Showing papers on "Stock exchange published in 1983"
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TL;DR: In this paper, the behavior of competing dealers in securities markets is analyzed and the conditions for interdealer trading are specified, and the equilibrium distribution of dealer inventories and equilibrium market spread are derived.
Abstract: The behavior of competing dealers in securities markets is analyzed. Securities are characterized by stochastic returns and stochastic transactions. Reservation bid and ask prices of dealers are derived under alternative assumptions about the degree to which transactions are correlated across stocks at a given time and over time in a given stock. The conditions for interdealer trading are specified, and the equilibrium distribution of dealer inventories and the equilibrium market spread are derived. Implications for the structure of securities markets are examined. IN THIS PAPER the behavior of competing dealers in security markets is examined. Much of the theoretical work on dealers (Demsetz [6], Tinic [18], Garman [8], Stoll [16], Amihud and Mendelson [1], Ho and Stoll [11], Copeland and Galai [3], Mildenstein and Schleef [13]) has recognized that dealers may face competition from other dealers or investors placing limit orders, but nonetheless has analyzed only a single (representative) dealer. This approach is quite reasonable for the New York Stock Exchange specialist who has a quasi-monopoly position, but it is less applicable when considering other markets such as the over-thecounter market where there are several dealers with equal access to the market. Similarly the empirical studies of dealer bid-ask spreads (Demsetz [6], Tinic [18], Tinic and West [19], Benston and Hagerman [2], Stoll [17], Smidt [15]) have either been based on models of a single dealer or have lacked a theoretical foundation based on the microeconomics of the dealer. This paper develops a theoretical model of equilibrium in a market with competing dealers and provides a basis for empirical work that would distinguish competing and monopolistic dealer markets. The paper is concerned with the behavior and interaction of individual competing dealers and with the determination of the market bid-ask spread. Markets with several dealers, several stocks and several periods are considered. Dealers bear risk arising not only from uncertainty about the returns on their inventories but also from uncertainty about the arrival of transactions. Each dealer also recognizes that his welfare depends on the actions of other dealers and each sets bid and ask prices to maximize his own expected utility of terminal wealth. A recent paper by Cohen, Maier, Schwartz and Whitcomb [5] examines similar issues in the context of an auction market in which the market spread is determined by limit orders. However, unlike the model of this paper, their analysis is not based as clearly on a model of individual traders' maximizing behaviors nor are the costs of placing * Financial support of the Dean's Fund for Faculty Research at the Owen Graduate School of
818 citations
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TL;DR: In this paper, the authors examined empirically stock market seasonality in major industrialized countries and provided evidence that there are strong seasonalities in the stock market return distributions in most of the capital markets around the world.
577 citations
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TL;DR: In this article, the authors analyze the variance-bound methodology used by Shiller and conclude that this approach cannot be used to test the hypothesis of stock market rationality, and they conclude that the empirical properties of the stochastic model I posit come close to resembling the empirical determinants of today's real-world markets.
Abstract: Perhaps for as long as there has been a stock market, economists have debated whether or not stock prices rationally reflect the "intrinsic" or fundamental values of the underlying companies. At one extreme on this issue is the view expressed in well-known and colorful passages by Keynes that speculative markets are no more than casinos for transferring wealth between the lucky and unlucky. At the other is the Samuelson-Fama Efficient Market Hypothesis that stock prices fully reflect available information and are, therefore, the best estimates of intrinsic values. Robert Shiller has recently entered the debate with a series of empirical studies which claim to show that the volatility of the stock market is too large to be consistent with rationally determined stock prices. In this paper, we analyze the variance-bound methodology used by Shiller and conclude that this approach cannot be used to test the hypothesis of stock market rationality. Resolution of the debate over stock market rationality is essentially an empirical matter. Theory may suggest the correct null hypothesis-in this case, that stock market prices are rational but it cannot tell us whether or not real-world speculative prices as seen on Wall Street or LaSalle Street are indeed rational. As Paul Samuelson wrote in his seminal paper on efficient markets: "You never get something for nothing. From a nonempirical base of axioms, you never get empirical results. Deductive analysis cannot determine whether the empirical properties of the stochastic model I posit come close to resembling the empirical determinants of today's real-world markets" (1965, p. 42). On this count, the majority of empirical studies report results that are consistent with stock market rationality.' There is, for example, considerable evidence that, on average, individual stock prices respond rationally to surprise announcements concerning firm fundamentals, such as dividend and earnings changes, and that prices do not respond to " noneconomic" events such as cosmetic changes in accounting techniques. Stock prices are, however, also known to be considerably more volatile than either dividends or accounting earnings. This fact, perhaps more than any other, has led many, both academic economists and practitioners, to the belief that prices must be moved by waves of "speculative" optimism and pessimism beyond what is reasonably justified by the fundamentals. 2
455 citations
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TL;DR: The authors investigated the relation between common stock returns and inflation in twenty-six countries for the postwar period and found that there is a consistent lack of positive relation between stock returns with inflation in most of the countries.
Abstract: This paper investigates the relation between common stock returns and inflation in twenty-six countries for the postwar period. Our results do not support the Fisher Hypothesis, which states that real rates of return on common stocks and expected inflation rates are independent and that nominal stock returns vary in one-to-one correspondence with expected inflation. There is a consistent lack of positive relation between stock returns and inflation in most of the countries.
427 citations
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TL;DR: In this paper, the authors suggest that the discrepancy between the actual and predicted prices is caused by taxes, and they use a simple arbitrage model to show that if the stock price drops, the investor can pass part of the loss on to the government by selling the stock.
Abstract: Stock index futures prices are generally below the level predicted by simple arbitrage models. This paper suggests that the discrepancy between the actual and predicted prices is caused by taxes. Capital gains and losses are not taxed until they are realized. As Constantinides demonstrates in a recent paper, this gives stockholders a valuable timing option. If the stock price drops, the investor can pass part of the loss on to the government by selling the stock. On the other hand, if the stock price rises, the investor can postpone the tax by not realizing the gain. Since this option is not available to stock index futures traders, the futures prices will be lower than standard no-tax models predict. ON 24 FEBRUARY 1982, the Kansas City Board of Trade began trading futures contracts on the Value Line Average stock index. During the next two months, both the Chicago Mercantile Exchange and the New York Futures Exchange also initiated trading in stock index futures. Although these contracts are actively traded, their prices have puzzled both practitioners and academics. The observed
190 citations
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TL;DR: For example, a European call option on a foreign currency is an option to buy one unit of the currency on a predetermined date at a predetermined exchange rate as mentioned in this paper, which can be defined in the same way as options on a stock.
Abstract: extended with its underlying assumptions being relaxed. The model has also found many applications in finance. Smith [6] provides a good overall review of the subject. Options on a foreign currency can be defined in the same way as options on a stock. For example, a European call option on a foreign currency is an option to buy one unit of the currency on a predetermined date at a predetermined exchange rate. At the time of writing there is no well-organized market for foreign currency options. However, the Philadelphia, Montreal and Vancouver stock exchanges have all submitted proposals for the creation of such a market.
147 citations
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TL;DR: In this article, the authors examined the effect of one type of merger, pure stock exchange, on the values of the debt and equity of the firms involved and found that different forms of merger could have different effects on security values of firms involved.
Abstract: Merger transactions involve differing degrees of change in capital structure and asset distribution. As a result, different forms of merger could have different effects on security values of the firms involved. Previous empirical studies primarily used samples that included all types of mergers. The present study examines the effect of one type of merger, pure stock exchange, on the values of the debt and equity of the firms involved.
134 citations
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91 citations
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TL;DR: In this paper, it is assumed that recipients of stock dividends look upon them as distributions of corporate earnings and usually in an amount equivalent to the fair value of the additional shares received, and it is to be presumed that such views of recipients are materially strengthened in those instances, which are by far the most numerous, where the issuances are so small in comparison with the shares previously outstanding that they do not have any apparent effect upon the share market price and, consequently, the market value of previously held remains substantially unchanged.
Abstract: Many recipients of stock dividends look upon them as distributions of corporate earnings and usually in an amount equivalent to the fair value of the additional shares received. Furthermore, it is to be presumed that such views of recipients are materially strengthened in those instances, which are by far the most numerous, where the issuances are so small in comparison with the shares previously outstanding that they do not have any apparent effect upon the share market price and, consequently, the market value of the shares previously held remains substantially unchanged.
56 citations
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54 citations
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TL;DR: In this paper, the authors provide a model of stock price performance, examine the link to business unit profitability, and suggest some steps to improve your company's market valuation. But, they do not address why stock prices are important and what is a high or low price.
Abstract: The price of a company's stock affects many aspects of its operations, ranging from access to capital to executive compensation to acquisition strategy. Unfortunately, too few managers understand why stock prices are important and what is a high or low price. The authors provide a model of stock price performance, examine the link to business unit profitability, and suggest some steps to improve your company's market valuation.
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TL;DR: In this paper, a simulation model of stock exchange trading is used to test the impact of various stabilization policies on a stock's market per formance characteristics (price volatility, the size of its bid-ask spread, and autocorrelation patterns in the security's returns).
Abstract: A simulation model of stock exchange trading is used to test the impact of various stabilization policies on a stock's market per formance characteristics (price volatility, the size of its bid-ask spread, and autocorrelation patterns in the security's returns). Market participants include large and small traders, a pure stabilizer, and a speculating stabilizer. The "market architecture" includes the arrival of market and limit orders the maintenance of a limit order book, and the handling of trade execution. Each type of stabilizer improves the operating characteristics of the market, with the speculating stabilizer having a bigger impact and realizing more profits than the pure stabilizer. Using the mechanism of simulation to eliminate other sources of the stabilizer's profit, we find that stabilization per se is an un profitable activity. We then suggest additional ways in which the simulation model could be developed and further uses for it.
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TL;DR: In this paper, the authors investigate whether the price differential can be explained solely by the different settlement procedures and find that it cannot be explained by the transaction settlement procedures, and they find that the when-issued share sells at a higher price (adjusted for the split factor) than the old share.
Abstract: A BASIC POSTULATE of the theory of finance is that two equivalent financial claims will sell at the same price in a competitive financial market. An occasion for testing this single price law of markets arises when new shares created as a result of a stock split are traded on a "when-issued" basis. Since one old share entitles the holder to the same cash flow stream as a proportional number of when-issued split shares, the price of the old shares should be the same as the price of the when-issued shares adjusted for the stock split factor. However, casual empiricism suggests that these two prices are seldom equal, and that in virtually all cases, the when-issued share sells at a higher price (adjusted for the split factor) than the old share. A possible explanation of this apparent price discrepancy lies in the transaction settlement procedures. The settlement of when-issued trading is not made until six business days after the new shares are distributed, whereas trades in the old shares are settled five business days after the trade date. In this note, we investigate whether the price differential can be explained solely by the different settlement procedures and find that it cannot. Section I describes trading in when-issued securities on the New York Stock Exchange (NYSE) and discusses possible causes of this price discrepancy. Section II describes the data used in this study and presents the empirical results. Additional discussion is in Section III, and Section IV contains concluding remarks.
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TL;DR: In this paper, a study of whether a smaller annual turnover of an exchange effects the degree of nonrandomness exhibited by its stock returns is presented. But the results of this study are limited to the Helsinki stock exchange.
Abstract: This note adds to previous Scandinavian evidence produced by the Jennergren & Korsvold (1974, 1975),' Jennergren (1975), Jennergren & ToftNielsen (1977), Korhonen (1977) and S0rensen (1982) studies of stock market return randomness. In daily data sets from the Oslo and Stockholm Stock Exchanges, Jennergren & Korsvold (1975) found evidence of nonrandomness in a majority of the 45 stocks studied. A similar result was later reported for the Copenhagen exchange by Jennergren & Toft-Nielsen (1977). Subsequent studies by Jennergren (1975) and S0rensen (1980) further indicated that the serial correlation inherent in Stockholm and Copenhagen data was strong enough to allow supernormal yields on simple filter strategies.2 The data for our study consist of daily trading or, when closings did not occur, bid prices adjusted for dividends and issues for all stocks quoted on the Helsinki Stock Exchange (HESE) between February 2, 1970 and December 31, 1981, along with data on daily trading volumes for the years 1977-81.3 The price file is based on the KOP-index file.4 Throughout this note, comparisons with previous results for other Scandinavian exchanges are made. Allowing for variations in sample periods, we attempt a study of whether a smaller annual turnover of an exchange effects the degree of nonrandomness exhibited by its stock returns. Of the
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TL;DR: In this paper, the effect of the differential taxation of dividends and capital gains on stock prices was analyzed by analyzing stock price changes around the 1971 Canadian Tax Reform and its subsequent amendments in 1977.
Abstract: THE EFFECT OF personal taxation on stock prices remains controversial. While some researchers have found evidence of a tax effect in the stock market, others have found evidence to the contrary.' This paper provides additional empirical evidence on the effect of the differential taxation of dividends and capital gains on stock prices by analyzing stock price changes around the 1971 Canadian Tax Reform and its subsequent amendments in 1977. The results show that changes in the taxation of cash dividends and capital gains affected high-yield and lowyield stocks listed on the Toronto Stock Exchange (TSE) differently. Section I of the paper describes the tax changes. The method used to analyze the tax effect is described in Section II. Section III reports the results, and conclusions are presented in Section IV.
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TL;DR: In this article, the authors tested monthly price changes on the Stock Exchange of Singapore for normality and serial dependence. And they found that the normal distribution is a good description of most of the data studied and that successive price changes are essentially independent.
Abstract:
Monthly price changes on the Stock Exchange of Singapore are tested for normality and serial dependence. It is found that the normal distribution is a good description of most of the data studied and that successive price changes are essentially independent. This is consistent with “weak form” efficiency.
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TL;DR: In this paper, the authors argue that the stock market moves inversely with the inflation rate in the short run and the generally poor performance of the market since 1967, a time of considerable inflation.
Abstract: AT ONE TIME it was widely believed that whatever growth in corporate earnings and market value took place without inflation-due to real factors such as profitability and reinvestment of earnings-would be augmented by the rate of inflation. This view has been shaken by the finding that the stock market moves inversely with the inflation rate in the short run' and by the generally poor performance of the market since 1967-a time of considerable inflation. Lintner [1975], Modigliani and Cohn [1979], Feldstein [1980], and others have argued that accounting practice, the tax system, and investor behavior make the stock market respond negatively to inflation. While Feldstein acknowledged that the underlying profitability (earnings before interest and taxes) of U.S. corporations may have been depressed by foreign competition and a decline in productivity growth since 1967, he went on to argue that even if that did not take place, "an important adverse effect of increased inflation on share prices results from basic features of U.S. tax laws, particularly historic cost depreciation and the taxation of nominal capital gains." (p. 839) However, his paper did not go beyond the theoretical consequences of inflation and the tax system for the stock market's performance. Furthermore, a limitation of Feldstein's model, which he acknowledged, for explaining the value of shares is his assumption that corporations have no debt in their capital structures and pay out all earnings in dividends. Modigliani and Cohn (M-C for short) claimed that the decline in the market value of common stocks since 1967 took place because inflation led investors to commit two errors in valuing shares. First, investors do not recognize-and corporations do not report-a major component of nominal earnings; that is, the increase in debt that corresponds to the rise in the nominal value of assets with inflation represents earnings that can be paid in dividends without raising the corporation's debt-to-equity ratio. Secondly, and quantitatively more important, investors do not recognize the expected rate of growth in nominal earnings due to inflation. However, the empirical work that persuaded M-C that investors actually make these errors in valuing shares does not convince this writer that certain other explanations for the stock market's performance in recent years can be dismissed.
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TL;DR: In this article, the authors present a framework for analyzing disequilibrium in a market, whose particular value lies especially in its capacity to demonstrate an economic process in which the economy approaches the equilibrium of neoclassical theory.
Abstract: The purpose of this paper is to present a framework for analyzing disequilibrium in a market, whose particular value lies especially in its capacity to demonstrate an economic process in which the economy approaches the equilibrium of neoclassical theory. Tatonnement has been cited as an approaching process towards equilibrium since Walras. However, because no production, consumption, and exchange activities are allowed to be conducted during the process until equilibrium is reached, tatonnement is not an economic process; rather it is, in effect, a mathematical algorithm to approximate equilibrium prices successively. Tatonnement, therefore, does not portray an actual process in which the economy approaches its equilibrium as individuals are engaging in production, consumption, and exchange activities. With this inadequency of tatonnement recognized, non-tatonnement processes have been proposed. (For instance, Uzawa [1962], Hahn and Negishi [1962], and Negishi [1972, Chap. 14]). Yet, production and consumption activities are not allowed to be conducted in the non-tatonnement processes, though exchange activities take place during the processes. Further, though postulated trading and price adjustment rules in the non-tatonnement processes at first sight sound plausible, it nonetheless remains ambiguous whether the rules are merely imaginary or attempting to represent particular economic set-ups and practices in real life. The central concept in our framework for disequilibrium analysis is the inventory stock market -a market frequently found as part of the distribution processes in which inventory stock of commodities are traded by middlemen. Prices in our framework are therefore determined in the inventory stock market so as to equate demand for inventory stock with the existing amount. This is in contrast to the role of the price attributed in neoclassical theory to equate the desired level of production of a commodity with the desired level of its consumption (here and hereafter meant as inclusive of consumption as material inputs and
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TL;DR: In this article, the authors show that screening away small price changes in a representative stock price index can sometimes reveal a run structure a series of successive changes in the same direction that can be valuable in market timing strategies.
Abstract: T his paper provides evidence that screening away small price changes in a representative stock price index can sometimes reveal a run structure a series of successive changes in the same direction that can be valuable in market timing strategies. The trick is to eliminate small changes and minor reversals that obscure longer run trends or more striking evidence of negative covariance between successive price changes. Eugene Fama recognized this point in 1965, but it has not been investigated in a systematic fashion.’ From 1928 to 1981, the annual changes in the S&P Industrial Stock Price Index were less than 5% in only seven years: 1934, 1947, 1948, 1956, 1960, 1970, and 1978. If we eliminate these years, the most dramatic effect of the screening process is to lower the number of ”abortive” oneyear-only upside reversals from four cases in the unscreened price change series to only one case, 1938, in the screened series. In other words, once the stock market has reversed itself on the upside by at least 5% or more for one full calendar year, the market has clearly tended to continue to drift basically upward so that investors could enjoy another gain of 5% or more before the market reverses itself on the downside by at least 5%. This is not a new characteristic of the stock market. There have only been two other cases of a fully identified one-year-only upside reversal in the S&P index since 1871.’ If price increases of 5% or more were generated by an independent Bernoulli process,‘ one would have expected to observe eight upside runs of one-yeas-only duration since 1871, instead of a total of
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TL;DR: In this article, the Black-Scholes option pricing model was used to generate stock prices which are "implied" by the model, and a close correspondence was found between implied stock prices and actual stock prices.
Abstract: The Black-Scholes option pricing model (with approximate adjustments for dividends and exercise price changes) was used to generate stock prices which are “implied” by the model. If the stock market is efficient, these implied prices should not be capable of being used profitably by traders. This hypothesis is tested using prices established in the Australian Options Market and the Sydney Stock Exchange over the period February 1976 to December 1980. A close correspondence is found between implied stock prices and actual stock prices. Tests of the predictive power of the implied prices were unable to discover evidence of market inefficiency. However, a simulated trading strategy executed over one trading day and based on the largest discrepancies between actual and implied prices did meet with some success.
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TL;DR: The stock market is a simple market system as discussed by the authors, and Zeeman's dynamic analysis, using catastrophe theory, of stock prices is equivalent to a standard economic model in which price movements produce deviation, amplifying feedbacks.
Abstract: The stock market is a simple market system. Zeeman's dynamic analysis, using catastrophe theory, of stock prices is shown to be equivalent to a standard economic model in which price movements produce deviation—amplifying feedbacks. Zeeman's catastrophe result in this system is thus based on an implicit assumption of irrational behavior.
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01 Jan 1983
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TL;DR: In this paper, the authors examine security price reactions to the differential naming of these distributions and find that security returns are not differentially affected by naming a large common stock distribution a stock dividend rather than a stock split.
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