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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A Possible Explanation of the Small Firm Effect
Published: 09/01/1981 | DOI: 10.1111/j.1540-6261.1981.tb04890.x
RICHARD ROLL
Recent empirical studies have found that small listed firms yield higher average returns than large firms even when their riskiness is equal. The riskiness of small firms, however, has been improperly measured. Apparently, the error is due to auto‐correlation in portfolio returns caused by infrequent trading. Other anomalous predictors of riskadjusted returns, such as price/earnings ratios and dividend yields, may also derive some of their apparent power from this spurious source.
A Simple Implicit Measure of the Effective Bid‐Ask Spread in an Efficient Market
Published: 09/01/1984 | DOI: 10.1111/j.1540-6261.1984.tb03897.x
RICHARD ROLL
In an efficient market, the fundamental value of a security fluctuates randomly. However, trading costs induce negative serial dependence in successive observed market price changes. In fact, given market efficiency, the effective bid‐ask spread can be measured by Spread=2−cov where “cov” is the first‐order serial covariance of price changes. This implicit measure of the bid‐ask spread is derived formally and is shown empirically to be closely related to firm size.
Industrial Structure and the Comparative Behavior of International Stock Market Indices
Published: 03/01/1992 | DOI: 10.1111/j.1540-6261.1992.tb03977.x
RICHARD ROLL
Stock Price Indices are compared across countries in an attempt to explain why they exhibit such disparate behavior. Three separate explanatory influences are empirically documented. First, part of the behavior can be attributed to a technical aspect of index construction; some indices are more diversified than others. Second, each country's industrial structure plays a major role in explaining stock price behavior. Third, for the majority of countries, a portion of national equity index behavior can be ascribed to exchange rate behavior. Exchange rates explain a significant portion of common currency denominated national index returns, although the amount explained by exchange rates is less than the amount explained by industrial structure for most countries.
INVESTMENT DIVERSIFICATION AND BOND MATURITY
Published: 03/01/1971 | DOI: 10.1111/j.1540-6261.1971.tb00588.x
Richard Roll
EVIDENCE ON THE “GROWTH‐OPTIMUM” MODEL
Published: 06/01/1973 | DOI: 10.1111/j.1540-6261.1973.tb01378.x
Richard Roll
R2
Published: 07/01/1988 | DOI: 10.1111/j.1540-6261.1988.tb04591.x
RICHARD ROLL
Even with hindsight, the ability to explain stock price changes is modest. R2s were calculated for the returns of large stocks as explained by systematic economic influences, by the returns on other stocks in the same industry, and by public firm‐specific news events. The average adjusted R2 is only about .35 with monthly data and .20 with daily data. There is little relation between explanatory power and either the firm's size or its industry. There is little improvement in R2 from eliminating all dates surrounding news reports in the financial press. However, the sample kurtosis is quite different when such news events are eliminated, thereby revealing a mixture of return distributions. Non‐news dates also indicate the presence of a distributional mixture, perhaps due to traders acting on private information.
On Valuing American Call Options with the Black‐Scholes European Formula
Published: 06/01/1984 | DOI: 10.1111/j.1540-6261.1984.tb02319.x
ROBERT GESKE, RICHARD ROLL
Empirical papers on option pricing have uncovered systematic differences between market prices and values produced by the Black‐Scholes European formula. Such “biases” have been found related to the exercise price, the time to maturity, and the variance. We argue here that the American option variant of the Black‐Scholes formula has the potential to explain the first two biases and may partly explain the third. It can also be used to understand the empirical finding that the striking price bias reverses itself in different sample periods. The expected form of the striking price bias is explained in detail and is shown to be closely related to past empirical findings.
How Stable Are Corporate Capital Structures?
Published: 03/26/2014 | DOI: 10.1111/jofi.12163
HARRY DeANGELO, RICHARD ROLL
Leverage cross‐sections more than a few years apart differ markedly, with similarities evaporating as the time between them lengthens. Many firms have high and low leverage at different times, but few keep debt‐to‐assets ratios consistently above 0.500. Capital structure stability is the exception, not the rule, occurs primarily at low leverage, and is virtually always temporary, with many firms abandoning low leverage during the post‐war boom. Industry‐median leverage varies widely over time. Target‐leverage models that place little or no weight on maintaining a particular ratio do a good job replicating the substantial instability of the actual leverage cross‐section.
The Fiscal and Monetary Linkage between Stock Returns and Inflation
Published: 03/01/1983 | DOI: 10.1111/j.1540-6261.1983.tb03623.x
ROBERT GESKE, RICHARD ROLL
Contrary to economic theory and common sense, stock returns are negatively related to both expected and unexpected inflation. We argue that this puzzling empirical phenomenon does not indicate causality.
An Empirical Investigation of the Arbitrage Pricing Theory
Published: 12/01/1980 | DOI: 10.1111/j.1540-6261.1980.tb02197.x
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.
On the Cross‐sectional Relation between Expected Returns and Betas
Published: 03/01/1994 | DOI: 10.1111/j.1540-6261.1994.tb04422.x
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.
Market Liquidity and Trading Activity
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00335
Tarun Chordia, Richard Roll, Avanidhar Subrahmanyam
Previous studies of liquidity span short time periods and focus on the individual security. In contrast, we study aggregate market spreads, depths, and trading activity for U.S. equities over an extended time sample. Daily changes in market averages of liquidity and trading activity are highly volatile and negatively serially dependent. Liquidity plummets significantly in down markets. Recent market volatility induces a decrease in trading activity and spreads. There are strong day‐of‐the‐week effects; Fridays accompany a significant decrease in trading activity and liquidity, while Tuesdays display the opposite pattern. Long‐ and short‐term interest rates influence liquidity. Depth and trading activity increase just prior to major macroeconomic announcements.
Liquidity and the Law of One Price: The Case of the Futures‐Cash Basis
Published: 09/04/2007 | DOI: 10.1111/j.1540-6261.2007.01273.x
RICHARD ROLL, EDUARDO SCHWARTZ, AVANIDHAR SUBRAHMANYAM
Deviations from no‐arbitrage relations should be related to market liquidity, because liquidity facilitates arbitrage. At the same time, a wide futures‐cash basis may trigger arbitrage trades and, in turn, affect liquidity. We test these ideas by studying the dynamic relation between stock market liquidity and the index futures basis. There is evidence of two‐way Granger causality between the short‐term absolute basis and liquidity, and liquidity Granger‐causes longer‐term absolute bases. Shocks to the absolute basis predict future stock market liquidity. The evidence suggests that liquidity enhances the efficiency of the futures‐cash pricing system.
Over‐the‐Counter Option Market Dividend Protection and “Biases” in the Black‐Scholes Model: A Note
Published: 09/01/1983 | DOI: 10.1111/j.1540-6261.1983.tb02295.x
ROBERT GESKE, RICHARD ROLL, KULDEEP SHASTRI
Most options are traded over‐the‐counter (OTC) and are dividend “protected;” the exercise price decreases on the ex date by an amount equal to the dividend. This protection completely inhibits the early exercise of American call options. Nevertheless, OTC‐protected options have market values which differ systematically from Black‐Scholes values for European options on non‐dividend paying stocks. The pricing difference is related to both the variance of the underlying stock return and to time until expiration of the option, but it is quite small in dollar amount.