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DISCUSSION
Published: 06/01/1978 | DOI: 10.1111/j.1540-6261.1978.tb00769.x
Jess B. Yawitz
EXTERNALITIES AND RISKY INVESTMENTS
Published: 09/01/1977 | DOI: 10.1111/j.1540-6261.1977.tb03316.x
Jess B. Yawitz
Asset Returns, Discount Rate Changes, and Market Efficiency
Published: 09/01/1985 | DOI: 10.1111/j.1540-6261.1985.tb02368.x
MICHAEL SMIRLOCK, JESS YAWITZ
The primary purpose of this paper is to reconcile the previous findings of discount rate endogeneity with the presence of discount rate announcement effects in securities markets. The crux of this reconciliation is the distinction between “technical” discount rate changes that are endogenous and “nontechnical” changes which contain some informative policy implications. In essence, we attempt to separate expected discount rate changes from unexpected changes, or equivalently, the expected component of discount rate changes from the unexpected component. If markets are efficient, the former should have no announcement effects while the latter may be associated with an announcement effect. Accordingly, the focus of the empirical analysis is on the interaction between discount rate exogeneity, the specific monetary policy regime, and accouncement effects. In addition, we examine whether the behavior of these markets in the postannouncement period is consistent with the rapid price adjustment implied by market efficiency.
Optimal Regulation Under Uncertainty
Published: 09/01/1981 | DOI: 10.1111/j.1540-6261.1981.tb04892.x
WILLIAM J. MARSHALL, JESS B. YAWITZ, EDWARD GREENBERG
This paper is concerned with the problem of price regulation when demand is uncertain. Uncertainty gives rise to substantial difficulties in determining both the return a firm's owners should be provided and a set of prices capable of producing that return. We argue that conventional approaches to price regulation are incapable of attaining the economically desirable objectives of efficiency and an equitable return to investors. The deficiencies in current practices are attributable to the separation of the risk measurement‐return determination and price setting activities in the conventional approach. We present a model of the regulated firm that synthesizes contemporary financial market theory and the theory of the firm under uncertainty.1 In our approach, the income stream produced by the firm is valued ex ante in the financial market according to investors' perceptions and preferences over riskreturn characteristics. We portray the firm as producing risk and return by choosing among available production technologies to maximize its market value, given the prices set by regulators. Within this framework, it is shown that regulators can choose the lowest prices consistent with an equitable return to investors. We also show that prices so chosen induce the choice of the optimal technology by the firm.
Taxes, Default Risk, and Yield Spreads
Published: 09/01/1985 | DOI: 10.1111/j.1540-6261.1985.tb02367.x
JESS B. YAWITZ, KEVIN J. MALONEY, LOUIS H. EDERINGTON
This paper develops a model of bond prices and yield spreads that incorporates the effect of both taxes and differences in default probabilities. The tax loss consequences of default are recognized. Traditionally, tax‐free (municipal) bond yields have been viewed as linearly related to taxable yields with a slope coefficient equal to one minus the tax rate and the intercept representing differences in default risk. While our model supports the linearity assumption, it implies that the slope and intercept are both functions of both the break‐even tax rate and the default probability(ies). Clientele effects among both municipal and taxable bonds are demonstrated. Finally, the implied marginal tax rates and the implied default probabilities are estimated for different categories of municipal bonds.