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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Risk Assessments and Risk Premiums in the Eurodollar Market
Published: 06/01/1982 | DOI: 10.1111/j.1540-6261.1982.tb02217.x
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.
DISCUSSION
Published: 05/01/1977 | DOI: 10.1111/j.1540-6261.1977.tb03280.x
Stephen A. Ross
Debt and Taxes and Uncertainty
Published: 07/01/1985 | DOI: 10.1111/j.1540-6261.1985.tb04986.x
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.
Compensation, Incentives, and the Duality of Risk Aversion and Riskiness
Published: 11/27/2005 | DOI: 10.1111/j.1540-6261.2004.00631.x
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.
Stock Markets, Growth, and Tax Policy
Published: 09/01/1991 | DOI: 10.1111/j.1540-6261.1991.tb04625.x
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.
Survival
Published: 07/01/1995 | DOI: 10.1111/j.1540-6261.1995.tb04039.x
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.
Discussion
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00374
Stephen A. Ross
SOME TIME SERIES PROPERTIES OF ACCOUNTING INCOME
Published: 06/01/1972 | DOI: 10.1111/j.1540-6261.1972.tb00991.x
Ray Ball, Ross Watts
Yes, The APT Is Testable
Published: 09/01/1985 | DOI: 10.1111/j.1540-6261.1985.tb02370.x
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 Analytics of Performance Measurement Using a Security Market Line
Published: 06/01/1985 | DOI: 10.1111/j.1540-6261.1985.tb04964.x
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.
The Dynamic Properties of Financial‐Market Equilibrium with Trading Fees
Published: 12/12/2018 | DOI: 10.1111/jofi.12744
ADRIAN BUSS, BERNARD DUMAS
We incorporate trading fees into a dynamic, multiagent general‐equilibrium model in which traders optimally decide when to trade. For that purpose, we propose an innovative algorithm that synchronizes the traders. Securities prices are not so much affected by the payment of the fees itself, but rather by the trade‐off that the traders face between smoothing consumption and smoothing holdings. In calibrated examples, the interest rate and welfare decline with trading fees, while risk premia and volatilities increase. Liquidity risk and expected liquidity are priced, leading to deviations from the consumption‐CAPM. With trading fees, capital is slow‐moving, generating slow price reversal.
Some Additional Evidence on Survival Biases
Published: 03/01/1979 | DOI: 10.1111/j.1540-6261.1979.tb02080.x
RAY BALL, ROSS WATTS