Showing papers on "Stock (geology) published in 1991"

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 percent innovation in the expected return is associated with a 4 or 5 percent 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, changing expected returns account for larger fraction of stock return variation than they do in the period 1927-51. Copyright 1991 by Royal Economic Society.

Production-Based Asset Pricing and the Link Between Stock Returns and Economic Fluctuations

Abstract: This paper describes a production-based asset pricing model. It is analogous to the standard consumption-based model, but it uses producers and production functions in the place of consumers and utility functions. The model ties stock returns to investment returns (marginal rates of transformation) which are inferred from investment data via a production function. The production-based model is used to examine forecasts of stock returns by business-cycle related variables and the association of stock returns with subsequent economic activity. THIS PAPER DESCRIBES A production-based asset pricing model. It is analogous to the standard consumption-based model, but it uses producers and production functions in the place of consumers and utility functions. The production-based model is used to explain two links between stock returns and economic fluctuations that have been the focus of much recent empirical research in finance. These are: 1) a number of variables forecast stock returns, including the term premium, the default premium, lagged returns, dividend-price ratios, and investment; and 2) many of the same variables, and stock returns in particular, forecast measures of economic activity such as investment and GNP growth.1 Since the production-based model is explicitly analogous to the consumption-based model, I start with a review of that model's logic. The consumption-based model ties asset returns to marginal rates of substitution which are inferred from consumption data (or state variables presumed to drive consumption) through a utility function. It is derived from the consumer's first order conditions for optimal intertemporal consumption demand. Its

What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns

Abstract: This paper uses a log-linear asset pricing framework and a vector autoregressive model to break down movements in stock and bond returns into changes in expectations of future stock dividends, inflation, short-term real interest rates, and excess returns on stocks and bonds. In monthly postwar U.S. data, excess stock returns are found to be driven largely by news about future excess stock returns, while excess 10-year bond returns are driven largely by news about future inflation. Real interest rate changes have little impact on either stock or 10-year bond returns, although they do affect the short-term nominal interest rate and the slope of the term structure. These findings help to explain why postwar excess stock and bond returns have been almost uncorrelated.

Stock Prices and the Supply of Information

Abstract: We develop a model in which the dependence of the brokerage commission rate on share price provides an incentive for brokers to produce research reports on firms with low share prices. Stock splits therefore affect the attention paid to a firm by investment analysts. Managers with favorable private information about their firms have an incentive to split their firm's shares in order to reveal the information to investors. We find empirical evidence that is consistent with the major new prediction of the model, that the number of analysts following a firm is inversely related to its share price.

Intraday Volatility in the Stock Index and Stock Index Futures Markets

Abstract: We examine the intraday relationship between returns and returns volatility in the stock index and stock index futures markets. Our results indicate a strong intermarket dependence in the volatility of the cash and futures returns. Price innovations that originate in either the stock or futures markets can predict the future volatility in the other market. We show that this relationship persists even during periods in which the dependence in the returns themselves appears to weaken. The findings are robust to controlling for potential market frictions such as asynchronous trading in the stock index. Our results have implications for understanding the pattern of information flows between the two markets. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Window Dressing by Pension Fund Managers

Abstract: This paper takes a first look at investment strategies of managers of 769 pension funds, with total assets of $129 billion at the end of 1989. The data show that managers of these funds tend to oversell stocks that have performed poorly. Relative sales of losers accelerate in the fourth quarter, when funds' portfolios are closely examined by the sponsors. This result supports the view that fund managers "window dress" their portfolios to impress sponsors and suggests that managers are evaluated on their individual stock selections and not just aggregate portfolio performance.

The efficient market inefficiency of capitalization–weighted stock portfolios

Abstract: 35 A s of the end of 1990, the largest 200 prehensive cap-weighted portfolios occupy positions defined-benefit pension plans had indexed a combined total of approximately $200 billion to capitalization-weighted stock portfolios, such as the Wilshire 5000. The sponsors of these plans presumably return. E: believe this to be an efficient investment, in the inside the efficient set. In this context, theory directs us to manage risk in seeking out investment portfolios with the lowest possible volatility given expected 6 8 5

Volatility, Efficiency, and Trading: Evidence from the Japanese Stock Market

Abstract: We study the joint effect of the trading mechanism and the time at which transactions take place on the behavior of stock returns using data from Japan. The Tokyo Stock Exchange employs a periodic clearing procedure twice a day, at the opening of both the morning and the afternoon sessions. This enables us to discern the effect of the clearing mechanism from the effect of the overnight trading halt. While the periodic clearing at the beginning of the trading day is noisy and inefficient, the midday clearing transaction appears to be no worse than the two closing transactions. IN A RECENT ARTICLE in this Journal (Amihud and Mendelson (1987a)) we examined the effects of two major trading mechanisms on the behavior of stock returns. One mechanism is the continuous dealership market, where investors trade with market makers at their quoted bid-ask prices, and the other is the periodic clearing procedure, where buy and sell orders accumulate during some time interval and are then executed simultaneously at a single price which equates the quantity demanded to the quantity supplied. Our study of the two trading mechanisms compared the time-series behavior of stock returns over the open-to-open and close-to-close time intervals for the same stocks over the same period on the New York Stock Exchange (NYSE). By this methodology, any information about the value of the stock equally affects both return series. Yet, there is a difference between the trading mechanisms by which opening and closing prices are set: The opening transaction in major NYSE stock issues is executed by a periodic clearing procedure, whereas trading continues afterward in a dealership market controlled by the Exchange specialist. If the different trading mechanisms had no effect on stock prices, the variances and autocorrelations would be the same for the two return series.

The Mode of Acquisition in Takeovers: Taxes and Asymmetric Information

Abstract: We develop a model in which the mode of acquisition conveys information concerning the value of the bidder. The model incorporates the possibility that offers containing both cash and stock can be made in a setting consistent with the U.S. tax code. We demonstrate that bidders with unfavorable private information about their equity value choose offers containing some stock to avoid the capital gains tax consequences of cash offers. The model yields a number of unique predictions about the construction of acquisition offers. We present evidence consistent with the model. WHEN ONE FIRM ACQUIRES another it can pay for the acquisition with cash, stock, or a combination of the two. Recent studies find that announcement returns to bidding firms who make cash offers are higher than when stock offers are made.' Models consistent with this evidence note that, as in Myers and Majluf (1984), a bidder with private information about the value of its assets only offers stock when its shares are overvalued by target shareholders. Recognizing this adverse selection, target shareholders reduce their estimate of the bidder's value. Thus, without some benefit in stock over cash as a means of payment, a "lemons" problem arises for stock offers, and bidders only choose cash offers. Our paper advances the use of stock in an offer through its tax advantages. In the United States, to realize the benefits available in "nontaxable" offers, an offer must contain at least fifty percent stock. Thus, when the bidder has private information about the value of its assets, stock off6rs can still occur because of their tax advantage. The intuition is as follows. Target holders can postpone the realization of capital gains when they receive stock in a takeover, so, other things equal, they demand higher prices in cash takeovers. While the offer of stock may have tax advantages, the shares swapped are valued by the target as if they were offered by the average bidder making a stock offer. Thus, a pool of higher private valuation bidder types choose cash offers in spite of the tax consequences. A pool of lower private valuation types

Seasonality in Stock Price Mean Reversion: Evidence from the U.S. and the U.K.

Abstract: The evidence of slowly mean-reverting components in stock prices has been controversial. The hypothesis of stock price mean-reversion is tested using a regression model that yields the highest asymptotic power among a class of regression tests. Although the evidence that the equally weighted index of stocks exhibits meanreversion is significant in the period 1926-1988, this phenomenon is entirely concentrated in January. In the post-war period both the equally weighted and the value-weighted indices exhibit seasonal mean-reversion in January. A similar phenomenon is also observed for the equally weighted index of stocks traded on the London Stock Exchange. IN A RECENT PAPER Fama and French (1988) report that "25-45 percent of the variation of 3- to 5-year stock returns is predictable from past returns" and pose a serious challenge to the long-held view that stock prices follow a random walk. In a subsequent paper, Poterba and Summers (1988) use variance ratio tests on the stock price data from the U.S. and 17 other countries and conclude that "The results consistently suggest the presence of transitory components in stock prices." However, Kim, Nelson, and Startz (1988) and Richardson (1989) criticize the earlier papers on statistical grounds and suggest on the basis of simulation evidence that the results of Fama and French and Poterba and Summers do not violate the random walk model. The conflicting opinions expressed in these papers clearly highlight the controversy surrounding the interpretation of the seemingly large point estimates of long-term serial correlation in stock returns. The economic interpretation of the estimates in these tests is difficult because they have low precision, and hence more efficient tests are required.

Investment Options, Assets in Place, and the Risk of Stocks

Abstract: This study views the firm's future investment opportunities as operating options and examines the effect of growth opportunities on the firm's systematic risk using contingent claims analysis. The study predicts that the greater the portion of a stock's market value accounted for by the firm's growth opportunities, the higher the systematic risk. Overall, our empirical results strongly support this hypothesis. Furthermore, including firm size in empirical analysis does not significantly change the relationship between the stock beta and growth variables. Thus, we conclude that the effect of growth on stock risk is independent of firm size.

Measuring Risk Aversion from Excess Returns on a Stock Index

Abstract: We distinguish the measure of risk aversion from the slope coefficient in the linear relationship between the mean excess return on a stock index and its variance. Even when risk aversion is constant, the latter can vary significantly with the relative share of stocks in the risky wealth portfolio, and with the beta of unobserved wealth on stocks. We introduce a statistical model with ARCH disturbances and a time-varying parameter in the mean (TVP ARCH-N). The model decomposes the predictable component in stock returns into two parts: the time-varying price of volatility and the time-varying volatility of returns. The relative share of stocks and the beta of the excluded components of wealth on stocks are instrumented by macroeconomic variables. The ratio of corporate profit over national income and the inflation rate ore found to be important forces in the dynamics of stock price volatility.

Stock Price Manipulation, Market Microstructure and Asymetric Information

Abstract: In recent years, there has been a large literature on how stock exchange specialists set prices when there are investors who know more about the stock than they do An important assumption in this literature is that there are *liquidity traders* who are equally likely to buy or sell for exogenous reasons It is plausible that some buyers have cash needs and are forced to sell their stock However, buyers will usually be able to choose the time at which they trade It will be optimal for them to minimize the probability of trading with informed investors by choosing an appropriate time to trade and clustering at that time This asymmetry means that when liquidity buyers are not clustering, purchases are more likely to be by an informed trader than sales so the price movement resulting from a purchase is larger than for a sale As a result, profitable manipulation by uninformed investors may occur A model where the specialist takes account of the possibility of manipulation in equilibrium is presented

Re-examination of interest rate sensitivity of commercial bank stock returns using a random coefficient model

Abstract: This article develops and tests a random coefficient two-index model for commercial bank stock returns which controls for the time-varying interest rate sensitivity caused by a bank's changing maturity profile. Using a sample of 51 actively traded commercial banks, the seemingly unrelated regression results provide evidence that commercial bank stock returns are significantly interest rate sensitive. The effect of interest rate changes on bank stock returns is found to be positively related to the maturity mismatch between the bank's assets and liabilities, when the proxy for interest rate changes and the proxy for maturity mismatch are compatible to each other.

What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns

Abstract: This paper uses a vector autoregressive model to decompose excess stock and 10-year bond returns into changes in expectations of future stock dividends, inflation, short-term real interest rates, and excess stock and bond returns. In monthly postwar U.S. data, stock and bond returns are driven largely by news about future excess stock returns and inflation, respectively. Real interest rates have little impact on returns, although they do affect the short-term nominal interest rate and the slope of the term structure. These findings help to explain the low correlation between excess stock and bond returns.

Volatility increases Subsequent to NYSE and AMEX Stock Splits

Abstract: The post-split increase in daily returns volatility is less for AMEX stocks than for NYSE stocks. The exchange trading location is a significant factor in explaining the volatility shift even after stock price and firm size are considered. Furthermore, when measured on a weekly basis, there is no increase in AMEX stocks' returns volatility. These results suggest that measurement errors created by bid-ask spreads and the 1/8 effect, and also one or more of the elements that make the NYSE different from the AMEX, explain why the estimated volatility of daily stock returns increases after the ex split date. OHLSON AND PENMAN (1985) provide evidence that NYSE stock returns variances increase subsequent to ex stock distribution days for splits of 100% or greater. The increase in volatility is independent of the size of the split alnd the post split price. Seven potential problems that might affect their results are analyzed and rejected.1 Ohlson and Penman (1985) suggest that the greater post-split volatility may be due to the activity of relatively ignorant noisy traders who prefer trading low-priced stocks (this "clientele factor" is attributed to Black (1986, pg. 534)) and "institutional factors" (a rather broad category that incorporates measurement problems created by the "1/8 effect" and bid-ask spreads) as possible hypotheses for the post split volatility increase. This paper extends Ohlson and Penman's (1985) analysis to AMEX stocks. Exchange listing can serve as a proxy for several real factors that may cause the increase in post-split variance, many of which are related to the clientele factor and institutional factors cited above. If the increase in volatility differs between NYSE and AMEX stocks, it will suggest that one (or more) of the following contributes to the phenomenon:

Dynamic Stock Markets with Multiple Assets: An Experimental Analysis

Abstract: We study the performance of the rational expectations hypothesis in multiperiod experimental markets with multiple assets. We find that the markets are generally inefficient from the point of view of full information aggregation. However, arbitrage relationships hold, and it is not possible to detect the informational inefficiency by using some standard tests of market efficiency. These findings suggest that the lack of arbitrage opportunities and the failure of common tests to reject inefficiency are not sufficient to conclude that a market is informationally efficient. A GROWING BODY OF research has investigated whether the rational expectations hypothesis provides a reasonable description of behavior observed in laboratory markets. In this paper, we continue this investigation by examining information aggregation in fairly complex multiperiod markets with multiple stocks and experienced traders. We find strong evidence against information aggregation. However, we also find that conventional econometric tests are unable to reject the hypothesis of an informationally efficient market. Our study consists of two markets, one with three stocks and one with four. In each market, each stock has a two-period life. A stock pays a dividend at the end of each period, and the underlying distribution of endowments is common knowledge. Traders are given private information about the dividends. Important features of our laboratory markets are: (a) trading takes place in continuous time in a computerized market; (b) multiple units of the same asset can be traded in a single transaction; (c) the same dividends are paid to all owners of a stock; (d) the distribution of private information is not common knowledge; and, (e) borrowing and short sales are allowed. We analyze the data obtained from the experimental sessions in several ways. First, we study how efficiently our markets aggregate information by measuring the extent to which market prices reflect all available information. Since a stock pays dividends in both periods, the aggregation problem in the first period is more difficult than in the second (since the rational expectations price must correctly forecast the sequence of dividends). We find

Foreign Stock Listings: Benefits, Costs, and the Accounting Poiicy Dilemma

Abstract: As firms enter foreign markets for customers and capital, accounting practitioners must wrestle with cross-border differences in languages, customs, accounting conventions, and auditing standards. Stock exchanges in the U.S. claim that they are at a competitive disadvantage because stringent U.S. reporting requirements discourage foreign firms from listing here.This study presents evidence on three key questions raised by these developments:(1) What are the benefits and costs to listing on a foreign stock exchange?(2) Tb what extent do accounting disclosure requirements influence foreign listing decisions?(3) What are the accounting policy issues posed by foreign stock exchange Ustings and how have regulatory authorities responded?

Evidence on Tax‐Motivated Securities Trading Behavior

Abstract: Tax-loss selling by investors in common stocks near the end of calendar years has been proposed as an explanation for the turn-of-the-year effect in stock returns. Past analyses of this hypothesis have relied on inferential data. We provide here some direct data from a compilation of over 80,000 actual common stock investment round trips by a sample of 3000 individual investors. We find strong evidence of a concentration of loss-taking trades late in the year and milder evidence of a concentration just prior to the dates when investments become eligible for long-term tax treatment. THE QUESTION AS TO whether, and in what manner, the impostion of a tax on realized capital gains affects the securities trading behavior of investors who are subject to the tax has been a longstanding topic of research in the financial ecomonics literature. The original attention devoted to the matter was motivated primarily by a concern about resource allocation and federal tax revenue consequences and was directed toward the phenomenon of what has been termed the "lock-in" effect of a gains tax. That issue has remained an important public policy one and continues today as part of the ongoing debate about appropriate strategies for reducing the federal budget deficit. Particular additional interest in the topic has emerged in recent years, however, because securities transactions undertaken systematically for tax reasons have also been proposed as part of the explanation for certain observed anomalies in historical common stock returns-most prominently, the well-documented turn-of-the-year effect. Our purpose here is to provide some new evidence that decisions by investors as to the timing of the realization of capital gains and losses from their common stock investments are significantly affected by tax considerations. This evidence indicates that a difference in the tax rates applicable to realizations classified as short and long term influences the timing of individual investors' trades and, further, that there is a clear tendency for trades by individuals which give rise to losses to be concentrated near the end of calendar (which, for them, are also tax) years. While we cannot conclude that

A comparative analysis of household wealth patterns in france and the united states

Abstract: We find that household wealth is distributed more unequally in the U.S. in 1983 than France in 1986. The Gini coefficient is 0.77 for the U.S. and 0.71 for France. There are also significant differences in the composition of wealth. Owner-occupied housing accounted for half of total assets in France, and only 30 percent in the U.S., while corporate stock and financial securities amounted to 19 percent in the U.S. and 8 percent in France. The debt-equity ratio was 0.13 in France and 0.20 in the U.S. The age-wealth profile in the two countries had the characteristic hump-shape predicted by the life-cycle model, but the profile was much flatter in France and peaked for families aged 50–59 in France, compared to 60–69 in the US.

Do Institutional Investors Destabilize Stock Prices? Evidence on Herding and Feedback Trading

Abstract: This paper uses a new data set of quarterly portfolio holdings of 769 all-equity pension funds between 1985 and 1989 to evaluate the potential effect of their trading on stock prices. We address two aspects of trading by money managers: herding, which refers to buying (selling) the same stocks as other managers buy (sell) at the same time; and positive-feedback trading, which refers to buying winners and selling losers. These two aspects of trading are commonly a part of the argument that institutions destabilize stock prices. At the level of individual stocks at quarterly frequencies, we find no evidence of substantial herding or positive-feedback trading by pension fund managers, except in small stocks. Also, there is no strong cross-sectional correlation between changes in pension funds' holdings of a stock and its abnormal return.

Stock Price Behavior Associated with Managers' Earnings and Revenue Forecasts

Abstract: Managers' earnings forecasts are associated with statistically significant stock price reactions. While nearly half of all earnings forecasts are released with revenue forecasts, the motivation for and the effects associated with revenue forecasts are unknown. This paper proposes and tests hypotheses involving the stock price informativeness of both earnings and revenue forecasts. The "expectations adjustment" hypothesis advanced by Ajinkya and Gift [1984], and generalized by King, Pownall, and Waymire [1990], predicts that managers release forecasts to align equilibrium prices of common stocks with those of managers. Under this view, both earnings and revenue forecasts are mechanisms by which managers adjust expectations. Since releasing forecasts entails costs, revenue forecasts will accompany earnings forecasts when the latter are insufficient to adjust stock prices consistent with managers' expectations. This yields our paper's primary hypotheses: (1) earnings forecasts released without revenue forecasts are more price informative, and (2) revenue forecasts are price informative. Since the magnitude and opportunities for trading gains from foreknowledge of information is greater for large firms, we

Foreign stock listings: benefits, costs, and the accounting policy dilemma

Abstract: As firms enter foreign markets for customers and capital, accounting practitioners must wrestle with cross-border differences in languages, customs, accounting conventions, and auditing standards. Stock exchanges in the U.S. claim that they are at a competitive disadvantage because stringent U.S. reporting requirements discourage foreign firms from listing here. This study presents evidence on three key questions raised by these developments: (1) What are the benefits and costs to listing on a foreign stock exchange? (2) Tb what extent do accounting disclosure requirements influence foreign listing decisions? (3) What are the accounting policy issues posed by foreign stock exchange Ustings and how have regulatory authorities responded?