The Journal of Finance

Economic News and the Impact of Trading on Bond Prices

Published: 6/2004,  Volume: 59,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2004.00660.x  |  Cited by: 312

T. Clifton Green

This paper studies the impact of trading on government bond prices surrounding the release of macroeconomic news. The results show a significant increase in the informational role of trading following economic announcements, which suggests the release of public information increases the level of information asymmetry in the government bond market. The informational role of trading is greater after announcements with a larger initial price impact, and the relation is associated with the surprise component of the announcement and the precision of the public information. The results provide evidence that government bond order flow reveals fundamental information about riskless rates.

Market Risk and Model Risk for a Financial Institution Writing Options

Published: 8/1999,  Volume: 54,  Issue: 4  |  DOI: 10.1111/0022-1082.00152  |  Cited by: 177

T. Clifton Green, Stephen Figlewski

Derivatives valuation and risk management involve heavy use of quantitative models. To develop a quantitative assessment of model risk as it affects the basic option writing strategy that might be followed by a financial institution, we conduct an empirical simulation, with and without hedging, using data from 1976 to 1996. Results indicate that imperfect models and inaccurate volatility forecasts create sizable risk exposure for option writers. We consider to what extent the damage due to model risk can be limited by pricing options using a higher volatility than the best estimate from historical data.

Tax and Liquidity Effects in Pricing Government Bonds

Published: 10/1998,  Volume: 53,  Issue: 5  |  DOI: 10.1111/0022-1082.00064  |  Cited by: 124

Edwin J. Elton, T. Clifton Green

Daily data from interdealer government bond brokers are examined for tax and liquidity effects. We use two approaches to create cash flow matching portfolios of similar securities and look for pricing discrepancies associated with liquidity or tax effects. We also look for the presence of tax and liquidity effects by including a liquidity term when fitting a cubic spline to the after‐tax yield curve. We find evidence of tax timing options and liquidity effects. However, the effects are much smaller than previously reported and the effects of liquidity are primarily due to high volume bonds with long maturities.

PROFESSOR SLICHTER ON BUDGET DEFICITS AND THE FUTURE MONEY SUPPLY

Published: 12/1950,  Volume: 5,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1950.tb03803.x  |  Cited by: 0

Clifton H. Kreps

FINANCIAL STRUCTURE AND REGULATION: SOME KNOTTY PROBLEMS

Published: 5/1971,  Volume: 26,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1971.tb00917.x  |  Cited by: 1

Clifton H. Kreps, Samuel B. Chase

PUBLIC REGULATION AND OPERATING CONVENTIONS AFFECTING SOURCES OF FUNDS OF COMMERCIAL BANKS AND THRIFT INSTITUTIONS*

Published: 5/1962,  Volume: 17,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1962.tb04281.x  |  Cited by: 0

Clifton H. Keeps, David T. Lapkin

A MORE CONSTRUCTIVE ROLE FOR DEPOSIT INSURANCE

Published: 5/1971,  Volume: 26,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1971.tb00919.x  |  Cited by: 0

Clifton H. Keeps, Richard F. Wacht

Report of the Editor of The Journal of Finance for the year 2000

Published: 8/2001,  Volume: 56,  Issue: 4  |  DOI: 10.1111/0022-1082.00382  |  Cited by: 0

Richard C. Green

Report of the Editor of The Journal of Finance for the Year 2001

Published: 8/2002,  Volume: 57,  Issue: 4  |  DOI: 10.1111/1540-6261.00481  |  Cited by: 0

Richard C. Green

Benchmark Portfolio Inefficiency and Deviations from the Security Market Line

Published: 6/1986,  Volume: 41,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1986.tb05037.x  |  Cited by: 23

RICHARD C. GREEN

This paper theoretically evaluates the robustness of the Security Market Line relationship when the market proxy employed is not mean‐variance efficient. The analysis focuses on the behavior of the “benchmark errors,” the deviations of assets and portfolios from the Security Market Line. First, we characterize how the location of an asset in mean‐variance space determines its benchmark error. Then the continuity properties of the benchmark errors are studied. The results indicate that the magnitudes of the errors exhibit continuous but not uniformly continuous behaviors. The relative rankings based on deviations from the Security Market Line, however, exhibit some severe discontinuities. In fact, these can be exactly reversed for two proxies arbitrarily close in mean‐variance space.

Positively Weighted Portfolios on the Minimum‐Variance Frontier

Published: 12/1986,  Volume: 41,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1986.tb02530.x  |  Cited by: 29

RICHARD C. GREEN

Duality theory is employed to provide necessary and sufficient conditions for portfolios on the minimum‐variance frontier to have positive investment proportions in all assets. These conditions involve the feasibility of portfolios that have non‐negative correlation with all assets and positive correlation with at least one. Using these results, several “qualitative” results concerning the signs of investment proportions in efficient portfolios are proved. It is argued that the conditions that ensure all‐positive weights in efficient portfolios are intuitively compelling and are not unique to the CAPM. With large numbers of assets, however, the signs of weights in minimum‐variance portfolios can be very sensitive to slight departures from these conditions due to, for example, sampling error.

EVALUATING ADEQUACY OF BANK CAPITAL AN ANALYSIS OF THE PROBLEM*

Published: 9/1954,  Volume: 9,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1954.tb01239.x  |  Cited by: 0

Ralph Tillman Green

Report of the Editor of The Journal of Finance for the Year 2002

Published: 7/15/2003,  Volume: 58,  Issue: 4  |  DOI: 10.1111/1540-6261.00585  |  Cited by: 0

Presidential Address: Issuers, Underwriter Syndicates, and Aftermarket Transparency

Published: 8/2007,  Volume: 62,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2007.01250.x  |  Cited by: 52

RICHARD C. GREEN

I model strategic interaction among issuers, underwriters, retail investors, and institutional investors when the secondary market has limited price transparency. Search costs for retail investors lead to price dispersion in the secondary market, while the price for institutional investors is infinitely elastic. Because retail distribution capacity is assumed to be limited for each underwriter‐dealer, Bertrand competition breaks down in the primary market and new issues are underpriced in equilibrium. Syndicates emerge in which underwriters bid symmetrically, with quantities allocated internally to efficiently utilize retail distribution capacity.

An Information‐Based Theory of Time‐Varying Liquidity

Published: 3/18/2016,  Volume: 71,  Issue: 2  |  DOI: 10.1111/jofi.12272  |  Cited by: 55

BRENDAN DALEY, BRETT GREEN

We propose an information‐based theory to explain time variation in liquidity and link it to a variety of patterns in asset markets. In “normal times,” the market is fully liquid and gains from trade are realized immediately. However, the equilibrium also involves periods during which liquidity “dries up,” which leads to endogenous liquidation costs. Traders correctly anticipate such costs, which reduces their willingness to pay. This foresight leads to a novel feedback effect between prices and market liquidity, which are jointly determined in equilibrium. The model also predicts that contagious sell‐offs can occur after sufficiently bad news.

The Investment Performance of Low‐grade Bond Funds

Published: 3/1991,  Volume: 46,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1991.tb03744.x  |  Cited by: 110

BRADFORD CORNELL, KEVIN GREEN

This study extends the literature on the pricing of low‐grade bonds by examining the performance of low‐grade bond funds. The findings reveal that over the long run low‐grade bond fund returns are approximately equal to the returns provided by an index of high‐grade bonds. The relative risks of high and low‐grade bonds are more difficult to assess. Because of their shorter durations, low‐grade bonds are less sensitive to movements in interest rates than high‐grade bonds. On the other hand, low‐grade bonds are much more sensitive to changes in stock prices than high‐grade bonds. When adjusted for risk using a simple two‐factor model, the returns on low‐grade bond funds are not statistically different from the returns on high‐grade bonds.

The Structure and Incentive Effects of Corporate Tax Liabilities

Published: 9/1985,  Volume: 40,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1985.tb02365.x  |  Cited by: 43

RICHARD C. GREEN, ELI TALMOR

This paper describes situations in which tax liabilities assume the form of a negative position in a call option. This structure motivates an examination of the investment decisions of taxed corporations in the presence of risk. It is shown that the structure of the tax liability creates an incentive to underinvest in more risky projects and an incentive for conglomerate merger. These effects are then evaluated in the presence of conflicts of interest between stockholders and bondholders, and under alternative assumptions about the tax code, and about the timing of investment and financing decisions.

Risk Aversion and Arbitrage

Published: 3/1985,  Volume: 40,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1985.tb04948.x  |  Cited by: 12

RICHARD C. GREEN, SANJAY SRIVASTAVA

This paper characterizes conditions under which asset returns and consumption are consistent with risk‐averse preferences. It is shown that risk aversion is equivalent to “zero arbitrage” on a transformation of the payoff space. The implicit state prices which are dual to this no‐arbitrage condition can be interpreted as prices of “pure consumption hedges.” This zero‐arbitrage restriction implies the usual restrictions associated with nonsatiation. The analysis holds in both complete and incomplete market settings.

When Will Mean‐Variance Efficient Portfolios Be Well Diversified?

Published: 12/1992,  Volume: 47,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1992.tb04683.x  |  Cited by: 200

RICHARD C. GREEN, BURTON HOLLIFIELD

We characterize the conditions under which efficient portfolios put small weights on individual assets. These conditions bound mean returns with measures of average absolute covariability between assets. The bounds clarify the relationship between linear asset pricing models and well‐diversified efficient portfolios. We argue that the extreme weightings in sample efficient portfolios are due to the dominance of a single factor in equity returns. This makes it easy to diversify on subsets to reduce residual risk, while weighting the subsets to reduce factor risk simultaneously. The latter involves taking extreme positions. This behavior seems unlikely to be attributable to sampling error.

The Allocation of Socially Responsible Capital

Published: 1/22/2025,  Volume: 80,  Issue: 2  |  DOI: 10.1111/jofi.13425  |  Cited by: 52

DANIEL GREEN, BENJAMIN N. ROTH

Portfolio allocation decisions increasingly incorporate social values. We develop a tractable framework to study how competition between investors to own socially valuable assets affects social welfare. Relative to the most common social‐investing strategies, we identify alternative strategies that result in higher impact and higher financial returns. We identify strategies for investors to have impact when impact is difficult to measure. From the firm's perspective, increasing profitability can have greater impact than directly increasing social value. We present new empirical evidence on the social preferences of investors that demonstrates the practical relevance of our theory.

Securitization, Ratings, and Credit Supply

Published: 12/20/2019,  Volume: 75,  Issue: 2  |  DOI: 10.1111/jofi.12866  |  Cited by: 52

BRENDAN DALEY, BRETT GREEN, VICTORIA VANASCO

We develop a framework to explore the effect of credit ratings on loan origination. We show that ratings endogenously shift the economy from asignalingequilibrium, in which banks inefficiently retain loans to signal quality, toward anoriginate‐to‐distributeequilibrium with zero retention and inefficiently low lending standards. Ratings increase overall efficiency, provided that the reduction in costly retention more than compensates for the origination of some negative net present value loans. We study how banks' ability to screen loans affects these predictions and use the model to analyze commonly proposed policies such as mandatory “skin in the game.”

Are There Tax Effects in the Relative Pricing of U.S. Government Bonds?

Published: 6/1997,  Volume: 52,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1997.tb04815.x  |  Cited by: 55

RICHARD C. GREEN, BERNT A. ØDEGAARD

We investigate the impact of the Tax Reform Act of 1986 on the relative pricing of U.S. Treasury bonds. We obtain positive statistically and economically significant estimates for the implicit tax rates of a “representative” investor in the late 1970s and early 1980s. After the 1986 Tax Reform, the point estimates for the tax rate are close to zero. Tests for a regime shift associated with the 1986 Tax Reform support the hypothesis that this event largely eliminated tax effects from the term structure. We discuss both institutional and statutory explanations for this change.

Due Diligence

Published: 3/4/2024,  Volume: 79,  Issue: 3  |  DOI: 10.1111/jofi.13322  |  Cited by: 30

BRENDAN DALEY, THOMAS GEELEN, BRETT GREEN

We propose a model of due diligence and analyze its effect on prices, payoffs, and deal completion. In our model, if the seller accepts an offer, the winning bidder (or “acquirer”) can gather information and chooses when to complete the transaction. In equilibrium, the acquirer engages in “too much” due diligence. Our quantitative results suggest that the magnitude of the distortion is economically significant. Nevertheless, allowing for due diligence can improve both total surplus and the seller's payoff compared to a setting without due diligence. We use our framework to explore the timing of due diligence, bidder heterogeneity, and breakup fees.

Tax Arbitrage and the Existence of Equilibrium Prices for Financial Assets

Published: 12/1987,  Volume: 42,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1987.tb04358.x  |  Cited by: 45

ROBERT M. DAMMON, RICHARD C. GREEN

In models where both investors and securities are subject to differential taxation, there may be no set of prices that rule out infinite gains to trade, or “tax arbitrage.” This paper characterizes the joint restrictions on financial‐asset returns and investors' tax schedules that preclude tax arbitrage in the absence of short‐sale constraints. The authors show that, if there exists any configuration of marginal tax rates on investors' tax schedules that rule out infinite gains to trade, then “no‐tax‐arbitrage” prices will exist. They also show that the existence of “no‐tax‐arbitrage” prices ensures the existence of equilibrium prices.

Price Discovery in Illiquid Markets: Do Financial Asset Prices Rise Faster Than They Fall?

Published: 9/21/2010,  Volume: 65,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2010.01590.x  |  Cited by: 127

RICHARD C. GREEN, DAN LI, NORMAN SCHÜRHOFF

We study price discovery in municipal bonds, an important OTC market. As in markets for consumer goods, prices “rise faster than they fall.” Round‐trip profits to dealers on retail trades increase in rising markets but do not decrease in falling markets. Further, effective half‐spreads increase or decrease more when movements in fundamentals favor dealers. Yield spreads relative to Treasuries also adjust with asymmetric speed in rising and falling markets. Finally, intraday price dispersion is asymmetric in rising and falling markets, as consumer search theory would predict.

HOME MORTGAGE DELINQUENCIES: A COHORT ANALYSIS

Published: 12/1974,  Volume: 29,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1974.tb03135.x  |  Cited by: 17

George M. von Furstenberg, R. Jeffery Green

Financial Expertise as an Arms Race

Published: 9/12/2012,  Volume: 67,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2012.01771.x  |  Cited by: 108

VINCENT GLODE, RICHARD C. GREEN, RICHARD LOWERY

We show that firms intermediating trade have incentives to overinvest in financial expertise. In our model, expertise improves firms’ ability to estimate value when trading a security. Expertise creates asymmetric information, which, under normal circumstances, works to the advantage of the expert as it deters opportunistic bargaining by counterparties. This advantage is neutralized in equilibrium, however, by offsetting investments by competitors. Moreover, when volatility rises the adverse selection created by expertise triggers breakdowns in liquidity, destroying gains to trade and thus the benefits that firms hope to gain through high levels of expertise.

Joint Editorial

Published: 4/2002,  Volume: 57,  Issue: 2  |  DOI: 10.1111/1540-6261.00451  |  Cited by: 7

A REPLY

Published: 9/1970,  Volume: 25,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1970.tb00569.x  |  Cited by: 1

Roman L. Weil, Joel E. Segall, David Green

Optimal Investment, Growth Options, and Security Returns

Published: 10/1999,  Volume: 54,  Issue: 5  |  DOI: 10.1111/0022-1082.00161  |  Cited by: 1117

Jonathan B. Berk, Richard C. Green, Vasant Naik

As a consequence of optimal investment choices, a firm's assets and growth options change in predictable ways. Using a dynamic model, we show that this imparts predictability to changes in a firm's systematic risk, and its expected return. Simulations show that the model simultaneously reproduces: (i) the time‐series relation between the book‐to‐market ratio and asset returns; (ii) the cross‐sectional relation between book‐to‐market, market value, and return; (iii) contrarian effects at short horizons; (iv) momentum effects at longer horizons; and (v) the inverse relation between interest rates and the market risk premium.

PREMIUMS ON CONVERTIBLE BONDS

Published: 6/1968,  Volume: 23,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1968.tb00819.x  |  Cited by: 10

Roman L. Weil, Joel E. Segall, David Green

PREMIUMS ON CONVERTIBLE BONDS: REPLY

Published: 12/1972,  Volume: 27,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1972.tb03035.x  |  Cited by: 0

Roman L. Weil, Joel E. Segall, David O. Green

Advance Refundings of Municipal Bonds

Published: 5/15/2017,  Volume: 72,  Issue: 4  |  DOI: 10.1111/jofi.12506  |  Cited by: 47

ANDREW ANG, RICHARD C. GREEN, FRANCIS A. LONGSTAFF, YUHANG XING

The advance refunding of debt is a widespread practice in municipal finance. In an advance refunding, municipalities retire callable bonds early and refund them with bonds with lower coupon rates. We find that 85% of all advance refundings occur at a net present value loss, and that the aggregate losses over the past 20 years exceed $15 billion. We explore why municipalities advance refund their debt at loss. Financially constrained municipalities may face pressure to advance refund since it allows them to reduce short‐term cash outflows. We find strong evidence that financial constraints are a major driver of advance refunding activity.