline the conditions necessary for the realisation of accrued capital gains and the deferral of capital losses these trading rules also provide guidance on which securities investors should sell given their tax basis when re balancing their portfolios

a simple algorithm to incorporate transactions costs in quadratic optimisation quantitative fund management invariably involves portfolio performance being measured in terms of a quadratic objective function due to the inclusion of variance terms as a measure of risk periodically the constituents of the fund are adjusted to improve performance this adjustment incurs a transaction cost which is a modulus function of the changes in holdings thus the fund manager wishes to minimise a combined quadratic and modulus function this paper presents a new approach to deal with the minimisation of this hybrid function using a well tried quadratic programming algorithm the new algorithm is demonstrated using a tactical asset allocation problem and an equity index tracking fund

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

economic implications of using a mean var model for portfolio selection a comparison with mean variance analysis abstract we relate value at risk var to mean variance analysis and examine the economic implications of using a mean var model for portfolio selection when comparing two mean variance efficient portfolios the higher variance portfolio might have less var consequently an efficient portfolio that globally minimizes var may not exist surprisingly we show that it is plausible for certain risk averse agents to end up selecting portfolios with larger standard deviations if they switch from using variance to var as a measure of risk therefore regulators should be aware that var is not an unqualified improvement over variance as a measure of risk

the effects of automobile strikes on the stock value of steel suppliers this analysis of stock market data for the years 1965 90 indicates that upon announcements of automobile strikes steel suppliers experienced statistically significant negative returns about equal to the negative returns experienced by the struck automobile producers significantly larger negative interindustry effects were associated with large multi plant strikes than with smaller one plant strikes and the negative effects were significantly greater in the later years of the sample period a time of relatively weak financial condition than in the earlier years a time of stronger financial condition the author concludes that researchers and policy makers evaluating the private and social costs of strikes should consider adverse effects on the profitability not only of the struck industries but also of linked industries and should take into account the important roles of strike size and industry financial health

effect of strike activity on firm value the article examines the stock market s reaction to labor management problems and employee strikes a discussion is presented about various categories of strike costs and cumulative abnormal return

spanning with short selling restrictions in principle the set of attainable payoff vectors is reduced if assets cannot be sold short however we show that the original space of payoff vectors is spanned despite short sale restrictions if there is one additional asset whose payoff is a positively weighted sum of the payoffs of the original assets for example this condition is automatically fulfilled if the original assets are stocks and the additional asset is an index future consisting of these stocks in real world financial markets short sales are restricted in models of asset markets 1 however it is assumed that unlimited short sales of assets are possible this assumption is crucial since short selling restrictions affect the completeness of a market system or the degree of its incompleteness expressed by the difference between the number of states of nature and the number of linearly independent assets litzenberger and ramaswamy 1980 and dybvig and ross 1986 are examples of models with short selling restrictions however the implication of short selling restrictions for market completeness is not discussed in these papers nor in any other to our knowledge in this note we start from an original set of assets and impose a shortselling restriction on all these assets we then introduce one additional asset which is a positively weighted sum of the original assets we show that this is sufficient to span the same space of payoffs as was spanned by the original assets with the possibility of unlimited short sales this implies that the assumption of no short selling restriction in asset market models can be relaxed in most applications with only one additional asset

optimal portfolio selection under institutional procedures for short selling abstract this study presents and formally justifies a simple ranking approach for optimal portfolio selection under institutional procedures for short selling it also provides economic insights of the explicit solution of the portfolio problem the analysis is applicable to different treatments of the short sale proceeds and any margin deposits in contrast to previous approaches it does not require assumptions that overstate short sale benefits for maintaining analytical tractability and it can easily identify and filter out securities that are undesirable for investing or for short selling thus this study can enhance the usefulness of portfolio modeling for assisting practical investment decisions

an empirical and forecasting analysis of the bioenergy market in the eu28 region evidence from a panel data simultaneous equation model this study improves upon and applies a comprehensive panel data simultaneous equation model to the european union eu28 region s bioenergy market the goals are to estimate bioenergy quantities in domestic and international markets for the period from 1990 to 2013 and to apply a forecasting analysis for the eu28 s domestic and international bioenergy markets for the period of 2014 2020 the results demonstrate that biomass harvest and the domestic price in a domestic market have a significant influence on the supply function additionally domestic price has a negative relationship with the bioenergy market domestic demand in international markets competitive import prices play a primary role in the development of the bioenergy market import demand export prices and gdp also have primary influences on the export demand for bioenergy moreover the exchange rate has a positive and significant effect on export demand the results of a forecasting analysis for the future period of 2014 2020 has predicted slight increases in domestic supply domestic demand and import trends on the other hand it also predicted a sharp decline in the export demand trend between those same years this study contributes to the literature by providing policymakers and other energy policy stakeholders a reliable forward looking analysis of the potential condition of the domestic and international bioenergy markets in the eu28 region through the end of 2020

the relationship between short interest and stock returns in the canadian market abstract this paper provides new insight into the relationship between short sales and stock market returns using a sample of stocks sold short in canada short interest is defined in relation to trading volume the results strongly support the assertion that short sales and excess returns are contemporaneously negatively correlated in canada the paper further finds that excess returns are more negative for small firms because the supply of shortable shares is constrained for these firms excess returns are less negative for stocks with associated options and convertible bonds importantly the evidence is consistent with the proposition that informed traders short sell canadian interlisted stocks in canada rather than the us to exploit lower execution costs together the results suggest that less restrictive regulation of short sales will improve the efficiency of markets

time diversification and estimation risk the recommendation that investors with long investment horizons tilt their portfolios toward stocks is commonplace we used a nonparametric bootstrap approach to investigate whether in a mean variance efficient portfolio the weights for u s stocks and u s t bills vary in a systematic manner with investment horizon this approach allowed us to analyze the impact of estimation risk on the optimal weights of stocks and fixed income securities the results show that an investor can gain from time diversification the weights for stocks in an efficient portfolio were significantly larger for long investment horizons than a one year horizon

market efficiency a theoretical distinction and so what with the aid of some simplifying assumptions the capital asset pricing model comes to dramatic conclusions about practical matters such as how to choose an investment portfolio and how to value financial assets as illustrated in this article when one particular clearly unrealistic capm assumption is replaced by a more real world version some of the dramatic practical conclusions of capm no longer follow this result has implications for financial practice research and pedagogy

the impact of export strategy on export sales performance export sales are an important route to growth for the small to medium sized firm this article reports the results of an extensive empirical study of the export strategies of a large sample of high technology electronics firms and the performance results of adopting alternate export strategies six strategy scenarios were identified the results show that the types of foreign markets selected segmentation strategies and product strategies all have a pronounced impact on export sales and export growth the best performers a group of firms called the world marketers and representing 13 5 of the sample achieved a dramatic 188 annual growth in exports and exported 52 5 of their output the profiles of firms that elected each strategy scenario were determined also

equilibrium with investors using a diversity of deviation measures abstract it has been argued that investors who optimize their portfolios with attention paid only to mean and standard deviation will all end up choosing some multiple of a certain master fund portfolio justification for the capital asset pricing model of classical portfolio theory which relates individual assets to such a master fund has come from this direction in particular attempts have been made to provide solid mathematical support by showing that the imputed behavior of investors is a consequence of price equilibrium in a market in which assets are traded subject to budget constraints and optimization is carried out with respect to utility functions that depend only on mean and standard deviation in recent years reliance on standard deviation has come under increasing criticism because of inconsistencies in its effect on portfolio preferences one response has been to introduce generalized measures of deviation which lead to alternative master funds the market implications of such extensions of theory have hitherto been unclear but in this paper the existence of equilibrium is established in circumstances where nonstandard deviations are admitted equilibrium is guaranteed even when different investors use different measures of deviation and thereby end up with portfolios scaled from different master funds whether they employ the same measure or not they may impose caps on deviation which likewise may be different

portfolio optimization with factors scenarios and realistic short positions this paper presents fast algorithms for calculating mean variance efficient frontiers when the investor can sell securities short as well as buy long and when a factor and or scenario model of covariance is assumed currently fast algorithms for factor scenario or mixed factor and scenario models exist but except for a special case of the results reported here apply only to portfolios of long positions factor and scenario models are used widely in applied portfolio analysis and short sales have been used increasingly as part of large institutional portfolios generally the critical line algorithm cla traces out mean variance efficient sets when the investor s choice is subject to any system of linear equality or inequality constraints versions of cla that take advantage of factor and or scenario models of covariance gain speed by greatly simplifying the equations for segments of the efficient set these same algorithms can be used unchanged for the long short portfolio selection problem provided a certain condition on the constraint set holds this condition usually holds in practice

time varying risk aversion an application to energy hedging abstract risk aversion is a key element of utility maximizing hedge strategies however it has typically been assigned an arbitrary value in the literature this paper instead applies a garch in mean garch m model to estimate a time varying measure of risk aversion that is based on the observed risk preferences of energy hedging market participants the resulting estimates are applied to derive explicit risk aversion based optimal hedge strategies for both short and long hedgers out of sample results are also presented based on a unique approach that allows us to forecast risk aversion thereby estimating hedge strategies that address the potential future needs of energy hedgers we find that the risk aversion based hedges differ significantly from simpler ols hedges when implemented in sample risk aversion hedges for short hedgers outperform the ols hedge ratio in a utility based comparison

short sale restrictions and market reaction to short interest announcements according to the diamond verrecchia hypothesis if increases in short interest are correlated with information that is not yet public they should precipitate a price adjustment stocks with unexpected increases in short interest are found to generate statistically significant but small negative abnormal returns for a short period around the announcement date when the sample is divided into stocks with and without tradable options nonoptioned stocks closely mimic these results but the optioned stocks do not in a cross sectional analysis of individual firms the short term negative abnormal returns are found to be 1 more negative the higher the degree of unexpected short interest and 2 less negative if the firm has tradable options

capital asset prices with and without negative holdings prize lecture to the memory of alfred nobel december 7 1990 this abstract was borrowed from another version of this item

risk arbitrage in takeovers this article studies the role of risk arbitrageurs in takeovers and the source of their advantage we show how the presence of arbitrageurs affects the value of the target shares since arbitrageurs are more likely to tender therefore an arbitrageur has the informational advantage of knowing he bought shares in equilibrium the number of arbitrageurs buying shares and the price they pay are determined endogenously we also present several empirical implications including the relationship among trading volume takeover premium liquidity of the shares and the number of risk arbitrageurs investing in one particular deal copyright 2002 oxford university press

a portfolio of nobel laureates markowitz miller and sharpe three pioneers of quantitative finance have now been justly honored harry markowitz merton miller and william sharpe received the nobel prize in economic science in 1990 from today s perspective it is hard to understand what finance was like before portfolio theory here i attempt to provide a very brief history of the quantitative revolution in finance drawing upon p bernstein s capital ideas 1992 and accounts of the three nobel laureates

estimation risk in farm planning under uncertainty this paper examines the impact of estimation risk on a decision maker s ability to distinguish between the mean variance characteristics of different farm plans the importance of making such distinctions should be clear risk averse decision makers will want to bear risk only if they can be reasonably confident of commensurate increases in expected return when parameters are unknown statistically testing for differences in their estimated values is appropriate an illustration of such tests using data from hazell suggests considerable resources must be devoted toward data generation if normative statements under uncertainty are to be reliable

the capital asset pricing model in economic perspective the capital asset pricing model capm is theoretically incomplete in its demand side focus risk averse investors and internally inconsistent homogeneous beliefs is not conclusively supported empirically and yet it legitimizes a notion that investors can earn higher returns by bearing undiversifiable risk our article does not merely extend the capm with more realistic assumptions it completes its original framework by including 1 risk taking investors in the investor population 2 investors who can have heterogeneous expectations or beliefs an overlooked but required condition for the capm to be an internally consistent and meaningful model of competitive financial asset pricing under uncertainty and 3 a positive sloped short run supply curve based on a reasonable interpretation of the nature of financial asset trade upon a complete economic interpretation it is shown that the equilibrium systematic risk rate of return relationship depends on whose aggregate trading activity dominates ri

contract theory and implications for perennial energy crop contracting abstract this article provides an overview of modern contract theory and discusses the implications of the theory for contracting for perennial dedicated energy crops we discuss some of the unique challenges of contracting for dedicated energy crops used for the production of advanced biofuels and survey some of the relevant concepts and research from the contract theory literature to address these challenges we focus primarily on the mechanism design or complete contracts approach to contracting which involves optimizing some objective function e g profits costs etc with respect to contract terms subject to important incentive constraints the solution to these optimization problems typically highlight important tradeoffs that a contract designer needs to consider in order to maximize profits and or minimize costs

concession bargaining the impact on shareholders equity this analysis of bargaining settlements in 1982 83 shows that on average shareholders in those firms that negotiated concessionary settlements enjoyed an 8 to 10 percent increase in the value of their holdings the author interprets this result to mean not that the value of the firm increased but rather that concessions enlarged the shareholders portion of the firm s value at the expense of the workers portion on the other hand concession bargaining does not seem to have reallocated business risk between shareholders and labor finally the evidence suggests that firm specific sources of risk can explain in part not only the magnitude of the concession effects but also the probability that concession bargaining will occur

the real effects of short selling constraints we use a regulatory experiment regulation sho that relaxes short selling constraints on a random sample of u s stocks to test whether capital market frictions have an effect on stock prices and corporate decisions we find that an increase in short selling activity causes prices to fall and that small firms react to these lower prices by reducing equity issues and investment these results not only provide evidence that short selling constraints affect asset prices but also confirm that short selling activity has a causal impact on financing and investment decisions

a note on price volume dynamics in an emerging stock market abstract we present a continuum economy with risk neutral agents having heterogeneous expectations and restricted short sales a stochastic version of the model is also formulated and the resulting time series behavior of the price and volume series under a specific money supply process derived the implications of the model are tested in the emerging turkish stock market where institutional arrangements comply with the restrictions of the model the results indicate that as predicted by the model price levels and trading volume are cointegrated the error correction models are also estimated and found to be significant in most cases

empirical tests for stochastic dominance efficiency we derive empirical tests for the stochastic dominance efficiency of a given portfolio with respect to all possible portfolios constructed from a set of assets the tests can be computed using straightforward linear programming bootstrapping techniques and asymptotic distribution theory can approximate the sampling properties of the test results and allow for statistical inference our results could provide a stimulus to the further proliferation of stochastic dominance for the problem of portfolio selection and evaluation using our tests the fama and french market portfolio is significantly inefficient relative to benchmark portfolios formed on market capitalization and book to market equity ratio

eighths sixteenths and market depth changes in tick size and liquidity provision on the nyse using limit order data provided by the nyse we investigate the impact of reducing the minimum tick size on the liquidity of the market while both spreads and depths quoted and on the limit order book declined after the nyse s change from eighths to sixteenths depth declined throughout the entire limit order book as well the combined e ect of smaller spreads and reduced cumulative limit order book depth has made liquidity demanders trading small orders better o however traders who submitted

a portfolio approach to estimating the average correlation coefficient for the constant correlation model this paper presents a portfolio approach to estimating the average correlation coefficient of a group of stocks which are considered for portfolio analysis the average correlation coefficient has been shown to produce a better estimate of the future correlation matrix than individual pairwise correlations the advantage of the approach described here is that it does not require the estimation of pairwise correlations for estimating their average a major obstacle to the implementation of markowitz s 1952 mean variance portfolio selection model is the difficulty in estimating the required inputs particularly troublesome are the pairwise correlations among all stocks which are being considered for inclusion in a portfolio the sheer number of required correlation estimates makes it highly impractical to examine a large number of stocks sharpe s 1963 single index model sim was developed in response to this problem it assumes correlations with a common index to be the only source of covariation among stock returns the necessary number of estimations is much reduced since only the correlations with the index need be considered accumulated empirical evidence suggests that the sim is misspecified bernard 1987 provides evidence of significant intra industry cross sectional correlations in contemporaneous market model residuals this evidence implies that correlations with a common index will not capture the total covariation among stock returns an alternative simple structure is the constant correlation model ccm which uses the historical average correlation coefficient for the future in two related articles elton and gruber 1973 and elton gruber and urich 1978 have shown that despite its simplicity the ccm produces better forecasts of the future correlation matrix than those obtained from the sim or the full historical correlation matrix the superior performance of the ccm should make it an attractive alternative to the sim although simple portfolio selection procedures have been developed for the ccm by elton gruber and padberg 1976 1977a b the computational problem will still be large if the full correlation matrix needs to be estimated to compute the average correlation we present below a simplified but exact method of estimating the average correlation coefficient which can be applied

short selling and efficient sets the effect of short selling on the composition and location of the efficient set has been analyzed in a variety of ways however the situation typically facing investors where the initial margin requirement is less than 100 percent and the riskfree interest rate that is paid on the short proceeds is less than the rate paid on initial margin has not previously been considered the elton gruber padberg algorithm 1976 1978 subject to certain modifications is shown here to be capable of identifying the efflcient set under such conditions when harry markowitz 1952 developed the notion of efficient sets as a method of identifying an investor s optimal portfolio he did so in a setting where short selling was prohibited since then the effect of short selling on the composition and location of the efficient set has been considered in a variety of ways for example lintner 1965 suggested that short sales be treated from the perspective of a broker dealer where an amount of money equal to the short proceeds must be put up as initial margin with the short seller receiving riskfree interest on both the short proceeds and the margin alternatively black 1972 and merton 1972 assumed that the short seller did not have to put up any initial margin and that the short seller actually got the use of the short proceeds more recently dyl 1975 has assumed that the short seller must put up initial margin that is less than the short proceeds but receives no interest on either the margin or short proceeds this paper is concerned with the generation of efficient sets where short selling is allowed but with certain restrictions attached to it referred to hereafter as restricted short selling in particular initial margin is required but can be met by depositing interest bearing securities with the brokerage firm where the short seller s account is kept furthermore the model allows the short seller to earn interest on the short proceeds accordingly the model

active portfolio management with benchmarking adding a value at risk constraint abstract we examine the impact of adding a value at risk var constraint to the problem of an active manager who seeks to outperform a benchmark while minimizing tracking error variance tev by using the model of roll 1992 a mean variance analysis of tracking error journal of portfolio management 18 13 22 we obtain three main results first portfolios on the constrained mean tev boundary still exhibit three fund separation but the weights of the three funds when the constraint binds differ from those in roll s model second the constraint mitigates the problem that when an active manager seeks to outperform a benchmark using the mean tev model he or she selects an inefficient portfolio finally when short sales are disallowed the extent to which the constraint reduces the optimal portfolio s efficiency loss can still be notable but is smaller than when short sales are allowed

trimability and fast optimization of long short portfolios optimization of long short portfolios through the use of fast algorithms takes advantage of models of covariance to simplify the equations that determine optimality fast algorithms exist for widely applied factor and scenario analysis for long only portfolios to allow their use in factor and scenario analysis for long short portfolios the concept of trimability is introduced the conclusion is that the same fast algorithms that were designed for long only portfolios can be used virtually unchanged for long short portfolio optimization provided the portfolio is trimable which usually holds in practice

the information content of short interest a natural experiment an increase in the cost of selling short should increase the bearish information content of short interest announcements by driving relatively uninformed short sellers out of the market we extend the diamond and verrecchia 1987 model to include short selling against the box and test the extended model using a natural experiment based around the taxpayer relief act of 1997 tra97 tra97 made short selling more costly for those shorting against the box consistent with the implications of our extended model this increase in short selling costs strengthens the negative relationship between short interest and subsequent stock price performance post tra97

estimation risk and simple rules for optimal portfolio selection elton gruber and padberg egp 6 7 have recently simplified the process of constructing optimal portfolios by developing simple criteria for optimal portfolio selection which do not involve use of mathematical programming their simple decision rules permit one to determine easily which securities to include in an optimal portfolio and how much to invest in each however in practical applications of theoretical models sample estimators are usually treated as if they were true values of unknown parameters as a result the effect of the standard errors of sample estimators on decision rules are completely ignored bawa brown and klein 1 have shown that what is optimal in the absence of estimation risk is not necessarily optimal or even approximately optimal in the presence of estimation risk moreover brown 4 examined optimal portfolio choice under uncertainty for various portfolio selection procedures the diffuse bayes rule the markowitz certainty equivalent ce rule the aggregation ce rule and the equal weight rule 1 and found that the diffuse bayes rule uniformly dominates the markowitz ce rule in repeated samples for the quadratic utility case as the sample size increases the bayes rule becomes superior to the aggregation ce and the equal weight rules in addition the result holds even where the probability distribution of returns is seriously misspecified thus brown s 4 study has clearly indicated that without taking estimation risk into account portfolio selection rules other than the bayes rule can lead investors to select suboptimal portfolios this paper shows by using the single index model for the return generating process that the simple decision rules for optimal portfolio selection derived by elton gruber and padberg 7 are not identical under the bayesian and the traditional methods of analysis 2 moreover in the case where short sales are not

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

when unions mattered the impact of strikes on financial markets 1925 1937 this examination of the stock market s responsiveness to strikes looks specifically at strike actions that labor historians generally view as the major ones occurring in the united states in the years 1925 37 the authors find that strikes had large negative effects on industry stock value longer strikes violent strikes strikes in which unions won industry wide strikes strikes that led to union recognition and strikes that led to large wage increases were associated with larger negative share price reactions than were other strikes much of the news generated by the typical strike seems to have been registered by the stock market very early in the strike however there were also some fairly large stock price reactions to news that could be fully revealed only at the end of a strike

multivariate dependence and portfolio optimization algorithms under illiquid market scenarios we propose a model for optimizing structured portfolios with liquidity adjusted value at risk lvar constraints whereby linear correlations between assets are replaced by the multivariate nonlinear dependence structure based on dynamic conditional correlation t copula modeling our portfolio optimization algorithm minimizes the lvar function under adverse market circumstances and multiple operational and financial constraints when we consider a diversified portfolio of international stock and commodity market indices under multiple realistic portfolio optimization scenarios the obtained results consistently show the superiority of our approach relative to other competing portfolio strategies including the minimum variance risk parity and equally weighted portfolio allocations

risk2 measuring the risk in value at risk the recent derivatives disasters have focused the attention of the finance industry on the need to control financial risks better this search has led to a uniform measure of risk called value at risk var which is the expected worst loss over a given horizon at a given confidence level var numbers however are themselves affected by sampling variation or estimation risk thus the risk in value at risk itself nevertheless given these limitations var is an indispensable tool to control financial risks this article lays out the statistical methodology for analyzing estimation error in var and shows how to improve the accuracy of var estimates

on the optimal selection of portfolios under limited diversification abstract we address the problem of selecting portfolios which maximize the ratio of the average excess return to the standard deviation among all those portfolios which comprise at most a pre specified number k of securities under the assumptions of constant pairwise correlations and no short selling we argue that the simple ranking procedure of elton gruber and padberg effectively solves the problem for all values of k and that as a function of k the optimal ratio increases at a decreasing rate we also clarify why further generalization or extension of our results to other situations is improbable

a simple algorithm for optimal portfolio selection with fixed transaction costs the general optimal portfolio selection problem with fixed transaction costs is a complex mathematical programming problem however by placing reasonable restrictions on the variance covariance matrix of returns it is possible to simplify the solution of the problem specifically if the structure of returns between securities is such that the pairwise correlation coefficients are approximately the same a fairly simple algorithm which requires little computational effort can be employed this method can also be extended to the case where changes in the information set necessitate a revision of an existing portfolio

the informational effects of restrictions on short sales some empirical evidence in a world of heterogeneous investors a competitive financial market has two major functions first it is the mechanism by which ownership of the existing supply of risky assets is distributed among investors this is the role which is analyzed in detail by the standard capital asset pricing model capm and its many extensions the second important market function is to aggregate the diverse information held by different investors into a single price most versions of the capm eliminate the information aggregation function by assuming that investors hold homogeneous beliefs with respect to the probability distribution of asset returns exceptions which deal with some aspects of the problem are lintner 7 grossman 4 grossman and stiglitz 5 and figlewski 1 3

short interest explanations and tests cross sectional and time series tests are performed to explain levels and changes in short interest explanatory variables and tests are chosen based on tax arbitrage and speculative reasons for going short short interest is found to follow a seasonal pattern that is weakly consistent with tax based trading stocks with high betas and the existence of convertible securities or options tend to have higher levels of short interest which is con sistent with arbitrage efforts for firms with traded options there is a positive association between the month to month changes in option open interest and short interest prior months returns and changes in short interest are positively related but there is no rela tionship between changes in short interest and returns in the subsequent month

on the optimality of long short strategies we consider the optimality of portfolios not subject to short selling constraints and derive conditions that a universe of securities must satisfy for an optimal active portfolio to be dollar neutr

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

a note on simple criteria for optimal portfolio selection using sharpe s 7 single index model elton gruber and padberg egp 4 5 have established some simple ranking criteria for optimal portfolio selection a further extension has been made by chen and brown 2 and alexander and resnick 1 to incorporate the risk associated with the estimation of input parameters this note explores the economic rationale underlying the portfolio formation process based on the single index model in so doing we seek to enhance the intuitive appeal of the simplified portfolio criteria developed in the above studies to practitioners to this end we restate the egp solution with short sales allowed as

adaptive asset allocation policies this article proposes an asset allocation policy that adapts to market movements by taking into account changes in the outstanding market values of major asset classes such a policy considers important information reduces or avoids contrarian behavior and can be followed by a majority of investors

20 myths about long short popular conceptions of long short investing are distorted by a number of myths many of which appear to result from viewing long short from a conventional investment perspective long short portfolios differ fundamentally from long only portfolios in construction in the measurement of their risk and return and in their implementation costs furthermore long short portfolios allow greater flexibility in security selection asset allocation and overall plan structure

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

performance of currency portfolios chosen by a bayesian technique 1967 1985 abstract this paper is about normative currency portfolio rules it assumes logarithmic investors who maximize the expected utility from lognormal currency returns with and without short sales restrictions a number of implementable portfolio diversification policies are tried out on a large body of data covering nine major currencies and eighteen years of weekly observations in doing so we present ways of dealing with the estimation risk in an international context the necessary mean and covariance inputs are provided by a bayesian prior on the means and by sample means and covariance matrices which are estimated from weekly sample data while some policies do produce abnormal returns over and beyond proper reward for risk none does so in a statistically significant way this means that the evidence does not allow one to conclude that market participants are improperly diversified as a byproduct of this investigation techniques are found which would allow portfolio managers to earn a proper reward for risk by following a purely mechanical procedure such techniques may be valuable in a multi country world where the aggregate portfolio of currencies and securities is unknown and is not supposed to be efficient

does it all add up benchmarks and the compensation of active portfolio managers in this article the authors examine theoretically the use of benchmark portfolios in the compensation of privately informed portfolio managers they find that the use of a benchmark and particularly the types of benchmarks often observed in practice cannot be easily rationalized specifically commonly used benchmark adjusted compensation schemes are generally inconsistent with optimal risk sharing and do not lead to the choice of an optimal portfolio for the investor moreover benchmarks do not help in solving potential contracting problems such as inducing the manager to expend effort or trying to screen out uninformed managers copyright 1997 by university of chicago press

convertible bond arbitrage liquidity externalities and stock prices abstract in the context of convertible bond issuance we examine the impact of arbitrage activity on underlying equity markets in particular we use changes in equity short interest following convertible bond issuance to identify convertible bond arbitrage activity and analyze its impact on stock market liquidity and prices for the period 1993 to 2006 there is considerable evidence of arbitrage induced short selling resulting from issuance moreover we find strong evidence that this activity is systematically related to liquidity improvements in the stock these results are robust to controlling for the potential endogeneity of arbitrage activity

anonymity adverse selection and the sorting of interdealer trades this article asks why london security dealers use more than one trading venue to trade with one another we argue that differences in the exclusivity liquidity anonymity and post trade transparency of each system permit a more efficient sorting of interdealer trades than if there were just one system our evidence comes from detailed data on where london dealers chose to place interdealer trades contrary to intuition we show that uninformed interdealer trades as measured by subsequent price impact tend to migrate to third party brokered systems where trade is anonymous by contrast informed interdealer trades tend to migrate to the direct nonanonymous public market additionally we show that this distribution of trades is supported by differences in the price improvement dealers receive in the direct and brokered markets our findings have implications for three strands of the market microstructure literature first they contribute to our understanding of the importance of anonymity and transparency in securities trading most theoretical models of the effects of anonymity and transparency predict that anonymous trading systems will attract more informed trades

simulating security markets in dynamic and equilibrium modes an asynchronous discrete time model run in dynamic mode can model the effects on market prices of changes in strategies leverage and regulations or the effects of different return estimation procedures and different trading rules run in equilibrium mode it can be used to arrive at equilibrium expected returns

institutions and individuals at the turn of the year this article evaluates the tax loss selling hypothesis against the window dressing hypothesis as explanations for turn of the year anomalies we examine differences between securities dominated by individual investors versus those dominated by institutional investors and find that the effect is more pervasive in the former controlling for capitalization we find that in early january late december stocks with greater individual investor interest outperform underperform stocks with greater institutional investor interest these results hold for both stocks that previously appreciated in value and stocks that previously depreciated in value the results are most consistent with the tax loss selling hypothesis as an explanation for the turn of the year effect

a note on market neutral portfolio selection abstract long short equity strategies allow investors to benefit potentially from both undervalued and overvalued securities the present study develops a normative portfolio model under the practical conditions that a market neutral strategy entails the offsetting long and short equity holdings are established jointly and without any constraints by the underlying market index while accurately capturing institutional procedures for short selling the model contains the analytical and economic properties as required for a ranking approach to filter out any undesirable securities under consideration in view of its practical features the analysis should be of interest to practitioners for assisting their long short investment decisions

options short sales and market completeness this paper presents empirical evidence that trading in options contributes to both transactional and informational efficiency of the stock market by reducing the effect of constraints on short sales the significantly higher average level of short interest exhibited by optionable stocks supports the argument that options facilitate short selling we also find significant effects on option prices related to the short interest in the underlying stock we then present evidence that options also increase information efficiency earlier work that is replicated and extended here has suggested that short sale constraints cause stock prices to underweight negative information options appear to reduce that effect

the willingness of farmers to engage with bioenergy and woody biomass production a regional case study from cumbria abstract in this paper we explore the willingness of cumbrian farmers to switch land use from food production to biomass production in a landscape where food production is both heavily subsidised and the area is a centre for tourism this is against a policy background of a switch of subsidies from food production to environmental benefits increased concerns about emissions from farming and an increased demand for renewable energy we identified an awareness of new markets for renewable energy alongside increasing volatility of other crops against a background of increasing demand for food from this our conclusions are that the main short term opportunities for increasing biomass production in this region are through intensifying management of existing woodlands in the medium term as the financial case for biomass crops becomes more certain we can envisage a tipping point which would favour a switch from marginal agricultural land to biomass

the impact of strikes on shareholder equity from an analysis of data for 1962 82 the authors find that strikes substantially affect shareholder equity as measured by the change in stock prices associated with strikes over that period the a

portfolio analysis using single index multi index and constant correlation models a unified treatment in this study a simple common algorithm which is applicable to seven models is proposed for optimal portfolio selection disallowing short sales of risky securities the models considered in the analysis consist of a single index model four multi index models and two constant correlation models unlike the previous approach the proposed algorithm does not require explicit ranking of securities therefore it is particularly useful for two multi index models with orthogonal indices which do not provide any ranking criterion also because of its algorithmic efficiency as demonstrated in a simulation study on models with multiple groups the approach here can enhance their usefulness in portfolio analysis in a series of publications elton and gruber 2 and elton gruber and padberg hereafter egp 3 8 have considered extensively portfolio optimization problems using a variety of index models and constant correlation models these models are sharpe s 12 single index model cohen and pogue s 1 multi index model in the diagonal form a multi index model with orthogonal indices 8 a constant correlation model with a single group 3 and a constant correlation model with multiple groups 7 hereafter sim mim di mim or ccm s and ccm m respectively using these models egp have developed some ranking procedures to reach optimal portfolios disallowing short sales of risky securities all securities in each group are ranked according to their performance as measured by a ratio of excess return to risk they are sequentially added to feasible portfolios following the ranking hierarchy until the optimal portfolio is reached for models where explicit ranking criteria can be established the egp approach is easy to implement and it clearly explains why a security belongs or does not belong to a portfolio besides the above models it is also applicable to cohen and pogue s 1 multi index model in the covariance form hereafter mim co however it does not work well for models lacking appropriate criteria to rank securities in order to overcome ranking difficulties in mim or egp 8 have introduced a market portfolio with zero residual risk to establish an alternative ranking criterion unfortunately as egp have indicated this causes internal inconsistency in the analysis in the present study a simple algorithm for optimal portfolio selection disal