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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Business Networks, Corporate Governance, and Contracting in the Mutual Fund Industry
Published: 09/28/2009 | DOI: 10.1111/j.1540-6261.2009.01498.x
CAMELIA M. KUHNEN
Business connections can mitigate agency conflicts by facilitating efficient information transfers, but can also be channels for inefficient favoritism. I analyze these two effects in the mutual fund industry and find that fund directors and advisory firms that manage the funds hire each other preferentially based on the intensity of their past interactions. I do not find evidence that stronger board‐advisor ties correspond to better or worse outcomes for fund shareholders. These results suggest that the two effects of board‐management connections on investor welfare—improved monitoring and increased potential for collusion—balance out in this setting.
REPLY
Published: 06/01/1976 | DOI: 10.1111/j.1540-6261.1976.tb01941.x
Clement G. Krouse
An Empirical Comparison of Alternative Models of the Short‐Term Interest Rate
Published: 07/01/1992 | DOI: 10.1111/j.1540-6261.1992.tb04011.x
K. C. CHAN, G. ANDREW KAROLYI, FRANCIS A. LONGSTAFF, ANTHONY B. SANDERS
We estimate and compare a variety of continuous‐time models of the short‐term riskless rate using the Generalized Method of Moments. We find that the most successful models in capturing the dynamics of the short‐term interest rate are those that allow the volatility of interest rate changes to be highly sensitive to the level of the riskless rate. A number of well‐known models perform poorly in the comparisons because of their implicit restrictions on term structure volatility. We show that these results have important implications for the use of different term structure models in valuing interest rate contingent claims and in hedging interest rate risk.
What Determines the Domestic Bias and Foreign Bias? Evidence from Mutual Fund Equity Allocations Worldwide
Published: 05/03/2005 | DOI: 10.1111/j.1540-6261.2005.768_1.x
KALOK CHAN, VICENTIU COVRIG, LILIAN NG
We examine how mutual funds from 26 developed and developing countries allocate their investment between domestic and foreign equity markets and what factors determine their asset allocations worldwide. We find robust evidence that these funds, in aggregate, allocate a disproportionately larger fraction of investment to domestic stocks. Results indicate that the stock market development and familiarity variables have significant, but asymmetric, effects on the domestic bias (domestic investors overweighting the local markets) and foreign bias (foreign investors under or overweighting the overseas markets), and that economic development, capital controls, and withholding tax variables have significant effects only on the foreign bias.
REPLY
Published: 09/01/1966 | DOI: 10.1111/j.1540-6261.1966.tb00255.x
C. Rangarajan, Alan K. Severn
THE RATE OF RETURN OF SELECTED INVESTMENT PROJECTS
Published: 09/01/1978 | DOI: 10.1111/j.1540-6261.1978.tb02064.x
Keith C. Brown
Options, Taxes, and Ex‐Dividend Day Behavior
Published: 06/01/1986 | DOI: 10.1111/j.1540-6261.1986.tb05045.x
COSTAS P. KAPLANIS
A novel way of estimating the expected as opposed to the actual share price fall‐off is developed using option prices. This method is applied to the UK Traded Options Market using data from 1979 to 1984. The results show that: (a) the average expected fall‐off implicit in option prices is around 55 to 60% of the dividend and significantly different from it. The fall‐off also varied inversely with the dividend yield, which is consistent with the prediction of the “tax clientele hypothesis.” (b) The estimates of the expected fall‐off were not significantly different from the actual fall‐off. (c) Finally, the results imply that the usual assumption made in valuing options on dividend‐paying stocks, that the fall‐off is equal to the dividend, would lead to downward‐biased estimates of the option value.
International Evidence on Institutional Trading Behavior and Price Impact
Published: 03/25/2004 | DOI: 10.1111/j.1540-6261.2004.00651.x
Chiraphol N. Chiyachantana, Pankaj K. Jain, Christine Jiang, Robert A. Wood
This study characterizes institutional trading in international stocks from 37 countries during 1997 to 1998 and 2001. We find that the underlying market condition is a major determinant of the price impact and, more importantly, of the asymmetry between price impacts of institutional buy and sell orders. In bullish markets, institutional purchases have a bigger price impact than sells; however, in the bearish markets, sells have a higher price impact. This differs from previous findings on price impact asymmetry. Our study further suggests that price impact varies depending on order characteristics, firm‐specific factors, and cross‐country differences.
An Asset‐Pricing Theory Unifying the CAPM and APT
Published: 09/01/1988 | DOI: 10.1111/j.1540-6261.1988.tb02610.x
K. C. JOHN WEI
This study shows that the competitive‐equilibrium version of the APT may be extended to develop an exact model if idiosyncratic risks obey the Ross separating distribution. The results indicate that one only need add the market portfolio as an extra factor to the factor model in order to obtain an exact asset‐pricing relation. Thus, this study presents an extension and integration of the CAPM and APT. The “empirical” APT is also generalized to allow for some factors to be omitted from the econometric model employed to test the theory. The developed model is extremely robust and may be reduced to the CAPM or expanded to approximate Ross's APT depending upon the number of omitted factors. Further, the importance of the market portfolio is shown to be a monotonic increasing function of the number of omitted factors. Finally, the study demonstrates that, in a finite economy, the pricing‐error bound of the Ross APT in a correlated‐residuals factor structure is an increasing function of the absolute value of market‐residual beta, rather than the weight of the asset in the market portfolio as is the case of uncorrelated factor residuals. However, under the normality assumption, the pricing error becomes an extra component related to the market‐portfolio factor, and the exact asset‐pricing relation is once again obtained.
Long‐Term Market Overreaction or Biases in Computed Returns?
Published: 03/01/1993 | DOI: 10.1111/j.1540-6261.1993.tb04701.x
JENNIFER CONRAD, GAUTAM KAUL
We show that the returns to the typical long‐term contrarian strategy implemented in previous studies are upwardly biased because they are calculated by cumulating single‐period (monthly) returns over long intervals. The cumulation process not only cumulates “true” returns but also the upward bias in single‐period returns induced by measurement errors. We also show that the remaining “true” returns to loser or winner firms have no relation to overreaction. This study has important implications for event studies that use cumulative returns to assess the impact of information events.
Two‐Pass Tests of Asset Pricing Models with Useless Factors
Published: 05/06/2003 | DOI: 10.1111/0022-1082.00102
Raymond Kan, Chu Zhang
In this paper we investigate the properties of the standard two‐pass methodology of testing beta pricing models with misspecified factors. In a setting where a factor is useless, defined as being independent of all the asset returns, we provide theoretical results and simulation evidence that the second‐pass cross‐sectional regression tends to find the beta risk of the useless factor priced more often than it should. More surprisingly, this misspecification bias exacerbates when the number of time series observations increases. Possible ways of detecting useless factors are also examined.
Supply and Demand Shifts in the Shorting Market
Published: 09/04/2007 | DOI: 10.1111/j.1540-6261.2007.01269.x
LAUREN COHEN, KARL B. DIETHER, CHRISTOPHER J. MALLOY
Using proprietary data on stock loan fees and quantities from a large institutional investor, we examine the link between the shorting market and stock prices. Employing a unique identification strategy, we isolate shifts in the supply and demand for shorting. We find that shorting demand is an important predictor of future stock returns: An increase in shorting demand leads to negative abnormal returns of 2.98% in the following month. Second, we show that our results are stronger in environments with less public information flow, suggesting that the shorting market is an important mechanism for private information revelation.
Static Hedging of Exotic Options
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00048
Peter Carr, Katrina Ellis, Vishal Gupta
This paper develops static hedges for several exotic options using standard options. The method relies on a relationship between European puts and calls with different strike prices. The analysis allows for constant volatility or for volatility smiles or frowns.
TEST OF PORTFOLIO BUILDING RULES: COMMENT
Published: 09/01/1971 | DOI: 10.1111/j.1540-6261.1971.tb00935.x
Pao L. Cheng, M. King Deets