Search results: 50.
Compensation, Incentives, and the Duality of Risk Aversion and Riskiness
Published: 2/2004, Volume: 59, Issue: 1 | DOI: 10.1111/j.1540-6261.2004.00631.x | Cited by: 529
Stephen A. Ross
The common folklore that giving options to agents will make them more willing to take risks is false. In fact, no incentive schedule will make all expected utility maximizers more or less risk averse. This paper finds simple, intuitive, necessary and sufficient conditions under which incentive schedules make agents more or less risk averse. The paper uses these to examine the incentive effects of some common structures such as puts and calls, and it briefly explores the duality between a fee schedule that makes an agent more or less risk averse, and gambles that increase or decrease risk.
SOME NOTES ON FINANCIAL INCENTIVE‐SIGNALLING MODELS, ACTIVITY CHOICE AND RISK PREFERENCES
Published: 6/1978, Volume: 33, Issue: 3 | DOI: 10.1111/j.1540-6261.1978.tb02018.x | Cited by: 33
Stephen A. Ross
Debt and Taxes and Uncertainty
Published: 7/1985, Volume: 40, Issue: 3 | DOI: 10.1111/j.1540-6261.1985.tb04986.x | Cited by: 63
STEPHEN A. ROSS
With a graduated personal tax schedule, Miller showed that there could be an equilibrium debt supply for the corporate sector as a whole. In the presence of uncertainty there is also a unique debt/equity ratio for each individual firm, and this ratio is related to the firm's operational risk characteristics. However, if firms merge and spin off in response to tax incentives, the identity of firms is ambiguous and only the corporate sector is a meaningful construct. These arguments are developed in both discrete and continuous models that employ extensions of the arbitrage‐free pricing theory.
THE CAPITAL ASSET PRICING MODEL (CAPM), SHORT‐SALE RESTRICTIONS AND RELATED ISSUES
Published: 3/1977, Volume: 32, Issue: 1 | DOI: 10.1111/j.1540-6261.1977.tb03251.x | Cited by: 90
Stephen A. Ross
DISCUSSION
Published: 5/1977, Volume: 32, Issue: 2 | DOI: 10.1111/j.1540-6261.1977.tb03280.x | Cited by: 0
Stephen A. Ross
Information and Volatility: The No‐Arbitrage Martingale Approach to Timing and Resolution Irrelevancy
Published: 3/1989, Volume: 44, Issue: 1 | DOI: 10.1111/j.1540-6261.1989.tb02401.x | Cited by: 492
STEPHEN A. ROSS
The no‐arbitrage martingale analysis is used to study the effect on asset prices of changes in the rate of information flow. The analysis is first used to develop some simple tools for asset pricing in a continuous‐time setting. These tools are then applied to determine the effect of information on prices and price volatility, to extend Samuelson's theorem on prices fluctuating randomly, and to study the impact on prices of the resolution of uncertainty. The conditions under which uncertainty resolution is irrelevant for asset pricing are shown to be similar to those which support the MM irrelevance theorems.
Institutional Markets, Financial Marketing, and Financial Innovation
Published: 7/1989, Volume: 44, Issue: 3 | DOI: 10.1111/j.1540-6261.1989.tb04377.x | Cited by: 165
STEPHEN A. ROSS
Firms and institutions are monitored and controlled through a complex set of implicit and explicit contractual relations. Because of these agency theoretic relations, institutional behavior in financial markets is not a simple reflection of the preference structures of individuals. Institutional preferences give rise to a demand for new financial instruments and innovations, even when the returns on these instruments are “spanned” in the sense of complete pricing. The innovations can be thought of as solving moral hazard problems. An agency theoretic example serves to illustrate the demand, supply, and financial marketing of stripped securities. In short, institutions matter.
Discussion
Published: 8/2001, Volume: 56, Issue: 4 | DOI: 10.1111/0022-1082.00374 | Cited by: 2
Stephen A. Ross
On the Cross‐sectional Relation between Expected Returns and Betas
Published: 3/1994, Volume: 49, Issue: 1 | DOI: 10.1111/j.1540-6261.1994.tb04422.x | Cited by: 168
RICHARD ROLL, STEPHEN A. ROSS
There is an exact linear relation between expected returns and true “betas” when the market portfolio is on the ex ante mean‐variance efficient frontier, but empirical research has found little relation between sample mean returns and estimated betas. A possible explanation is that market portfolio proxies are mean‐variance inefficient. We categorize proxies that produce particular relations between expected returns and true betas. For the special case of a zero relation, a market portfolio proxy must lie inside the efficient frontier, but it may be close to the frontier.
A Critical Reexamination of the Empirical Evidence on the Arbitrage Pricing Theory: A Reply
Published: 6/1984, Volume: 39, Issue: 2 | DOI: 10.1111/j.1540-6261.1984.tb02313.x | Cited by: 43
RICHARD ROLL, STEPHEN A. ROSS
The Determination of Fair Profits for the Property‐Liability Insurance Firm
Published: 9/1982, Volume: 37, Issue: 4 | DOI: 10.1111/j.1540-6261.1982.tb03594.x | Cited by: 45
ALAN KRAUS, STEPHEN A. ROSS
Single period and dynamic valuation models in continuous time, under certainty and uncertainty, are developed for a property‐liability insurance contract to determine the “fair” (competitive) premium and underwriting profit. The intertemporal stochastic model assumes that the claim frequency and the price index of claim settlements are functions of a set of underlying state variables which follow a multivariate Wiener process. The competitive premium is shown to be proportional to the claim frequency and the price index for claim settlements at the time the policy is issued. The factor of proportionality varies directly with the claim settlement rate and the length of coverage, and inversely with the risk‐adjusted real interest rate on the dollar‐valued claim rate.
An Empirical Investigation of the Arbitrage Pricing Theory
Published: 12/1980, Volume: 35, Issue: 5 | DOI: 10.1111/j.1540-6261.1980.tb02197.x | Cited by: 860
RICHARD ROLL, STEPHEN A. ROSS
Empirical tests are reported for Ross' [48] arbitrage theory of asset pricing. Using data for individual equities during the 1962–72 period, at least three and probably four priced factors are found in the generating process of returns. The theory is supported in that estimated expected returns depend on estimated factor loadings, and variables such as the own standard deviation, though highly correlated (simply) with estimated expected returns, do not add any further explanatory power to that of the factor loadings.
Survival
Published: 7/1995, Volume: 50, Issue: 3 | DOI: 10.1111/j.1540-6261.1995.tb04039.x | Cited by: 369
STEPHEN J. BROWN, WILLIAM N. GOETZMANN, STEPHEN A. ROSS
Empirical analysis of rates of return in finance implicitly condition on the security surviving into the sample. We investigate the implications of such conditioning on the time series of rates of return. In general this conditioning induces a spurious relationship between observed return and total risk for those securities that survive to be included in the sample. This result has immediate implications for the equity premium puzzle. We show how these results apply to other outstanding problems of empirical finance. Long‐term autocorrelation studies focus on the statistical relation between successive holding period returns, where the holding period is of possibly extensive duration. If the equity market survives, then we find that average return in the beginning is higher than average return near the end of the time period. For this reason, statistical measures of long‐term dependence are typically biased towards the rejection of a random walk. The result also has implications for event studies. There is a strong association between the magnitude of an earnings announcement and the postannouncement performance of the equity. This might be explained in part as an artefact of the stock price performance of firms in financial distress that survive an earnings announcement. The final example considers stock split studies. In this analysis we implicitly exclude securities whose price on announcement is less than the prior average stock price. We apply our results to this case, and find that the condition that the security forms part of our positive stock split sample suffices to explain the upward trend in event‐related cumulated excess return in the preannouncement period.
A SURVEY OF SOME NEW RESULTS IN FINANCIAL OPTION PRICING THEORY
Published: 5/1976, Volume: 31, Issue: 2 | DOI: 10.1111/j.1540-6261.1976.tb01893.x | Cited by: 100
John C. Cox, Stephen A. Ross
The Analytics of Performance Measurement Using a Security Market Line
Published: 6/1985, Volume: 40, Issue: 2 | DOI: 10.1111/j.1540-6261.1985.tb04964.x | Cited by: 66
PHILIP H. DYBVIG, STEPHEN A. ROSS
Security market line (SML) analysis, while an important tool, has never been fully justified from a theoretical standpoint. Assuming symmetric information and an inefficient index, we show that SML analysis can be grossly misleading, since, in general, efficient and inefficient portfolios can plot above and below the SML. On a more positive note, if SML analysis uses the return on a marketed riskless asset for the zero‐beta rate, efficient portfolios must plot above the SML. Nonetheless, arbitrarily inefficient portfolios also plot above the SML.
Differential Information and Performance Measurement Using a Security Market Line
Published: 6/1985, Volume: 40, Issue: 2 | DOI: 10.1111/j.1540-6261.1985.tb04963.x | Cited by: 194
PHILIP H. DYBVIG, STEPHEN A. ROSS
An uninformed observer using the tools of mean variance and security market line analysis to measure the performance of a portfolio manager who has superior information is unlikely to be able to make any reliable inferences. While some positive results of a very limited nature are possible, e.g., when there is a riskless asset or when information is restricted to be “security specific,” in general anything is possible. In particular, a manager with superior information can appear to the observer to be below or above the security market line and inside or outside of the mean‐variance efficient frontier, and any combination of these is possible.
Tax Clienteles and Asset Pricing
Published: 7/1986, Volume: 41, Issue: 3 | DOI: 10.1111/j.1540-6261.1986.tb04540.x | Cited by: 28
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.
Yes, The APT Is Testable
Published: 9/1985, Volume: 40, Issue: 4 | DOI: 10.1111/j.1540-6261.1985.tb02370.x | Cited by: 73
PHILIP H. DYBVIG, STEPHEN A. ROSS
The Arbitrage Pricing Theory (APT) has been proposed as an alternative to the mean‐variance Capital Asset Pricing Model (CAPM). This paper considers the testability of the APT and points out the irrelevance for testing of the approximation error. We refute Shanken's objections, including his assertion that Roll's critique of the CAPM is applicable to the APT. We also explain the testability of the APT on subsets, and we explore the relationship between the APT and the CAPM.
THE CURRENT STATUS OF THE CAPITAL ASSET PRICING MODEL (CAPM)
Published: 6/1978, Volume: 33, Issue: 3 | DOI: 10.1111/j.1540-6261.1978.tb02029.x | Cited by: 12
Martin J. Gruber, Stephen A. Ross
A Re‐examination of Traditional Hypotheses about the Term Structure of Interest Rates
Published: 9/1981, Volume: 36, Issue: 4 | DOI: 10.1111/j.1540-6261.1981.tb04884.x | Cited by: 231
JOHN C. COX, JONATHAN E. INGERSOLL, STEPHEN A. ROSS
The term structure of interest rates is an important subject to economists, and has a long history of traditions. This paper re‐examines many of these traditional hypotheses while employing recent advances in the theory of valuation and contingent claims. We show how the Expectations Hypothesis and the Preferred Habitat Theory must be reformulated if they are to obtain in a continuous‐time, rational‐expectations equilibrium. We also modify the linear adaptive interest rate forecasting models, which are common to the macroeconomic literature, so that they will be consistent in the same framework.
An Analysis of Variable Rate Loan Contracts
Published: 5/1980, Volume: 35, Issue: 2 | DOI: 10.1111/j.1540-6261.1980.tb02169.x | Cited by: 183
JOHN C. COX, JONATHAN E. INGERSOLL, STEPHEN A. ROSS
High‐Water Marks and Hedge Fund Management Contracts
Published: 7/15/2003, Volume: 58, Issue: 4 | DOI: 10.1111/1540-6261.00581 | Cited by: 394
William N. Goetzmann, Jonathan E. Ingersoll, Stephen A. Ross
Incentive fees for money managers are frequently accompanied by high‐water mark provisions that condition the payment of the performance fee upon exceeding the previously achieved maximum share value. In this paper, we show that hedge fund performance fees are valuable to money managers, and conversely, represent a claim on a significant proportion of investor wealth. The high‐water mark provisions in these contracts limit the value of the performance fees. We provide a closed‐form solution to the cost of the high‐water mark contract under certain conditions. Our results provide a framework for valuation of a hedge fund management company.
The Price Impact and Survival of Irrational Traders
Published: 1/20/2006, Volume: 61, Issue: 1 | DOI: 10.1111/j.1540-6261.2006.00834.x | Cited by: 261
LEONID KOGAN, STEPHEN A. ROSS, JIANG WANG, MARK M. WESTERFIELD
Milton Friedman argued that irrational traders will consistently lose money, will not survive, and, therefore, cannot influence long‐run asset prices. Since his work, survival and price impact have been assumed to be the same. In this paper, we demonstrate that survival and price impact are two independent concepts. The price impact of irrational traders does not rely on their long‐run survival, and they can have a significant impact on asset prices even when their wealth becomes negligible. We also show that irrational traders' portfolio policies can deviate from their limits long after the price process approaches its long‐run limit.
On Timing and Selectivity
Published: 7/1986, Volume: 41, Issue: 3 | DOI: 10.1111/j.1540-6261.1986.tb04536.x | Cited by: 146
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.
The Recovery Theorem
Published: 3/12/2015, Volume: 70, Issue: 2 | DOI: 10.1111/jofi.12092 | Cited by: 303
STEVE ROSS
We can only estimate the distribution of stock returns, but from option prices we observe the distribution of state prices. State prices are the product of risk aversion—the pricing kernel—and the natural probability distribution. The Recovery Theorem enables us to separate these to determine the market's forecast of returns and risk aversion from state prices alone. Among other things, this allows us to recover the pricing kernel, market risk premium, and probability of a catastrophe and to construct model‐free tests of the efficient market hypothesis.
Stock Markets, Growth, and Tax Policy
Published: 9/1991, Volume: 46, Issue: 4 | DOI: 10.1111/j.1540-6261.1991.tb04625.x | Cited by: 571
ROSS LEVINE
An extensive literature documents the role of financial markets in economic development. To help explain this relationship, this paper constructs an endogenous growth model in which a stock market emerges to allocate risk and explores how the stock market alters investment incentives in ways that change steady state growth rates. The paper demonstrates that stock markets accelerate growth by (1) facilitating the ability to trade ownership of firms without disrupting the productive processes occurring within firms and (2) allowing agents to diversify portfolios. Tax policy affects growth directly by altering investment incentives and indirectly by changing the incentives underlying financial contracts.
DISCUSSION
Published: 5/1976, Volume: 31, Issue: 2 | DOI: 10.1111/j.1540-6261.1976.tb00581.x | Cited by: 0
Ross L. Watts
Some Additional Evidence on Survival Biases
Published: 3/1979, Volume: 34, Issue: 1 | DOI: 10.1111/j.1540-6261.1979.tb02080.x | Cited by: 37
RAY BALL, ROSS WATTS
Risk Assessments and Risk Premiums in the Eurodollar Market
Published: 6/1982, Volume: 37, Issue: 3 | DOI: 10.1111/j.1540-6261.1982.tb02217.x | Cited by: 20
GERSHON FEDER, KNUD ROSS
Increasing awareness of the potential risks involved in lending to heavily indebted governments focuses attention on credit pricing in the Eurodollar market. This paper utilizes a recent survey of country‐by‐country risk assessments as perceived by lenders to show that a systematic relationship exists between these assessments and interest rates in the Euromarket. The relationship is derived from an underlying model described in the paper. The estimated parameters verify a number of hypotheses, providing insights on the loss rates lenders expect to incur in case of default.
REPLY TO SALAMON AND SMITH
Published: 12/1977, Volume: 32, Issue: 5 | DOI: 10.1111/j.1540-6261.1977.tb03378.x | Cited by: 9
Ray Ball, Ross Watts
SOME TIME SERIES PROPERTIES OF ACCOUNTING INCOME
Published: 6/1972, Volume: 27, Issue: 3 | DOI: 10.1111/j.1540-6261.1972.tb00991.x | Cited by: 291
Ray Ball, Ross Watts
Big Bad Banks? The Winners and Losers from Bank Deregulation in the United States
Published: 9/21/2010, Volume: 65, Issue: 5 | DOI: 10.1111/j.1540-6261.2010.01589.x | Cited by: 3122
THORSTEN BECK, ROSS LEVINE, ALEXEY LEVKOV
We assess the impact of bank deregulation on the distribution of income in the United States. From the 1970s through the 1990s, most states removed restrictions on intrastate branching, which intensified bank competition and improved bank performance. Exploiting the cross‐state, cross‐time variation in the timing of branch deregulation, we find that deregulation materially tightened the distribution of income by boosting incomes in the lower part of the income distribution while having little impact on incomes above the median. Bank deregulation tightened the distribution of income by increasing the relative wage rates and working hours of unskilled workers.
Hedging Performance and Basis Risk in Stock Index Futures
Published: 7/1984, Volume: 39, Issue: 3 | DOI: 10.1111/j.1540-6261.1984.tb03654.x | Cited by: 275
STEPHEN FIGLEWSKI
USES OF FLOW‐OF‐FUNDS ACCOUNTS IN THE FEDERAL RESERVE SYSTEM*
Published: 5/1963, Volume: 18, Issue: 2 | DOI: 10.1111/j.1540-6261.1963.tb00720.x | Cited by: 1
Stephen Taylor
Futures Trading and Volatility in the GNMA Market
Published: 5/1981, Volume: 36, Issue: 2 | DOI: 10.1111/j.1540-6261.1981.tb00461.x | Cited by: 147
STEPHEN FIGLEWSKI
Information Diversity and Market Behavior: A Reply
Published: 3/1984, Volume: 39, Issue: 1 | DOI: 10.1111/j.1540-6261.1984.tb03881.x | Cited by: 1
STEPHEN FIGLEWSKI
Information Diversity and Market Behavior
Published: 3/1982, Volume: 37, Issue: 1 | DOI: 10.1111/j.1540-6261.1982.tb01097.x | Cited by: 29
STEPHEN FIGLEWSKI
The paper addresses two major issues raised by information diversity in a speculative market. First, we analyze what property of an investor's information leads to an expected speculative profit and show that independence is more important than accuracy. Second, we consider whether the market price must become fully efficient, in the sense that every investor's information is accurately discounted, when traders use it rationally as an information source. We prove that for any information structure there is a unique equilibrium weighting of investor beliefs at which the price is fully efficient and also every trader's expected profit is zero. Except for special structures, however, this equilibrium need not be attained in finite time.
Options Arbitrage in Imperfect Markets
Published: 12/1989, Volume: 44, Issue: 5 | DOI: 10.1111/j.1540-6261.1989.tb02654.x | Cited by: 221
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.
Private Equity and Financial Stability: Evidence from Failed‐Bank Resolution in the Crisis
Published: 11/27/2024, Volume: 80, Issue: 1 | DOI: 10.1111/jofi.13399 | Cited by: 10
EMILY JOHNSTON‐ROSS, SONG MA, MANJU PURI
This paper investigates the role of private equity (PE) in failed‐bank resolutions after the 2008 financial crisis, using proprietary Federal Deposit Insurance Corporation failed‐bank acquisition data. PE investors made substantial investments in underperforming and riskier failed banks, particularly in geographies where local banks were also distressed, filling the gap created by a weak, undercapitalized banking sector. Using a quasi‐random empirical design based on detailed bidding information, we show that PE‐acquired banks performed better ex post, with positive real effects for the local economy. Overall, PE investors played a positive role in stabilizing the financial system through their involvement in failed‐bank resolution.
COMMERCIAL BANK BEHAVIOR AND THE LEVEL OF ECONOMIC ACTIVITY: AN ECONOMETRIC STUDY*
Published: 9/1965, Volume: 20, Issue: 3 | DOI: 10.1111/j.1540-6261.1965.tb02918.x | Cited by: 0
Stephen M. Goldfeld
Personal Lending Relationships
Published: 12/14/2017, Volume: 73, Issue: 1 | DOI: 10.1111/jofi.12589 | Cited by: 134
STEPHEN ADAM KAROLYI
I identify the effects of personal relationships on loan contracting using executive deaths and retirements at other firms as a source of exogenous variation in executive turnover. After plausibly exogenous turnover, borrowers choose lenders with which their new executives have personal relationships 4.1 times as frequently, and loans from these lenders have 20 basis points lower spreads and 12.5% larger amounts. Personal relationships benefit firms across loan terms, especially during macroeconomic downturns. Increased financial flexibility from personal relationships insulated firms from financial shocks during the recent financial crisis: they exhibited less constrained investment and were less likely to layoff employees.
MONETARY POLICY IN CONTINENTAL WESTERN EUROPE, 1944–52*
Published: 12/1956, Volume: 11, Issue: 4 | DOI: 10.1111/j.1540-6261.1956.tb04097.x | Cited by: 0
Stephen F. Sherwin
THE THEORETICAL VALUE OF A STOCK RIGHT: A COMMENT
Published: 9/1956, Volume: 11, Issue: 3 | DOI: 10.1111/j.1540-6261.1956.tb00111.x | Cited by: 1
Stephen H. Archer
THE INTERNAL DRAIN AND BANK CREDIT EXPANSION*
Published: 12/1953, Volume: 8, Issue: 4 | DOI: 10.1111/j.1540-6261.1953.tb01187.x | Cited by: 0
Stephen L. McDonald
FINANCIAL STRUCTURE AND THE THEORY OF PRODUCTION
Published: 12/1970, Volume: 25, Issue: 5 | DOI: 10.1111/j.1540-6261.1970.tb00868.x | Cited by: 6
Stephen J. Turnovsky
AN INTEGRATED DECISION MODEL OF THE FIRM*
Published: 6/1973, Volume: 28, Issue: 3 | DOI: 10.1111/j.1540-6261.1973.tb01403.x | Cited by: 0
Stephen P. Mezger
EFFICIENT CAPITAL MARKETS: COMMENT
Published: 3/1976, Volume: 31, Issue: 1 | DOI: 10.1111/j.1540-6261.1976.tb03204.x | Cited by: 55
Stephen F. LeRoy
Foreign Exchange Rate Forecasting Techniques: Implications for Business and Policy
Published: 5/1979, Volume: 34, Issue: 2 | DOI: 10.1111/j.1540-6261.1979.tb02104.x | Cited by: 42
STEPHEN H. GOODMAN
A SIMPLE MODEL OF INFORMATION AND LENDING BEHAVIOR: COMMENT
Published: 3/1977, Volume: 32, Issue: 1 | DOI: 10.1111/j.1540-6261.1977.tb03257.x | Cited by: 1
Stephen M. Miller
SOME FACTORS AFFECTING THE INCREASED RELATIVE USE OF CURRENCY SINCE 1939*
Published: 9/1956, Volume: 11, Issue: 3 | DOI: 10.1111/j.1540-6261.1956.tb00107.x | Cited by: 0
Stephen L. McDonald