Showing papers on "Financial market published in 1988"

Stock Prices, Earnings, and Expected Dividends

Abstract: This paper presents estimates indicating that, for aggregate U.S. stock market data 1871-1986, a long historical average of real earnings is a good predictor of the present value of future real dividends. This is true even when the information contained in stock prices is taken into account. We estimate that for each year the optimal forecast of the present value of future real dividends is roughly a weighted average of moving average earnings and current real price, with between 2/3 and 3/4 of the weight on the earnings measure. This means that simple present value models of stock market prices can be strongly rejected. We use a vector autoregressive approach which enables us to compute the implications of this for the behavior of stock prices and returns. We estimate that log dividend-price ratios are more variable than, and virtually uncorrelated with, their theoretical counterparts given the present value models. Annual returns on stocks are quite highly correlated with their theoretical counterparts, but are two to four times as variable. Our approach also reveals the connection between recent papers showing forecastability of long-horizon returns on corporate stocks, and earlier literature claiming that stock prices are too volatile to be accounted for in terms of simple present value models. We show that excess volatility directly implies the forecastability of long-horizon returns.

Foundations for financial economics

Abstract: 1. Preferences Representation and Risk Aversion. 2. Stachastic Dominance. 3. Mathematics of the Portfolio Frontier. 4. Two Fund Separation and Linear Valuation. 5. Allocative Efficiency and the Valuation of State Contingent Securities. 6. Valuation of Complex Securities and Options with Preference Restrictions. 7. Multiperiod Securities Markets I: Equilibrium Valuation. 8. Multiperiod Securities Markets II: Valuation by Arbitrage. 9. Financial Markets with Differential Information. 10. Econometric Issues in Testing the Capital Asset Pricing Model.

Financial Market Imperfections and Business Cycles

Abstract: This paper develops a simple model of macroeconomic behavior which incorporates the impact of financial market "imperfections," such as those generated by asymmetric information in financial markets. These information asymmetries may lead to breakdowns in markets, like that for equity, in which risks arm shared. In particular, we analyze firm behavior in the presence of equity rationing and imperfect futures markets, in which there are lags in production. Aft a consequence, firms act in a risk-averse manner. We trace out the macroeconomic consequences, and show that they are able to account for many of the widely observed aspects of actual business cycles.

On Jump Processes in the Foreign Exchange and Stock Markets

Abstract: exchange rates exhibit systematic discontinuities, even after allowingfor conditional heteroskedasticity in the diffusion process. The results are much more significant in theforeign exchange market than in the stock market, which suggests differences in the structure of these markets. Finally, this jump component is shown to explain some of the empirically observed mispricings in the currency options market. The objective of this article is to analyze and compare the empirical distribution of returns in the stock market and in the foreign exchange market. There are a number of reasons why a better understanding of the stochastic processes driving prices in these markets would be useful. Many financial models rely heavily on the assumption of a particular stochastic process, while relatively little attention is paid to the empirical fit of the postulated distribution. As a result, models like option pricing models are applied indiscriminately to various markets such as the stock market and the foreign exchange market when the underlying processes may be fundamentally different. The foreign exchange market, for instance, is characterized by active exchange rate man

Financial Development, Growth, And The Distribution Of Income

Abstract: A paradigm is presented where both the extent of financial intermediation and the rate of economic growth are endogenously determined. Financial intermediation promotes growth because it allows a higher rate of return to be earned on capital, and growth in turn provides the means to implement costly financial structures. Thus, financial intermediation and economic growth are inextricably linked in accord with the Goldsmith-McKinnon-Shaw view on economic development. The model also generates a development cycle reminiscent of the Kuznets hypothesis. In particular, in the transi tion from a primitive slowgrowing economy to a developed fast-growing one, a nation passes through a stage where the distribution of wealth across the rich and poor widens. (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.)

Testing Rationality in the Point Spread Betting Market

Abstract: This paper presents empirical tests of market rationality using data from the point spread betting market on National Football League games. Data from this market avoid many common pitfalls of tests of rationality in conventional financial markets. The authors test for rationality with two types of tests, statistical and economic. Results of the tests reveal that the statistical tests cannot reject market rationality while the economic tests do reject market rationality. MARKET RATIONALITY CAN BE empirically examined with either pure statistical tests or direct economic tests. Statistical tests look at statistical properties of markets, such as price correlations. Economic tests attempt to detect unexploited profit opportunities. This paper compares the results of these two types of rationality tests with data from the point spread betting market on National Football League (NFL) games. We conclude that the statistical tests are too weak to reject rationality in a market where irrationality appears to exist. Our results are strikingly consistent with those of Summers [26], who simulated a model of stock prices incorporating nonrational expectations and then showed that standard statistical tests are too weak to detect the absence of rationally formed expectations. Summers employed simulation because market rationality is difficult to test directly in conventional financial markets: the ongoing nature of securities markets means that there exists no point at which an objective fundamental value can be observed and compared with actual prices.' In contrast, the point spread market offers an objective, though uncertain, game outcome to decide the end-of-horizon payoff. Moreover, once a bet is placed in these markets, the impact of subsequent betting does not affect the odds on the placed bet (unlike pari-mutuel betting). Because of this elementary market

The Encyclopedia of Technical Market Indicators

Abstract: This book deals with the advantages of using technical market indicators, which to use, how and when to use them, and why. This new edition offers an accumulated treasury of nearly all known technical market indicators, including many new ones and better ways to use long-established ones. It offers precise formulas, performance over all available market history, and how to maximize reward/risk potentials. Now you can apply tested indicators immediately to your own investment decision making. Praise for the first edition: 'Objective. Systematic. Honest. Pulls no punches. Thorough. Extensively researched. Provides in-depth coverage of more than one hundred indicators, clearly revealing both their strengths and weaknesses. Shows you how to select indicators that work best to achieve your objectives while taking the guesswork out of your investing and trading. The source for the actual facts about technical market timing indicators' - Alan R. Shaw, CMT, Managing Director, Senior Advisor, Technical Research Department, Salomon Smith Barney. 'The most thoroughly documented research that I have ever seen. Shows hard evidence. Highly recommended' - Gerald Appel, Signalert Corporation. 'Credible. Must reading' - Norman G. Fosback, The Institute for Econometric Research, Inc. 'Terrific. The most helpful text' - Paul Rabbitt, RabbittAnalytics.Com. The same technical market indicators used by top-performing traders and investors are available now. This book offers the necessary knowledge on how to formulate and test technical market indicators in an orderly, step-by-step fashion. Specific technical market indicator parameters shown in this book would have maximized reward/risk performance over actual market history. Technical market indicators offer: logical, practical, efficient, effective, systematic, and precisely quantified frameworks for organizing information about actual observed market behavior, providing a firm foundation for making speculative decisions, grounded on historical precedent; flexibility and adaptability to any time frame and any trading instrument; and, clear-cut, precise, and objective signals that allow us to confidently execute trades while eliminating uncertainty, guesswork, confusion, anxiety, and stress, and freeing us from forecasts, opinion, bias, ego, hope, greed, and fear. Technical market indicators offer: a sensible and orderly procedure for selecting specific decision rules that would have maximized reward/risk performance over actual past market behavior; simple, intuitive, easy-to-understand, and precisely defined formulas based on a manageable number of variables, enabling us to execute decisions with the timely and disciplined consistency that is vital for success in the financial markets; accessibility, based on readily available technology and data; conservation of capital and precisely defined methods for risk control; and, risk reduction means greater consistency of profitable returns. This book shows you how to find a trading system that is right for you and how to apply it for best results increased profit, decreased risk, and the self-confidence of gaining control over your investment decision making.

Fads, Martingales, and Market Efficiency

Abstract: Much of the theoretical basis for current monetary and financial theory rests on the economic efficiency of financial markets. Not surprisingly, considerable effort has been expended to test the efficient markets hypothesis, usually by examination of the predictability of equity returns. Unfortunately, there are two competing explanations of the presence of such predictable variation: (1)market inefficiency, and stock price 'overreaction' due to speculative 'fads' and (2) predictable changes in expected security returns associated with forecasted changes in market or individual security 'fundamentals?. These explanations can be distinguished by examining equity returns over short time intervals since there should be negligible systematic changes in the fundamental valuation of individual firms over intervals like a week in an efficient market. This study finds sharp evidence of market inefficiency in the form of systematic tendencies for current 'winners' and 'losers' in one week to experience sizeable return reversals over the subsequent week in a way that reflect apparent arbitrage profits. These measured arbitrage profits persist after corrections for the mismeasurement of security returns because of thin trading and bid-ask spreads and for plausible levels of transactions costs.

The Development of Corporate Financial Markets in Britain and the United States, 1600–1914: Overcoming Asymmetric Information

Abstract: In the following article, Professor Baskin traces the evolution of corporate finance from its beginnings among the British trading companies to its modern transformation in the United States at the end of the nineteenth century. He argues that deductive theoretical analyses based on perfect capital markets cannot always explain actual historical developments, and that financial history generally has not received sufficient attention from either economic theorists or historians. Professor Baskin suggests that financial markets developed as they did largely as a result of efforts to minimize the problems created by the asymmetry of information between company insiders and potential investors.

Costly short sales and the correlation of returns with volume

Abstract: Previous researchers have documented an empirical correlation between returns and trading volume in some financial markets. In this paper, an explanation is proposed based on the notion that short positions are more costly than long positions in these markets. The hypothesis is consistent with previous findings and with futures markets data, in which the costs of assuming short and long positions are symmetric and in which the correlation between returns and volume is not significant.

Private Annuity Markets in the United States: 1919-1984

Abstract: Load factors on life annuities issued to 65-year old males and females over the period 1919 through 1984 have ranged from 10 cents to 29 cents per dollar of actuarial present value. From 8 cents to 16 cents of these loads represents the cost of adverse selection, and approximately 7.5 cents represents transaction costs. The cost of adverse selection increased during the middle period of study, 1941-1962, on annuities sold to males, while the cost of adverse selection continually declined for females. Annuities were at the height of their popularity in the early 1930s when policies were credited with interest rates higher than those available in the financial market; implicitly 7.5 cents of the load factor was returned to policyholders. The use of interest rates lower than market yields in the last period of study, 1963-1984, however, increased load factors by 6.6 cents. This study examines the pricing of individual life annuities over an extended historical period. It attempts to identify and examine the factors relevant to annuity pricing: the roles that adverse selection of mortality risks, the use of portfolio yields, and transaction costs play in the determination of load factors on individual annuity contracts. The claim by Abel (1986) that the cost of adverse selection increased with the introduction of Social Security and pension plans is also briefly examined. Empirical evidence on private annuity markets may help to broaden and inform current discussions in the economics literature concerning the life cycle hypothesis of savings and the impact of the introduction of Social Security on steady-state wealth and social welfare. Relying on simulation work, Davies (1981) attempts to reconcile the life cycle hypothesis with the observed slow dissaving of marketable assets by the retired. He claims that it is unnecessary to resort to a bequest motive for explanation because plausible parameters of Mark Warshawsky is an Economist with the Board of Governors of the Federal Reserve System. The author thanks Joyce Payne for help in assembling the data, Amy Bassan for pointing out the data source on annuity prices, and Andrew Abel, Michael G. Bradley, Benjamin Friedman, Frank Nothaft, Francis Schott, seminar participants at the University of Pennsylvania, and an Associate Editor and anonymous referee of this Journal for helpful comments. The opinions expressed in the paper are those of the author and not those of the Board of Governors of the Federal Reserve System or its staff. This content downloaded from 157.55.39.114 on Fri, 14 Jul 2017 17:35:18 UTC All use subject to http://about.jstor.org/terms Private Annuity Markets in the United States 519 the utility function and the absence of private annuity markets can adequately explain the slow dissaving of assets by the aged in the face of an uncertain lifetime. Abel (1985) employs this scenario to demonstrate that the introduction of a Social Security system alleviates the need for precautionary saving and therefore leads to a reduction in steady-state wealth. Eckstein, Eichenbaum, and Peled (1985) demonstrate how particular schemes for the introduction of a Social Security system lead unambiguously to a Pareto improvement in social welfare in the absence of private annuity markets. The results of these theoretical analyses, however, are suspect because of the strong and incorrect assumption that private annuity markets are nonexistent. The more relevant questions which researchers should instead pose are: (a) whether observed load factors on annuity contracts are sufficient to account for the lack of participation in private annuity markets and the slow dissaving of assets by the aged; and (b) whether a private annuity market with load factors would increase or decrease social welfare when compared to a social annuity program like the Social Security system. It is hoped that the empirical evidence on private annuity markets produced in this article will enable researchers to pose these questions.

Investing in Bankrupt Firms

Abstract: We examine the investment characteristics of firms electing to enter bankruptcy, between 1973 and 1982. Comparisons are made before and after the Bankruptcy Reform Act of 1978. Our results indicate that the 1978 Act had no significant impact on bankruptcy decisions or resolutions for actively traded firms. Trading in bankrupt firms' securities is becoming more common, but no abnormal returns appear to be available. Systematic risk does not change significantly with the filing of bankruptcy, but there is a significant increase in return variance. The financial markets also react to various announcements of stages in the reorganization process.

Business Cycles, Financial Crises, and Stock Volatility

Abstract: This paper shows that stock volatility increases during recessions and financial crises from 1834-1987 The evidence reinforces the notion that stock prices are an important business cycle indicator Using two different statistical models for stock volatility, I show that volatility increases after major financial crises Moreover stock volatility decreases and stock prices rise before the Fed increases margin requirements Thus, there is little reason to believe that public policies can control stock volatility The evidence supports the observation by Black [1976] that stock volatility increases after stock prices fall

The Conundrum of Successful Credit Projects in Floundering Rural Financial Markets

Abstract: Many governments use credit projects to foster agricultural development, and donors spend billions of dollars supporting these activities in low income countries (LICs). Most of these activities are justified by the purported impact that loans have on ultimate borrowers, for example, credit demands filled, additional crops produced, changes in modern inputs used, and borrowers' incomes increased. Most project evaluations report favorable impacts that, in turn, stimulate donors and governments to spend more money on agricultural credit. These favorable evaluations have prompted policymakers to conclude that rural financial markets are strengthened by most credit projects. At the same time, other researchers have evaluated rural financial markets in countries with successful credit projects and have found mounting problems. They report on markets that lose substantial portions of the purchasing power of their loan portfolios to ravages of default or inflation, concentrations of cheap loans in the hands of the wealthy, political meddling in lending, systems that offer few savings opportunities, large transaction costs for lenders and borrowers, lenders who are addicted to outside funds for their sustenance, and credit institutions that sporadically implode or self-destruct.' These reports of healthy parts but infirm wholes present a conundrum. How can the major parts of the rural financial system involved in donor and government projects be doing well while the system as a whole is doing poorly? Are these projects islands of tranquility in otherwise stormy seas? Or is one of these two approaches to evaluation giving an erroneous picture? Unfortunately, few credit project evaluations are published in journals or books, although a large number of these studies have been done. Typically, evaluation results are buried in unpublished reports or in graduate student theses. While millions of dollars have been spent

Financial Factors in Business Fluctuations

Abstract: Recent research in macroeconomics -- both theoretical and empirical -- has resurrected the idea that capital market imperfections may be significant factors in business volatility by making new progress in characterizing the mechanisms. This paper outlines a case for a financial aspect to business fluctuations, in light of the contributions of this new literature. We present a theoretical model that explicitly motivates how financial factors may affect investment. We then report some existing tests of the model's basic predictions4 and also present two new sets of results. The first demonstrates that the inverse relation between sales variability and size documented in many studies may be due to financial rather than technological factors, in contrast to the conventional view. The second lends support to a theoretical prediction of the model. that the effects of capital market frictions on investment should be asymmetric -- having more impact in recessions than booms. The final section presents conclusions, and addresses some policy questions.

Financial Market Imperfections and Business Cycles

Abstract: This paper develops a simple model of macroeconomic behavior which incorporates the impact of financial market "imperfections," such as those generated by asymmetric information in financial markets. These information asymmetries may lead to breakdowns in markets, like that for equity, in which risks arm shared. In particular, we analyze firm behavior in the presence of equity rationing and imperfect futures markets, in which there are lags in production. Aft a consequence, firms act in a risk-averse manner. We trace out the macroeconomic consequences, and show that they are able to account for many of the widely observed aspects of actual business cycles.

On the Roles of International Financial Markets and Their Relevance for Economic Policy

Abstract: A general equilibrium approach to international finance and macroeconomics has been developed. Recent work associated with this development provides useful tools for interpreting evidence and evaluating alternative policy options. Important issues to which these advances have been applied include the choice of an exchange rate system; the high variability of exchange rates; the effects of budget deficits, sterilized foreign exchange market intervention, and monetary and fiscal policies; the causes and consequences of large and variable current account deficits or surpluses and their connections with exchange rates; and the development of more open and sophisticated international financial markets. Copyright 1988 by Ohio State University Press.

Survey Research for Managers: How to Use Surveys in Management Decision-making

Abstract: Survey research for management decision-making the consumer the industrial customer corporate image employees financial markets the small shareholder the city government international research qualitative research. Appendix: Market Research Society Code of conduct.

Finance constraints, expectations, and macroeconomics

Abstract: This study examines a new area of macroeconomic theory: the implications of the finance constraint approach to monetary theory. Hicks, Tsiang, Diamond, Howitt, Stockman, Kohn, Greenwald and Stiglitz, Helpman and Drazen, Svensson, Aoki and Liejonhufvud, and Woodford contribute papers which seek to understand monetary and macroeconomic issues in terms of financial market "imperfections". The incompleteness of financial markets and the existence of finance constraints provide an explanation for the sort of co-ordination problem that afflicts real-world economies, but is absent from simplistic New Classical models. In the presence of financial constraints, economies exhibit deviation-amplifying multipliers, non-pecuniary externalities and multiple self-fulfilling expectations equilibria. Even with rational expectations, optimizing behaviour and flexible prices, these papers argue that there may remain room for benign policy intervention of a Keynesian nature.

Innovations, Debts, and Bubbles: International Integration of Financial Markets in Western Europe, 1688–1720

Abstract: The article uses recent exchange-rate data to explore the progressive integration of early eighteenth-century, West European financial markets. The process climaxed in 1719 and 1720 with the Mississippi Bubble in Paris, the South Sea Bubble in London, and the insurance bubbles in Hamburg and throughout Holland. Only Paris failed to integrate permanently into the new multinational network.

Monetary Control Mechanism in Japan

Abstract: This paper is to explain Japan's monetary control techniques and to analyze how they determine short-term money market rates and the money stock. We analyze that interest rates in the short-term call and bill-discount markets, operating variables of the Bank of Japan, are determined mainly through the adjustment of the official discount rate and of the "progress ratio of reserve deposits." We also analyze that the Bank of Japan controls an intermediate target, by relying the transmission of initial changes in the call and bill rates to other financial markets. Finally, we point out some problems that the Bank of Japan has to consider regarding monetary control during the process of financial globalization.

Recent developments in Japan's bond and money markets

Abstract: This paper traces the evolution of Japan's bond and money markets, which were for many years characterized by market segmentation, regulated interest rates, and a limited menu of financial instruments. Beginning in the late 1970s, the authorities responded to a major structural change in the real economy by liberalizing the financial system. Consequently, the bond and money markets have expanded rapidly and, with the elimination of legal barriers and a fall in transactions costs, different components of these once-segmented financial markets in Japan have become highly integrated. However, market liberalization is not yet complete, and further liberalization is likely to occur with implications for the regulation of other aspects of the financial system.

Capital changes at large affiliated banks

Abstract: The federal bank regulators imposed numerical capital guidelines in December 1981. If these guidelines are binding, then banking organizations may respond to the costs of regulation in various ways. If the regulations are not binding, then further reliance may be placed on market discipline. This study develops two models of changes in the equity capital to assets ratio of large banks affiliated with bank holding companies—a regulatory model in which capital regulations are a binding influence and a market model in which financial markets influence capital ratios. The two models are examined empirically through a disequilibrium framework and maximum likelihood estimation techniques. The results suggest that most banks are predominantly influenced by regulatory forces.

International capital mobility and exchange rate volatility

Abstract: Three post-1980 developments have instilled in many observers a feeling that all is not quite right with the world financial system: the international debt problem of many developing countries, the large U.S. current account deficit and the corresponding cumulation of foreign indebtedness, and the heightened volatility of exchange rates and other asset prices in world financial markets. To what extent are the large swings in prices and quantities on international financial markets attributable to a higher degree of international capital mobility in the 1980s? This paper examines, first, various ways of quantifying the degree of international capital mobility, and, second, implications of high capital mobility for the possibility that exchange rates are "excessively volatile."

Financial deregulation and the globalization of capital markets

Abstract: Financial deregulation in recent years has vastly increased the ability of the financial markets to allocate international capital efficiently. It has also sparked explosive growth in financial transactions and resulted in a restructured, more competitive, and less costly financial services industry. But the deregulation has proceeded so rapidly that the volume of purely financial transactions now greatly exceeds that of transactions driven by international trade in goods and services. This new pattern has led to growing economic uncertainty and instability. Markets now run around the clock and respond to change so rapidly that there is a growing danger of chain reactions that could precipitate global market failure. Regulators in the major trading nations need to address the possibility of a full-scale breakdown of the financial system.