Showing papers on "Stock (geology) published in 1989"
TL;DR: In this paper, the relationship between aggregate productivity and stock and flow government-spending variables is investigated and the empirical results indicate that the non-military public capital stock is dramatically more important in determining productivity than is either the flow of nonmilitary or military spending, and that military capital bears little relation to productivity.
5,163 citations
TL;DR: The authors analyzes the relation of stock volatility with real and nominal macroeconomic volatility, economic activity, financial leverage, and stock trading activity using monthly data from 1857 to 1987, finding that stock return variability was unusually high during the 1929-1939 Great Depression.
Abstract: This paper analyzes the relation of stock volatility with real and nominal macroeconomic volatility, economic activity, financial leverage, and stock trading activity using monthly data from 1857 to 1987. An important fact, previously noted by Officer (1973), is that stock return variability was unusually high during the 1929-1939 Great Depression. While aggregate leverage is significantly correlated with volatility, it explains a relatively small part of the movements in stock volatility. The amplitude of the fluctuations in aggregate stock volatility is difficult to explain using simple models of stock valuation, especially during the Great Depression. ESTIMATES OF THE STANDARD deviation of monthly stock returns vary from two to twenty percent per month during the 1857-1987 period. Tests for whether differences this large could be attributable to estimation error strongly reject the hypothesis of constant variance. Large changes in the ex ante volatility of market returns have important negative effects on risk-averse investors. Moreover, changes in the level of market volatility can have important effects on capital investment, consumption, and other business cycle variables. This raises the question of why stock volatility changes so much over time. Many researchers have studied movements in aggregate stock market volatility. Officer (1973) relates these changes to the volatility of macroeconomic variables. Black (1976) and Christie (1982) argue that financial leverage partly explains this phenomenon. Recently, there have been many attempts to relate changes in stock market volatility to changes in expected returns to stocks, including Merton (1980), Pindyck (1984), Poterba and Summers (1986), French, Schwert, and Stambaugh (1987), Bollerslev, Engle, and Wooldridge (1988), and Abel (1988). Mascaro and Meltzer (1983) and Lauterbach (1989) find that macroeconomic volatility is related to interest rates. Shiller (1981a,b) argues that the level of stock market volatility is too high relative to the ex post variability of dividends. In present value models such as Shiller's, a change in the volatility of either future cash flows or discount rates
3,094 citations
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TL;DR: In this paper, the authors investigated why almost all stock markets fell together despite widely differing economic circumstances and found that "contagion" between markets occurs as the result of attempts by rational agents to infer information from price changes in other markets.
Abstract: This paper investigates why, in October 1987, almost all stock markets fell together despite widely differing economic circumstances. The idea is that "contagion" between markets occurs as the result of attempts by rational agents to infer information from price changes in other markets. This provides a channel through which a "mistake" in one market can be transmitted to other markets. Hourly stock price data from New York, Tokyo and London during an eight month period around the crash offer support for the contagion model. In addition, the magnitude of the contagion coefficients are found to increase with volatility.
1,779 citations
TL;DR: In this article, the authors estimate the fraction of the variance in aggregate stock returns that can be attributed to various kinds of news and show that it is difficult to explain more than one third of the return variance from this source.
Abstract: This paper estimates the fraction of the variance in aggregate stock returns that can be attributed to various kinds of news. First, we consider macroeconomic news and show that it is difficult to explain more than one third of the return variance from this source. Second, to explore the possibility that the stock market responds to information that is omitted from our specifications, we also examine market moves coincident with major political and world events. The relatively small market responses to such news, along with evidence that large market moves often occur on days without any identifiable major news releases, casts doubt on the view that stock price movements are fully explicable by news about future cash flows and discount rates.
916 citations
TL;DR: In this article, the authors examined the economic importance of the ability of nominal interest rates to forecast nominal excess returns on stocks and concluded that the forecasting ability of the one-month interest rate is useful in forecasting the sign as well as the variance of the excess return on stocks.
Abstract: Knowledge of the one-month interest rate is useful in forecasting the sign as well as the variance of the excess return on stocks. The services of a portfolio manager who makes use of the forecasting model to shift funds between bills and stocks would be worth an annual management fee of 2% of the value of the assets managed. During 1954:4 to 1986:12, the variance of monthly returns on the managed portfolio was about 60% of the variance of the returns on the value weighted index, whereas the average return was two basis points higher. A STATISTICALLY SIGNIFICANT NEGATIVE correlation between nominal excess returns on stocks and nominal interest rates has been noted in the financial economics literature. In this paper we examine the economic importance of the ability of nominal interest rates to forecast nominal excess returns on stocks. The qualitative conclusion of the paper is that the forecasting ability of treasury bill rates is economically significant. The evidence suggests that this is true because both the expected value and the variance of the nominal stock excess returns depend in interesting ways on the nominal interest rate.' Our approach to evaluating the economic importance of the negative correlation between the nominal interest rate and stock returns is similar in spirit to Fama and Schwert (1977), who examine whether the statistically significant negative correlation between stock returns and nominal interest rates can be used to forecast times when the expected nominal risk premium on stocks is negative. They conclude that the negative slope coefficient in the regression of stock returns on treasury bill returns is not useful in predicting times when stocks do worse than bills. This is probably too stringent a measure of economic importance-we are able to show economic significance despite the inability of the model to consistently forecast periods with a negative risk premium. Our primary assumption is that the model used to forecast stock index returns is known to sophisticated investors; i.e., the model is predicting (market) expected
646 citations
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TL;DR: In this article, the authors present an information-theoretic, infinite horizon model of the equity issue decision and show that the price drop at issue announcement is uncorrelated with the social cost of suboptimal investment due to asymmetric information.
Abstract: This paper presents an information-theoretic, infinite horizon model of the equity issue decision. The model's predictions about stock price behavior and issue timing explain most of the stylized facts in the empirical literature: (a) equity issues on average are preceded by an abnormal positive return on the stock, although there is considerable variation across firms, (b) equity issues on average are preceded by an abnormal rise in the market, and (c) the stock price drops significantly at the announcement of an issue. In this model, the price drop at issue announcement is uncorrelated with the social cost of suboptimal investment due to asymmetric information; the welfare loss may be small even if the price drop is large.
620 citations
TL;DR: Dierickx et al. as mentioned in this paper presented a paper on asset stock accumulation and the sustainability of competitive advantage in the context of finance and finance management, which was published in 1989.
Abstract: Authors' reply to comments regarding their paper Dierickx, I., K. Cool. 1989. Asset stock accumulation and the sustainability of competitive advantage. Management Sci..
565 citations
TL;DR: In this article, the constant elasticity of variance (CEV) formula can be expressed as a function of the noncentral chi-square distribution and a simple and efficient algorithm for computing this distribution is presented.
Abstract: This paper expresses the constant elasticity of variance option pricing formula in terms of the noncentral chi-square distribution. This allows the application of well-known approximation formulas and the derivation of a whole class of closed-form solutions. In addition, a simple and efficient algorithm for computing this distribution is presented. THIS PAPER SHOWS THAT the constant elasticity of variance (CEV) formula can be expressed as a function of the noncentral chi-square distribution. A simple and efficient algorithm for computing this distribution is presented. Approximations to this distribution can be used to estimate accurately the CEV formula when the computation of the exact solution is problematic. Section I discusses theories and some evidence on the association between volatility and price level. Section II presents the particular kind of relationship assumed by the CEV model and reviews empirical evidence on the model. Section III shows that the CEV formula can be expressed in terms of the noncentral chisquare distribution. A simple algorithm for computing this distribution is derived in Section IV. Section V presents some special "closed-form" solutions to this distribution. Finally, Section VI shows that an approximation to the CEV formula can be used when the exact solution converges slowly. I. Relationship between Volatility and Price Level Several theoretical arguments imply an association between stock price and volatility. Geske [11], Black [3], and Christie [5] consider the effects of financial leverage on the variance of the stock. An increase in the stock price reduces the debt-equity ratio of the firm and therefore reduces the variance of the stock's returns. Black hypothesizes that price changes may also affect volatility through their impact on operating leverage. In addition, he proposes a reverse causal relationship whereby an increase in the volatility of stocks causes prices to fall. In Rubinstein's [171 displaced diffusion model, the relation between price and volatility of returns depends on the firm's asset mix and debt-equity ratio. Empirical evidence supports the hypothesis that volatility changes with stock price. Schmalensee and Trippi [19], examining just over a year of weekly data on six stocks, find a strong negative relationship between stock price changes and changes in implied volatility. Black [3], using over ten years of data on thirty stocks, finds that a given proportional increase (decrease) in stock price is
339 citations
TL;DR: In this article, Cohen et al. show that, in a stock market with transaction costs, this interaction between thinness and volatility can produce multiple steady state equilibria, some characterized by low trade and high volatility, and others by high trade and low volatility.
Abstract: Thin equity markets cannot accommodate temporary bulges of buy or sell orders without large price movements. The resulting volatility can induce risk-averse transactors who face transaction costs to desert these markets. Thus thinness and the related price volatility may become joint self-perpetuating features of an equity market, irrespective of the volatility of asset fundamentals. If, however, appropriate incentive schemes are adopted to encourage entry by additional investors, this vicious circle can be broken, eventually shifting the market to a selfsustaining, superior equilibrium characterized by a higher number of transactors, lower price volatility and larger supply of the asset. A number of empirical studies (Cohen et al. (1976), Telser and Higimbotham (1977), Pagano (1986), Tauchen and Pitts (1983)) have found that thin speculative markets are ceteris paribus more volatile than deep ones. A plausible explanation for this finding is that thin markets are generally characterized by small numbers of transactors per unit time, and thus their prices are more sensitive to the impact of individual traders' demand shocks. Conversely, in deep markets, transactors are so many that the uncorrelated demand shocks experienced by individual traders tend to offset each other and leave market prices largely unaffected. While this suggests a rationale for the observed relationship between market size and price volatility, it does so by taking market size as the exogenous factor. However, the volatility of a speculative market may feed back on its size, in the sense that the high liquidation risk implied by very volatile prices can induce potential entrants to keep out of the market. This paper shows that, in a stock market with transaction costs, this interaction between thinness and volatility can produce multiple steady-state equilibria, some characterized by low trade and high volatility, and others by high trade and low volatility. Whether the market will settle in one equilibrium or another depends entirely on the expectations held by economic agents (Sections 2 and 3). The existence of these multiple "bootstrap" equilibria can be explained heuristically as follows. Each additional trader generates a positive externality for other (actual or potential) traders by decreasing the riskiness of the stock; lower risk in turn tends to attract more investors, with the effect of raising stock prices and inducing corporations to issue additional equity. We thus have a feedback loop between market size and price volatility-where market size is measured both along the dimension of the number of traders and along that of the total stock of equities. If however investors face transactions costs in the stock market, this positive feedback may fail to be operative: if the volume of trade is expected to be small, investors with relatively high transaction costs will abstain from trading. Thus the market
303 citations
TL;DR: In this paper, the authors assess the welfare effects and incidence of such noice trading using an overlapping-generations model that gives investors short horizons, and find that the additional risk generated by noise trading can reduce the capital stock and consumption of the economy, and part of that cost may be borne by rational investors.
Abstract: Recent empirical research has identified a significant amount of volatility in stock prices that cannot easily be explained by changes in fundamentals; one interpretation is that asset prices respond not only to news but also to irrational “noise trading.” We assess the welfare effects and incidence of such noice trading using an overlapping-generations model that gives investors short horizons. We find that the additional risk generated by noise trading can reduce the capital stock and consumption of the economy, and we show that part of that cost may be borne by rational investors. We conclude that the welfare costs of noise trading may be large if the magnitude of noise in aggregate stock prices is as large as suggested by some of the recent empirical litrature on the excess volatility of the market.
287 citations
TL;DR: McSweeny and Hornstein this article showed that speculative trade in stock index futures and index options increased speculative activity that in turn destabilized the stock market, causing higher volatility.
Abstract: S&P 500 stock return volatilities are compared to the volatilities of a matched set of stocks, after controlling for cross-sectional differences in firm attributes known to affect volatility. No significant difference in volatility is observed between 1975 and 1983before the start of trade in index futures and index options. Since then, S&P 500 stocks have been relatively more volatile. The difference is statistically, but not economically, significant. The relative increase occurs primarily in daily returns and only to a lesser extent in longer interval returns. Other factors besides the start of derivative trade could be responsible for the small increase in volatility. STOCK PRICE VOLATILITY HAS received much attention in the popular press over the last few years, especially since the October 19, 1987 stock market crash. The rise in volatility has alarmed investors, regulators, and the public in general. Some suggest that the start of trade in stock index futures and index options increased speculative activity that in turn destabilized cash markets, causing higher volatility. Large trading activity in the derivative contracts makes the suggestion plausible. Volume in index futures and index options increased dramatically since their introductions in 1982 and 1983. By 1987, the average daily dollar volume in the S&P 500 futures contracts alone exceeded the dollar volume of cash S&P 500 trade by a factor of about two, while the dollar value of the daily net change in total open interest is about 8% of S&P 500 stock dollar volume. Speculative trade in futures and options frequently is accused of destabilizing underlying cash markets. The charge has been made for more than a century in the agricultural, precious metal, and currency markets. Recent evidence by French and Roll (1986) showing stock variance to be strongly related to trading session hours heightens these concerns. Unfortunately, theoretical analyses of whether speculative trade destabilizes cash markets lead to conflicting conclusions, depending on what assumptions are made.1 * School of Business Administration, University of Southern California and Office of Economic Analysis, U.S. Securities and Exchange Commission. I wish to thank Mary (Denny) McSweeny and Steve Hornstein for their valuable research assistance and the referee and editor for their many suggestions and insights. The opinions expressed in this paper do not necessarily reflect those of the U.S. Securities and Exchange Commission or those of the author's colleagues on its staff. 'An increase in well informed speculative trade has two opposite effects on measured volatility. It decreases volatility due to order flow imbalances caused by uninformed traders because informed traders provide liquidity in such events, and it increases volatility due to new fundamental information since the information (which is assumed to be generated at discrete time intervals) is impounded into
TL;DR: The authors investigated the relationship between stock indices, asset portfolios and macroeconomic variables in ten European countries and found that employment, imports, inflation and interest rates are inversely related to stock prices.
Abstract: This paper investigates the relationship between stock indices, asset portfolios and macroeconomic variables in ten European countries. It is shown that employment, imports, inflation and interest rates are inversely related to stock prices. Expectations about future real activity, measures for money and the U.S. yield curve are positively related to stock prices. A portfolio of European stock indices was constructed and it is shown that this portfolio is the variable that most strongly explains the variation in the stock prices. The associations between stock prices and macroeconomic variables are shown to be strongest in Germany, the Netherlands, Switzerland and the United Kingdom. There is a high degree of similarity between the effects in the first three of these countries. In several instances the stock prices are related to historic value of economic variables indicating that predictive models can be constructed.
TL;DR: This article examined the variance of returns on common stocks around the time exchange-traded options are listed on these stocks and found that stock return variance declines after options listing, and that this phenomenon is not fully explained by contemporaneous shifts in market volatility.
TL;DR: AUTOMOBILE STOCK PERFORMANCE RELATED to RECALLS CONSIDERing the PRODUCTION of DEFECTIVE cars is studied for clues about the design and quality of these vehicles.
Abstract: AUTOMOBILE STOCK PERFORMANCE RELATED TO RECALLS CONSIDERING THE PRODUCTION OF DEFECTIVE CARS
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TL;DR: In this paper, a framework based on the notion of asset stock accumulation is established and guidelines for assessing the sustainability of a firm's competitive advantage are developed for incomplete factor markets where critical resources are accumulated rather than acquired and some factors are not traded in open markets.
Abstract: Examines the concept "strategic factor markets"--a market where the resources necessary to implement a strategy are acquired. A framework based on the notion of asset stock accumulation is established and guidelines for assessing the sustainability of a firm's competitive advantage are developed. The limitations of the strategic factor markets concept are particularly visible in incomplete factor markets, where critical resources are accumulated rather than acquired and some factors are not traded in open markets. The framework gauges the sustainability of the income stream generated through the deployment of non-tradable assets. It is shown that the sustainability of a firm's asset position is directly influenced by the ease with which these assets can be substituted or imitated. The imitation of these assets is linked to five characteristics of the asset accumulation process: (1) time compression diseconomies--if a firm develops a resource quickly the result is usually a lower quality resource and a higher development cost; (2) asset mass efficiencies--sustainability of a resource is enhanced to the extent that adding increments to an existing asset stock is facilitated by owning high levels of that stock; (3) interconnectedness of asset stocks--accumulating increments in an existing stock may depend not just on the level of that stock, but also on the level of other stocks; (4) asset erosion--all asset stocks decay in the absence of adequate maintenance expenditures; (5) causal ambiguity--the levels of a firm's stocks will determine each firm's probability of success. (SFL)
TL;DR: This article showed that stock volatility increases during recessions and financial crises from 1834-1987 and that stock prices are an important business cycle indicator, and that public policies can control stock volatility.
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TL;DR: In this paper, the authors provide some econometric evidence on the impact of financial factors like cash flow, debt and stock measures of liquidity on the investment decisions of U.K. firms.
Abstract: In this paper we provide some econometric evidence on the impact of financial factors like cash flow, debt and stock measures of liquidity on the investment decisions of U. K. firms. These variables are introduced via an extension of the Q model of investment which explicitly includes agency/financial distress costs. We discuss if the significance of cash flow may be due to the fact that it proxies for output or because it is a better measure of market fundamentals than Q. Moreover we investigate if the effect of financial factors varies across different types of firms, according to size, age, and type of industry (growing and declining). We analyze the determinants of the magnitude of the cash flow effect and explain why caution must be exercised in attributing inter-firm differences only to differences in the importance of agency or financial distress costs.
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TL;DR: In this article, the authors explore the possible roles of increased risk and reduced productivity growth in accounting for the behavior of bond and stock prices in a simple general equilibrium model and find that both disturbances unambiguously lower the riskless interest rate, but may cause the stock market to respond perversely depending on the degree of aversion to intertemporal substitution and the share of the corporate sector in total wealth.
Abstract: The 1970s were associated with very low real interest rates and a large drop in equity values relative to dividends and earnings. This paper explores the possible roles of increased risk and reduced productivity growth in accounting for the behavior of bond and stock prices in a simple general equilibrium model. Both disturbances unambiguously lower the riskless interest rate, but may cause the stock market to respond perversely depending on the degree of aversion to intertemporal substitution and the share of the corporate sector in total wealth. Copyright 1989 by American Economic Association.
TL;DR: In this article, the extent to which the disclosure requirements of the London Stock Exchange relating to company annual reports are complied with or exceeded by Continental European companies listed on the Exchange was investigated.
Abstract: This study investigates the extent to which the disclosure requirements of the London Stock Exchange relating to company annual reports are complied with or exceeded by Continental European companies listed on the Exchange. It was found that the companies exceeded Exchange requirements through a wide range of voluntary disclosures, which in some cases were substantial. The significance of the Stock Exchange requirements appeared to be relatively minimal compared to competitive pressures associated with the need to raise capital in the international capital market context. At the same time, there were persistent national characteristics in the pattern of items voluntarily disclosed.
TL;DR: For example, this article found that abnormally low returns on Monday seem to follow stock market declines, even when the market has previously risen, and that the negative average return on Monday is positively correlated with the previous Friday's return.
Abstract: One of the most unusual empirical results in finance is the significantly negative average return on the stock market on Mondays. The present paper documents a twist on this effect. We find that abnormally low returns on Monday seem to follow stock market declines. In fact, the Monday effect virtually disappears when the market has previously risen. Cross, Keim-Stambaugh, and Jaffe-Westerfield point out that Monday's return is positively correlated with the previous Friday's return. Surprisingly our findings hold even after one accounts for this Friday–Monday correlation.
TL;DR: In this paper, the authors compare and contrast the returns to the CRSP value and equal-weighted portfolios of Dow Jones, Standard & Poor's and American Stock Exchange (AMEX) stocks.
Abstract: Monthly stock returns from Smith and Cole [1935], Macaulay [1938] and Cowles [1939J are compared and contrasted with the returns to the CRSP value and equal-weighted portfolios of New York Stock Exchange (NYSE) stocks. Daily stock returns from Dow Jones [1972] and Standard & Poor's [1986] are compared and contrasted with the returns to the CRSP value and equal-weighted portfolios of NYSE and American Stock Exchange (AMEX) stocks. Effects of dividends, nonsynchronous trading and time-averaging are analyzed. Splicing together the best indexes gives monthly data from 1802-1987 (2,227) observations) and daily data from 1885-1987 (28,884 observations.) This working paper was produced incompletely - several pages of the original were missing and others were duplicated. To see a complete version of this paper click here
TL;DR: In this article, the authors analyzed fishery data on Georges Bank haddock Melanogrammus aeglefinus by using yield-per-recruit analysis and found that the stock is at about 16% of the maximum possible spawning stock biomass per recruit, but this ratio must reach at least 30% to maintain the stock at its present level, if recent recruitment patterns persist.
Abstract: Analysis of spawning stock biomass per recruit has been used to evaluate the effects of fishing mortality and age at first capture on the spawning potential of a stock. This technique, which is analogous to yield-per-recruit analysis, is used to analyze stock-recruitment data. It may be used to develop a long-term management strategy to maintain or enhance spawning stock biomass. We analyzed fishery data on Georges Bank haddock Melanogrammus aeglefinus by using this technique. Currently, this stock is at about 16% of the maximum possible spawning stock biomass per recruit, but it appears that this ratio must reach at least 30% to maintain the stock at its present level, if recent recruitment patterns persist.
01 Jan 1989
TL;DR: For example, the authors pointed out that very large increases or decreases would always be possible even if changes in stock prices were normally distributed, but they would occur only rarely and that the variation of stock prices does not nicely match the familiar bell-shaped normal distribution.
Abstract: MOST PEOPLE AGREE that stock prices sometimes behave in strange ways. Going beyond this simple observation typically proves more difficult. For at least the past quarter century, economists have been well aware that the variation of stock prices does not nicely match the familiar bell-shaped normal distribution.1 The problem is too many extreme movements. Very large increases or decreases would always be possible even if changes in stock prices were normally distributed, but they would occur only rarely. By contrast, actual stock prices rise or fall by large percentage amounts fairly often-certainly often enough to raise serious doubts that the usual normal distribution provides a useful way to think about how they vary. Economists and other analysts of the stock market have tended to react to this problem in either of two ways. The most common approach is simply to ignore it and go ahead to analyze changes in stock prices as
TL;DR: In this paper, an optimal control model is used to determine the optimal steady-state forest stock in the Cote D'Ivoire, and the optimal stock is shown to increase with increases in the forestry returns relative to those in agriculture.
Abstract: An optimal control model is used to determine the optimal steady-state forest stock in the Cote d'Ivoire. This stock is shown to increase with increases in the forestry returns relative to those in agriculture. Technological progress in agriculture and increases in the social discount rate serve to lower the optimal steady-state forest stock. Based on an estimated aggregate yield function, the optimal forest stock is shown to be most sensitive to changes in the social rate of discount. Assuming current (1985) technology, deforestation appears socially optimal only for values of the discount rate greater than 8%.
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TL;DR: In this article, the authors compare several statistical models for monthly stock return volatility, focusing on U.S. data from 1834-19:5 and post-1926 data.
Abstract: This paper compares several statistical models for monthly stock return volatility. The focus is on U.S. data from 1834-19:5 because the post-1926 data have been analyzed in more detail by others. Also, the Great Depression had levels of stock volatility that are inconsistent with stationary models for conditional heteroskedasticity, We show the importance of nonlinearities in stock return behavior that are not captured by conventional ARCH or GARCH models. We also show the nonstationariry of stock volatility, even over the 1834-1925 period.
TL;DR: In this paper, the authors present a general model of a camel and small stock, nomadic pastoral system and show that the optimal ratio of camels to small stock depends on total household wealth, and the importance of changing strategy according to wealth is illustrated by comparing the long term survival chances of households following the optimal policy with households following two other simple strategies which do not depend on wealth.
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TL;DR: In this article, the authors argue that the stock market is not driven solely by news about fundamentals, but by investor sentiment, i.e., beliefs held by some investors that cannot be rationally justified.
Abstract: Recent events and research findings increasingly suggest that the stock market is not driven solely by news about fundamentals. There seem to be good theoretical as well as empirical reasons to believe that investor sentiment, also referred to as fads and fashions, affects stock prices. By investor sentiment we mean beliefs held by some investors that cannot be rationally justified. Such investors are sometimes referred to as noise traders. To affect prices, these less-than-rational beliefs have to be correlated across noise traders, otherwise trades based on mistaken judgments would cancel out. When investor sentiment affects the demand of enough investors, security prices diverge from fundamental values. The debates over market efficiency, exciting as they are, would not be important if the stock market did not affect real economic activity. If the stock market were a sideshow, market inefficiencies would merely redistribute wealth between smart investors and noise traders. But if the stock market influences real economic activity, then the investor sentiment that affects stock prices could also indirectly affect real activity.
TL;DR: Ohlson and Penman as mentioned in this paper used the Black-Scholes and Roll option pricing formulas to examine the behavior of implied standard deviations (ISDs) around split announcement and ex-dates.
Abstract: A test of the efficiency of the Chicago Board Options Exchange, relative to post-split increases in the volatility of common stocks, is presented. The Black-Scholes and Roll option pricing formulas are used to examine the behavior of implied standard deviations (ISDs) around split announcement and ex-dates. Comparisons with a control group of stocks find no relative increase in ISDs of stocks announcing splits. However, a relative increase is detected at the ex-date. Therefore, the joint hypothesis that 1) the BlackScholes and Roll formulas are true and 2) the CBOE is efficient can be rejected. RECENT STUDIES BY OHLSON and Penman (1985), Dravid (1984), and Dubofsky and French (1985) have documented significant increases in the observed variance of common stock returns subsequent to splits larger than 25%. This is surprising because, in theory, no real event is associated with the actual day of the split. Dravid (1988) and Lim and Vijh (1986) have tried to explain the postsplit variance increase as the effect of stock price discreteness and the bid-ask spread.' The evidence in Lim and Vijh (1986) and Ohlson and Penman (1985) suggests, however, that this is at best a partial explanation.2 Although the causes of the volatility increase are not apparent, the post-split volatility increase should increase prices of calls (on the splitting stock) that expire after the ex-date relative to those that expire before the ex-date. Similarly, prices of post-split expiration calls on splitting stocks should increase relative to prices of calls on stocks that do not split. In an efficient options market, these relative price changes should occur at the announcement of the split. In fact,
TL;DR: In this article, the authors examined the relation between the prices of Japanese stocks traded on the Tokyo Stock Exchange (TSE) as reflected in the Nikkei Stock Average (NSA) stock index and prices of the NSA futures contract traded on Singapore International Monetary Exchange (SIMEX).
TL;DR: In this paper, the authors developed a model in which stock repurchases serve as a defense against takeovers by signaling the manager's private information about the value of the firm.
Abstract: We develop a model in which stock repurchases serve as a defense against takeovers by signaling the manager's private information about the value of the firm. The manager repurchases shares to block a takeover only if the cost of doing so is not too high. Since the cost is inversely related to the value of the firm under his management, a repurchase signals that the value of the stock is high, blocking a takeover. While a repurchase increases the expected value of the stock, it also makes the stock riskier. The model also implies that there are toofew takeoversfor efficiency.