Showing papers on "Stock (geology) published in 1993"

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.

Smart Money, Noise Trading and Stock Price Behaviour

Abstract: This paper estimates an equilibrium model of stock price behaviour in which changes in exponentially de-trended dividends and prices are normally distributed and exogenous "noise traders" interact with "smart-money" investors who have constant absolute risk aversion. The model can explain the volatility and predictability of U.S. stock returns in the period 1871-1986 using either a low discount rate (4% or below) and a large constant risk discount on the stock price, or a higher discount rate (5% or above) and noise trading correlated with fundamentals. The data are not well able to distinguish between these explanations.

A new database on human capital stock : sources, methodology and results

Abstract: The authors describe the techniques and data adopted for the construction of a new series of estimates of the stock of education in 85 countries over 28 years (1960-87). It covers all the important developing regions except the republics of the former Soviet Union. The International Economics Department (IEC) continues a well-established trend in growth research of using educational stock (measured as mean school years of education of the labor force) as a proxy for human capital. The series are built from enrollment data using the perpetual inventory method, adjusted for mortality. Estimates are corrected for grade repetition among school-goers and country-specific drop-out rates for primary and secondary students. Enrollment data series used start as far back as 1930 for most countries, and even earlier for others. This reduces the need for backward extrapolation of enrollments to provide the initial estimates of the investment inventory.

Options, Short Sales, and Market Completeness

Abstract: This paper presents empirical evidence that trading in options contributes to both transactional and informational efficiency of the stock market by reducing the effect of constraints on short sales. The significantly higher average level of short interest exhibited by optionable stocks supports the argument that options facilitate short selling. We also find significant effects on option prices, related to the short interest in the underlying stock. We then present evidence that options also increase information efficiency. Earlier work, that is replicated and extended here, has suggested that short sale constraints cause stock prices to underweight negative information. Options appear to reduce that effect.

The Pricing of Initial Public Offerings: A Dynamic Model with Information Production

Abstract: This paper presents an information-theoretic model of IPO pricing in which insiders sell stock in both the IPO and the secondary market, have private information about their firm's prospects, and outsiders may engage in costly information production about the firm. High-value firms, knowing they are going to pool with low-value firms, induce outsiders to engage in information production by underpricing, which compensates outsiders for the cost of producing information. The information is reflected in the secondary market price of equity, giving a higher expected stock price for high-value firms.

Stock returns and inflation: A long-horizon perspective

Abstract: Two main empirical facts regarding the statistical relation between stock returns and inflation emerge from the current literature in finance. The first is that ex post nominal stock returns and inflation are negatively correlated. Financial economists consider this result surprising since stocks, as claims against real assets, should compensate for movements in inflation. The second, and related, empirical result documents a negative relation between ex ante nominal stock returns and ex ante inflation. Since the Fisher model implies that expected nominal rates should move one-forone with expected inflation, this negative correlation strikes at the heart of one of the oldest and most respected financial models (see e.g., John Lintner, 1975; Zvie Bodie, 1976; Charles Nelson, 1976; Eugene Fama and G. William Schwert, 1977; Jeffrey Jaffe and Gershon Mandelker, 1977; N. Bulent Gultekin, 1983; Gautam Kaul, 1987). Existing studies, however, have focused almost exclusively upon short-term asset returns with time horizons of one year and less.1 Since the Fisher model (and its corresponding intuition) might be expected to hold at all horizon lengths, this void in the empirical literature is unfortunate for several reasons. First, from a practical perspective, many investors hold stocks over long holding periods. Therefore, it is important to know the manner in which stock returns move with inflation over longer horizons. Second, the relation between stock returns and inflation at long horizons is of particular interest given that the results at short horizons (both ex ante and ex post) appear to be anomalous. That is, evidence at these longer horizons may provide additional information regarding explanations for the negative correlation between nominal stock returns and both ex ante and ex post inflation. In this paper, the relation between stock returns and inflation at long horizons is examined. In approaching this issue, several problems arise which must be addressed. The first difficulty is the necessity for a long data sample in order to capture long-term movements in the time series of returns. We have been able to accumulate two centuries of data on stocks, short-term and long-term bonds, and inflation in both the United States and the United Kingdom in order to fulfill this requirement. The second difficulty results from the inability to model ex ante long-term inflation accurately. We circumvent the absence of any long-horizon inflation model by using an instrumental* Finance Department, Stern School of Business, New York University, New York, NY 10012, and Finance Department, Wharton School of Finance and Commerce, University of Pennsylvania, Philadelphia, PA 19104-6367, respectively. An earlier version of the paper was circulated under the title, "Stocks Are a Good Hedge for Inflation (in the Long Run)." We thank Pierluigi Balduzzi, Bob Cumby, Silverio Foresi, Yasushi Hamao, Julie Richardson, Jeremy Siegel, Tom Smith, participants at the Western Finance Association meetings (San Francisco, 1992), and two anonymous referees for their helpful comments and suggestions. Special thanks to Tim Opler and Jeremy Siegel for use of the data. The authors gratefully acknowledge research support from the New York University Salomon Center (Boudoukh), and the Geewax-Terker Research Foundation (Richardson). IAs a representative sample of this literature, in their study of a variety of assets, Fama and Schwert (1977) document a negative relation between ex ante stock returns and expected inflation using monthly, quarterly, and semiannual data.

What have we learned about policy and growth from cross-country regressions?

Abstract: Economists have been seeking to comprehend why some countries are rich and others poor for well over 200 years. A better understanding of the national policies associated with long-run growth would both contribute to our ability to explain cross country differences in per capita incomes and provide a basis for making policy recommendations that could lead to improvements in human welfare. Recently, economists have used cross-country regressions to search for empirical linkages between longrun growth and indicators of national policies (e.g., Roger Kormendi and Philip Meguire, 1985; Robert J. Barro, 1991). The large cross-country growth literature has identified various fiscal, monetary, trade, exchange-rate, and financial-policy indicators that are significantly correlated with longrun growth. Yet, Levine and David Renelt (1992) show that many of these findings are fragile to small alterations in the conditioning information set. That is, small changes in the right-hand-side variables produce different conclusions regarding the relationship between individual policies and growth. In this paper, we take stock of what the profession has learned from cross-country regression studies of policy and long-run growth. I. Limitations

A Test for the Number of Factors in an Approximate Factor Model

Abstract: An important issue in applications of multifactor models of asset returns is the appropriate number of factors. Most extant tests for the number of factors are valid only for strict factor models, in which diversifiable returns are uncorrelated across assets. In this paper we develop a test statistic to determine the number of factors in an approximate factor model of asset returns, which does not require that diversifiable components of returns be uncorrelated across assets. We find evidence for one to six pervasive factors in the cross-section of New York Stock Exchange and American Stock Exchange stock returns.

Efficiency in the savings and loan industry

Abstract: The stochastic econometric cost frontier approach is modified to investigate efficiency in mutual and stock S & Ls using 1991 data on U.S. S & Ls. This methodology allows both the cost frontier and error structures to differ between S & Ls of these two ownership forms. A likelihood ratio test indicates that the data support this unrestricted model, which implies efficient mutual and stock S & Ls use different production technologies. Various measures of inefficiency show that on average stock S & Ls are less efficient than mutual S & Ls. The second part of the article relates the inefficiency measures to several correlates.

Stock Versus Mutual Ownership Structures: The Risk Implications

Abstract: This article provides empirical tests of the risk differences between two types of ownership structure in the property-liability insurance industry. Empirical evidence is provided that suggests stock insurers have more risk than mutuals where the risk inherent in future cash flows is proxied by the variance of the loss ratio. Further evidence suggests that stock insurers write relatively more business than do mutuals in lines and states having higher risk. Copyright 1993 by University of Chicago Press.

Mean and volatility spillovers across major national stock markets: further empirical evidence

Abstract: This paper provides additional insight into the nature and degree of interdependence of stock markets of the United States, Japan, the United Kingdom, Canada, and Germany, and it reports the extent to which volatility in these markets influences expected returns The analysis uses the multivariate GARCH-M model Although they are considered weak, statistically significant mean spillovers radiate from stock markets of the US to the UK, Canada, and Germany, and then from the stock markets of Japan to Germany No relation is found between conditional market volatility and expected returns Strong time-varying conditional volatility exists in the return series of all markets The own-volatility spillovers in the UK and Canadian markets are insignificant, supporting the view that conditional volatility of returns in these markets is “imported” from abroad, specifically from the US Significant volatility spillovers radiate from the US stock market to all four stock markets, from the UK stock market to the Canadian stock market, and from the German stock market to the Japanese stock market The results are robust and no changes occur in the correlation structure of returns over time

Why Does the Stock Market Fluctuate

Abstract: Major long-run swings in the U. S. stock market over the past century are broadly consistent with a model driven by changes in current and expected future dividends in which investors must estimate the time-varying long-run dividend growth rate. Such an estimated long-run growth rate resembles a long distributed lag on past dividend growth, and is highly correlated with the level of dividends. Prices therefore respond more than proportionately to long-run movements in dividends. The time-varying component of dividend growth need not be detectable in the dividend data for it to have large effects on stock prices.

Closed-End Country Funds and U.S. Market Sentiment, Mitsui Life Financial Research Center

Abstract: The premiums on closed-end country funds tend to move in tandem, but do not move together with premiums on domestic closed-end funds. After controlling for foreign market fundamentals, changes in the stock price of country funds co-move with U.S. market returns, but changes in their net asset values do not. An index of changes in country fund premiums explains cross-sectional stock returns in the U.S. market. Collectively, these findings suggest U.S. stock prices are affected by market-wide sentiments which are reflected in closed-end country fund premiums.

International Listings of Stocks: The Case of Canada and the U.S.

Abstract: The globalization of financial markets has seen ever-increasing numbers of firms choosing to list their stocks on foreign exchanges. We examine whether the extent of economic and financial market integration (or segmentation) between a firm's home country and listing country influences stock price reaction by examining the case of two “similar” countries: the U.S. and Canada. During the 100 days before the week of interlisting in the U.S., (risk-adjusted) stock prices of Canadian firms rise (on average) by over 9.4%, rise by an additional 2% around the interlisting date, but follow with a corresponding drop of 9.7% in the 100 days after interlisting. We interpret this evidence to be consistent with the financial market segmentation between Canada and the U.S. However, a subsample of Canadian resource firms does not exhibit these stock price effects, suggesting industry-related factors may also be an important determinant of integration. We also find average trading volume in interlisted stocks more than doubles in the months following interlisting.

Why Option Prices Lag Stock Prices: A Trading-based Explanation

Abstract: While many studies find that option prices lead stock prices, Stephan and WVhaley (1990) find that stocks lead options. We find no evidence that options, even deep out-of-the-money options, lead stocks. After confirming Stephan and Whaley's results, we show their results can be explained as spurious leads induced by infrequent trading of options. We show that the stock lead disappears when the average of the bid and ask prices is used instead of transaction prices. Hence, we find no evidence of arbitrage opportunities associated with the stock lead. IN A PERFECT MARKET, price discrepancies should be instantly arbitraged away. In particular, option prices should neither lead nor lag stock prices. In real markets, only very short leads should occur. Traders with private information who are confident that their information is valid and that they will not be detected generally want highly leveraged positions to exploit their advantage. Thus, we might expect options, with their greater leverage, to lead stocks, if information trading is important. Manaster and Rendleman (1982), Bhattacharya (1987), and Anthony (1988) find evidence that options

The impact of international cross listings on risk and return

Abstract: This paper examines the impact of the listing of American Depository Receipts (ADRs) on the risk and return of the underlying stocks. We find that the listing of ADRs is associated with positive abnormal returns to the underlying stock on the listing day. In addition, our results suggest that the listing of ADRs are associated with permanent increases in the return volatilities of the underlying stocks. We interpret this evidence as consistent with the existence of informed traders in the markets in which the ADRs and the underlying stocks trade.

Temporary Components of Stock Prices: A Skeptic's View

Abstract: Recent empirical work has uncovered U-shaped patterns of large magnitude in the serial-correlation estimates of multiyear stock returns. The current literature in finance has taken this evidence to mean that there exists a temporary component of stock prices. This article provides an alternative explanation regarding these findings. Specifically, we show that the patterns in serial-correlation estimates and their magnitude observed in previous studies should be expected under the null hypothesis of serial independence.

The Comovement of Stock Prices

Abstract: We test whether comovements of individual stock prices can be justified by economic fundamentals. This is a test of the present value model of security valuation with the constraint that changes in discount rates depend only on changes in macroeconomic variables. Then, stock prices of companies in unrelated lines of business should move together only in response to changes in current or expected future macroeconomic conditions. Using a latent variable model to capture unobserved expectations, we find excess comovement of returns. We show that this excess comovement can be explained in part by company size and degree of institutional ownership, suggesting market segmentation.

A new database on human capital stock : sources, methodology and results

Abstract: The authors describe the techniques and data adopted for the construction of a new series of estimates of the stock of education in 85 countries over 28 years (1960-87). It covers all the important developing regions except the republics of the former Soviet Union. The International Economics Department (IEC) continues a well-established trend in growth research of using educational stock (measured as mean school years of education of the labor force) as a proxy for human capital. The series are built from enrollment data using the perpetual inventory method, adjusted for mortality. Estimates are corrected for grade repetition among school-goers and country-specific drop-out rates for primary and secondary students. Enrollment data series used start as far back as 1930 for most countries, and even earlier for others. This reduces the need for backward extrapolation of enrollments to provide the initial estimates of the investment inventory.

A General Equilibrium Model of International Portfolio Choice

Abstract: We investigate, in a two-country general equilibrium model, whether a bias in consumption towards domestic goods will necessarily lead to a preference for domestic securities. We develop a model where investors are constrained to consume only from their domestic capital stock and where it is costly to transfer capital across countries. In this model, investors less risk averse than an investor with log utility bias their portfolios towards domestic assets. Investors more risk averse than log, however, prefer foreign assets. Thus, this model suggests that it is unlikely that the portfolios observed empirically can be explained by the high proportion of domestic goods in total consumption. WE INVESTIGATE, IN A two-country, general equilbrium model, whether a bias in consumption toward domestic goods will necessarily lead to a preference for domestic assets in an investor's optimal portfolio. We constrain investors to consume only from their domestic capital stock and introduce a proportional cost for transferring goods from one country. This cost gives rise to endogenous deviations from the law of one price (LOP). Thus, the home and foreign investors do not hold identical portfolios. We show that an investor's optimal portfolio is biased towards domestic equity only if she is less risk averse than an investor with log utility. Investors with relative risk aversion greater than one exhibit a preference for the foreign asset. This is because the exchange rate, derived endogenously, is negatively correlated with the return on the foreign asset, and therefore, the translated return on the foreign stock is less risky than that on the domestic stock. Thus, the results of this model suggest that it is unlikely that the preference for domestic assets that is observed empirically can be explained by the high proportion of domestic goods in total consumption. There exists a considerable body of literature documenting the gains from international diversification. Grubel (1968) was the first to propose that international diversification allows investors to attain lower return variances than those achievable by diversifying domestically. This proposition relies on the correlation between stock indices across countries being significantly less

Installation vs. echelon stock policies for multilevel inventory control

Abstract: This paper compares installation and echelon stock policies for multilevel inventory control. The major results are for serial and assembly systems. For (Q, r)-rules, echelon stock policies are, in general, superior to installation stock policies. A Kanban-policy is identified as a restricted type of installation stock (Q, r)-policy.

Capital markets and financial intermediation: Stock markets and resource allocation

Abstract: Introduction As West European countries integrate their economies and East European countries move away from communism, both are reassessing their economic and financial institutions. One of the most important choices they face concerns the emphasis they should place on stock markets (including equity, bond and other markets) as opposed to banks for providing finance to their industries. Although both stock markets and banks have existed in most advanced countries for many years, the relative importance of the two has varied. Stock-market-based financial systems have been associated with the nineteenth-century UK, which was the first country to go through the Industrial Revolution, and the twentieth-century US, which was the first country to go through the post-Industrial Revolution. Bank-based financial systems have been associated with France, Germany and Japan. In the second half of the nineteenth century the stock market played an important role in the financing of industry in the UK. According to Michie (1987), roughly one-quarter of capital formation was raised through the London Stock Exchange in 1853; by 1913 this had grown to one-third. Table 4.1 gives a detailed breakdown of the distribution of securities by industry between 1853 and 1913. It can be seen that railways were the most important category apart from government debt. Urban services, financial services and commercial and industrial firms were all significant and constituted most of the remainder. Agriculture was a very minor component and consisted entirely of overseas investments. In the first half of the twentieth century, the role of the London Stock Exchange in raising funds for industry declined and it was in the US that stock markets came to have the greatest relative importance.

Imperfect Information and Cross-Autocorrelation among Stock Prices

Abstract: I develop a model to explain why stock returns are positively cross-autocorrelated. When market makers observe noisy signals about the value of their stocks but cannot instantaneously condition prices on the signals of other stocks, which contain marketwide information, the pricing error of one stock is correlated with the other signals. As market makers adjust prices after observing true values or previous price changes of other stocks, stock returns become positively crossautocorrelated. If the signal quality differs among stocks, the cross-autocorrelation pattern is asymmetric. I show that both own- and cross-autocorrelations are higher when market movements are larger.