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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Information and Volatility: The No‐Arbitrage Martingale Approach to Timing and Resolution Irrelevancy
Published: 03/01/1989 | DOI: 10.1111/j.1540-6261.1989.tb02401.x
STEPHEN A. ROSS
The no‐arbitrage martingale analysis is used to study the effect on asset prices of changes in the rate of information flow. The analysis is first used to develop some simple tools for asset pricing in a continuous‐time setting. These tools are then applied to determine the effect of information on prices and price volatility, to extend Samuelson's theorem on prices fluctuating randomly, and to study the impact on prices of the resolution of uncertainty. The conditions under which uncertainty resolution is irrelevant for asset pricing are shown to be similar to those which support the MM irrelevance theorems.
Information and Volatility: The No‐Arbitrage Martingale Approach to Timing and Resolution Irrelevancy
Published: 03/01/1989 | DOI: 10.1111/j.1540-6261.1989.tb02401.x
STEPHEN A. ROSS
The no‐arbitrage martingale analysis is used to study the effect on asset prices of changes in the rate of information flow. The analysis is first used to develop some simple tools for asset pricing in a continuous‐time setting. These tools are then applied to determine the effect of information on prices and price volatility, to extend Samuelson's theorem on prices fluctuating randomly, and to study the impact on prices of the resolution of uncertainty. The conditions under which uncertainty resolution is irrelevant for asset pricing are shown to be similar to those which support the MM irrelevance theorems.
Discussion
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00374
Stephen A. Ross
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.
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.
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.
The Determination of Fair Profits for the Property‐Liability Insurance Firm
Published: 09/01/1982 | DOI: 10.1111/j.1540-6261.1982.tb03594.x
ALAN KRAUS, STEPHEN A. ROSS
Single period and dynamic valuation models in continuous time, under certainty and uncertainty, are developed for a property‐liability insurance contract to determine the “fair” (competitive) premium and underwriting profit. The intertemporal stochastic model assumes that the claim frequency and the price index of claim settlements are functions of a set of underlying state variables which follow a multivariate Wiener process. The competitive premium is shown to be proportional to the claim frequency and the price index for claim settlements at the time the policy is issued. The factor of proportionality varies directly with the claim settlement rate and the length of coverage, and inversely with the risk‐adjusted real interest rate on the dollar‐valued claim rate.
Tax Clienteles and Asset Pricing
Published: 07/01/1986 | DOI: 10.1111/j.1540-6261.1986.tb04540.x
PHILIP H. DYBVIG, STEPHEN A. ROSS
Taxation of asset returns can create various clientele effects. If every agent is marginal on all assets, no clientele effects arise. If some (but not every) agent is marginal on all assets, there arises a clientele effect in quantities but none in prices. If no agent is marginal on all assets, there arise clientele effects in both quantities and prices. In the first two cases, standard asset pricing and martingale results extend to analogous aftertax results. In the third case, linear asset pricing works only on subsets of assets, and the standard martingale results become after‐tax supermartingale results.
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.
Differential Information and Performance Measurement Using a Security Market Line
Published: 06/01/1985 | DOI: 10.1111/j.1540-6261.1985.tb04963.x
PHILIP H. DYBVIG, STEPHEN A. ROSS
An uninformed observer using the tools of mean variance and security market line analysis to measure the performance of a portfolio manager who has superior information is unlikely to be able to make any reliable inferences. While some positive results of a very limited nature are possible, e.g., when there is a riskless asset or when information is restricted to be “security specific,” in general anything is possible. In particular, a manager with superior information can appear to the observer to be below or above the security market line and inside or outside of the mean‐variance efficient frontier, and any combination of these is possible.
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.
A Re‐examination of Traditional Hypotheses about the Term Structure of Interest Rates
Published: 09/01/1981 | DOI: 10.1111/j.1540-6261.1981.tb04884.x
JOHN C. COX, JONATHAN E. INGERSOLL, STEPHEN A. ROSS
The term structure of interest rates is an important subject to economists, and has a long history of traditions. This paper re‐examines many of these traditional hypotheses while employing recent advances in the theory of valuation and contingent claims. We show how the Expectations Hypothesis and the Preferred Habitat Theory must be reformulated if they are to obtain in a continuous‐time, rational‐expectations equilibrium. We also modify the linear adaptive interest rate forecasting models, which are common to the macroeconomic literature, so that they will be consistent in the same framework.