The Journal of Finance

Predictable Financial Crises

Published: 01/27/2022   |   DOI: 10.1111/jofi.13105

ROBIN GREENWOOD, SAMUEL G. HANSON, ANDREI SHLEIFER, JAKOB AHM SØRENSEN

Using historical data on postwar financial crises around the world, we show that the combination of rapid credit and asset price growth over the prior three years, whether in the nonfinancial business or the household sector, is associated with a 40% probability of entering a financial crisis within the next three years. This compares with a roughly 7% probability in normal times, when neither credit nor asset price growth is elevated. Our evidence challenges the view that financial crises are unpredictable “bolts from the sky” and supports the Kindleberger‐Minsky view that crises are the byproduct of predictable, boom‐bust credit cycles. This predictability favors policies that lean against incipient credit‐market booms.

THE REGULATION OF BANK HOLDING COMPANIES

Published: 05/01/1975   |   DOI: 10.1111/j.1540-6261.1975.tb01810.x

Samuel B. Chase, John J. Mingo, Sherman J. Maisel

THE BANKING STRUCTURE AND THE TRANSMISSION OF MONETARY POLICY

Published: 06/01/1969   |   DOI: 10.1111/j.1540-6261.1969.tb00362.x

Sam Peltzman

The Distribution of Foreign Exchange Price Changes: Trading Day Effects and Risk Measurement

Published: 06/01/1982   |   DOI: 10.1111/j.1540-6261.1982.tb02218.x

JAMES W. McFARLAND, R. RICHARDSON PETTIT, SAM K. SUNG

This study investigates the nature of price changes in a variety of major and minor foreign exchange markets. The results suggest that the log of price changes over one (trading) day intervals seems to follow a non‐normal stable distribution function. Different measures of location (and to lesser extent scale) are present for different days of the week. Dollar denominated price changes are high on Mondays and Wednesdays and low on Thursdays and Fridays for all currencies. The Wednesday‐Thursday result is consistent with the settlement procedures used in foreign exchange transactions in the dollar. The Friday‐Monday result is consistent with an increase in demand for the dollar prior to the weekend.

The Distribution of Foreign Exchange Price Changes: Trading Day Effects and Risk Measurement—A Reply

Published: 03/01/1987   |   DOI: 10.1111/j.1540-6261.1987.tb02561.x

JAMES W. McFARLAND, R. RICHARDSON PETTIT, SAM K. SUNG

On the Exclusion of Assets from Tests of the Mean Variance Efficiency of the Market Portfolio

Published: 03/01/1984   |   DOI: 10.1111/j.1540-6261.1984.tb03860.x

SHMUEL KANDEL

This paper presents an analysis of the testability of the mean variance efficiency of a market index when the returns on some components of the index itself are not perfectly observable. The results are basically not supportive of the notion that mean variance efficiency is testable on a subset of the assets. Bounding the market share of the missing asset and its expected return is not sufficient to produce a valid test. When the variance of the missing asset is bounded, and the amount of wealth that might be missing is small, it is possible, in principle, to reject correctly the mean variance efficiency of a market index.

Portfolio Inefficiency and the Cross‐section of Expected Returns

Published: 03/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb05170.x

SHMUEL KANDEL, ROBERT F. STAMBAUGH

The Capital Asset Pricing Model implies that (i) the market portfolio is efficient and (ii) expected returns are linearly related to betas. Many do not view these implications as separate, since either implies the other, but we demonstrate that either can hold nearly perfectly while the other fails grossly. If the index portfolio is inefficient, then the coefficients and R2 from an ordinary least squares regression of expected returns on betas can equal essentially any values and bear no relation to the index portfolio's mean‐variance location. That location does determine the outcome of a mean‐beta regression fitted by generalized least squares.

The Geometry of the Maximum Likelihood Estimator of the Zero‐Beta Return

Published: 06/01/1986   |   DOI: 10.1111/j.1540-6261.1986.tb05040.x

SHMUEL KANDEL

This paper explores geometric relations, in mean‐variance space, among the sample frontier, the maximum likelihood estimator, and two other estimators of the zerobeta return. It is also demonstrated that a partition of the portfolio space is determined by a family of parabolas; the zeros of each parabola are the maximum likelihood estimators associated with all portfolios on the parabola. This observation is the basis for an additional interpretation of the statistic of the Likelihood Ratio Test of portfolio efficiency without a riskless asset.

DISCUSSION

Published: 07/01/1987   |   DOI: 10.1111/j.1540-6261.1987.tb04572.x

SHMUEL KANDEL

On the Predictability of Stock Returns: An Asset‐Allocation Perspective

Published: 06/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb02689.x

SHMUEL KANDEL, ROBERT F. STAMBAUGH

Sample evidence about the predictability of monthly stock returns is considered from the perspective of a risk‐averse Bayesian investor who must allocate funds between stocks and cash. The investor uses the sample evidence to update prior beliefs about the parameters in a regression of stock returns on a set of predictive variables. The regression relation can seem weak when described by usual statistical measures, but the current values of the predictive variables can exert a substantial influence on the investor's portfolio decision, even when the investor's prior beliefs are weighted against predictability.

The Price of Options Illiquidity

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00346

Menachem Brenner, Rafi Eldor, Shmuel Hauser

The purpose of this paper is to examine the effect of illiquidity on the value of currency options. We use a unique dataset that allows us to explore this issue in special circumstances where options are issued by a central bank and are not traded prior to maturity. The value of these options is compared to similar options traded on the exchange. We find that the nontradable options are priced about 21 percent less than the exchange‐traded options. This gap cannot be arbitraged away due to transactions costs and the risk that the exchange rate will change during the bidding process.

THE TREATMENT OF RISK IN THE STOCK MARKET

Published: 09/01/1969   |   DOI: 10.1111/j.1540-6261.1969.tb00394.x

G. Briscoe, J. M. Samuels, D. J. Smyth

Mean‐Variance Spanning

Published: 09/01/1987   |   DOI: 10.1111/j.1540-6261.1987.tb03917.x

GUR HUBERMAN, SHMUEL KANDEL

The authors propose a likelihood‐ratio test of the hypothesis that the minimum‐variance frontier of a set of K assets coincides with the frontier of this set and another set of N assets. They study the relation between this hypothesis, exact arbitrage pricing, and mutual fund separation. The exact distribution of the test statistic is available. The authors test the hypothesis that the frontier spanned by three size‐sorted stock portfolios is the same as the frontier spanned by thirty‐three size‐sorted stock portfolios.

Working Orders in Limit Order Markets and Floor Exchanges

Published: 08/14/2007   |   DOI: 10.1111/j.1540-6261.2007.01252.x

KERRY BACK, SHMUEL BARUCH

We analyze limit order markets and floor exchanges, assuming an informed trader and discretionary liquidity traders use market orders and can either submit block orders or work their demands as a series of small orders. By working their demands, large market order traders pool with small traders. We show that every equilibrium on a floor exchange must involve at least partial pooling. Moreover, there is always a fully pooling (worked order) equilibrium on a floor exchange that is equivalent to a block order equilibrium in a limit order market.

Multimarket Trading and Liquidity: Theory and Evidence

Published: 09/04/2007   |   DOI: 10.1111/j.1540-6261.2007.01272.x

SHMUEL BARUCH, G. ANDREW KAROLYI, MICHAEL L. LEMMON

We develop a new model of multimarket trading to explain the differences in the foreign share of trading volume of internationally cross‐listed stocks. The model predicts that the trading volume of a cross‐listed stock is proportionally higher on the exchange in which the cross‐listed asset returns have greater correlation with returns of other assets traded on that market. We find robust empirical support for this prediction using stock return and volume data on 251 non‐U.S. stocks cross‐listed on major U.S. exchanges.

Mimicking Portfolios and Exact Arbitrage Pricing

Published: 03/01/1987   |   DOI: 10.1111/j.1540-6261.1987.tb02546.x

GUR HUBERMAN, SHMUEL KANDEL, ROBERT F. STAMBAUGH

We characterize the sets of mimicking positions with returns that can serve in place of factors in an exact K‐factor arbitrage‐pricing relation for a set of N assets. All of the sets are K‐dimensional nonsingular linear transformations of each other. We interpret three examples of such transformations and discuss empirical considerations. We provide conditions under which the mimicking positions can be expressed as portfolios, and we characterize the relation between mimicking portfolios and the minimum‐variance frontier.

Tests of Asset Pricing with Time‐Varying Expected Risk Premiums and Market Betas

Published: 06/01/1987   |   DOI: 10.1111/j.1540-6261.1987.tb02564.x

WAYNE E. FERSON, SHMUEL KANDEL, ROBERT F. STAMBAUGH

Tests of asset‐pricing models are developed that allow expected risk premiums and market betas to vary over time. These tests exploit the relation between expected excess returns and current market values. Using weekly data for 1963 through 1982 on ten common stock portfolios formed according to equity capitalization, a single‐risk‐premium model is not rejected if the expected premium is time varying and is not constrained to correspond to a market factor. Conditional mean‐variance efficiency of a value‐weighted stock index is rejected, and the rejection is insensitive to how much variability of expected risk premiums is assumed.

Real Interest Rates and Inflation: An Ex‐Ante Empirical Analysis

Published: 03/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb05207.x

SHMUEL KANDEL, AHARON R. OFER, ODED SARIG

We develop a method of measuring ex‐ante real interest rates using prices of index and nominal bonds. Employing this method and newly available data, we directly test the Fisher hypothesis that the real rate of interest is independent of inflation expectations. We find a negative correlation between ex‐ante real interest rates and expected inflation. This contradicts the Fisher hypothesis but is consistent with the theories of Mundell and Tobin, Darby and Feldstein, and Stulz. We also find that nominal interest rates include an inflation risk premium that is positively related to a proxy for inflation uncertainty.

THE CAPITAL LEVY AND DEADWEIGHT DEBT IN ENGLAND—1815–40

Published: 03/01/1953   |   DOI: 10.1111/j.1540-6261.1953.tb01134.x

Manuel Gottlieb