Search results: 50.
Disasters Implied by Equity Index Options
Published: 11/14/2011, Volume: 66, Issue: 6 | DOI: 10.1111/j.1540-6261.2011.01697.x | Cited by: 238
DAVID BACKUS, MIKHAIL CHERNOV, IAN MARTIN
We use equity index options to quantify the distribution of consumption growth disasters. The challenge lies in connecting the risk‐neutral distribution of equity returns implied by options to the true distribution of consumption growth. First, we compare pricing kernels constructed from macro‐finance and option‐pricing models. Second, we compare option prices derived from a macro‐finance model to those we observe. Third, we compare the distribution of consumption growth derived from option prices using a macro‐finance model to estimates based on macroeconomic data. All three perspectives suggest that options imply smaller probabilities of extreme outcomes than have been estimated from macroeconomic data.
Volatility, Valuation Ratios, and Bubbles: An Empirical Measure of Market Sentiment
Published: 8/31/2021, Volume: 76, Issue: 6 | DOI: 10.1111/jofi.13068 | Cited by: 70
CAN GAO, IAN W. R. MARTIN
We define a sentiment indicator based on option prices, valuation ratios, and interest rates. The indicator can be interpreted as a lower bound on the expected growth in fundamentals that a rational investor would have to perceive to be happy to hold the market. The bound was unusually high in the late 1990s, reflecting dividend growth expectations that in our view were unreasonably optimistic. Our approach exploits two key ingredients. First, we derive a new valuation ratio decomposition that is related to the Campbell–Shiller loglinearization but that resembles the Gordon growth model more closely and has certain other advantages. Second, we introduce a volatility index that provides a lower bound on the market's expected log return.
What Is the Expected Return on a Stock?
Published: 5/22/2019, Volume: 74, Issue: 4 | DOI: 10.1111/jofi.12778 | Cited by: 199
IAN W. R. MARTIN, CHRISTIAN WAGNER
We derive a formula for the expected return on a stock in terms of the risk‐neutral variance of the market and the stock's excess risk‐neutral variance relative to that of the average stock. These quantities can be computed from index and stock option prices; the formula has no free parameters. The theory performs well empirically both in and out of sample. Our results suggest that there is considerably more variation in expected returns, over time and across stocks, than has previously been acknowledged.
Long‐Horizon Exchange Rate Expectations
Published: 9/29/2025, Volume: 80, Issue: 6 | DOI: 10.1111/jofi.13504 | Cited by: 11
LUKAS KREMENS, IAN W. R. MARTIN, LILIANA VARELA
We study exchange rate expectations in surveys of financial professionals and find that they successfully forecast currency appreciation at the two‐year horizon, both in and out of sample. Exchange rate expectations are also interpretable, in the sense that three macro‐finance variables—the risk‐neutral covariance between the exchange rate and equity market, the real exchange rate, and the current account relative to GDP—explain most of their variation. There is no “secret sauce,” however, in expectations: After controlling for the three macro‐finance variables, the residual information in survey expectations does not forecast currency appreciation in our sample.
DISCUSSION
Published: 6/1978, Volume: 33, Issue: 3 | DOI: 10.1111/j.1540-6261.1978.tb02042.x | Cited by: 0
Ian H. Giddy
The Limits of Limited Liability: Evidence from Industrial Pollution
Published: 10/13/2020, Volume: 76, Issue: 1 | DOI: 10.1111/jofi.12978 | Cited by: 284
PAT AKEY, IAN APPEL
We study how parent liability for subsidiaries' environmental cleanup costs affects industrial pollution and production. Our empirical setting exploits a Supreme Court decision that strengthened parent limited liability protection for some subsidiaries. Using a difference‐in‐differences framework, we find that stronger liability protection for parents leads to a 5% to 9% increase in toxic emissions by subsidiaries. Evidence suggests the increase in pollution is driven by lower investment in abatement technologies rather than increased production. Cross‐sectional tests suggest convexities associated with insolvency and executive compensation drive heterogeneous effects. Overall, our findings highlight the moral hazard problem associated with limited liability.
THE EFFECT OF DEPOSIT RATE CEILINGS ON AGGREGATE INCOME
Published: 12/1972, Volume: 27, Issue: 5 | DOI: 10.1111/j.1540-6261.1972.tb03020.x | Cited by: 1
Gordon Pye, Ian Young
Trading Patterns and Prices in the Interbank Foreign Exchange Market
Published: 9/1993, Volume: 48, Issue: 4 | DOI: 10.1111/j.1540-6261.1993.tb04760.x | Cited by: 259
TIM BOLLERSLEV, IAN DOMOWITZ
The behavior of quote arrivals and bid‐ask spreads is examined for continuously recorded deutsche mark‐dollar exchange rate data over time, across locations, and by market participants. A pattern in the intraday spread and intensity of market activity over time is uncovered and related to theories of trading patterns. Models for the conditional mean and variance of returns and bid‐ask spreads indicate volatility clustering at high frequencies. The proposition that trading intensity has an independent effect on returns volatility is rejected, but holds for spread volatility. Conditional returns volatility is increasing in the size of the spread.
The Informational Content of Initial Public Offerings
Published: 6/1989, Volume: 44, Issue: 2 | DOI: 10.1111/j.1540-6261.1989.tb05066.x | Cited by: 40
IAN GALE, JOSEPH E. STIGLITZ
The ability of capital markets to distinguish firms of different value by the size of their initial equity offerings is attenuated when insiders can sell equity more than once. A model is developed in which there is price risk from holding equity between periods. When the uncertainty is small, there must be pooling in the first period. When uncertainty is large, the pooling equilibria dominate the separating equilibrium.
Determinants of the Consumer Bankruptcy Decision
Published: 2/1999, Volume: 54, Issue: 1 | DOI: 10.1111/0022-1082.00110 | Cited by: 200
Ian Domowitz, Robert L. Sartain
Qualitative choice models of consumers' decisions to file for bankruptcy and their choice of bankruptcy chapter are estimated jointly, combining choice‐based sampling techniques with a nested estimation procedure. Medical and credit card debt are found to be the strongest contributors to bankruptcy, with homeownership playing an important role with respect to both the decision to declare bankruptcy and the choice of bankruptcy alternative. The potential effects of legal changes relating to property exemptions and dischargeable debt categories are found to encourage debt repayment through Chapter 13.
Work Ethic, Employment Contracts, and Firm Value
Published: 3/13/2009, Volume: 64, Issue: 2 | DOI: 10.1111/j.1540-6261.2009.01449.x | Cited by: 83
BRUCE IAN CARLIN, SIMON GERVAIS
We analyze how the work ethic of managers impacts a firm's employment contracts, riskiness, growth potential, and organizational structure. Flat contracts are optimal for diligent managers because they reduce risk‐sharing costs, but they attract egoistic agents who shirk and unskilled agents who add no value. Stable, bureaucratic firms with low growth potential are more likely to gain value from managerial diligence. Firms that hire from a virtuous pool of agents are more conservative in their investments and have a horizontal corporate structure. Our theory also yields several testable implications that distinguish it from standard agency models.
ESTIMATION AND USES OF THE TERM STRUCTURE OF INTEREST RATES
Published: 9/1976, Volume: 31, Issue: 4 | DOI: 10.1111/j.1540-6261.1976.tb01960.x | Cited by: 68
Willard T. Carleton, Ian A. Cooper
The Default Risk of Swaps
Published: 6/1991, Volume: 46, Issue: 2 | DOI: 10.1111/j.1540-6261.1991.tb02676.x | Cited by: 86
IAN A. COOPER, ANTONIO S. MELLO
We characterize the exchange of financial claims from risky swaps. These transfers are among three groups: shareholders, debtholders, and the swap counterparty. From this analysis we derive equilibrium swap rates and relate them to debt market spreads. We then show that equilibrium swaps in perfect markets transfer wealth from shareholders to debtholders. In a simplified case, we obtain closed‐form solutions for the value of the default risk in the swap. For interest‐rate swaps, we obtain numerical solutions for the equilibrium swap rate, including default risk. We compare these with equilibrium debt market default risk spreads.
Dynamics of Borrower‐Lender Interaction: Partitioning Final Payoff in Venture Capital Finance
Published: 5/1979, Volume: 34, Issue: 2 | DOI: 10.1111/j.1540-6261.1979.tb02117.x | Cited by: 14
IAN A. COOPER, WILLARD T. CARLETON
Market Segmentation and Stock Prices: Evidence from an Emerging Market
Published: 7/1997, Volume: 52, Issue: 3 | DOI: 10.1111/j.1540-6261.1997.tb02725.x | Cited by: 170
IAN DOMOWITZ, JACK GLEN, ANANTH MADHAVAN
We examine the relationship between stock prices and market segmentation induced by ownership restrictions in Mexico. The focus is on multiple classes of equity that differentiate between foreign and domestic traders, and between domestic individuals and institutions. Significant stock price premia are documented for shares not restricted to a particular investor group. We analyze the theoretical and empirical determinants of premia across firms and over time. In addition to economy‐wide factors, segmentation reflects the relative scarcity of unrestricted shares. The results provide additional support for Stulz and Wasserfallen's (1995) hypothesis that firms discriminate between investor groups with different demand elasticities.
International Cross‐Listing and Order Flow Migration: Evidence from an Emerging Market
Published: 12/1998, Volume: 53, Issue: 6 | DOI: 10.1111/0022-1082.00081 | Cited by: 282
Ian Domowitz, Jack Glen, Ananth Madhavan
Policymakers in emerging markets are increasingly concerned about the consequences for the domestic equity market when companies list stock abroad. We show that the effects of cross‐listing depend on the quality of intermarket information linkages. We investigate these issues with unique data from the Mexican equity market. The impact of cross‐listing is complex—balancing the costs of order flow migration against the benefits of increased intermarket competition. These effects are exacerbated by equity investment barriers that induce segmentation of the domestic equity market. Consequently, the benefits and costs of cross‐listing are not evenly spread over all classes of shareholders.
COMPETITIVE EQUILIBRIUM CONTINGENT COMMODITIES AND INFORMATION*
Published: 3/1977, Volume: 32, Issue: 1 | DOI: 10.1111/j.1540-6261.1977.tb03253.x | Cited by: 0
Martin Shubik
Trading Complex Assets
Published: 9/10/2013, Volume: 68, Issue: 5 | DOI: 10.1111/jofi.12029 | Cited by: 68
BRUCE IAN CARLIN, SHIMON KOGAN, RICHARD LOWERY
We perform an experimental study to assess the effect of complexity on asset trading. We find that higher complexity leads to increased price volatility, lower liquidity, and decreased trade efficiency especially when repeated bargaining takes place. However, the channel through which complexity acts is not simply due to the added noise induced by estimation error. Rather, complexity alters the bidding strategies used by traders, making them less inclined to trade, even when we control for estimation error across treatments. As such, it appears that adverse selection plays an important role in explaining the trading abnormalities caused by complexity.
An Empirical Analysis of the Dynamic Relation between Investment‐Grade Bonds and Credit Default Swaps
Published: 9/16/2005, Volume: 60, Issue: 5 | DOI: 10.1111/j.1540-6261.2005.00798.x | Cited by: 1042
ROBERTO BLANCO, SIMON BRENNAN, IAN W. MARSH
We test the theoretical equivalence of credit default swap (CDS) prices and credit spreads derived by
Duffie (1999)
, finding support for the parity relation as an equilibrium condition. We also find two forms of deviation from parity. First, for three firms, CDS prices are substantially higher than credit spreads for long periods of time, arising from combinations of imperfections in the contract specification of CDSs and measurement errors in computing the credit spread. Second, we find short‐lived deviations from parity for all other companies due to a lead for CDS prices over credit spreads in the price discovery process.
Another Puzzle: The Growth in Actively Managed Mutual Funds
Published: 7/1996, Volume: 51, Issue: 3 | DOI: 10.1111/j.1540-6261.1996.tb02707.x | Cited by: 1465
MARTIN J. GRUBER
Mutual funds represent one of the fastest growing type of financial intermediary in the American economy. The question remains as to why mutual funds and in particular actively managed mutual funds have grown so fast, when their performance on average has been inferior to that of index funds. One possible explanation of why investors buy actively managed open end funds lies in the fact that they are bought and sold at net asset value, and thus management ability may not be priced. If management ability exists and it is not included in the price of open end funds, then performance should be predictable. If performance is predictable and at least some investors are aware of this, then cash flows into and out of funds should be predictable by the very same metrics that predict performance. Finally, if predictors exist and at least some investors act on these predictors in investing in mutual funds, the return on new cash flows should be better than the average return for all investors in these funds. This article presents empirical evidence on all of these issues and shows that investors in actively managed mutual funds may have been more rational than we have assumed.
CAPITAL RATIONING: n AUTHORS IN SEARCH OF A PLOT
Published: 12/1977, Volume: 32, Issue: 5 | DOI: 10.1111/j.1540-6261.1977.tb03345.x | Cited by: 41
H. Martin Weingartner
A STUDY OF CREDITORS' PRACTICES IN THE FINANCING OF RELIGIOUS INSTITUTIONS*
Published: 12/1959, Volume: 14, Issue: 4 | DOI: 10.1111/j.1540-6261.1959.tb00147.x | Cited by: 0
Mother Martin Byrne
DISCUSSION
Published: 5/1967, Volume: 22, Issue: 2 | DOI: 10.1111/j.1540-6261.1967.tb00003.x | Cited by: 1
H. Martin Weingartner
MONETARY POLICY AND INTERNATIONAL PAYMENTS*
Published: 3/1963, Volume: 18, Issue: 1 | DOI: 10.1111/j.1540-6261.1963.tb01617.x | Cited by: 0
William McChesney Martin
DETERMINANTS OF COMMON STOCK PRICES*
Published: 12/1966, Volume: 21, Issue: 4 | DOI: 10.1111/j.1540-6261.1966.tb00282.x | Cited by: 1
Martin Jay Gruber
AN INVESTOR EXPECTATIONS STOCK PRICE PREDICTIVE MODEL USING CLOSED‐END FUND PREMIUMS
Published: 3/1973, Volume: 28, Issue: 1 | DOI: 10.1111/j.1540-6261.1973.tb01346.x | Cited by: 102
Martin E. Zweig
The Method of Payment in Corporate Acquisitions, Investment Opportunities, and Management Ownership
Published: 9/1996, Volume: 51, Issue: 4 | DOI: 10.1111/j.1540-6261.1996.tb04068.x | Cited by: 414
KENNETH J. MARTIN
This article examines the motives underlying the payment method in corporate acquisitions. The findings support the notion that the higher the acquirer's growth opportunities, the more likely the acquirer is to use stock to finance an acquisition. Acquirer managerial ownership is not related to the probability of stock financing over small and large ranges of ownership, but is negatively related over a middle range. In addition, the likelihood of stock financing increases with higher pre‐acquisition market and acquiring firm stock returns. It decreases with an acquirer's higher cash availability, higher institutional shareholdings and blockholdings, and in tender offers.
PRICING A BANKING SERVICE—THE SPECIAL CHECKING ACCOUNT
Published: 9/1960, Volume: 15, Issue: 3 | DOI: 10.1111/j.1540-6261.1960.tb01601.x | Cited by: 0
Martin H. Seiden
Episodic Liquidity Crises: Cooperative and Predatory Trading
Published: 9/4/2007, Volume: 62, Issue: 5 | DOI: 10.1111/j.1540-6261.2007.01274.x | Cited by: 228
BRUCE IAN CARLIN, MIGUEL SOUSA LOBO, S. VISWANATHAN
We describe how episodic illiquidity arises from a breakdown in cooperation between market participants. We first solve a one‐period trading game in continuous‐time, using an asset pricing equation that accounts for the price impact of trading. Then, in a multi‐period framework, we describe an equilibrium in which traders cooperate most of the time through repeated interaction, providing apparent liquidity to one another. Cooperation breaks down when the stakes are high, leading to predatory trading and episodic illiquidity. Equilibrium strategies that involve cooperation across markets lead to less frequent episodic illiquidity, but cause contagion when cooperation breaks down.
The Interaction of Financing and Investment Decisions When the Firm has Unused Tax Credits††
Published: 5/1983, Volume: 38, Issue: 2 | DOI: 10.1111/j.1540-6261.1983.tb02267.x | Cited by: 2
WILBUR G. LEWELLEN, IAN COOPER, JULIAN R. FRANKS
Spanning with Short‐Selling Restrictions
Published: 6/1993, Volume: 48, Issue: 2 | DOI: 10.1111/j.1540-6261.1993.tb04740.x | Cited by: 10
MARTIN RAAB, ROBERT SCHWAGER
In principle, the set of attainable payoff vectors is reduced if assets cannot be sold short. However, we show that the original space of payoff vectors is spanned despite short sale restrictions if there is one additional asset whose payoff is a positively weighted sum of the payoffs of the original assets. For example, this condition is automatically fulfilled if the original assets are stocks and the additional asset is an index future consisting of these stocks.
Consumption, Aggregate Wealth, and Expected Stock Returns
Published: 6/2001, Volume: 56, Issue: 3 | DOI: 10.1111/0022-1082.00347 | Cited by: 1712
Martin Lettau, Sydney Ludvigson
This paper studies the role of fluctuations in the aggregate consumption–wealth ratio for predicting stock returns. Using U.S. quarterly stock market data, we find that these fluctuations in the consumption–wealth ratio are strong predictors of both real stock returns and excess returns over a Treasury bill rate. We also find that this variable is a better forecaster of future returns at short and intermediate horizons than is the dividend yield, the dividend payout ratio, and several other popular forecasting variables. Why should the consumption–wealth ratio forecast asset returns? We show that a wide class of optimal models of consumer behavior imply that the log consumption–aggregate wealth (human capital plus asset holdings) ratio summarizes expected returns on aggregate wealth, or the market portfolio. Although this ratio is not observable, we provide assumptions under which its important predictive components for future asset returns may be expressed in terms of observable variables, namely in terms of consumption, asset holdings and labor income. The framework implies that these variables are cointegrated, and that deviations from this shared trend summarize agents' expectations of future returns on the market portfolio.
THE EFFECT OF SHARE REPURCHASE ON THE VALUE OF THE FIRM*
Published: 3/1968, Volume: 23, Issue: 1 | DOI: 10.1111/j.1540-6261.1968.tb03002.x | Cited by: 13
Edwin Elton, Martin Gruber
Expected Returns, Time‐varying Risk, and Risk Premia
Published: 6/1994, Volume: 49, Issue: 2 | DOI: 10.1111/j.1540-6261.1994.tb05156.x | Cited by: 49
MARTIN D. D. EVANS
A new empirical model for intertemporal capital asset pricing is presented that allows both time‐varying risk premia and betas where the latter are identified from the dynamics of the conditional covariance of returns. The model is more successful in explaining the predictable variations in excess returns when the returns on the stock market and corporate bonds are included as risk factors than when the stock market is the single factor. Although changes in the covariance of returns induce variations in the betas, most of the predictable movements in returns are attributed to changes in the risk premia.
What Is the Cost of Privatization for Workers?
Published: 5/30/2025, Volume: 80, Issue: 4 | DOI: 10.1111/jofi.13462 | Cited by: 14
MARTIN OLSSON, JOACIM TÅG
Privatization of state‐owned enterprises is on the agenda across the globe. Using Swedish data covering two decades, we show that productivity gains and headcount reductions are associated with economic costs for incumbent workers. Workers experience income losses and higher unemployment, but half of the losses are covered by the social safety net. We also find small positive effects on entrepreneurship and cash holdings but no meaningful effects on other labor market, family, health, or household finance outcomes. Productivity improves when the CEO is replaced, and the gains outweigh workers' income declines by a factor of between two and six.
Should Derivatives Be Privileged in Bankruptcy?
Published: 11/12/2015, Volume: 70, Issue: 6 | DOI: 10.1111/jofi.12201 | Cited by: 63
PATRICK BOLTON, MARTIN OEHMKE
Derivatives enjoy special status in bankruptcy: they are exempt from the automatic stay and effectively senior to virtually all other claims. We propose a corporate finance model to assess the effect of these exemptions on a firm's cost of borrowing and incentives to engage in derivative transactions. While derivatives are value‐enhancing risk management tools, seniority for derivatives can lead to inefficiencies: it transfers credit risk to debtholders, even though this risk is borne more efficiently in the derivative market. Seniority for derivatives is efficient only if it provides sufficient cross‐netting benefits to derivative counterparties that provide hedging services.
Pension Funding, Share Prices, and National Savings
Published: 9/1981, Volume: 36, Issue: 4 | DOI: 10.1111/j.1540-6261.1981.tb04885.x | Cited by: 78
MARTIN FELDSTEIN, STEPHANIE SELIGMAN
This paper examines empirically the effect of unfunded pension obligations on corporate share prices and discusses the implications of these estimates for national saving, the decline of the stock market in recent years, and the rationality of corporate financial behavior. The analysis uses the information on inflation‐adjusted income and assets which large firms were required to provide for 1976 and subsequent years.The evidence for a sample of nearly 200 manufacturing firms is consistent with the conclusion that share prices fully reflect the value of unfunded pension obligations. Since the conventional accounting measure of the unfunded pension liability has a number of problems (which we examine in the paper), it would be more accurate to say that the data are consistent with the conclusion that shareholders accept the conventional measure as the best available information and reduce share prices by a corresponding amount.The most important implication of the share price response is that the existence of unfunded private pension liabilities does not necessarily entail a reduction in total private saving. Because the pension liability reduces the equity value of the firm, shareholders are given notice of its existence and an incentive to save more themselves. For this reason, unfunded private pensions differ fundamentally from the unfunded Social Security pension and the other unfunded federal government civilian and military pensions.
How Does Household Portfolio Diversification Vary with Financial Literacy and Financial Advice?
Published: 3/12/2015, Volume: 70, Issue: 2 | DOI: 10.1111/jofi.12231 | Cited by: 519
HANS‐MARTIN VON GAUDECKER
Household investment mistakes are an important concern for researchers and policymakers alike. Portfolio underdiversification ranks among those mistakes that are potentially most costly. However, its roots and empirical importance are poorly understood. I estimate quantitatively meaningful diversification statistics and investigate their relationship with key variables. Nearly all households that score high on financial literacy or rely on professionals or private contacts for advice achieve reasonable investment outcomes. Compared to these groups, households with below‐median financial literacy that trust their own decision‐making capabilities lose an expected 50 bps on average. All group differences stem from the top of the loss distribution.
REPLY
Published: 12/1968, Volume: 23, Issue: 5 | DOI: 10.1111/j.1540-6261.1968.tb00327.x | Cited by: 2
Edwin Elton, Martin Gruber
The Perception of Dependence, Investment Decisions, and Stock Prices
Published: 12/13/2020, Volume: 76, Issue: 2 | DOI: 10.1111/jofi.12993 | Cited by: 47
MICHAEL UNGEHEUER, MARTIN WEBER
How do investors perceive dependence between stock returns; and how does their perception of dependence affect investments and stock prices? We show experimentally that investors understand differences in dependence, but not in terms of correlation. Participants invest as if applying a simple counting heuristic for the frequency of comovement. They diversify more when the frequency of comovement is lower even if correlation is higher due to dependence in the tails. Building on our experimental findings, we empirically analyze U.S. stock returns. We identify a robust return premium for stocks with high frequencies of comovement with the market return.
The Market for Conflicted Advice
Published: 11/8/2019, Volume: 75, Issue: 2 | DOI: 10.1111/jofi.12848 | Cited by: 24
BRIANA CHANG, MARTIN SZYDLOWSKI
We present a model of the market for advice in which advisers have conflicts of interest and compete for heterogeneous customers through information provision. The competitive equilibrium features information dispersion and partial disclosure. Although conflicted fees lead to distorted information, they are irrelevant for customers' welfare: banning conflicted fees improves only the information quality, not customers' welfare. Instead, financial literacy education for the least informed customers can improve all customers' welfare because of a spillover effect. Furthermore, customers who trade through advisers realize lower average returns, which rationalizes empirical findings.
Real Rates, Expected Inflation, and Inflation Risk Premia
Published: 2/1998, Volume: 53, Issue: 1 | DOI: 10.1111/0022-1082.75591 | Cited by: 183
Martin D. D. Evans
This paper studies the term structure of real rates, expected inflation, and inflation risk premia. The analysis is based on new estimates of the real term structure derived from the prices of index‐linked and nominal debt in the U.K. I find strong evidence to reject both the Fisher Hypothesis and versions of the Expectations Hypothesis for real rates. The estimates also imply the presence of time‐varying inflation risk premia throughout the term structure.
Repo over the Financial Crisis
Published: 2/10/2025, Volume: 80, Issue: 2 | DOI: 10.1111/jofi.13406 | Cited by: 3
ADAM COPELAND, ANTOINE MARTIN
This paper uses new data to provide a comprehensive view of repo activity during the 2007 global financial crisis. We show that activity declined much more in the bilateral segment of the market than in the tri‐party segment. Surprisingly, a large share of the decline in activity is driven by repos backed by Treasury securities. Further, a disproportionate share of the decline in repo activity is connected to securities dealer's market‐making activity. In particular, the evidence suggests that at least part of the decline is not driven by clients pulling away from securities dealers because of counterparty credit concerns.
FX Trading and Exchange Rate Dynamics
Published: 12/2002, Volume: 57, Issue: 6 | DOI: 10.1111/1540-6261.00501 | Cited by: 134
Martin D. D. Evans
I examine the sources of exchange rate dynamics by focusing on the information structure of FX trading. This structure permits the existence of an equilibrium distribution of transaction prices at a point in time. I develop and estimate a model of the price distribution using data from the Deutsche mark/dollar market that prroduces two striking results: (1) Much of the short‐term volatility in exchange rates comes from sampling the heterogeneous trading decisions of dealers in a distribution that, under normal market conditions, changes comparatively slowly; (2) public news is rarely the predominant source of exchange rate movements over any horizon.
DISCUSSION
Published: 5/1963, Volume: 18, Issue: 2 | DOI: 10.1111/j.1540-6261.1963.tb00728.x | Cited by: 1
Albert Ando, Martin J. Bailey
Why Is Long‐Horizon Equity Less Risky? A Duration‐Based Explanation of the Value Premium
Published: 1/11/2007, Volume: 62, Issue: 1 | DOI: 10.1111/j.1540-6261.2007.01201.x | Cited by: 337
MARTIN LETTAU, JESSICA A. WACHTER
We propose a dynamic risk‐based model that captures the value premium. Firms are modeled as long‐lived assets distinguished by the timing of cash flows. The stochastic discount factor is specified so that shocks to aggregate dividends are priced, but shocks to the discount rate are not. The model implies that growth firms covary more with the discount rate than do value firms, which covary more with cash flows. When calibrated to explain aggregate stock market behavior, the model accounts for the observed value premium, the high Sharpe ratios on value firms, and the poor performance of the CAPM.
Ambiguity, Information Quality, and Asset Pricing
Published: 1/10/2008, Volume: 63, Issue: 1 | DOI: 10.1111/j.1540-6261.2008.01314.x | Cited by: 661
LARRY G. EPSTEIN, MARTIN SCHNEIDER
When ambiguity‐averse investors process news of uncertain quality, they act as if they take a worst‐case assessment of quality. As a result, they react more strongly to bad news than to good news. They also dislike assets for which information quality is poor, especially when the underlying fundamentals are volatile. These effects induce ambiguity premia that depend on idiosyncratic risk in fundamentals as well as skewness in returns. Moreover, shocks to information quality can have persistent negative effects on prices even if fundamentals do not change.
DISCUSSION
Published: 5/1968, Volume: 23, Issue: 2 | DOI: 10.1111/j.1540-6261.1968.tb00814.x | Cited by: 0
Richard T. Pratt, Preston Martin