The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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The Pricing of Tax‐Exempt Bonds and the Miller Hypothesis
Published: 09/01/1982 | DOI: 10.1111/j.1540-6261.1982.tb03588.x
CHARLES TRZCINKA
This paper reports a new test of two competing theories of the relation between tax‐exempt and taxable interest rates. The Miller hypothesis predicts that the tax‐exempt rate is 52 percent of the taxable rate, while the institutional demand hypothesis predicts a volatile relationship. The tests in this paper employ a random intercept model to control for the risk of average interest rates. The results favor the Miller hypothesis. Marginal tax rates are found to be close to Miller's predicted 48 percent. The relationship is not influenced by relative demand or supply and the marginal tax rate appears stable over time.
On the Number of Factors in the Arbitrage Pricing Model
Published: 06/01/1986 | DOI: 10.1111/j.1540-6261.1986.tb05041.x
CHARLES TRZCINKA
Recent theory has demonstrated that the Arbitrage Pricing Model with K factors critically depends on whether K eigenvalues dominate the covariance matrix of returns as the number of securities grows large. The purpose of this paper is to test whether sample covariance matrices can be characterized as having K large eigenvalues. Using all available data on the 1983 CRSP tapes, we compute sample covariance matrices of returns in sequentially larger portfolios of securities. Analyzing their eigenvalues, we find evidence that one eigenvalue dominates the covariance matrix indicating that a one‐factor model may describe security pricing. We also find that, for values of K larger than one, there is no obvious way to choose the number of factors. Nevertheless, we find that while only the first eigenvalue dominates the matrix, the first five eigenvalues are growing more distinct.
Sequential Tests of the Arbitrage Pricing Theory: A Comparison of Principal Components and Maximum Likelihood Factors
Published: 12/01/1990 | DOI: 10.1111/j.1540-6261.1990.tb03727.x
RAVI SHUKLA, CHARLES TRZCINKA
We examine the cross‐sectional pricing equation of the APT using the elements of eigenvectors and the maximum likelihood factor loadings of the covariance matrix of returns as measures of risk. The results indicate that, for data assumed stationary over twenty years, the first vector is a surprisingly good measure of risk when compared with either a one‐ or a five‐factor model or a five‐vector model. We conclude that in some circumstances principal components analysis may be preferred to factor analysis.
Municipal Bond Pricing and the New York City Fiscal Crisis
Published: 12/01/1982 | DOI: 10.1111/j.1540-6261.1982.tb03615.x
DAVID S. KIDWELL, CHARLES A. TRZCINKA
This paper's findings suggests that the New York City fiscal crisis by itself did not lead to a fundamental change in risk perceptions of investors, resulting in higher interest rates in the municipal bond market. The monthly prediction errors generated by time series tests were relatively small and none were statistically significant. Only the signs on the prediction errors for June, July, and August were consistent with a New York City effect. Thus, if the New York City default had an impact on aggregate interest rates, it was at most small and of short duration.
Do Portfolio Manager Contracts Contract Portfolio Management?
Published: 06/13/2019 | DOI: 10.1111/jofi.12823
JUNG HOON LEE, CHARLES TRZCINKA, SHYAM VENKATESAN
Most mutual fund managers have performance‐based contracts. Our theory predicts that mutual fund managers with asymmetric contracts and mid‐year performance close to their announced benchmark increase their portfolio risk in the second part of the year. As predicted by our theory, performance deviation from the benchmark decreases risk‐shifting only for managers with performance contracts. Deviation from the benchmark dominates incentives from the flow‐performance relation, suggesting that risk‐shifting is motivated more by management contracts than by a tournament to capture flows.