Showing papers on "Stock (geology) published in 1996"

Stock markets, banks, and economic growth

Abstract: Using data on 49 countries from 1976 to 1993, the authors investigate whether measures of stock market liquidity, size, volatility, and integration in world capital markets predict future rates of economic growth, capital accumulation, productivity improvements, and private savings. They find that stock market liquidity-as measured by stock trading relative to the size of the market and economy - is positivelyand significantly correlated with current and future rates of economic growth, capital accumulation, productivity growth, even after controlling for economic and political factors. Stock market size, volatility, and integration are not robustly linked with growth. Nor are financial indicators closely associated with private savings rates. Significantly, banking development -as measured by bank loans to private enterprises divided by GDP -when combined with stock market liquidity predicts future rates of growth, capital accumulation, and productivity growth when entered together in regressions. The authors determine that these results are consistent with views that (1)financial markets and institutions provide important services for long-run growth, and (2)stock markets and banks provide different financial services.

Evidence on the Characteristics of Cross Sectional Variation in Stock Returns

Abstract: Firm size and book-to-market ratios are both highly correlated with the returns of common stocks. Fama and French (1993) have argued that the association between these firm characteristics and their stock returns arises because size and book-to-market ratios are proxies for non-diversifiable factor risk. In contrast, the evidence in this paper indicates that the return premia on small capitalization and high book-to-market stocks does not arise because of the co-movements of these stocks with pervasive factors. It is the firm characteristics and not the covariance structure of returns that explain the cross-sectional variation in stock returns.

Oil and the stock markets

Abstract: We test whether the reaction of international stock markets to oil shocks can be justified by current and future changes in real cash flows and/or changes in expected returns. We find that in the postwar period, the reaction of United States and Canadian stock prices to oil shocks can be completely accounted for by the impact of these shocks on real cash flows alone. In contrast, in both the United Kingdom and Japan, innovations in oil prices appear to cause larger changes in stock prices than can be justified by subsequent changes in real cash flows or by changing expected returns.

Understanding Risk and Return

Abstract: This paper uses an equilibrium multifactor model to interpret the cross-sectional pattern of postwar U.S. stock and bond returns. Priced factors include the return on a stock index, revisions in forecasts of future stock returns (to capture intertemporal hedging effects), and revisions in forecasts of future labor income growth (proxies for the return on human capital). Aggregate stock market risk is the main factor determining excess returns; but in the presence of human capital or stock market mean reversion, the coefficient of relative risk aversion is much higher than the price of stock market risk.

Why Do Markets Move Together? An Investigation of U.S.-Japan Stock Return Comovements

Abstract: This article explores the fundamental factors that affect cross-country stock return correlations. Using transactions data from 1988 to 1992, we construct overnight and intraday returns for a portfolio of Japanese stocks using their NYSE-traded American Depository Receipts (ADRs) and a matched-sample portfolio of U. S. stocks. We find that U. S. macroeconomic announcements, shocks to the Yen/Dollar foreign exchange rate and Treasury bill returns, and industry effects have no measurable influence on U.S. and Japanese return correlations. However, large shocks to broadbased market indices (Nikkei Stock Average and Standard and Poor's 500 Stock Index) positively impact both the magnitude and persistence of the return correlations. STOCK RETURN CROSS-COUNTRY COVARIANCES play a key role in international finance. Changes in these covariances affect the volatility of portfolios and asset prices. As these covariances increase, one expects that: (a) fewer domestic risks are internationally diversifiable, so portfolio volatility increases; (b) the risk premium on the world market portfolio increases;1 (c) the cost of capital increases for individual firms; and, (d) the domestic version of the CAPM becomes increasingly inadequate.2 Despite the important economic consequences of changes in cross-country covariances, the determinants of the levels and dynamics of these covariances have been little studied from an academic

Expectations and the Cross-Section of Stock Returns

Abstract: Previous research has shown that stocks with low prices relative to book value, cash flow, earnings, or dividends (that is, value stocks) earn high returns. Value stocks may earn high returns because they are more risky. Alternatively, systematic errors in expectations may explain the high returns earned by value stocks. I test for the existence of systematic errors using survey data on forecasts by stock market analysts. I show that investment strategies that seek to exploit errors in analysts' forecasts earn superior returns because expectations about future growth in earnings are too extreme. IT IS BECOMING INCREASINGLY accepted that stock returns have a predictable component. Fama and French (FF, 1992) find that size (the market value of a stock's equity) and the ratio of the book value of a firm's common equity to its market value (BM), but not 1B (the slope coefficient in the regression of a security's return on the market's return), capture much of the cross-section of average stock returns.' FF argue that size and BM are proxies for unobservable common risk factors, and that their findings are consistent with rational asset pricing. An alternative interpretation, argue Lakonishok, Shleifer, and Vishny (LSV, 1994), is that financial ratios have predictive power because they capture systematic errors in the way that investors form expectations about future returns, and because the stock market is not fully efficient. Strategies that call for the purchase of stocks with low prices relative to dividends, earnings, and

Energy shocks and financial markets

Abstract: This study analyzes the information transmission mechanism linking oil futures with stock prices, where we examine the lead and lag cross-correlations of returns in one market with the others. We investigate the dynamic interactions between oil futures prices traded on the New York Mercantile Exchange (NYMEX) and U.S. stock prices, which allows us to examine the effects of energy shocks on financial markets. In particular, we examine the extent to which these markets are contemporaneously correlated, with particular attention paid to the association of oil price indexes with the SP 12 major industry stock price indices and 3 individual oil company stock price series. We also examine the extent to which price changes or returns in one market dynamically lead returns in the others and whether volatility spillover effects exist across these markets. Using VAR model estimates for various time series of returns we find that petroleum industry stock index and our three oil company stocks are the only series where we can reject the null hypothesis that oil futures do not lead Treasury Bill rates and stock returns, while we can reject the hypothesis that oil futures lag these other two series. Finally, the return volatility evidence for oil futures leading individual oil company stocks is much weaker than is the evidence for returns themselves.

Private and Public Supply of Liquidity

Abstract: This paper addresses a basic, yet unresolved question : Do claims on private assets provide sufficient liquidity for an efficient functioning of the productive sector? Or does the State have a role in creating liquidity and regulating it either through adjustments in the stock of government securities or by other means?

On the Predictability of Stock Returns: An Asset-Allocation Perspective

Abstract: Sample evidence about the predictability of monthly stock returns is considered from the perspective of a risk-averse Bayesian investor who must allocate funds between stocks and cash. The investor uses the sample evidence to update prior beliefs about the parameters in a regression of stock returns on a set of predictive variables. The regression relation can seem weak when described by usual statistical measures, but the current values of the predictive variables can exert a substantial influence on the investor's portfolio decision, even when the investor's prior beliefs are weighted against predictability. INVESTORS IN THE STOCK market are interested in predicting future stock returns, and the academic literature offers numerous empirical investigations of stockreturn predictability. Many of these investigations report the results of estimating linear time-series regressions of stock returns on one or more predictive variables, and considerable effort has been devoted to assessing the strength and reliability of this regression evidence from a statistical perspective. Given that the regression coefficients are estimated with error, confronting the investor with what is commonly termed "estimation risk," to what extent might the regression evidence influence a rational, risk-averse investor's portfolio decision? Consider an investor who, on December 31, 1993, must allocate funds between the value-weighted portfolio of the New York Stock Exchange (NYSE) and one-month Treasury bills. The investor is given the results of estimating the following regression using monthly data from January 1927 through December 1993,

The International Transmission of Financial Shocks: The Case of Japan

Abstract: One of the more dramatic financial events of the late 1980s and early 1990s was the surge in Japanese stock prices that was immediately followed by a very sharp decline of more than 50 percent. While the unprecedented fluctuations in Japanese stock prices were domestic financial shocks, the unique institutional characteristics of the Japanese economy produce a framework that is particularly suited to the transmission of such shocks to other countries through the behavior of the Japanese banking system. The large size of Japanese bank lending operations in the United States enables us to use U.S. banking data to investigate the extent to which this domestic Japanese financial shock was transmitted to the United States, as well as to identify a supply shock to U.S. bank lending that is independent of U.S. loan demand. We find that binding risk-based capital requirements associated with the decline in the Japanese stock market resulted in a decline in commercial lending by Japanese banks in the United States that was both economically and statistically significant. This finding has added importance given the severe real estate loan problems currently faced by Japanese banks. How Japanese bank regulators decide to resolve these problems will have significant implications for credit availability in the United States as well as in other countries with a significant Japanese bank presence.

Earnings and Expected Returns

Abstract: The aggregate dividend payout ratio forecasts aggregate excess returns on both stocks and corporate bonds in post-war US data Both high corporate profits and high stock prices forecast low excess returns on equities When the payout ratio is high, expected returns are high The payout ratio's correlation with business conditions gives it predictive power for returns; it contains information about future stock and bond returns that is not captured by other variables The payout ratio is useful because it captures the temporary components of earnings The dynamic relationship between dividends, earnings and stock prices shows that a positive innovation in earnings lowers expected returns in the near future, but raises them thereafter

Evidence on the Characteristics of Cross Sectional Variation in Stock Returns

Abstract: Firm size and book-to-market ratios are both highly correlated with the returns of common stocks. Fama and French (1993) have argued that the association between these firm characteristics and their stock returns arises because size and book-to-market ratios are proxies for non-diversifiable factor risk. In contrast, the evidence in this paper indicates that the return premia on small capitalization and high book-to-market stocks does not arise because of the co-movements of these stocks with pervasive factors. It is the firm characteristics and not the covariance structure of returns that explain the cross-sectional variation in stock returns.

International Market Correlation and Volatility

Abstract: International correlations for stocks and bonds fluctuate widely over time. As previous studies have found, volatility appears to be contagious across markets. In addition, international correlation increases in periods of high market volatility. Although the correlation of individual foreign stock markets with the U.S. stock market has generally increased slightly over the past 37 years, it has not increased during the past 10 years. Similarly, the international correlation of bond markets increased in the early 1980s, but it has had no discernible trend in the past 10 years. The fairly low levels of international correlation among stocks or bonds suggests that national factors still strongly affect local asset prices. The link between correlation and market volatility is bad news for global money managers because when the domestic market is subject to a strong negative shock is when the benefits of international risk diversification are needed most.

New Evidence on Stock Price Effects Associated with Changes in the S&P 500 Index

Abstract: Since October 1989, Standard and Poor s has (when possible) announced changes in the composition of the S&P 500 index one week in advance. Because index funds hold S&P 500 stocks to minimize tracking error, index composition changes since this date provide an opportunity to examine the market reaction to an anticipated change in the demand for a stock. Using post-October-1989 data, we document significantly positive (negative) post-announcement abnormal returns that are only partially reversed following additions (deletions). These results indicate the existence of temporary price pressure and downward-sloping log-run demand curves for stocks and represent a violation of market efficiency.

Real and Spurious Long Memory Properties of Stock Market Data

Abstract: We test for the presence of long memory in daily stock returns and their squares using a robust semiparametric procedure. Spurious results can be produced by nonstationarity and aggregation.

The Spirit of Capitalism and Stock-Market Prices

Abstract: In existing theory, wealth is no more valuable than its implied consumption rewards. In reality, investors acquire wealth not just for its implied consumption but for the resulting social status. Max M. Weber (1958) refers to this desire for wealth as the spirit of capitalism. The authors examine, both analytically and empirically, implications of Weber's hypothesis for consumption, savings, and stock prices. When investors care about relative social status, propensity to consume and risk-taking behavior will depend on social standards and stock prices will be volatile. The spirit of capitalism seems to be a driving force behind stock-market volatility and economic growth. Copyright 1996 by American Economic Association.

Lessons for stock assessment from the northern cod collapse

Abstract: Fisheries assessment scientists can learn at least three lessons from the collapse of the northern cod off Newfoundland: (1) assessment errors can contribute to overfishing through optimistic long-term forecasts leading to the build-up of overcapacity or through optimistic assessments which lead to TACs being set higher than they should; (2) stock size overestimation is a major risk when commercial catch per effort is used as an abundance trend index, so there is continued need to invest in survey indices of abundance trend no matter what assessment methodology is used; and (3) the risk of recruitment overfishing exists and may be high even for very fecund species like cod. This implies that harvest rate targets should be lower than has often been assumed, especially when stock size assessments are uncertain. In the end, the high cost of information for accurate stock assessment may call for an alternative approach to management, involving regulation of exploitation rate via measures such as large-scale closures (refuges) that directly restrict the proportion of fish available to harvest. Development of predictive models for such regulatory options is a major challenge for fisheries assessment science.

Economic Consequences of Accounting for Stock-Based Compensation

Abstract: The Financial Accounting Standards Board's (FASB) project on employee stock-based compensation was one of the most controversial in the Board's 20-year history. In particular, the Board's 1993 Exposure Draft proposing the recognition of an expense for employee stock options generated predictions of dire economic consequences and prompted the threat of regulatory intervention from Congress and the White House. This study employs three complementary research approaches to evaluate the nature and extent of the predicted economic consequences. First, we examine the characteristics of firms lobbying against the 1993 Exposure Draft (FASB [1993]). Second, we examine the characteristics of firms using employee stock options under the original financial reporting rules. Finally, we examine stock price reactions to announcements concerning the new financial reporting rules.

Employee Stock Ownership and Corporate Performance among Public Companies

Abstract: This study compares the corporate performance in 1990/91 of two groups of public companies: those in which employees owned more than 5% of the company's stock, and all others. The results of the analysis, which looks at profitability, productivity, and compensation, are consistent with neither negative nor highly positive views of employee ownership, but where differences are found, they are favorable to companies with employee ownership, especially among companies of small size. The circumstances in which employee ownership was used—specifically, whether it was part of a wage/benefit concession package and whether it was involved in a takeover threat—do not appear to have had a significant effect on the 1990 performance levels or 1980–90 performance growth of the firms. Although the authors caution that the data do not permit clear tests of causality, these results are broadly consistent with those of past studies.

Delayed Reaction to Good News and the Cross‐Autocorrelation of Portfolio Returns

Abstract: We document a directional asymmetry in the small stock concurrent and lagged response to large stock movements. WVhen returns on large stocks are negative, the concurrent beta for small stocks is high, but the lagged beta is insignificant. When returns on large stocks are positive, small stocks have small concurrent betas and very significant lagged betas. That is, the cross-autocorrelation puzzle documented by Lo and MacKinlay (1990a) is associated with a slow response by some small stocks to good, but not to bad, common news. Time series portfolio tests and cross-sectional tests of the delay for individual securities suggest that existing explanations of the cross-autocorrelation puzzle based on data mismeasurement, minor market imperfections, or time-varying risk premiums fail to capture the directional asymmetry in the data. IN AN ARTICLE ANALYZING the source of contrarian profits, Lo and MacKinlay (1990a) point out that the return on a portfolio of small stocks is correlated with the lagged return on a portfolio of large stocks. Lo and MacKinlay also point out a size asymmetry, noting that the return on a portfolio of large stocks is not correlated with the lagged return on small stocks.1 Boudoukh, Richardson, and Whitelaw (1994, hereafter BRW), among others, show that this cross-autocorrelation between large and small stock portfolio returns can also be characterized by the autocorrelation of the small stock portfolio. However, Lo and MacKinlay (1990a and 1990b) argue that such autocorrelation cannot be explained by appeals to traditional nontrading arguments. Thus, a search for new, more viable, explanations of why small stock returns can be predicted by past larger stock returns has begun. BRW categorize extant explanations into three camps: "Loyalists," "Revisionists," and "Heretics." Loyalists defend the efficiency of stock markets by pointing to data mismeasurement or to market imperfections as the sources of the predictability. Revisionists attribute the predictability of small stock returns to time-varying risk premiums. Finally, Heretics attribute the predictability to market fads, bubbles, or overreaction. Each explanation is typically

Why Should Older People Invest Less in Stocks Than Younger People

Abstract: Financial planners typically advise people to shift investments away from stocks and toward bonds as they age. The planners commonly justify this advice in three ways. They argue that stocks are less risky over a young person’s long investment horizon, that stocks are often necessary for young people to meet large financial obligations (like college tuition for their children), and that younger people have more years of labor income ahead with which to recover from the potential losses associated with stock ownership. This article uses economic reasoning to evaluate these three different justifications. It finds that the first two arguments do not make economic sense. The last argument is valid—but only for people with labor income that is relatively uncorrelated with stock returns. If a person’s labor income is highly correlated with stock returns, then that investor is better off shifting investments toward stocks over time.

The Option to Repurchase Stock

Abstract: Companies often announce their intention to reacquire share via open market transactions. However, these programs are not firm commitments. By design, they provide managers the flexibility to forego repurchasing stock. Managers concerned with maximizing the wealth of long-term stockholders will tend to buy back share when they view their stock as undervalued and otherwise forego repurchasing shares. We value this inherent flexibility as an exchange option in which the market price of the stock is exchanged for the true value of the stock. Hence, the announcement of a repurchase expands the company's investment opportunity set. In essence, the programs authorize management to use the firm's resources along with their "insider" valuation of the firm to the benefit of long-term shareholders.

Excess Volatility and Predictability of Stock Prices in Autoregressive Dividend Models with Learning

Abstract: To what extent can agents' learning and incomplete information about the "true" underlying model generating stock returns explain findings of excess volatility and predictability of returns in the stock market? In this paper we analyse two models of recursive learning in the stock market when dividends follow a (trend-)stationary autoregressive process. The asymptotic convergence properties of the models are characterized and we decompose the variation in stock prices into rational expectations and recursive learning components with different rates of convergence. A present-value learning rule is found to generate substantial excess volatility in stock prices even in very large samples, and also seems capable of explaining the positive correlation between stock returns and the lagged dividend yield. Self-referential learning, where agents' learning affect the law of motion of the process they are estimating, is shown to generate some additional volatility in stock prices, though of a magnitude much smaller than present value learning

Bustup Takeovers of Value-Destroying Diversified Firms

Abstract: We examine whether the value loss from diversification affects takeover and breakup probabilities. We estimate diversification's value effect by imputing stand-alone values for individual business segments and find that firms with greater value losses are more likely to be taken over. Moreover, those acquired firms whose losses are greatest are most likely to be bought by LBO associations, which frequently break up their targets. For a subsample of large diversified targets: (1) higher value losses increase the extent of post-takeover bustup; and (2) post-takeover bustup generally results in divested divisions being operated as part of a focused, stand-alone firm. BERGER AND OFEK (1995) CONFIRM recent evidence by Lang and Stulz (1994) of a value loss from diversification in the 1980s, which Servaes (1996) finds also occurred in the 1960s, and, to a lesser extent, in the 1970s. Berger and Ofek use segment-level data to estimate the magnitude of the loss and find that, during 1986-1991, the average diversified firm destroyed about 15 percent of the value its lines of business would have had if operated as stand-alone businesses. The evidence that diversification represents a suboptimal managerial strategy suggests that internal control systems do not prevent managers from destroying significant amounts of value. The value destruction does, however, generate large profit opportunities for outsiders. The natural question that arises is whether these profit opportunities result in takeovers disciplining the management of firms with large and persistent value losses from diversification. The U.S. market for corporate control reached its zenith during the last half of the 1980s. The many takeovers and leveraged buyouts (LBOs) during this period transferred control over corporate resources which, in many cases, had been under the control of diversified corporations. Marris (1963) and Manne (1965) argue that the difference between actual and potential stock prices in firms operated suboptimally creates incentives for outsiders to acquire these firms and improve operations. Jensen (1986) extends this reasoning to value

Do Sales–Price and Debt–Equity Explain Stock Returns Better than Book–Market and Firm Size?

Abstract: During the 1979–91 period, the sales–price ratio and the debt–equity ratio had greater explanatory power for stock returns than either the book–market value of equity ratio or the market value of equity. Furthermore, the sales–price ratio captures the role of the debt–equity ratio in explaining stock returns. Neither the book–market value of equity ratio nor the market value of equity has consistent explanatory power for stock returns, and the sales–price ratio is a more reliable explanatory factor.

Modeling the dynamic interdependence of major european stock markets

Abstract: The growing globalization of financial markets has been accompanied by a growing body of empirical research attempting to describe and quantify the ways in which financial markets within and across countries interact. Better understanding of the nature of cross market linkages and interactions could be of help to investors and policy makers alike. With respect to policy, aspects of market interaction that promote efficiency could, in principle, be facilitated whereas, those with undesirable side effects could be controlled. Likewise, investment and hedging strategies could be more effective if the nature of market interactions were better understood. The extant literature provides convincing evidence that financial markets do influence each other. For example, Koch and Koch (1991) provide evidence on the evolution of contemporaneous and lead/lag relationships among eight national stock markets. They suggest that regional interdependencies have grown over time. Becker, Finnerty, and Gupta (1990) show that information generated in the US stock market could be used to trade profitably in Japan, contrary to the market efficiency hypothesis. However, when transaction costs and transfer taxes are included into the analysis, excess profits vanish. Eun and Shim (1989) document that markets around the globe respond to innovations in a way that is consistent with the notion of informationally efficient international stock markets. King and Wadhwani (1990) use a rational expectations model with asymmetric information to test for 'contagion effects' i.e., the notion that valuation mistakes in one market can be transmitted to other markets.' More recent papers extend the scope of market interaction to include second moment linkages. This extension allows testing ofthe hypothesis that information generated in a given market at time / is useful in terms of predicting the conditional mean and variance in another market at time t+l. Hamao, Masulis and Ng (1990) examine first and second moment interdependencies in the three major stock markets (New York, Tokyo, and London) using univariate GARCH models. For the period after the October 1987 worldwide stock market crash, they find that innovations coming from