a comparison of alternative covariance matrices for models with over lapping observations abstract this paper investigates the relative performance of alternative covariance matrices for models with over lapping observations commonly used in the finance literature the alternative covariance matrices used are those of hansen 1982 newey and west 1987 bartlett and quadratic spectral qs weights and andrews and monahan 1992 qs weights all matrices produce standard errors which are too small yielding empirical size probabilities above their corresponding theoretical values even in large samples empirical examples such as testing efficiency in the foreign exchange market and mean reversion in stock prices show that the choice of covariance matrix can affect the outcome of a hypothesis test

simulating stock returns under switching regimes a new test of market efficiency a model of profits switches between four regimes with fixed probabilities the rationally expected profits stream implies the stock market value this efficient market model is not rejected by uk post war time series behaviour of either profits or the ftse index

further evidence on the asymmetric behavior of economic time series over the business cycle evidence has recently been presented by salih neftci to support the hypothesis that recessions in economic activity tend to be steeper and more short lived than recoveries in economic activity that evidence however was confined to the behavior of the unemployment rate in the united states in this paper it is shown that when neftci s methods are applied to analyze the behavior of real gross national product investment and productivity in the united states or when they are used to analyze industrial production abroad the asymmetry hypothesis seems to be less compelling

patterns in three centuries of stock market prices this article applies autoregression and rescaled range statistics to very long stock market series to test the hypothesis that long term temporal dependencies are present in financial data for the annual capital appreciation returns to the london stock exchange evidence of persistence in raw returns greater than five years and of mean reversion in deviations from rolling twenty year averages is found similar patterns are observed for the new york stock exchange however they are not significant at traditional confidence levels copyright 1993 by university of chicago press

the effect of expanding medicaid eligibility on the distribution of children s health insurance coverage federal legislation passed in the late 1980s greatly expanded the medicaid program to include children in families with incomes at and above the poverty threshold regardless of family structure using march current population survey data the author evaluates how the expansions affected private and public insurance coverage levels across the income distribution estimates of the extent of take up of public coverage and substitution of private coverage are used to generate distributions of coverage under two counterfactual situations absence of expansions and absence of substitution the results indicate that the expansions had an equalizing effect on coverage levels across the lower five deciles of the income distribution between 1988 and 1995 in their absence coverage would have fallen significantly in the third through fifth income deciles also if all of the increased medicaid enrollment had come from the uninsured population inequality in coverage levels would have decreased even further

does public insurance crowd out private insurance the cost of expanding public sector health programs depends critically on the extent to which public eligibility will cover just the uninsured or will crowd out existing private insurance coverage we estimate the extent of crowd out arising from the expansions of medicaid to pregnant women and children over the 1987 1992 period we estimate that approximately 50 percent of the increase in medicaid coverage was associated with a reduction in private insurance coverage this occurred largely because employees took up employer based insurance less frequently there is also some evidence that employers contributed less for insurance and that workers dropped coverage of dependents

long horizon mean reverting stock prices revisited this paper reexamines long horizon stock returns and finds that previous work overstates the evidence of mean reversion the overstatement is largely due to the implicit weighting of ordinary least squares tests which place more weight on the depression and world war ii observations which have both large error variances and stronger mean reverting tendencies additionally the reliance on asymptotic statistics and the improper focus on only the most negative estimates of mean reversion contribute to the overstatement using generalized least squares randomization tests on the 1926 to 1987 period the random walk cannot be rejected for value or equally weighted real returns at any of 10 return horizons or by joint tests over all 10 horizons simultaneously additionally the random walk cannot be rejected for the extended 1871 to 1987 period

estimating interest rate setting behaviour in korea a constrained ordered choices model approach abstractwe study the bank of korea s interest rate setting behaviour using an array of constrained ordered choices models where the monetary policy committee revises the target policy interest rate only when the current market interest rate deviates from the optimal rate by more than certain threshold values our models explain changes in the monetary policy stance well for the monthly frequency korean data since january 2000 we find important roles for the output gap and the foreign exchange rate in understanding the bank of korea s rate decision making process we also implement out of sample forecast exercises with september 2008 lehman brothers bankruptcy for a split point we demonstrate that out of sample predictability improves greatly for the rate cut and the rate hike decisions using se adjusted inaction bands

nonlinearity and intraday efficiency tests on energy futures markets using high frequency data this paper first time comprehensively examines the intraday efficiency of four major energy crude oil heating oil gasoline natural gas futures markets in contrast to earlier studies which focus on in sample evidence and assume linearity the paper employs various nonlinear models and several model evaluation criteria to examine market efficiency in an out of sample forecasting context overall there is evidence for intraday market inefficiency of two of the four energy future markets heating oil and natural gas which exists particularly during the bull market condition but not during the bear market condition the evidence is also robust against the data snooping bias and the model overfitting problem and its economic significance can be very substantial

the effect of medicaid expansions for low income children on medicaid participation and private insurance coverage evidence from the sipp abstract we examine medicaid enrollment and private coverage loss following expansions of medicaid eligibility we attempt to replicate cutler and gruber s q j econ 111 1996 391 results using the survey of income and program participation sipp and find smaller rates of take up and little evidence of crowding out we find that some of the difference in results can be attributed to different samples and recall periods in the data sets used extending the previous literature we find that take up is slightly increased if a child s siblings are eligible and with time spent eligible focusing on children whose eligibility status changes during the sample we estimate smaller take up effects we find little evidence of crowding out in any of our extensions

the changing nature of stock and bond volatility this article examines the changing nature of u s stock and bond risk from 1871 through 2000 and the implications for asset allocation using geometric means and standard deviations we examine nominal and inflation adjusted monthly returns over nonoverlapping 5 year periods as well as annual returns over periods of approximately 25 years and we document how stock and bond volatility changed over the period our analysis suggests that the relative change in the volatility of stocks and volatility of bonds over the past 50 years has increased the importance of stocks in asset allocation the change is even more pronounced when inflation is considered

public health insurance expansions and labour supply of married women the state children s health insurance programme while the relationships between health insurance and the labour supply of women have been explored in the literature little is known about the effects of offering public health insurance on the labour supply decisions of married women this article examines the labour supply decisions of married women using the state children s health insurance programme our empirical analysis implies that certain groups of married women may be leaving the labour force in order to provide public health insurance for their children we conclude that the programme causes unexpected efficiency losses through distorted labour supply decisions

stop go monetary policy we propose and estimate several discrete choice models of monetary policy decision making that feature time varying inertia the models permit us to account for three stylized facts characterizing monetary policymaking in the united states 1 target interest rates are gradually adjusted in small discrete movements 2 there are some long stretches of time in which rates are repeatedly moved and 3 there are other long stretches in which the policy rate does not change our models are used to account for the fed s failure to adopt promptly an easier policy stance during the recession of 2001 they are also used to explain delay in tightening the policy stance during the 2003 2006 period that featured a bubble in house prices and was followed by a financial crisis in 2008

the lower bound and the causes of monetary policy inertia evidence from sweden abstractin 2009 in the midst of a global recession sweden s riksbank approached a lower bound on nominal interest rates this encounter with the lower bound provides a natural experiment for investigating the causes of monetary policy inertia to exploit this experiment we estimate taylor rules with tobit specifications that permit both interest rate smoothing and persistent shocks serial correlation as explanations for inertia the interest rate smoothing hypothesis leads to a specification in which lagged actual values of the dependent variable appear on the right hand side of the taylor rule while the persistent shocks hypothesis leads to a specification in which lagged values of an unobserved latent dependent variable appear on the right hand side of the taylor rule the divergence of actual and latent dependent variables that occurs at the lower bound provides leverage in distinguishing the two hypotheses for a conventional taylor rule we find evidence of both sources of inertia for a modifi

dynamics of the federal funds target rate a nonstationary discrete choice approach we apply a discrete choice approach to model the empirical behaviour of the federal reserve in changing the federal funds target rate the benchmark of short term market interest rates in the us our methods allow the explanatory variables to be nonstationary as well as stationary this feature is particularly useful in the present application as many economic fundamentals that are monitored by the fed and are believed to affect decisions to adjust interest rate targets display some nonstationarity over time the chosen model successfully predicts the majority of the target rate changes during the time period considered 1994 2001 and helps to explain strings of similar intervention decisions by the fed based on the model implied optimal interest rate our findings suggest that there is a lag in the fed s reaction to economic shocks during this period copyright 2004 john wiley sons ltd

an econometric model of serial correlation and illiquidity in hedge fund returns the returns to hedge funds and other alternative investments are often highly serially correlated in sharp contrast to the returns of more traditional investment vehicles such as long only equity portfolios and mutual funds in this paper we explore several sources of such serial correlation and show that the most likely explanation is illiquidity exposure i e investments in securities that are not actively traded and for which market prices are not always readily available for portfolios of illiquid securities reported returns will tend to be smoother than true economic returns which will understate volatility and increase risk adjusted performance measures such as the sharpe ratio we propose an econometric model of illiquidity exposure and develop estimators for the smoothing prole as well as a smoothing adjusted sharpe ratio for a sample of 908 hedge funds drawn from the tass database we show that our estimated smoothing coecien ts vary considerably across hedge fund style categories and may be a useful proxy for quantifying illiquidity exposure

the predictive power of january returns in foreign and domestic markets abstract in the post world war ii era cumulative returns from february through december in the us and in other large equity markets relate positively to the preceding january s returns in those markets however in the us the january return in the pre war era is negatively related to the cumulative february december return over the same period thus although risk premia vary over time in a manner that can be predicted ex ante exogenous shocks to the economy e g war can disrupt the relation one is accustomed to observing

monetary policy rules based on real time data this paper examines the magnitude of informational problems associated with the implementation and interpretation of simple monetary policy rules using taylor s rule as an example i demonstrate that real time policy recommendations differ considerably from those obtained with ex post revised data further estimated policy reaction functions based on ex post revised data provide misleading descriptions of historical policy and obscure the behavior suggested by information available to the federal reserve in real time these results indicate that reliance on the information actually available to policy makers in real time is essential for the analysis of monetary policy rules

are stock returns predictable a test using markov chains this paper uses a markov chain model to test the random walk hypothesis of stock prices given a time series of returns a markov chain is defined by letting one state represent high returns and the other represent low returns the random walk hypothesis restricts the transition probabilities of the markov chain to be equal irrespective of the prior years annual real returns are shown to exhibit significant nonrandom walk behavior in the sense that low high returns tend to follow runs of high low returns in the postwar period

a search for long memory in international stock market returns abstract a major issue in financial economics is the behavior of stock returns over long as opposed to short horizons this study provides empirical evidence from the perspective of long memory analysis international evidence on long memory is explored using the morgan stanley capital international stock index data for eighteen countries two tests that are robust to short term dependence and conditional heteroskedasticity are employed a modified rescaled range test and a fractional differencing test the empirical results in general provide little support for long memory in international stock returns the findings are not sensitive to inflation adjustments in stock returns data sources and statistical methods used

procrastination and obedience in this lecture i shall focus on situations involving repeated decisions with time inconsistent behavior although each choice may be close to maximizing and therefore result in only small losses the cumulative effect of a series of repeated errors may be quite large thus in my examples decision makers are quite close to the intelligent well informed individuals usually assumed in economic analysis but cumulatively they make seriously wrong decisions that do not occur in standard textbook economics this lecture discusses and illustrates several pathological modes of individual and group behavior procrastination in decision making undue obedience to authority membership of seemingly normal individuals in deviant cult groups and escalation of commitment to courses of action that are clearly unwise in each case individuals choose a series of current actions without fully appreciating how those actions will affect future perceptions and behavior the standard assumption of rational forwardlooking utility maximizing is violated the nonindependence of errors in decision making in the series of decisions can be explained with the concept from cognitive psychology of undue salience or vividness for example present benefits and costs may have undue salience relative to future costs

efficient market hypothesis evidence from a small open economy this article studies the efficient market hypothesis for the istanbul stock exchange national 100 isen 100 price index within the lumsdaine and papell two structural breaks unit root test framework the main finding of the article shows that the isen 100 index is characterized by a unit root with two structural breaks which is consistent with the efficient market hypothesis in addition the article applies the augmented dickey fuller test runs test and the variance ratio test to test the weak form efficiency of the isen 100 the analyses are repeated for three sub periods delineated in view of the endogenously determined break points

dynamic asset allocation for varied financial markets under regime switching framework asset allocation among diverse financial markets is essential for investors especially under situations such as the financial crisis of 2008 portfolio optimization is the most developed method to examine the optimal decision for asset allocation we employ the hidden markov model to identify regimes in varied financial markets a regime switching model gives multiple distributions and this information can convert the static mean variance model into an optimization problem under uncertainty which is the case for unobservable market regimes we construct a stochastic program to optimize portfolios under the regime switching framework and use scenario generation to mathematically formulate the optimization problem in addition we build a simple example for a pension fund and examine the behavior of the optimal solution over time by using a rolling horizon simulation we conclude that the regime information helps portfolios avoid risk during left tail events

estimating heterogeneous takeup and crowd out responses to existing medicaid income limits and their nonmarginal expansions we use a switching probit model and the income limit based structure of medicaid eligibility for children to estimate treatment effects of nonmarginal medicaid expansions on medicaid takeup private insurance coverage and crowd out as well as crowd out for those eligible for medicaid under rules already in place many of these estimates are not found in existing work on public insurance and cannot be calculated with the linear probability model used by previous work in this literature we provide an estimation approach that is straightforward to implement yet yields precise treatment effects

are economic time series asymmetric over the business cycle it has long been argued that major cyclical variables such as the unemployment rate display an asymmetric behavior over various phases of the business cycle the paper provides a statistical test for this hypothesis using the framework of finite state markov processes i implement a test to see if the behavior of the unemployment rate is characterized by sudden jumps and slower drops it is argued that the framework provided in the paper can also be used to test other sample path properties of economic time series

nonlinearity data snooping and stock index etf return predictability abstract this paper examines daily return predictability for eighteen international stock index etfs the out of sample tests are conducted based on linear and various popular nonlinear models and both statistical and economic criteria for model comparison the main results show evidence of predictability for six of eighteen etfs a simple linear autoregression model and a nonlinear in variance garch model but not several popular nonlinear in mean models help outperform the martingale model the allowance of data snooping bias using white s reality check also substantially weakens otherwise apparently strong predictability

public policy and health insurance choices of the elderly evidence from the medicare buy in program this study provides evidence on health insurance decisions of senior citizens nearly all senior citizens have health insurance coverage through medicare but poor seniors may also qualify for medicaid that fills many gaps in medicare coverage since 1987 the medicaid program has expanded eligibility using the sipp i find that medicaid eligibility increased from 8 7 in 1987 to 12 4 in 1995 for every 100 elderly who became eligible approximately 50 took up medicaid but more than 30 dropped private coverage resulting in crowd out of 60 crowd out came from individuals dropping privately purchased health insurance rather than dropping employer provided retiree health insurance the roles of asset tests health status and the panel structure of the sipp are also explored i find that a major strength of the sipp is in its point in time asset information for determining medicaid eligibility while the changing income and demographic information over the course of the 2 year panel adds little insight beyond cross sectional data 2000 elsevier science s a all rights reserved

the econometric analysis of models with risk terms summary in this paper we have attempted to provide an integrated approach to the estimation of models with risk terms it was argued that there exist orthogonality conditions between variables in the information set and higher order moments of the unanticipated variable density these could be exploited to provide consistent estimators of the parameters associated with the risk term specifically it was recommended that an iv estimator should be applied with instruments constructed from the information set four existing methods commonly used to estimate models with risk terms are examined and applications of the techniques are made to the estimation of the risk term in the us c exchange market and the effects of price uncertainty upon production

a markov model of heteroskedasticity risk and learning in the stock market abstract we examine a variety of models in which the variance of a portfolio s excess return depends on a state variable generated by a first order markov process a model in which the state is known to economic agents is estimated it suggests that the mean excess return moves inversely with the level of risk we then estimate a model in which agents are uncertain of the state the estimates indicate that agents are consistently surprised by high variance periods so there is a negative correlation between movements in volatility and in excess returns

rational expectations econometric analysis of changes in regime an investigation of the term structure of interest rates abstract this paper is of interest both for its methodological contribution of new tools for analyzing rational expectations models and for its substantive conclusions concerning the term structure of interest rates during the monetary experiment of october 1979 the paper studies systems subject to changes in regime interpreted here as occasional discrete shifts in the parameters governing the time series behavior of exogenous economic variables the specification is shown to be quite tractable both theoretically and empirically the technique is used to analyze yields on three month treasury bills and ten year treasury bonds during 1962 to 1987 a constant parameter linear model for short term rates is shown to be inconsistent both with the univariate time series properties of short rates and with the observed bivariate relation between long and short rates under the expectations hypothesis of the term structure an alternative nonlinear model that admits the possibility of changes in regime affords a much better description of the univariate process for short rates moreover the cross equation restrictions implied by the expectations hypothesis of the term structure are consistent with the nonlinear specification indeed the residuals of the restricted relation have a standard error of only 0 8 basis points this is a third less than that of a completely unrestricted linear regression of long rates on short rates and compares with an unconditional standard deviation of long rates of 142 basis points i conclude that once the recognition by bond traders of changes in regime is taken into account the expectations hypothesis of the term structure of interest rates holds up fairly well for these data

a test for speculative bubbles in the sterling dollar exchange rate 1981 84 the u s dollar price of the u k pound sterling is tested for a speculative bubble defined as a period with a nonzero median in excessreturns a nonparametric procedure is developed which controls for data mining over the period of flexible exchange rates and finds a negative bubble in the excess return to holding sterling rather than dollar assets during the period 1981 84 possible interpretations arebootstrap equilibria rational bubbles nonsym metric fundamentals and nonrational expectations copyright 1986 by american economic association

does idiosyncratic risk really matter goyal and santa clara 2003 find a significantly positive relation between the equalweighted average stock volatility and the value weighted portfolio returns on the nyse amex nasdaq stocks for the period of 1963 08 to 1999 12 we show that this result is driven by small stocks traded on the nasdaq and is in part due to a liquidity premium in addition their result does not hold for the extended sample of 1963 08 to 2001 12 and for the nyse amex and nyse stocks more importantly we find no evidence of a significant link between the value weighted portfolio returns and the median and value weighted average stock volatility the intertemporal relation between risk and return has long been an important topic in asset pricing literature most asset pricing models postulate a positive relationship between a stock portfolio s expected returns and risk which is often modeled by the variance or standard deviation of the portfolio s returns however there is no agreement about the existence of such a trade off for stock market indices 1 while return volatility is an intuitively appealing measure of risk different approaches used by previous researchers suggest that no clear consensus has emerged regarding its relevance 2 whether or not investors require a larger risk premium on average for investing in a security during times when the security is more risky remains an open question

when did the fomc begin targeting the federal funds rate what the verbatim transcripts tell us in october 1982 the fomc deemphasized m1 and moved to what is commonly referred to as a borrowed reserves operating procedure sometime thereafter the fomc switched to a funds rate targeting procedure but never formally announced the change given the close correspondence between a borrowed reserves operating procedure and a funds rate targeting procedure thornton 1988 suggested that the fomc went immediately to a funds rate targeting procedure others date the switch to the funds rate procedure later meulendyke 1998 suggests the switch came in late 1987 while others suggest the change occurred later this paper reviews the verbatim transcripts of the fomc meetings to establish the timing of the switch the verbatim transcripts suggest that the fomc effectively switched to a funds rate targeting procedure in 1982 the documentary evidence is supported by an analysis of the spread between the funds rate and the funds rate target which suggests that the differences in the behavior of the spread before october 1979 and after october 1982 are relatively small and economically unimportant

term structure evidence on interest rate smoothing and monetary policy inertia abstract numerous studies have used quarterly data to estimate monetary policy rules or reaction functions that appear to exhibit a very slow partial adjustment of the policy interest rate the conventional wisdom asserts that this gradual adjustment reflects a policy inertia or interest rate smoothing behavior by central banks however such quarterly monetary policy inertia would imply a large amount of forecastable variation in interest rates at horizons of more than 3 months which is contradicted by evidence from the term structure of interest rates the illusion of monetary policy inertia evident in the estimated policy rules likely reflects the persistent shocks that central banks face

bank rate policy under the interwar gold standard a dynamic probit model the classical gold standard occupies an almost mystical position in the literature of international finance in popular accounts the gold standard is portrayed as a remarkably durable and efficient mechanism for achieving price and exchange rate stability and for relieving balance of payments pressures the system s resilience is attributed to the willingness of nationa monetary authorities to refrain from impeding the international adjustment process when central banks intervened in financial markets it is said they did so mechanically obeying rules of the game which dictated that they reinforce the impact on domestic money and credit of changing balance of payments conditions succeeding generations of economists and historians have sought to qualify this popular view the recent contributions of bordo i98i and cooper i982 make a critical assessment of extravagant claims concerning price and exchange rate stability under the classical gold standard other authors have extended the research of bloomfield i 959 ford i962 and triffin i964 who emphasised the special conditions that permitted the classical gold standard s smooth operation and cast doubt on the tendency of national monetary authorities to adhere faithfully to rules of the game all too often scant mention is made of the interwar gold standard for it is not evident how interwar experience fits into either view certain facts are clear it is clear that the interwar standard was far from durable britain s resumption of gold payments in i925 usually is taken to mark the gold standard s resurrection just as her devaluation a mere 6 years later is taken as its demise in the interim many of the major participants suffered serious balance of payments pressures that threatened to render their exchange rates indefensible the system was anything but conducive to stability it precluded neither price nor income fluctuations as the great depression dramatically illustrated numerous explanations have been advanced for the interwar gold standard s

does the fed act gradually a var analysis abstract the tendency for changes in the federal funds rate to be implemented gradually has been considered evidence of an interest rate smoothing objective for the federal reserve this paper investigates whether gradual funds rate movements can be explained by the dynamic structure of the economy and the uncertainty surrounding that structure without recourse to including an ad hoc interest rate smoothing argument in the fed s objective function in the absence of parameter uncertainty the optimal policy involves more aggressive movements in the funds rate than observed parameter uncertainty however limits the responsiveness of the interest rate as a result the optimal policy under parameter uncertainty can account for a considerable portion of the gradualism observed

what drives international equity correlations volatility or market direction abstract we consider impulse response functions to study the impact of both return and volatility on the correlation between international equity markets using data on the us as the reference country canada the uk and france equity indices empirical evidence shows that without taking into account the effect of return there is an asymmetric effect of volatility on correlation the volatility seems to have an impact on correlation especially during downturn periods however once we introduce the effect of return the impact of volatility on correlation disappears these observations suggest that the relation between volatility and correlation is an association rather than a causality the strong increase in the correlation is driven by the past of the return and the market direction rather than the volatility

the persistence of volatility and stock market fluctuations this paper examines the potential influence of changing volatility in stock market prices on the level of stock market prices it demonstrates that volatility is only weakly serially correlated implying that shocks to volatility do not persist these shocks can therefore have only a small impact on stockmarket prices since changes in volatility affect expected required rates of return for relatively short intervals these findings lead us to be skeptical of recent claims that the stock market s poor performance during the 1970 s can be explained by volatility induced increases in risk premia this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

do higher oil prices push the stock market into bear territory this paper investigates whether a higher oil price pushes the stock market into bear territory by using time varying transition probability markov switching models it examines different measures of oil price shocks empirical evidence from monthly returns on the standard poor s s p 500 price index suggests that an increase in oil prices leads to a higher probability of a bear market emerging

stock returns asymmetric volatility risk aversion and business cycle some new evidence i introduction most asset pricing models starting with intertemporal capital asset pricing model of merton 1973 suggest a positive relation between risk and return for the aggregate stock market there is an extensive empirical literature that has tried to establish the existence of such a trade off between risk and return for stock market indexes unfortunately the results have been inconclusive often the relation between risk and return has been found insignificant and sometimes even negative recently it has been debated whether risk aversion is state dependent and whether it is procyclical or countercyclical in this article we explore the role of the business cycle in the relation between risk and return for the aggregate stock market specifically by employing asymmetric generalized autoregressive conditional heteroskedasticity in mean models agarch m markov switching models and a simple theoretical equilibrium framework we explore how these three related issues excess stock returns volatility and risk aversion are affected by business cycles as noted by fama 1990 of many possible forces that drive the stock market real economic activities represented by business cycles could be an important one since they are highly related to major stock pricing factors market volatility and the psychology of investors particularly investors attitude toward risk an interesting observation about excess stock return is that it is time varying over business cycles and significantly higher in boom periods 1 according to our estimates for the sample period 1926 2001 presented in table 1 the mean excess stock return is 0 8963 mo in boom periods and 0 3247 mo in recession periods the excess stock return tends to be very high in the boom period because stock returns remain relatively high with increasing dividend payments another interesting observation about the stock market is that the volatility of excess stock return is also time varying over business cycles and significantly lower in boom periods our estimates of standard deviation of monthly stock excess return for the sample period 1926 2001 are 4 6 in the boom period and 8 2 in the recession period these estimates imply that the excess return risk relation is time varying over the business cycle since the coefficient of variance or standard deviation in the conditional mean equation is usually interpreted as being closely related to the coefficient of relative risk aversion as argued by merton 1980 our finding suggests a potential time varying risk aversion 2 there is a general agreement that investors within a given time period require a larger expected return from a security that is riskier however there seems to be no relationship between risk and return over time as such whether or not investors require a larger risk premium for investing in a security during periods when the security is more risky relatively remains inconclusive at first glance it may appear that rational risk averse investors would require a relatively larger risk premium during times when the payoff from the security is more risky a larger risk premium may not be required however because times that are relatively more risky could coincide with times in which investors are better able to bear particular types of risk further a larger risk premium may not be required because investors may want to save relatively more during periods when the future is more risky 3 hence a positive as well as a negative sign for the correlation between the conditional mean and the conditional variance of the excess return on stocks would be consistent with existing theories since there are conflicting predictions about the intertemporal trade off between risk and return it is important to empirically characterize the nature of this relation according to merton 1980 the coefficient of variance or the standard deviation in the conditional mean equation which is called volatility feedback is usually interpreted as the coefficient of relative risk aversion

is stock price volatility increasing several different measures of stock price volatility over the period from march 1885 through october 20 1989 indicate that volatility has not increased substantially if one looks at the entire period and that volatility today is much less than it was in the 1930s this holds true whether one considers daily movements within a decade monthly movements within a decade or daily movements over the whole period daily market volatility in the 1980s has been greater than in any decade since 1950 however volatility was unusually low in the 1950s and 1960s furthermore the increase in daily volatility in the 1980s disappears when volatility is measured as month to month percentage changes our perception of volatility is a function of the benchmark used to make comparisons and the time period over which volatility is measured

a unified approach to testing for serial correlation in stock returns this article provides a unified approach for testing serial correlation in stock returns the authors describe a general class of statistics that are linear combinations of consistent estimators of autocorrelations as special cases they show that this class captures many of the statistics studied in the recent finance and macroeconomics literature using this result the authors then provide a common perspective on the asymptotic distribution and power of these statistics copyright 1994 by university of chicago press

does a bias in fomc policy directives help predict intermeeting policy changes since 1984 the fomc has issued directives indicating a bias toward easing or tightening this paper investigates the information content of these asymmetric directives for the likelihood of inter meeting changes in policy during the greenspan chairmanship if policy is measured by the change in the average daily federal funds rate after a directive is issued the results indicate that a bias predicts a significant change in the average funds rate if policy is measured qualitatively by whether the target for the federal funds rate changed a bias significantly affects the probability that the target will be changed

mean reversion in equilibrium asset prices this paper demonstrates that negative serial correlation in long horizon stock returns is consistent with an equilibrium model of asset pricing when investors display only a moderate desire to smooth their consumption commonly used measures of mean reversion in stock prices calculated from historical returns data nearly always lie within a 60 percent confidence interval of the median of the monte carlo distributions implied by the authors equilibrium model from this evidence the authors conclude that the degree of serial correlation in the data could plausibly have been generated by their model copyright 1990 by american economic association

volatility components leverage effects and the return volatility relations abstract this paper investigates the risk return trade off by taking into account the model specification problem market volatility is modeled to have two components one due to the diffusion risk and the other due to the jump risk the model implies merton s icapm in the absence of leverage effects whereas the return volatility relations are determined by interactions between risk premia and leverage effects in the presence of leverage effects empirically i find a robust negative relationship between the expected excess return and the jump volatility and a robust negative relationship between the expected excess return and the unexpected diffusion volatility the latter provides an indirect evidence of the positive relationship between the expected excess return and the diffusion volatility