Showing papers on "Stock (geology) published in 1987"

Mean Reversion in Stock Prices: Evidence and Implications

Abstract: This paper analyzes the statistical evidence bearing on whether transitory components account for a large fraction of the variance in common stock returns. The first part treats methodological issues involved in testing for transitory return components. It demonstrates that variance ratios are among the most powerful tests for detecting mean reversion in stock prices, but that they have little power against the principal interesting alternatives to the random walk hypothesis. The second part applies variance ratio tests to market returns for the United States over the 1871-1986 period and for seventeen other countries over the 1957-1985 period, as well as to returns on individual firms over the 1926- 1985 period. We find consistent evidence that stock returns are positively serially correlated over short horizons, and negatively autocorrelated over long horizons. The point estimates suggest that the transitory components in stock prices have a standard deviation of between 15 and 25 percent and account for more than half of the variance in monthly returns. The last part of the paper discusses two possible explanations for mean reversion: time varying required returns, and slowly-decaying "price fads" that cause stock prices to deviate from fundamental values for periods of several years. We conclude that explaining observed transitory components in stock prices on the basis of movements in required returns due to risk factors is likely to be difficult.

Mean-Variance Spanning

Abstract: The authors propose a likelihood-ratio test of the hypothesis that the minimum-variance frontier of a set of K assets coincides with the frontier of this set and another set of N assets. They study the relation between this hypothesis, exact arbitrage pricing, and mutual fund separation. The exact distribution of the test statistic is available. The authors test the hypothesis that the frontier spanned by three size-sorted stock portfolios is the same as the frontier spanned by thirty-three size-sorted stock portfolios. INVESTORS' CHOICES OF PORTFOLIOS of assets and the implications of these choices for assets' prices are major topics in financial economics. Students of the first topic-portfolio theory-often strive to derive separation results, i.e., seek conditions under which each investor allocates all of his or her savings among a small number of separating funds. These separating funds are the same across investors. The second topic entails a study of the aggregate behavior of security market participants. Students of the pricing issues derive equilibrium restrictions on security prices. We focus on the relations among mean-variance efficiency, mutual fund separation, and two prominent security-pricing models in finance: the CAPM and the APT. The investment universe under consideration includes K + N risky assets with returns that have a nonsingular covariance matrix. In addition, it may include a risk-free asset. We are particularly interested in forming K portfolios of the N + K original assets and then studying the relation between the minimum-variance frontier spanned by the K derived assets and the frontier of the original N + K

Using Financial Prices to Test Exchange Rate Models: A Note

Abstract: THE PURPOSE OF THIS note is to illustrate how tests of exchange rate models can be conducted using financial prices rather than macroeconomic data. All empirical tests of exchange rate models have met with limited success so far.' A major problem encountered is the poor quality of the macroeconomic data used. Most of the data suffer from large measurement error or cannot even be measured directly. For example, these models often require measures of changes in expected real activity or in monetary policy; such variables can only be poorly estimated from time-series models on industrial production or money supply. The innovation in this paper is to use financial prices such as stock prices instead of the traditional macroeconomic data. There exists convincing empirical evidence that stock returns forecast changes in economic activity as measured by industrial production, real growth in GNP, employment rate, or corporate profits (Fama [5] and Geske and Roll [8]). In the domestic context, stock prices have been used to test the relation between economic activity and inflation (e.g., Fama [5], Geske and Roll [8], and Solnik [12]). In the same spirit, stock returns are used in this paper as proxies for changes in economic activity to test the relation between exchange rates and economic activity. Interest rates are determined by monetary policies, and changes in interest rates are used in this article as indicators of monetary shocks. The approach used is introduced in Section I, while the empirical results are presented in Section II. The data cover the eight major western countries over the recent period of flexible exchange rates (July 1973 to December 1983).

Price Changes of Related Securities: The Case of Call Options and Stocks

Abstract: This paper tests the hypothesis that option prices contain information not reflected in con? temporaneous stock prices. An options transactions data base is used for the purpose. The evidence suggests that the magnitude of anticipation of stock prices by option prices is insufficient to overcome the bid/ask spread for intra-day holding periods. Implications of the profits in the overnight-holding periods are discussed.

Loss Leader Pricing and Rain Check Policy

Abstract: Loss leader pricing and rain check policies are common in retail markets, yet research on these topics is surprisingly scarce. In this paper, we study the effects of leader pricing and rain check policy on stores' profits and market outcomes. Suppose stores can accurately predict demand. Might they still run out of stock? We investigate whether such a result is plausible when stores can offer rain checks. The paper also helps resolve an issue that has recently attracted much attention: Should the FTC repeal its rule prohibiting stock outs of advertised sale items?

Production Economics and Optimal Stock Size in a North Atlantic Fishery

Abstract: This paper contains an analysis of a fishery production function and an empirical analysis of the North Sea herring fishery. An intertemporal profit function is defined by introducing stock dynamics and the concept of a sole resource manager. Some new results with respect to the relationship between the optimal stock level and production technology are derived. Estimates of the optimal stock level for herring are also presented.

The Puzzle in Post-Listing Common Stock Returns

Abstract: Prior studies indicate that common stocks tend to earn negative returns immediately following listing on the NYSE. The authors document the phenomenon in detail and investigate a number of possible explanations. No full explanation is discovered, although several are ruled out. A NUMBER OF STUDIES have examined common stock returns around the time at which the stocks became listed on a major stock exchange. These studies cover a variety of time periods and employ a variety of empirical methodologies, but they reveal two common patterns in stock returns. First, stocks appear to rise in price immediately prior to listing. Second, stock prices appear to decline immediately thereafter. For example, Ule [26] examines a sample of twenty-nine overthe-counter (OTC) stocks that listed on the New York Stock Exchange (NYSE) or the Curb Exchange over the period 1934 through 1937. He compares monthly stock price changes with changes in an appropriate industry index over a sixmonth period prior to and following listing. Ule reports that the prices of the stocks in his sample increased relative to their respective industry indexes prior

A Note on the Behavior of Stock Returns around Ex‐Dates of Stock Distributions

Abstract: stock returns after the ex-split date is significantly higher than the presplit volatility. The increase in the standard deviation of daily returns is of the order of twenty-eight to thirty-five percent and persists for as long as a full year after the ex-date.' Even more interesting is their finding that there is no (permanent) change in the variance of returns at the announcement date. They investigate several potential explanations for this "aberration" but are unable to find a satisfactory answer. Grinblatt, Masulis, and Titman [6] (henceforth GMT) examine the behavior of expected returns around announcement dates and exdates for stock distributions exceeding ten percent. Classifying stock distributions as either stock dividends (split factors of twenty-five percent or less) or stock splits, they conclude that return behavior differs across these two types of distributions, with stock dividends exhibiting larger abnormal returns than splits. This is interpreted by them as evidence in favor of the "retained earnings hypothesis": the dissimilar accounting treatment of these two types of stock distributions affects retained earnings in different ways, and hence splits are not simply large stock dividends. This paper extends the work of OP to all types of stock distributions. In Section I, postsplit variance is shown to be different from the presplit variance for small stock splits and stock dividends. While small splits display an increase in volatility like large splits, stock dividends are associated with a decrease in the volatility of returns. This evidence also supports GMT's conclusions that stock splits and stock dividends are "different" types of events. Section II investigates the volatility of returns for reverse splits and demonstrates that postsplit volatility decreases for these events. This evidence is complementary to Woolridge and Chambers' [9] findings that reverse splits are also associated with negative abnormal returns at their announcement and ex-dates. Section III concludes the paper.

Nonstationarity of Production Relationships in Exploited Populations

Abstract: Stock assessment usually proceeds from the assumption that there are time-invariant relationships between stock size and rate processes such as recruitment, although such relationships are difficul...

Some Generalized Mixture Distributions with an Application to Unemployment Duration

Abstract: Compounding or mixture distributions provide a rich class of models for applications ranging from models of heterogeniety, measurement error, distribution of stock returns and income to models of unemployment duration. Some very general mixtures are considered which include many new mixture models and also provide a unified method of organizing and comparing previously considered models as well as a test of heterogeneity. These models are used to analyze CPS unemployment duration data. A heterogeniety interpretation of the mixture models explains the discrepancy between implications of search theory and patterns observed in aggregate unemployment data. Copyright 1987 by MIT Press.

Seasonality in Canadian Stock Prices: A Test of the "Tax-Loss-Selling" Hypothesis

Abstract: A popular hypothesis to explain the anomalous January returns of common stocks is based on the argument that there is considerable tax-loss selling by investors toward the end of the year. The purpose of this study is to test the tax-loss-selling hypothesis with data on Canadian stocks. Although the introduction of capital gains tax in Canada seems to have affected the behavior of stock returns, the findings do not support the proposition that taxinduced trading is the sole cause ofthe seasonality in stock returns in Canada. I. Introduction Over the past several years, a number of studies have shown that the returns on common stocks, in general, and the stocks of small companies, in particular, tend to be abnormally high during the month of January. Keim [10] demonstrated quite clearly that a very high percentage of the abnormal positive returns gener? ated on stocks with low market capitalizations occurs during January, with the returns during the first five trading days of the year accounting for most of the anomalous behavior. His results were recently confirmed by Roll [14], who re? ported that around 37 percent of the annual differences in the returns on the equally-weighted and value-weighted indices of NYSE and AMEX stocks is ac? counted for by what happens in the five trading days from the last trading day in December through the fourth trading day in January. A popular hypothesis to explain the so-called "January effect" in stock re? turns is based on the argument that there is considerable end of the year tax-lossselling by investors. Originally proposed by Wachtel [19], it asserts that inves? tors try to realize losses towards the end of the year to reduce their taxes, thereby putting downward pressure on stock prices. According to the hypothesis, once

The Integration and Efficiency of the London and Amsterdam Stock Markets in the Eighteenth Century

Abstract: This article explores the operation of the international capital market between Amsterdam and London in the early eighteenth century and concludes that both markets were efficient and well integrated from 1723 on.

Compound distribution models of stock returns: an empirical comparison

Abstract: The study provides empirical tests and comparison of mixed diffusion-jump processes and finite mixtures of normal processes as models of stock price behavior. For weekly returns, both specifications have significantly higher descriptive validity than a stationary normal distribution, and, in most cases, mixed diffusion-jump processes are empirically superior to finite normal mixtures. The distribution of monthly returns, however, can be safely assumed to be approximately normal.

Consumption Risk and International Asset Returns: Some Empirical Evidence

Abstract: The paper examines if real stock returns in four countries are consistent with consumption-based models of international asset pricing. The paper finds that ex-ante real stock returns exhibit statistically significant fluctuations over time and that these fluctuations cannot be explained by consumption-based models when the conditional covariances between real stock returns and the rate of change of consumption are assumed to be constant over time. These conditional covariances are then modeled and the paper finds that they too exhibit statistically significant fluctuations over time. However, even when conditional covariances are allowed to change over time, the paper finds that the consumption-based models do not fully explain real stock returns.

The Relation between Return and Income

Abstract: This paper presents evidence that the corporate stock owned by high-income investors appreciates substantially faster than the stock owned by investors with lower incomes. The evidence indicates that the differences are large and that they have persisted for a long period of time. Some potential explanations of this phenomenon are discussed, and it seems that the best explanation is that the rich have a higher tendency to invest in risky stock.

The Power Structure of American Business

Abstract: Mintz and Schwartz offer a fascinating tour of the corporate world. Through an intensive study of interlocking corporate directorates, they show that for the first time in American history the loan making and stock purchasing and selling powers are concentrated in the same hands: the leadership of major financial firms. Their detailed descriptions of corporate case histories include the forced ouster of Howard Hughes from TWA in the late fifties as a result of lenders' pressure; the collapse of Chrysler in the late seventies owing to banks' refusal to provide further capital infusions; and the very different "rescues" of Pan American Airlines and Braniff Airlines by bank intervention in the seventies.

The Issue Decision of Manager‐Owners under Information Asymmetry

Abstract: A firm must issue common stock in order to undertake a new investment, and the firm's manager-owners can value the firm more accurately than the market. The ability of the manager-owners to trade in the firm's shares during the issue (a) reduces the investments that are foregone because of the market's mispricing the firm's shares, (b) changes the size and direction of the stock price change when the firm announces a new stock issue, and (c) changes the market value of the firm before and after the issue announcement, whether or not it decides to issue. THE FOCUS OF THIS paper is a firm that must issue common stock in order to undertake a new investment. There is information asymmetry in the market for the firm's shares in that the firm's managers value its existing assets and the new investment more accurately than the market. Previous studies that investigated this setting include Myers and Majluf [11] and Leland and Pyle [7]. Myers and Majluf use a rational-expectations approach to (a) show the conditions under which the firms forego positive net-present-value (NPV) investments and (b) explain why firms' stock prices typically decline when they announce that new stock will be issued to finance new investment.' However, they assume that managers do not own or transact in the firm's shares. This paper extends their framework to consider the case in which managers are owners. The issues examined here are (a) the extent to which the manager-owners' ability to trade in the firm's shares can reduce the foregone investments, (b) the impact of manager-owners upon the size and direction of the stock price change when the firm announces a new stock issue, and (c) the extent to which the purchases of new stock by manager-owners can signal the firm's value to the market. The latter subject was examined by Leland and Pyle. Leland and Pyle examined the case of a new firm whose only resource was an asset in place, whereas this paper examines the investment and trading for the insiders of an existing firm. This firm has common stock outstanding and an existing asset and is considering issuing new stock and investing in another

Failure of Stock Prices to Discipline Managers in a Rational Expectations Economy

Abstract: In this paper we show that even a strongly efficient stock market is, by itself, insufficient to discipline managers who may hold incorrect beliefs about investors' behavior and their decision rules. Instead of disciplining the managers, the stock market may generate prices that reinforce these incorrect beliefs. When this happens, the disciplining of managers must be accomplished through other mechanisms, such as through markets for managerial labor, mergers and takeovers, the financial press, and education. These alternative mechanisms may produce slower disciplinary reactions than the stock market. Several important classes of accounting phenomena seem consistent with a failure of the stock market to discipline managers promptly. We present in detail how the apparent failure of managers to make cashflow-maximizing LIFO-FIFO choices in a timely fashion is consistent with this theory. Our approach is also applicable to other financial reporting conundrums in which adverse managerial and stock market reactions were predicted in response to Financial Accounting Standard No. 2 (accounting for research and development outlays), Standard No.

New Issues in Corporate Finance

Abstract: Flow of funds data are used to compare methods of financing the corporate sector in five countries over the period 1970-85. Many of the problems associated with previous studies of corporate finance are avoided by defining financing proportions in net terms. The degree of consolidation of accounts, reciprocal arrangements between borrowers and lenders, and compensating deposit requirements on borrowers no longer distort financing patterns when net financing is the focus. Corrections for inflation are provided by employing flow rather than stock figures and using own aggregation procedures to derive stock measures. Significant variations in financing emerge. These are not readily explained by traditional explanations of corporate financing decisions, in particular those which emphasize tax considerations. The paper suggests an alternative approach, which emphasizes that relationships between borrowers and lenders establish forms of commitment that are conducive to the provision of long-term finance. This approach suggests that the separation between the analysis of investment and that of finance, which has been the starting point of corporate finance theory, is untenable in a multi-period context in which terms of finance define future allocation of control.

Monetary Policy Regimes and the Reduced Form for Interest Rates

Abstract: This study investigates whether the recent poor performance and inst ability of reduced-form interest-rate equations can be accounted for by changes in monetary policy regimes. The results imply that reduced -form coefficients move by statistically-significant and economically -meaningful amounts in response to such policy parameter shifts. Both in-sample and out-of-sample predictions from the models that allow f or the endogeneity of the money stock outperform those produced by the conventional specification. Copyright 1987 by Ohio State University Press.

Evidence on the Effect of Option Expirations on Stock Prices

Abstract: (1987). Evidence on the Effect of Option Expirations on Stock Prices. Financial Analysts Journal: Vol. 43, No. 1, pp. 55-57.