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Volume 41: Issue 3 (July 1986)


Front Matter

Pages: i-vi  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb00515.x  |  Cited by: 0


Back Matter

Pages: vii-xii  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb00518.x  |  Cited by: 0


Noise

Pages: 528-543  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04513.x  |  Cited by: 1043

FISCHER BLACK

The effects of noise on the world, and on our views of the world, are profound. Noise in the sense of a large number of small events is often a causal factor much more powerful than a small number of large events can be. Noise makes trading in financial markets possible, and thus allows us to observe prices for financial assets. Noise causes markets to be somewhat inefficient, but often prevents us from taking advantage of inefficiencies. Noise in the form of uncertainty about future tastes and technology by sector causes business cycles, and makes them highly resistant to improvement through government intervention. Noise in the form of expectations that need not follow rational rules causes inflation to be what it is, at least in the absence of a gold standard or fixed exchange rates. Noise in the form of uncertainty about what relative prices would be with other exchange rates makes us think incorrectly that changes in exchange rates or inflation rates cause changes in trade or investment flows or economic activity. Most generally, noise makes it very difficult to test either practical or academic theories about the way that financial or economic markets work. We are forced to act largely in the dark.


Valuation of Risky Assets in Arbitrage Free Economies with Frictions

Pages: 545-557  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04514.x  |  Cited by: 25

ELIEZER Z. PRISMAN

This paper derives a framework for arbitrage models in markets with frictions. It generalizes the existence of a valuation operator to such markets. As in perfect markets, the valuation operator is a linear operator and its existence is implied by the no‐arbitrage condition. In imperfect markets the valuation operator is individual‐specific and depends on the agent's position in the market. The methodology employed in the paper is duality in convex programming.


DISCUSSION

Pages: 557-560  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04515.x  |  Cited by: 0

EHUD I. RONN


LYON Taming

Pages: 561-576  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04516.x  |  Cited by: 69

JOHN J. McCONNELL, EDUARDO S. SCHWARTZ

A Liquid Yield Option Note (LYON) is a zero coupon, convertible, callable, puttable bond. This paper presents a simple contingent claims pricing model for valuing LYONS and uses the model to analyze a specific LYON issue.


DISCUSSION

Pages: 576-577  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04517.x  |  Cited by: 0

SCOTT P. MASON


Do Demand Curves for Stocks Slope Down?

Pages: 579-590  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04518.x  |  Cited by: 582

ANDREI SHLEIFER

Since September, 1976, stocks newly included into the Standard and Poor's 500 Index have earned a significant positive abnormal return at the announcement of the inclusion. This return does not disappear for at least ten days after the inclusion. The returns are positively related to measures of buying by index funds, consistent with the hypothesis that demand curves for stocks slope down. The returns are not related to S & P's bond ratings, which is inconsistent with a plausible version of the hypothesis that inclusion is a certification of the quality of the stock.


Does the Stock Market Rationally Reflect Fundamental Values?

Pages: 591-601  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04519.x  |  Cited by: 385

LAWRENCE H. SUMMERS

This paper examines the power of statistical tests commonly used to evaluate the efficiency of speculative markets. It shows that these tests have very low power. Market valuations can differ substantially and persistently from the rational expectation of the present value of cash flows without leaving statistically discernible traces in the pattern of ex‐post returns. This observation implies that speculation is unlikely to ensure rational valuations, since similar problems of identification plague both financial economists and would be speculators.


DISCUSSION

Pages: 601-602  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04520.x  |  Cited by: 4

ROBERT F. STAMBAUGH


Integration vs. Segmentation in the Canadian Stock Market

Pages: 603-614  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04521.x  |  Cited by: 133

PHILIPPE JORION, EDUARDO SCHWARTZ

This paper examines the issue of integration versus segmentation of the Canadian equity market relative to a global North American market. We compare the international and domestic versions of the CAPM, and find that integration, or the mean‐variance efficiency of the global market index, is rejected by the data. Segmentation is the preferred model, based on a maximum likelihood procedure correcting for thin trading. We further divide the sample into securities that are interlisted in Canada and the U.S., and those that are not. Integration is rejected for both groups, which indicates that the source of segmentation can be traced to legal barriers based on the nationality of issuing firms.


DISCUSSION

Pages: 614-616  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04522.x  |  Cited by: 1

JAMES N. BODURTHA


The Empirical Implications of the Cox, Ingersoll, Ross Theory of the Term Structure of Interest Rates

Pages: 617-630  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04523.x  |  Cited by: 105

STEPHEN J. BROWN, PHILIP H. DYBVIG

The one‐factor version of the Cox, Ingersoll, and Ross model of the term structure is estimated using monthly quotes on U.S. Treasury issues trading from 1952 through 1983. Using data from a single yield curve, it is possible to estimate implied short and long term zero coupon rates and the implied variance of changes in short rates. Analysis of residuals points to a probable neglected tax effect.


DISCUSSION

Pages: 630-632  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04524.x  |  Cited by: 0

WAYNE E. FERSON


Pricing New Corporate Bond Issues: An Analysis of Issue Cost and Seasoning Effects

Pages: 633-643  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04525.x  |  Cited by: 25

W. K. H. FUNG, ANDREW RUDD

The pricing of new corporate bond issues is examined, with particular emphasis on the seasoning effect and the cost of underwriting. Considerable attention is paid to some special features of the corporate bond market, including the use of actual trader quotes so as to accurately measure holding period returns. Our results suggest that the cost of issuing corporate bonds is less than previously reported.


DISCUSSION

Pages: 643-644  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04526.x  |  Cited by: 0

ROBERT A. TAGGART


An Economic Analysis of Interest Rate Swaps

Pages: 645-655  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04527.x  |  Cited by: 56

JAMES BICKSLER, ANDREW H. CHEN

Interest rate swaps, a financial innovation in recent years, are based upon the principle of comparative advantage. An interest rate swap is a useful tool for active liability management and for hedging against interest rate risk. The purpose of this paper is to provide a simple economic analysis of interest rate swaps. Alternative uses of and the appropriate valuation procedure for interest rate swaps are described.


Inflation, Uncertainty, and Investment

Pages: 657-668  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04528.x  |  Cited by: 10

CARLISS Y. BALDWIN, RICHARD S. RUBACK

This paper investigates the effect of inflation on a firm's investments in fixed assets. When future prices are certain, inflation affects the present value of depreciation tax shields, and the impact of inflation on the choice between different lived assets is nonmonotonic. Future asset price uncertainty creates a valuable switching option and benefits shorter‐lived assets.


DISCUSSION

Pages: 668-669  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04529.x  |  Cited by: 0

ALAN J. AUERBACH


Returns and Risks of U.S. Bank Foreign Currency Activities

Pages: 671-682  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04530.x  |  Cited by: 16

THEOHARRY GRAMMATIKOS, ANTHONY SAUNDERS, ITZHAK SWARY

In this paper the risks and returns on U.S. banks' foreign currency positions are analyzed in a portfolio setting when both exchange rate and foreign interest rate risks are present. It is shown that U.S. banks could achieve considerable reductions in risk by optimally selecting their foreign currency positions. Actual foreign currency portfolio returns generated from expected exchange rate changes and exchange rate surprises were positive on average but those generated from interest rate surprises were negative. Although the total portfolio returns were positive, on a risk‐adjusted basis bank return performance was relatively poor. Nevertheless, despite this relatively poor performance, the risk of ruin or failure for a “representative bank” from foreign currency activities was found to be approximately zero when judged in comparison to the capital funds available to large money center banks to cushion such losses.


DISCUSSION

Pages: 682-683  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04531.x  |  Cited by: 0

JAMES A. BRICKLEY


The Timing and Substance of Divestiture Announcements: Individual, Simultaneous and Cumulative Effects

Pages: 685-696  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04532.x  |  Cited by: 80

APRIL KLEIN

This paper examines differences in announcement day effects among firms engaged in voluntary sell‐offs. While, on average, an initial sell‐off announcement results in a significant positive excess return, not all divestiture announcements are accompanied by positive price movements. Dividing the sample into two subsamples based on whether the transaction price is announced shows that the announcement day effect is significantly positive for the price group but not statistically different from zero for the no‐price group. In addition, a positive relation is found between the relative size of the sell‐off and the announcement day return.


DISCUSSION

Pages: 696-697  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04533.x  |  Cited by: 0

GAILEN L. HITE


Discrete Expectational Data and Portfolio Performance

Pages: 699-713  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04534.x  |  Cited by: 74

EDWIN J. ELTON, MARTIN J. GRUBER, SETH GROSSMAN

In this article we examine the information content in analysts' recommendations which are made on a five‐point buy, hold, or sell scale. Our data set includes data on 10,000 forecasts per month. Unlike most prior studies, our data set does not suffer from selection or survivorship bias. We find information in analysts' changes in recommendations. Approximately 4.5% extra return can be earned by purchasing new buys rather than new sells.


DISCUSSION

Pages: 713-714  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04535.x  |  Cited by: 0

DENNIS E. LOGUE


On Timing and Selectivity

Pages: 715-730  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04536.x  |  Cited by: 112

ANAT R. ADMATI, SUDIPTO BHATTACHARYA, PAUL PFLEIDERER, STEPHEN A. ROSS

The dichotomy between timing ability and the ability to select individual assets has been widely used in discussing investment performance measurement. This paper discusses the conceptual and econometric problems associated with defining and measuring timing and selectivity. In defining these notions we attempt to capture their intuitive interpretation. We offer two basic modeling approaches, which we term the portfolio approach and the factor approach. We show how the quality of timing and selectivity information can be identified statistically in a number of simple models, and discuss some of the econometric issues associated with these models. In particular, a simple quadratic regression is shown to be valid in measuring timing information.


DISCUSSION

Pages: 730-732  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04537.x  |  Cited by: 0

ROBERT E. VERRECCHIA


Optimal Portfolio Choice Under Incomplete Information

Pages: 733-746  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04538.x  |  Cited by: 142

GERARD GENNOTTE

Models of asset pricing generally assume that the variables which characterize the state of the economy are observable. However, the distributional properties of asset prices that are relevant for portfolio decisions are in general not observable, and therefore must be estimated. The estimation of expected returns is a particularly difficult problem and estimation errors are likely to be substantial. In this light, it is reasonable to examine whether the assumption of observability of expected returns and other relevant state variables causes significant mis‐specification in equilibrium models of asset prices. This paper has three main objectives: first, to derive optimal estimators for the unobservable expected instantaneous returns using observations of past realized returns; second, to establish that estimation and portfolio choice can be solved in two separate steps; third, to analyze the impact of estimation error on investment choices. The estimators of expected returns are in general not consistent, i.e., the estimation error does not tend to disappear asymptotically. The effects of the estimation error, therefore, cannot be ignored even if realized returns are observed continuously over an infinite time period.


DISCUSSION

Pages: 747-749  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04539.x  |  Cited by: 0

DAVID FELDMAN


Tax Clienteles and Asset Pricing

Pages: 751-762  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04540.x  |  Cited by: 14

PHILIP H. DYBVIG, STEPHEN A. ROSS

Taxation of asset returns can create various clientele effects. If every agent is marginal on all assets, no clientele effects arise. If some (but not every) agent is marginal on all assets, there arises a clientele effect in quantities but none in prices. If no agent is marginal on all assets, there arise clientele effects in both quantities and prices. In the first two cases, standard asset pricing and martingale results extend to analogous aftertax results. In the third case, linear asset pricing works only on subsets of assets, and the standard martingale results become after‐tax supermartingale results.


DISCUSSION

Pages: 762-763  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04541.x  |  Cited by: 0

JOSEPH WILLIAMS


Minutes of the Annual Membership Meeting

Pages: 765-766  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04542.x  |  Cited by: 0

Michael Keenan


Report of the Executive Secretary and Treasurer

Pages: 767-769  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04543.x  |  Cited by: 0

Michael Keenan


Report of the Managing Editors of theJournal of Financefor 1985

Pages: 771-774  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb04544.x  |  Cited by: 0

EDWIN J. ELTON, MARTIN J. GRUBER


ASSOCIATION MEETINGS

Pages: 775-776  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb00516.x  |  Cited by: 0


ANNOUNCEMENTS

Pages: 777-777  |  Published: 7/1986  |  DOI: 10.1111/j.1540-6261.1986.tb00517.x  |  Cited by: 0