S&P 500 Cash Stock Price Volatilities
Pages: 1155-1175 | Published: 12/1989 | DOI: 10.1111/j.1540-6261.1989.tb02648.x | Cited by: 148
LAWRENCE HARRIS
S&P 500 stock return volatilities are compared to the volatilities of a matched set of stocks, after controlling for cross‐sectional differences in firm attributes known to affect volatility. No significant difference in volatility is observed between 1975 and 1983—before the start of trade in index futures and index options. Since then, S&P 500 stocks have been relatively more volatile. The difference is statistically, but not economically, significant. The relative increase occurs primarily in daily returns and only to a lesser extent in longer interval returns. Other factors besides the start of derivative trade could be responsible for the small increase in volatility.
Economic Significance of Predictable Variations in Stock Index Returns
Pages: 1177-1189 | Published: 12/1989 | DOI: 10.1111/j.1540-6261.1989.tb02649.x | Cited by: 339
WILLIAM BREEN, LAWRENCE R. GLOSTEN, RAVI JAGANNATHAN
Knowledge of the one‐month interest rate is useful in forecasting the sign as well as the variance of the excess return on stocks. The services of a portfolio manager who makes use of the forecasting model to shift funds between bills and stocks would be worth an annual management fee of 2% of the value of the assets managed. During 1954:4 to 1986:12, the variance of monthly returns on the managed portfolio was about 60% of the variance of the returns on the value weighted index, whereas the average return was two basis points higher.
Changes in Expected Security Returns, Risk, and the Level of Interest Rates
Pages: 1191-1217 | Published: 12/1989 | DOI: 10.1111/j.1540-6261.1989.tb02650.x | Cited by: 107
WAYNE E. FERSON
Regressions of security returns on treasury bill rates provide insight about the behavior of risk in rational asset pricing models. The information in one‐month bill rates implies time variation in the conditional covariances of portfolios of stocks and fixed‐income securities with benchmark pricing variables, over extended samples and within five‐year subperiods. There is evidence of changes in conditional “betas” associated with interest rates. Consumption and stock market data are examined as proxies for marginal utility, in a general framework for asset pricing with time‐varying conditional covariances.
Firm Size and Turn‐of‐the‐Year Effects in the OTC/NASDAQ Market
Pages: 1219-1245 | Published: 12/1989 | DOI: 10.1111/j.1540-6261.1989.tb02651.x | Cited by: 56
CHRISTOPHER G. LAMOUREUX, GARY C. SANGER
This paper examines the turn‐of‐the‐year effect, the firm size effect, and the relation between these two effects for a sample of OTC stocks traded via the NASDAQ reporting system over the period 1973–1985. We find results similar to those based solely on listed stocks. The importance of these findings stems from the existence of nontrivial differences between the characteristics of the OTC/NASDAQ sample and the samples of listed firms examined previously in the literature. We also find that NASDAQ quoted bid‐ask spreads are highly negatively correlated with firm size, are not highly seasonal, and are large enough to preclude trading profits based upon a knowledge of the seasonality of small firms' returns.
The Number of Factors in Security Returns
Pages: 1247-1262 | Published: 12/1989 | DOI: 10.1111/j.1540-6261.1989.tb02652.x | Cited by: 99
STEPHEN J. BROWN
Both factor analysis of security returns and the analysis of eigenvalues seem to indicate that a market factor explains the major part of security returns. We find that such evidence is consistent with an economy where there are in fact k “equally important” priced factors; eigenvalue analysis in the context of such an economy will lead an investigator to the false inference that the one important “factor” is the return on an equally weighted market index.
Primes and Scores: An Essay on Market Imperfections
Pages: 1263-1287 | Published: 12/1989 | DOI: 10.1111/j.1540-6261.1989.tb02653.x | Cited by: 23
ROBERT A. JARROW, MAUREEN O'HARA
This paper investigates the reported relative mispricing of primes and scores to the underlying stock. Given transaction costs, we establish arbitrage‐based bounds on prime and score prices. We then develop a new nonparametric statistical technique to test whether prime and score prices violate these bounds. We find that prime and score prices do exceed stock prices, and often by a considerable amount. We demonstrate that this increased value is most likely due to the score's ability to save on the costs of dynamic hedging. We also show how short sale and trust size constraints impede the ability to arbitrage price disparities.
Options Arbitrage in Imperfect Markets
Pages: 1289-1311 | Published: 12/1989 | DOI: 10.1111/j.1540-6261.1989.tb02654.x | Cited by: 174
STEPHEN FIGLEWSKI
Option valuation models are based on an arbitrage strategy—hedging the option against the underlying asset and rebalancing continuously until expiration—that is only possible in a frictionless market. This paper simulates the impact of market imperfections and other problems with the “standard” arbitrage trade, including uncertain volatility, transactions costs, indivisibilities, and rebalancing only at discrete intervals. We find that, in an actual market such as that for stock index options, the standard arbitrage is exposed to such large risk and transactions costs that it can only establish very wide bounds on equilibrium options prices. This has important implications for price determination in options markets, as well as for testing of valuation models.
LDC Debt: Forgiveness, Indexation, and Investment Incentives
Pages: 1335-1350 | Published: 12/1989 | DOI: 10.1111/j.1540-6261.1989.tb02656.x | Cited by: 33
KENNETH A. FROOT, DAVID S. SCHARFSTEIN, JEREMY C. STEIN
Stock Splits, Volatility Increases, and Implied Volatilities
Pages: 1361-1372 | Published: 12/1989 | DOI: 10.1111/j.1540-6261.1989.tb02658.x | Cited by: 40
AAMIR M. SHEIKH
A test of the efficiency of the Chicago Board Options Exchange, relative to post‐split increases in the volatility of common stocks, is presented. The Black‐Scholes and Roll option pricing formulas are used to examine the behavior of implied standard deviations (ISDs) around split announcement and ex‐dates. Comparisons with a control group of stocks find no relative increase in ISDs of stocks announcing splits. However, a relative increase is detected at the ex‐date. Therefore, the joint hypothesis that 1) the Black‐Scholes and Roll formulas are true and 2) the CBOE is efficient can be rejected.
Does the Stock Market Overreact to Corporate Earnings Information?
Pages: 1385-1399 | Published: 12/1989 | DOI: 10.1111/j.1540-6261.1989.tb02660.x | Cited by: 30
PAUL ZAROWIN
This paper tests whether the stock market overreacts to extreme earnings, by examining firms' stock returns over the 36 months subsequent to extreme earnings years. While the poorest earners do outperform the best earners, the poorest earners are also significantly smaller than the best earners. When poor earners are matched with good earners of equal size, there is little evidence of differential performance. This suggests that size, and not investor overreaction to earnings, is responsible for the “overreaction” phenomenon, the tendency for prior period losers to outperform prior period winners in the subsequent period.
A Re‐Examination of Shareholder Wealth Effects of Calls of Convertible Preferred Stock
Pages: 1401-1410 | Published: 12/1989 | DOI: 10.1111/j.1540-6261.1989.tb02661.x | Cited by: 15
ERIC L. MAIS, WILLIAM T. MOORE, RONALD C. ROGERS
Common stock price reactions to announcements of 67 calls of in‐the‐money convertible preferred stocks are examined, and a significant average abnormal return of −1.6 percent is documented. The finding is robust to the choice of estimation period and the assumed return‐generating process. Annual dividend obligations for the called preferred issues in the sample typically are greater than the dividends for the common shares into which they are converted, and announcement‐period abnormal returns are negatively correlated with changes in dividends. Moreover, calls that result in dilution of voting rights appear to have greater adverse valuation effects than calls that do not alter voting rights concentration.
Pages: 1411-1420 | Published: 12/1989 | DOI: 10.1111/j.1540-6261.1989.tb02662.x | Cited by: 11
CHANG MO AHN
This paper demonstrates that temporal risk aversion makes smoothing consumption over time less attractive, while the usual risk aversion makes it more attractive. As temporal risk aversion increases, the equilibrium interest rate decreases and the equity premium increases. This paper also shows a striking and novel result that an increase in time impatience can lead to either a decrease or an increase in the interest rate, depending on the nature of the nonseparability.
Corrections for Trading Frictions in Multivariate Returns
Pages: 1421-1434 | Published: 12/1989 | DOI: 10.1111/j.1540-6261.1989.tb02663.x | Cited by: 5
BOB KORKIE
When observed stock returns are obtained from trades subject to friction, it is known that an individual stock's beta and covariance are measured with error. Univariate models of additive error adjustment are available and are often applied simultaneously to more than one stock. Unfortunately, these multivariate adjustments produce non‐positive definite covariance and correlation matrices, unless the return sample sizes are very large. To prevent this, restrictions on the adjustment matrix are developed and a correction is proposed, which dominates the uncorrected estimator. The estimators are illustrated with asset opportunity set estimates where daily returns have trading frictions.
Pages: 1435-1438 | Published: 12/1989 | DOI: 10.1111/j.1540-6261.1989.tb02664.x | Cited by: 18
YASH P. ANEJA, RAMESH CHANDRA, ERDAL GUNAY
This paper presents a portfolio approach to estimating the average correlation coefficient of a group of stocks which are considered for portfolio analysis. The average correlation coefficient has been shown to produce a better estimate of the future correlation matrix than individual pairwise correlations. The advantage of the approach described here is that it does not require the estimation of pairwise correlations for estimating their average.
Pages: 1451-1456 | Published: 12/1989 | DOI: 10.1111/j.1540-6261.1989.tb00292.x | Cited by: 0