Endogenous Liquidity in Asset Markets
Pages: 1-30 | Published: 2/2004 | DOI: 10.1111/j.1540-6261.2004.00625.x | Cited by: 218
Andrea L. Eisfeldt
This paper analyzes a model in which long‐term risky assets are illiquid due to adverse selection. The degree of adverse selection and hence the liquidity of these assets is determined endogenously by the amount of trade for reasons other than private information. I find that higher productivity leads to increased liquidity. Moreover, liquidity magnifies the effects of changes in productivity on investment and volume. High productivity implies that investors initiate larger scale risky projects which increases the riskiness of their incomes. Riskier incomes induce more sales of claims to high‐quality projects, causing liquidity to increase.
Value‐Enhancing Capital Budgeting and Firm‐specific Stock Return Variation
Pages: 65-105 | Published: 2/2004 | DOI: 10.1111/j.1540-6261.2004.00627.x | Cited by: 649
Art Durnev, Randall Morck, Bernard Yeung
We document a robust cross‐sectional positive association across industries between a measure of the economic efficiency of corporate investment and the magnitude of firm‐specific variation in stock returns. This finding is interesting for two reasons, neither of which is a priori obvious. First, it adds further support to the view that firm‐specific return variation gauges the extent to which information about the firm is quickly and accurately reflected in share prices. Second, it can be interpreted as evidence that more informative stock prices facilitate more efficient corporate investment.
Bondholder Wealth Effects in Mergers and Acquisitions: New Evidence from the 1980s and 1990s
Pages: 107-135 | Published: 2/2004 | DOI: 10.1111/j.1540-6261.2004.00628.x | Cited by: 263
Matthew T. Billett, Tao‐Hsien Dolly King, David C. Mauer
We examine the wealth effects of mergers and acquisitions on target and acquiring firm bondholders in the 1980s and 1990s. Consistent with a coinsurance effect, below investment grade target bonds earn significantly positive announcement period returns. By contrast, acquiring firm bonds earn negative announcement period returns. Additionally, target bonds have significantly larger returns when the target's rating is below the acquirer's, when the combination is anticipated to decrease target risk or leverage, and when the target's maturity is shorter than the acquirer's. Finally, we find that target and acquirer announcement period bond returns are significantly larger in the 1990s.
Social Interaction and Stock‐Market Participation
Pages: 137-163 | Published: 2/2004 | DOI: 10.1111/j.1540-6261.2004.00629.x | Cited by: 1294
Harrison Hong, Jeffrey D. Kubik, Jeremy C. Stein
We propose that stock‐market participation is influenced by social interaction. In our model, any given “social” investor finds the market more attractive when more of his peers participate. We test this theory using data from the Health and Retirement Study, and find that social households—those who interact with their neighbors, or attend church—are substantially more likely to invest in the market than non‐social households, controlling for wealth, race, education, and risk tolerance. Moreover, consistent with a peer‐effects story, the impact of sociability is stronger in states where stock‐market participation rates are higher.
Optimal Consumption and Investment with Transaction Costs and Multiple Risky Assets
Pages: 289-338 | Published: 2/2004 | DOI: 10.1111/j.1540-6261.2004.00634.x | Cited by: 229
Hong Liu
We consider the optimal intertemporal consumption and investment policy of a constant absolute risk aversion (CARA) investor who faces fixed and proportional transaction costs when trading multiple risky assets. We show that when asset returns are uncorrelated, the optimal investment policy is to keep the dollar amount invested in each risky asset between two constant levels and upon reaching either of these thresholds, to trade to the corresponding optimal targets. An extensive analysis suggests that transaction cost is an important factor in affecting trading volume and that it can significantly diminish the importance of stock return predictability as reported in the literature.
Informed Trading When Information Becomes Stale
Pages: 339-390 | Published: 2/2004 | DOI: 10.1111/j.1540-6261.2004.00635.x | Cited by: 59
Dan Bernhardt, Jianjun Miao
This paper characterizes informed trade when speculators can acquire distinct signals of varying quality about an asset's value at different dates. The most reasonable characterization of private information about stocks is that while information is long‐lived, new information will arrive over time, information that may be acquired by others. Hence, while a speculator may know more than others at a moment, in the future, his information will become stale, but not valueless. In an environment that allows for arbitrary correlations among signals, we characterize equilibrium outcomes including trading, prices, and profits. We provide explicit numerical characterizations for different informational environments.
Option‐Implied Risk Aversion Estimates
Pages: 407-446 | Published: 2/2004 | DOI: 10.1111/j.1540-6261.2004.00637.x | Cited by: 501
Robert R. Bliss, Nikolaos Panigirtzoglou
Using a utility function to adjust the risk‐neutral PDF embedded in cross sections of options, we obtain measures of the risk aversion implied in option prices. Using FTSE 100 and S&P 500 options, and both power and exponential‐utility functions, we estimate the representative agent's relative risk aversion (RRA) at different horizons. The estimated coefficients of RRA are all reasonable. The RRA estimates are remarkably consistent across utility functions and across markets for given horizons. The degree of RRA declines broadly with the forecast horizon and is lower during periods of high market volatility.
Pages: 473-474 | Published: 2/2004 | DOI: 10.1111/j.1540-6261.2004.00639.x | Cited by: 0