Showing papers on "Financial market published in 1982"

Bubbles, Rational Expectations and Financial Markets

Abstract: This paper investigates the nature and the presence of bubbles in financial markets. Are bubbles consistent with rationality? If they are, do they, like Ponzi games, require the presence of new players forever? Do they imply impossible events in finite time, such as negative prices? Do they need to go on forever to be rational? Can they have real effects? These are some of the questions asked in the first three sections. The general conclusion is that bubbles, in many markets, are consistent with rationality, that phenomena such as runaway asset prices and market crashes are consistent with rational bubbles. In the last two sections, we consider whether the presence of bubbles in a particular market can be detected statistically. The task is much easier if there are data on both prices and returns. In this case, as shown by Shiller and Singleton, the hypothesis of no bubble implies restrictions on their joint distribution and can be tested. In markets in which returns are difficult to observe, possibly because of a nonpecuniary component, such as gold, the task is more difficult. We consider the use of both "runs tests" and "tail tests" and conclude that they give circumstantial evidence at best.

Bubbles, Rational Expectations and Financial Markets

Abstract: This paper investigates the nature and the presence of bubbles in financial markets. Are bubbles consistent with rationality? If they are, do they, like Ponzi games, require the presence of new players forever? Do they imply impossible events in finite time, such as negative prices? Do they need to go on forever to be rational? Can they have real effects? These are some of the questions asked in the first three sections. The general conclusion is that bubbles, in many markets, are consistent with rationality, that phenomena such as runaway asset prices and market crashes are consistent with rational bubbles. In the last two sections, we consider whether the presence of bubbles in a particular market can be detected statistically. The task is much easier if there are data on both prices and returns. In this case, as shown by Shiller and Singleton, the hypothesis of no bubble implies restrictions on their joint distribution and can be tested. In markets in which returns are difficult to observe, possibly because of a nonpecuniary component, such as gold, the task is more difficult. We consider the use of both "runs tests" and "tail tests" and conclude that they give circumstantial evidence at best.

On the Relationship between Systematic Risk and the Degrees of Operating and Financial Leverage

Abstract: In order to use the capital asset pricing model (CAPM) to make operating and financial decisions, financial managers must confront the problem of estimating a security's systematic risk, or what commonly is termed beta (3) One approach to this problem is to estimate / by regressing the time series of a security's realized financial return (dividend plus capital gain or loss) on the contemporaneous realized financial return on a market portfolio Such a procedure is suspect for three reasons First, there is evidence that ,Ss of individual securities are not stationary [3, 4, 7, 9] Second, this procedure cannot be undertaken when historical information is not readily available, as might be the case in evaluating new product decisions Third, it masks the important fact that firms make decisions about how to operate in the factor and product markets of the real economic sector As Myers [20] points out, the actions taken as a result of these decisions generate a real return composed of an immediate cash flow plus any change in the present value of future investment opportunities The regression procedure, though, uses the realized financial returns generated in the financial sector of the economy to calculate / It therefore provides no knowledge of the real determinants of/ from the underlying characteristics of the real assets Moreover, financial managers cannot look to the CAPM to find clues for estimating ,B on the basis of real variables As a theory of financial market behavior, the CAPM states only a necessary equilibrium relationship between the prices of securities given their stochastic characteristics over a period of time It says little about how stock prices are determined by the real variables that financial managers must consider in evaluating strategic, operating, and financial alternatives The studies that seek to provide financial managers with knowledge of the real determinants of systematic risk are numerous There are those that empirically test intuitive specifications between real variables and / [2,

Bubbles, Rational Expectations and Financial Markets

Abstract: This paper investigates the nature and the presence of bubbles in financial markets. Are bubbles consistent with rationality? If they are, do they, like Ponzi games, require the presence of new players forever? Do they imply impossible events in finite time, such as negative prices? Do they need to go on forever to be rational? Can they have real effects? These are some of the questions asked in the first three sections. The general conclusion is that bubbles, in many markets, are consistent with rationality, that phenomena such as runaway asset prices and market crashes are consistent with rational bubbles. In the last two sections, we consider whether the presence of bubbles in a particular market can be detected statistically. The task is much easier if there are data on both prices and returns. In this case, as shown by Shiller and Singleton, the hypothesis of no bubble implies restrictions on their joint distribution and can be tested. In markets in which returns are difficult to observe, possibly because of a nonpecuniary component, such as gold, the task is more difficult. We consider the use of both "runs tests" and "tail tests" and conclude that they give circumstantial evidence at best.

Changes in the Financial Market: Welfare and Price Effects and the Basic Theorems of Value Conservation

Abstract: This paper analyzes the impact, on both welfare and equilibrium prices, of changes in the financial market in a general equilibrium, two-period context. Previous papers have focussed on the "securities effect," tending to essentially ignore the equally important "endowment effect" that arises when market structure changes are implemented. Two forms of endowment neutrality and market structure changes which either preserve, expand, or shift allocational feasibility differentiate the main theorems, which are based on arbitrary preferences and beliefs and substantially extend and modify extant results; in particular, earlier statements identified with value conservation are sharply moderated. Very roughly, the paper yields the following implications for some of the more common changes in the market: nonsynergistic corporate spinoffs and the opening of option markets have, on balance, strongly positive welfare effects; nonsynergistic mergers tend to have strong negative welfare effects, while the welfare effects of alternative risky debt structures tend to be ambiguous. All of the preceding, however, may under plausible conditions be redistributive. CHANGES IN THE STRUCTURE of the financial market have long been of interest to financial economists. While such changes may take many forms, it is perhaps surprising that only a few of the more common ones have been systematically studied. Foremost among these are changes which involve the firm's capital structure (the relative amounts of debt and equity), mergers, and other special recapitalizations. This paper analyzes the impact, on both welfare and equilibrium prices, of changes in the financial market in a two-period context. It differs from previous studies primarily in that it is based on a fully integrated (general equilibrium) approach similar to that employed in international trade analysis. Thus, while the resulting mosaic contains previous studies as clearly recognizable fragments, such as the classic paper of Modigliani and Miller [33], it also provides the necessary framework and tools for an evaluation of market structure changes of any type, such as changes involving subordinated debt, convertibles, warrants, mergers, spinoffs, and the opening of option markets.

Can We Sterilize? Theory and Evidence

Abstract: Under managed floating, as under the Bretton Woods system, central banks have intervened heavily in the foreign exchange market. As before, they have often attempted to divorce their intervention activities from their money supplies through offsetting operations in domestic financial markets. An official purchase of foreign exchange can be sterilized through a corresponding openmarket sale of domestic securities. The transaction, which is equivalent to an official forward sale of domestic currency, leaves relative money supplies unchanged but alters the relative supplies of foreign- and domestic-currency bonds available to the public. Regardless of the exchange-rate regime, sterilized intervention may be viewed as an attempt to attain independent exchange-rate and money-stock targets in the short run. For this to be possible, bonds denominated in different currencies must be imperfect substitutes in private portfolios. If feasible, sterilization may or may not be useful in attaining the long-run objectives of the central bank.

The Pricing of Commodity‐Linked Bonds

Abstract: DURING 1980 SUNSHINE MINING Co., operator of the largest silver mine in the United States, made two $25 million bond issues backed by silver. Each $1000 bond is linked to 50 ounces of silver, pays a coupon rate of 81/2% and has a maturity of 15 years. At maturity the company promises to pay the bondholders either the $1000 face value or the market value of the 50 ounces of silver, whichever is greater.' At the time of the first issue in April 1980, silver was trading at $16 an ounce so that the value of 50 ounces was $800. In August of 1979, an agency of the Mexican Government issued bonds in local currency backed by oil. Each 1,000 pesos bond was linked to 1.95354 barrels of oil, had a coupon rate of 12.65823% and a maturity of three years. At maturity they would be redeemed at face value plus the amount by which the market value of the reference oil bundle exceeded the face value plus all coupons received during the life of the bond, if this amount were positive. This was the third successful issue of 'petrobonds' by the Mexican agency. These are two recent examples of a corporation or government seeking funds in financial markets and being willing to share the potential price appreciation of the underlying commodity with the purchaser of the bond, in exchange for a lower coupon rate, more favorable bond indentures or the acceptance of a weaker currency by foreign investors. In both cases, the underlying commodity was produced by the issuing firm or country. In early references to the potential use of commodity-linked bonds by less developed countries, Lessard [1977a, 1977b, 1979] had suggested that producers could transfer a substantial proportion of

Sufficient Conditions for Public Information to Have Social Value in a Production and Exchange Economy

Abstract: Conditions are derived under which all consumers in a production and exchange economy will prefer (at least weakly) disclosure of public information to no such disclosure. The conditions involve consumer endowments, the allocative efficiency of the financial market, and value maximizing behavior by firms. Cases exist where consumers will prefer disclosure of public information in a production and exchange economy, although they would be indifferent to such disclosure in an otherwise similar pure exchange economy. The difference in results is due purely to the fact that in production and exchange economies, information may be used to reallocate resources across time and firms, thus highlighting the fundamental difference between the role of information in pure exchange and in production and exchange economies.

An evaluation of research on rural financial markets in India

Abstract: 2. When an image on the film is obliterated with a round black mark, it is an indication of either blurred copy because of movement during exposure, duplicate copy, or copyrighted materials that should not have been filmed. For blurred pages, a good image o f the page can be found in the adjacent frame. I f copyrighted materials were deleted, a target note will appear listing the pages in the adjacent frame.

Financial Crises: Recent Experience in U.S. and International Markets

Abstract: THE THREAT of a "financial crisis" may have motivated the Federal Reserve Board's apparent decision to relax monetary policy earlier this year. Such crises have been a recurrent theme since the mid-1960s, although definition of the term and prediction of the event have proved equally elusive. Corporate bankruptcies, failures in the thrift industry, problems at regional banks, and near-defaults on loans to foreign borrowers have created new concerns about the resiliency of the financial structure. The concerns are especially great because of the linkages between the health of the financial system and the growth of real economic activity. In this paper I propose to differentiate between the ebb and flow of the business cycle on the one hand, and events triggered by financial market weaknesses on the other. In that context, I evaluate recent experience in domestic and international financial markets. My conclusion is that the current episode qualifies as a full-fledged crisis of a magnitude comparable to the 1974-75 experience. The Federal Reserve is seen to play crucial roles both in the development and in the resolution of past and present crises.

Do We Really Know that Financial Markets are Efficient

Abstract: This paper examines the power of statistical tests commonly used to examine the efficiency of speculative markets. It shows that for markets with "long horizons" such as the stock markets, or the market for long term bonds, these tests have very low power. Market valuations can differ substantially and persistently from the rational expectation of the present value of cash flows without leaving statistically discernible traces in the pattern of ex-post returns. This observation also suggests that speculation is unlikely to insure rational valuations, since similar problems of identification plague both financial economists and would-be speculators.

Capital Structure and the Financing of the Multinational Corporation: A Fractional Multiobjective Approach

Abstract: The financial manager of the multinational corporation (MNC) is faced with various tax structures, changing exchange rates, barriers to capital flows, and the possibility of financial market segmentation. The manager must be concerned with determining an optimal capital structure as well as identifying the sources of the relevant funds. Likewise, the manager must be concerned not only with funds flows, but also with the risk that the value of these flows will change owing to changing exchange rates. Finally, the manager must be concerned with operating under widely differing governmental philosophies.

The Term Structure of Interest Rates: a Survey of the Theories and Empirical Evidence

Abstract: In financial markets investors and borrowers are faced with a whole structure of prices and interest rates on financial instruments. The determination of equilibria in these markets is a complex process and presents a challenge to researchers and practitioners alike. In this article we are concerned with a single section of these markets where we study the relationships between the interest rates or yields on financial securities which can be distinguished from each other (as far as possible) only by their term to maturity. We only cover the structure of money or nominal yields, as an examination of the real returns would require another arti‐cle in itself.

Do we really know that financial markets are efficient

Abstract: Introduction The proposition that securities markets are efficient forms the basis for most research in financial economics. A voluminous literature has developed supporting this hypothesis. Jensen (1978) calls it the best established empirical fact in economics. Indeed, apparent anomalies such as the discounts on closed end mutual funds and the success of trading rules based on earnings announcements are treated as indications of the failures of models specifying equilibrium returns, rather than as evidence against the hypothesis of market efficiency. Recently the Efficient Markets Hypothesis and the notions connected with it have provided the basis for a great deal of research in macro–economics. This research has typically assumed that asset prices are in some sense rationally related to economic realities. Despite the widespread allegiance to the notion of market efficiency a number of authors have suggested that certain asset prices are not rationally related to economic realities. Modigliani and Cohn (1979) suggest that the stock market is very substantially undervalued because of inflation illusion. A similar claim regarding bond prices is put forward in Summers (1983). Brainard, Shoven and Weiss (1980) found that the then low level of the stock market could not be rationally related to economic realities. Shiller (1979 and 1981a) concludes that both bond and stock prices are far more volatile than can be justified on the basis of real economic events.

A Guide to the Financial Markets

Abstract: This book brings together all the major financial markets. The author achieves this by organizing the material into capital markets and hedging markets. Each chapter provides a discussion of each market, beginning with basic definitions and concepts and finishing with current problems.

The Japanese market and the economic environment

Abstract: S ince the War, the Japanese economy has been able to maintain a high growth rate. Among the conditions for such a growth, we cannot ignore the important role of the financial market.' Although post-war Japanese financial intermediation relied mostly on the flow of funds through the banking sector, there has been little research that deals with the securities market.' Since the oil crisis, however, the Japanese financial structure has drastically changed because of large issues of government bonds, so that the function of the securities market has rapidly become more important than before. Therefore, it is important to survey the Japanese securities market with the hope that it will be a starting point for this kind of research. In this paper, we shall focus on the stock market and examine its function from the macroeconomic point of view. The objective of our analysis is to clarify whether or not the price mechanism works in the Japanese stock market. The answer to this question provides a foundation for what is to follow, which will include a test of the Capital Ass& Pricing Model and the measurement of the cost of capital. First, we will survey the character of the Japanese stock market. We will then investigate the effectiveness of the price mechanism from two aspects, i.e., from the standpoint of allocational efficiency and from that of informational efficiency. Finally, we will present some concluding remarks.

The Impossibility of Efficient Decision Rules for Firms in Competitive Stock Market Economies

Abstract: Considerable attention has been focused recently on models of firms under uncertainty in which there is an incomplete set of securities markets. In these models, each firm can issue only one security and consumers can generate consumption plans only through the purchase of firms' securities. Consequently, if the economy is competitive, each stockholder of a firm will impute the same value to the firm in equilibrium, where this value is given by the market price of the firm's security. However, stockholders will not, in general, have the same implicit prices for state-contingent consumption. Since the financial market is said to be incomplete if the number of independent securities is less than the number of states of nature, consumers cannot hedge perfectly, whichimplies that unconstrained Pareto-optimal allocations are not generally attainable (see [2] and [3]). Finally, it is unclear what firms' objectives should be in these models because profit maximization is not well defined; firms' profits in different states cannot be aggregated into a single index. It is still generally accepted, however, that firms should operate in their own stockholders'interests, a necessary condition for allocative efficiency.

Effects of Low Interest Rates on the Poor in Low Income Countries

Abstract: Over the past three decades, agricultural credit has received considerable attention in low income countries as governments have tried to stimulate output and help the rural poor through credit. Recent analyses, however, reveal major problems in many agricultural credit programmes. Cheap credit policies appear to fragment rural financial markets so that resources are not allocated efficiently. Low interest rates also undermine the financial integrity of financial intermediaries and force them to become highly dependent on loanable funds from central banks or external aid agencies. Despite the high hopes held for cheap credit as an effective way to help the rural poor, it tends to increase rather than decrease income concentration. In the discussion that follows, we briefly outline four ways that financial markets affect income distribution--through negative impacts on savers, leverage, negative real rates of interest, and defaults. We conclude with suggested policy changes that might reduce the adverse impact financial markets have on income distributions.

A Disequilibrium Model of Savings and Loan Associations

Abstract: This paper discusses the consistent specification and estimation of asset demand equations in a disequilibrium model of financial markets. We estimate the effective asset demands of savings and loan associations, allowing for rationing in the mortgage market. These disequilibrium estimates are not very different from the estimates of notional demands with no rationing assumed. Savings and loans seem to be least affected by excess demand situations in that they are apparently not reluctant to raise mortgage rates and/or to ration borrowers.

Discussion: The Impossibility of Efficient Decision Rules for Firms in Competitive Stock Market Economies

Abstract: This paper serves as an intuitive companion piece to a more technical paper in which Forsythe and Suchanek (F–S) introduce a model which demonstrates “the impossibility of efficient decision rules for firms in competitive stock market economies.” F–S are to be commended for undertaking this effort. The major theme of this paper appears to be that “inefficient equilibria are generic to competitive stock market economies.” This is contrary to the general belief that not only do complete financial markets but also a wide variety of incomplete financial markets guarantee efficient financial equilibria. The F–S model claims to demonstrate otherwise.