Showing papers on "Stock (geology) published in 1990"

Human capital fertility and economic growth.

Abstract: Our analysis of growth assumes endogenous fertility and a rising rate of return on human capital as the stock of human capital increases. When human capital is abundant, rates of return on human ca...

Correlations in Price Changes and Volatility across International Stock Markets

Abstract: The short-run interdependence of prices and price volatility across three major international stock markets is studied Daily opening and closing prices of major stock indexes for the Tokyo, London, and New York stock markets are examined The analysis utilizes the autoregressive conditionally heteroskedastic (ARCH) family of statistical models to explore these pricing relationships Evidence of price volatility spillovers from New York to Tokyo, London to Tokyo, and New York to London is observed, but no price volatility spillover effects in other directions are found for the pre-October 1987 period Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies

Transmission of Volatility between Stock 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.

When Are Contrarian Profits Due to Stock Market Overreaction

Abstract: If returns on some stocks systematically lead or lag those of others, a portfolio strategy that sells "winners" and buys "losers" can produce positive expected returns, even if no stock's returns are negatively autocorrelated as virtually all models of overreaction imply. Using a particular contrarian strategy, the authors show that, despite negative autocorrelation in individual stock returns, weekly portfolio returns are strongly positively autocorrelated and are the result of important cross-autocorrelations. The authors find that the returns of large stocks lead those of smaller stocks, and present evidence against overreaction as the only source of contrarian profits. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Stock Volatility and the Crash of ’87

Abstract: This article analyzes the behavior of stock return volatility using daily data from 1885 through 1988. The October 1987 stock market crash was unusual in many ways. October 19 was the largest percentage change in market value in over 29,000 days. Stock volatility jumped dramatically during and after the crash. Nevertheless, it returned to lower, more normal levels more quickly than past experience predicted. The author uses data on implied volatilities from call option prices and estimates of volatility from futures contracts on stock indexes to confirm this result. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Stock Returns and Real Activity: A Century of Evidence

Abstract: This paper analyzes the relation between real stock returns and real activity from 18891988. It replicates Fama's (1990) results for the 1953-1987 period using an additional 65 years of data. It also compares two measures of industrial production in the tests: (1) the series produced by Babson for 1889-1918, spliced with the Federal Reserve Board index of industrial production for 1919-1988, and (2) the new Miron and Romer (1989) index spliced with the Federal Reserve Board index in 1941. Fama's findings are robust for a much longer period-future production growth rates explain a large fraction of the variation in stock returns. The new Miron-Romer measure of industrial production is less closely related to stock price movements than the older Babson and Federal Reserve Board measures. FAMA (1990) SHOWS THAT MONTHLY, quarterly, and annual stock returns are highly correlated with future production growth rates for 1953-1987. Moreover, the degree of correlation increases with the length of the holding period. He argues that the relation between current stock returns and future production growth reflects information about future cash flows that is impounded in stock prices. Fama uses multiple regression tests to control for variation in expected stock returns that is reflected in dividend yields on stocks D(t)/V(t), default spreads on corporate bonds DEF(t), and term spreads on bonds TERM(t). Finally, he analyzes the effects of shocks to expected returns on stock returns. Combining these sources of variation in stock returns, he explains up to 59 percent of the variation in annual stock returns from 1953-1987. Nevertheless, as Fama (1990, pp. 18-19) notes, One could also argue, however, that the regressions overstate explanatory power. The variables used to explain returns are chosen largely on the basis of goodness-of-fit rather than the directives of a well-developed theory.... It is possible that with fresh data, the explanatory power of the variables used here would be lower than that measured for 1953-87.

Stock Returns and Real Activity: A Century of Evidence

Abstract: This paper analyzes the relation between real stock returns and real activity from 1889-1988. It replicates Fama's (1990) results for the 1953-87 period using an additional 65 years of data. It also compares two measures of industrial production in the tests: (1) the series produced by Babson for 1889-1918, spliced with the Federal Reserve Board index of industrial production for 1919-1988, and (2) the new Miron and Romer (1989) index spliced with the Fed index in 1941. Fama's findings are robust for a much longer period -- future production growth rates explain a large fraction of the variation in stock returns. The new Miron-Romer measure of industrial production is less closely related to stock price movements than the older Babson and Federal Reserve Board measures.

Stock prices, news, and business conditions

Abstract: Previous research finds that fundamental macroeconomic news has little effect on stock prices. This study shows that after allowing for different stages of the business cycle, a stronger relationship between stock prices and news is evident. In particular, the empirical results suggest that the effect of news about real economic activity depends on the varying responses of expected cash flows relative to equity discount rates. When the economy is strong, for example, the stock market responds negatively to good news about real economic activity, reflecting the larger effect on discount rates relative to expected cash flows.

The Stock Market and Investment

Abstract: Changes in stock prices have substantial explanatory power for U.S. investment, especially for long-term samples, and even in the presence of cash flow variables. The stock market dramatically out-performs a standard q-variable because the market-equity component of this variable is only a rough proxy for stock market value. Although the stock market did not predict accurately after the crash of October 1987, the errors were not statistically significant. Parallel relationships for Canada raise the puzzle that Canadian investment appears to react more to the U.S. stock market than to the Canadian market. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

The Great Crash and the Onset of the Great Depression

Abstract: This paper argues that the collapse of stock prices in October 1929 generated temporary uncertainty about future income which led consumers to forgo purchases of durable goods. That the Great Crash generated uncertainty is evidenced by the decline in surety expressed by contemporary forecasters. That this uncertainty affected consumer behavior is shown by the fact that spending on consumer durables declined drastically in late 1929, while spending on perishable goods rose slightly. This effect is confirmed by the fact that there is a significant negative relationship between stock market variability and the production of consumer durables in the prewar era.

Stock Dividends, Stock Splits, and Signaling

Abstract: This paper provides evidence that firms signal their private information about future earnings by their choice of split factor. Split factors are increasing in earnings forecast errors, after controlling for differences in pre-split price and firm size. Furthermore, price changes at stock dividend and split announcements are significantly correlated with split factors, holding other factors constant, and with earnings forecast errors. These correlations suggest that management's choice of split factor signals private information about future earnings and that investors revise their beliefs about firm value accordingly. The analysis also suggests, however, that announcement returns are significantly correlated with split factors after controlling for earnings forecast errors. This suggests that earnings forecast errors measure management's private information about future earnings with error, that split factors signal other valuation-relevant attributes, or that a'signaling explanation is incomplete. RESEARCHERS HAVE LONG PUZZLED over the role of stock splits and stock dividends. A stock dividend or split increases the number of equity shares outstanding but has no effect on shareholders' proportional ownership of shares. It is therefore puzzling that firms engage in these transactions, and even more so that stock prices rise on average when these transactions are announced, as Grinblatt, Masulis, and Titman (1984) document. The significant positive announcement effects led Grinblatt, Masulis, and Titman (hereafter GMT) to hypothesize that firms signal information about their future earnings or equity values through their split decisions. To date, this hypothesis has met with limited support. GMT conclude that "the announcement returns cannot be explained by forecasts of imminent increases in cash dividends" because they observe similar stock price behavior in firms that do not pay dividends. Our study provides further evidence on the signaling hypothesis by testing whether stock dividends and splits convey information about future earnings, and by testing whether the split factor itself is the signal. The notion that the split factor may act as a signal has institutional as well as theoretical support. Practitioners have long contended that the purpose of stock splits is to move a firm's share price into an "optimal trading range." Baker and Gallagher (1980), who surveyed chief financial officers of firms that split their shares, report that 94% of their sample indicated their stock splits moved their

Indexes of U.S. Stock Prices from 1802 to 1987

Abstract: Monthly stock returns from Smith and Cole (1935), Macaulay (1938), and Cowles (1939) are compared and contrasted with the returns to the Center for Research in Security Prices value-weighted portfolios of New York Stock Exchange (NYSE) stocks. Daily stock returns from Dow Jones (1972) and Standard and Poor's (1986) are compared and contrasted with the returns to the Center for Research in Security Prices value-weighted portfolios of NYSE and American Stock Exchange 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). Copyright 1990 by the University of Chicago.

Volatiltiy and Links Between National Stock Markets

Abstract: The empirical objective of this study is to account for the time-variation the covariances between markets. Using data on sixteen national stock markets, we estimate a multivariate factor model in which the volatility of returns is induced by changing volatility in the orthogonal factors. Excess returns are assumed to depend both on innovations in observable economic variables and on unobservable factors. The risk premium on an asset is a near combination of the risk premia associated with factors. The main empirical finding is that only a small proportion of the time variation in the covariances between national stock markets can be accounted for by observable economic variables. Changes in correlations markets are given primarily by movements in unobservable variables. We also estimate the risk premia for each country, and are able to identify substantial movements in the required return on equity. Our results also suggest that, although inter-correlations between markets have risen since the 1987 stock market crash this is not necessarily evidence of a trend decrease.

A Variance Decomposition for Stock Returns

Abstract: This paper shows that unexpected stock returns must be associated with changes in expected future dividends or expected future returns A vector autoregressive method is used to break unexpected stock returns into these two components. In U.S. monthly data in 1927-88, one-third of the variance of unexpected returns is attributed to the variance of changing expected dividends, one-third to the variance of changing expected returns, and one-third to the covariance of the two components. Changing expected returns have a large effect on stock prices because they are persistent: a 1% innovation in the expected return is associated with a 4 or 5% capital loss. Changes in expected returns are negatively correlated with changes in expected dividends, increasing the stock market reaction to dividend news. In the period 1952-88, hanging expected. returns account for a larger fraction of stock return variation than they do in the period 1927-51.

Liquidity of the CBOE Equity Options

Abstract: We examine the CBOE option market depth and bid-ask spreads. Absence of price effects surrounding large option trades suggests excellent market depth. However, bid-ask spreads for the CBOE options and the NYSE stocks are nearly equal, even though an average option is equivalent to less than half a stock plus borrowing. We explain this tradeoff between market depth and bid-ask spreads on the CBOE and the NYSE by differences in market mechanisms. We also show that the adverse-selection component of the option spread, which measures the extent of information-related trading on the CBOE, is very small.

Option listing and stock returns

Abstract: This article examines the effect of option introductions on the underlying stocks In addition to the price increase and volatility decrease that take place when new options are listed, we obtain and explain the following new empirical results: (i) an increase in the value of the market around the listing dates of new options, (ii) an increase in the value of an industry index which excludes the optioned stocks, (iii) the dissipation of the price and volatility effects in recent periods and (iv) the existence of an announcement effect in one subperiod of our sample and its dissipation in recent periods

Margin Regulation and Stock Market Volatility

Abstract: Using daily and monthly stock returns we find no convincing evidence that Federal Reserve margin requirements have served to dampen stock market volatility. The contrary conclusion, expressed in recent papers by Hardouvelis (1988a,b), is traced to flaws in his test design. We do detect the expected negative relation between margin requirements and the amount of margin credit outstanding. We also confirm the recent finding by Schwert (1988) that changes in margin requirements by the Fed have tended to follow rather than lead changes in market volatility. AFTER 55 YEARS, STOCK MARKET margin requirements are again a source of controversy. The Securities and Exchange Act of 1934 transferred to the Federal Reserve System the authority, exercised previously by the New York Stock Exchange and other private-sector exchanges, to set the minimum margins (i.e., down-payments) that securities brokers and dealers (subsequently expanded to all lenders) must require of customers purchasing common stocks on credit. The transfer of authority reflected the view, widely held at the time, that the low initial margins set by the exchanges had fueled the stock market boom of the 1920's, and that the frenzied liquidation of shares in response to margin calls had accelerated the Crash in October 1929, supposedly dragging the economy down with it. Congress hoped that timely raising of margin requirements by the monetary authorities might dampen speculative excesses before they raged out of control or, in today's terms, that margin controls might reduce "market volatility." What the Federal Reserve has done since then with its margin-setting authority can be seen from Figure 1 which shows the time paths both of margins and one measure of market volatility from October 1934 to December 1987. Margin requirements were set initially at 45 percent, raised to 55 percent during the boomlet of 1936 and then cut back to a low of 40 percent after the sharp stockmarket break in the autumn of 1937. The requirement stayed at that level for the remainder of the 30's and most of the war years, but was stepped up sharply as the war drew to a close, reaching 100 percent (i.e., all cash, no borrowing) for most of 1946. Changes were frequent over the next two and a half decades,

The Intertemporal Relation Between the U.S. and Japanese Stock Markets

Abstract: This paper finds a high correlation between the open to close returns for U.S. stocks in the previous trading day and the Japanese equity market performance in the current period. In contrast, the Japanese market has only a small impact on the U.S. return in the current period. High correlations among open to close returns are a violation of the efflcient market hypothesis; however, in trading simulations, the excess profits in Japan vanish when transactions costs and transfer taxes are included. THE TWO LARGEST STOCK markets in the world in terms of capitalization, volume, and shares listed are the Tokyo Stock Exchange (TSE) and the New York Stock Exchange (NYSE). Because Tokyo is 14 hours ahead of New York, there is an eight and one-half hour difference between the close of the TSE and open of the NYSE. Since there is no overlap between the two markets, traders or technical analysts may look to the TSE as a predictor of market movement on the NYSE and/or examine changes on the NYSE as indicators of TSE performance. As shown in Figure 1, the TSE opens at 7:00 p.m. Eastern Standard Time (EST) and closes at 1:00 a.m. EST.1 The NYSE opens at 11:30 p.m. Japanese time (9:30 a.m. EST) and closes at 5:00 a.m. Japanese time (4:00 p.m. EST). Thus, there is no common time interval in which both markets are open. High correlations between the respective open to close returns are a violation of the efficient market hypothesis because public information about the performance in one market could be used to profitably trade in another market. If the markets are efficient, information about the open to close performance in one market (for example, the U.S. return in period t - 1) will be fully reflected in the open price of the other market (Japan in period t, for example). Since new information flows randomly into the market, subsequent price changes should be random and the open to close returns in Japan will be uncorrelated with the U.S. returns. Thus, the U.S. performance should affect the open price in Japan, and the correlation between the open to close returns of the two markets will be zero. Early research on the synchronization among stock prices across countries (Grubel (1968), Levy and Sarnat (1970), Agmon (1972), Ripley (1973), Lessard

Stock Price Reactions to The Wall Street Journal's Securities Recommendations

Abstract: This paper examines the impact of the "Heard-on-the-Street" (HOTS) column of The Wall Street Journal on common stock prices. The results of the study indicate that the HOTS column appears to have an impact on stock prices on the publication day; however, we also find a smaller, but statistically significant, impact on two days preceding the pub? lication. The significant abnormal returns on these days are associated with higher trading volume. The reaction of stock prices is symmetric with respect to the buy and sell recom? mendations, and the impact of single-company recommendations is greater than the im? pact of the multi-company recommendations. I. Introduction The efficient market hypothesis assumes that security prices fully and instantaneously reflect all available information. Considerable evidence has been accumulated during the past decades in support of the hypothesis. The acceptance of the hypothesis has raised questions about the economic value of professional investment advice. If the market is efficient, then the management of port? folios based on these recommendations should not consistently outperform the market. Why, then, are investors still willing to pay for this information? Examples of the advice include low-cost financial publications, brokerage house rec? ommendations, and subscription financial newsletters that sell for hundreds of dollars. Recent studies argue that investment advisors can provide information to investors at a lower cost than the investors' cost of information production. Millon and Thakor (1985) develop a model that explains the existence of investment advisory agencies. They argue that if the information of investment advisory agencies permits security analysts to share information about common uncertainties that affect the value of firms as a whole (such as the return on the market portfolio), then investment advisory agencies can produce information more cheaply than individual investors. This model is consistent with the study of

Do Bidder Managers Knowingly Pay Too Much for Target Firms

Abstract: This study examines the stock transactions of top managers of bidder firms for their personal accounts as signals about their motivations regarding corporate takeovers. Overall, the data indicate that, prior to takeover announcements, top managers increase their net purchases rather than sales. Bidder managers purchase more shares when the stock price reaction to the takeover announcement is large and positive than when it is large and negative. Bidder managers are also more optimistic in cash offers than in equity offers. Overall, the evidence does not appear to support the hypothesis that bidder managers knowingly pay too much for target firms. Copyright 1990 by the University of Chicago.

Benefits of international diversification: The case of Pacific Basin stock markets

Abstract: R ecent international diversification literature uses monthly data from foreign stock markets to make the point that American investors should hold foreign stocks to reduce the variance of a portfolio of domestic stocks without reducing its expected return.' While this claim is the source of some debate, it has come to be believed that a well-managed equity portfolio should include positions in foreign stocks. At the same time, little research has been produced that investigates the benefits of diversifying into the markets of the Pacific Basin. This article estimates these benefits using daily dollar returns for indexes from these markets. We also discuss the problems that arise in using daily returns to estimate the benefits from international diversification. The issue of diversifying into Pacific Basin markets is interesting for a number of reasons. As a group these markets have a capitalization that exceeds the capitalization of the European markets and is not too different from the capitalization of the United States markets.* Although not all of these markets are equally open to foreign investors, they are rapidly becoming more accessible. The economies of most of the Pacific Basin countries generally have been healthy even when Western economies were in cyclical downturns. All this suggests that diversifying into the economies of these countries is likely to improve portfolio performance. Our analysis finds that these Stulz

Overreaction or Fundamentals: Some Lessons from Insiders' Response to the Market Crash of 1987

Abstract: This paper shows that i) the Crash was a surprise to corporate insiders; ii) insiders became buyers of stock in record numbers immediately following the Crash; iii) stocks that declined more during the Crash were also purchased more by insiders; and iv) stocks that were purchased more extensively by insiders during October 1987 showed larger positive returns in 1988. The overall evidence suggests that overreaction was an important part of the Crash. THE Dow JONES INDUSTRIAL Average (DJIA) declined by 769 points (30.7%) from October 13 to 19, 1987 (Tuesday to Monday), with a record one-day drop of 508 points (22.6%) on October 19 alone. Similar declines occurred on other equity markets: the American Stock Exchange (ASE), the Over-the-Counter (OTC) market, and international stock markets. Various explanations have been offered to account for the October Crash. One view relies on shifts in fundamental factors: Roll (1989) suggests downward revised expectations for the worldwide economic activity; Fama (1989) advocates sudden upward revision in equilibrium required stock returns as measured by the increase in dividend yields; and Black (1988) argues for sharply declining relative risk aversion, coupled with a sudden realization of lower future expected returns. Another view is that stock prices can take swings from fundamental values because of trading activities of the uninformed (Shiller (1984) and De Long, Shleifer, Summers, and Waldmann (1989, 1990a,b)).1 While this view does not identify what triggered the Crash, it predicts that the activities of noise traders contributed to an overreaction in market prices: an adjustment in stock prices occurred in reaction to a proposed tax legislation in mid-October. This adjustment was turned into a major crash, and stock prices were driven below the fundamentals as a result of positive feedback investment strategies by uninformed traders,