Behavior of municipal bond default-risk premiums by maturity

Default-risk premiums have traditionally been considered to be an increasing function of time. More recently, a model has been developed which indicates that, under certain conditions, default-risk premiums are invariant to maturity. One study found significant differences in default-risk premiums for long-term corporate bonds and commercial paper. The hypothesis that default-risk premiums are invariant to maturity was tested using municipal bond data. Results indicate that risk premiums are not invariant to maturity.     

International bank lending: Political risk and portfolio diversification

The extent to which a large U.S. bank, all U.S. banks, and banks in the Group of Ten took account of political risk in their international country exposures in 1976 is tested using a simple portfolio diversification model. Assuming that political risks are important relative to economic risks, and that political risks are uncorrelated across countries, these banks' exposures should be negatively related to political risk indices. However, the portfolios of these banks appear to be related to political risk only insofar as political risk is roughly approximated by GNP per capita. International banks were not yet able to systematically vary their international portfolios with respect to political risk.     

Stability of mutual fund systematic risk statistics

Empirical data for 85 mutual funds are used to test the intertemporal stability of their systematic risk statistics. Reasons why the portfolios may be nonstationary are suggested. A random coefficient model developed by Theil [37] is employed to test for the stability of each fund's beta. The data suggest that some funds do exhibit a beta that is best described as being a random coefficient. However, the percentage of funds exhibiting this characteristic was not statistically different from the percentage of randomly created portfolios that exhibited a random beta coefficient. The findings of this study support the statistical models employed in two other recent studies [18,21] to test for the stability of beta. Yet, for mutual funds that do exhibit a random beta coefficient, the partitioning of the total risk of the portfolio return into systematic and unsystematic risk is no longer valid for explaining the total risk.     

Variations in municipal bond default risk premia by term-to-maturity

A recent study by McInish of the influence of term-to-maturity on municipal bond default risk premia concluded that default risk premia were not invariant with respect to maturity. That study, as well as an earlier one by Robinson, failed to consider the effects of issuer credit quality. Using a large cross-sectional sample of general obligation bonds sold between 1977 and 1980, the influence of issuer credit quality on the relationship between term-to-maturity and default risk premia is investigated. The results indicate that default risk premia were an increasing function of maturity, and that this effect was larger for lower rated bonds.     

Criteria used by venture capitalists to evaluate new venture proposals

A questionnaire was administered to one hundred venture capitalists to determine the most important criteria that they use to decide on funding new ventures. Perhaps the most important finding from the study is direct confirmation of the frequently iterated position taken by the venture capital community that above all it is the quality of the entrepreneur that ultimately determines the funding decision. Five of the top ten most important criteria had to do with the entrepreneur's experience or personality. There is no question that irrespective of the horse (product), horse race (market), or odds (financial criteria), it is the jockey (entrepreneur) who fundamentally determines whether the venture capitalist will place a bet at all.The question is if this is the case, then why is so much emphasis placed on the business plan? In a business plan there is generally little to indicate the characteristics of the entrepreneur—it is generally devoted to a detailed discussion of the product/service, the market, and the competition. To us, the implications are obvious—such content is necessary, but not sufficient. The business plan should also show as clearly as possible that the “jockey is fit to ride” —namely, indicate by whatever feasible and credible means possible that the entrepreneur has staying power, has a track record, can react to risk well, and has familiarity with the target market. Failing this, he or she needs to be able to pull together a team that has such characteristics and show that he or she is capable of leading that team.Factor analysis of the results indicate that venture capitalists appear to assess ventures systematically in terms of six categories of risk to be managed. These are: risk of losing the entire investment: risk of being unable to bail out if necessary; risk of failure to implement the venture idea; competitive risk; risk of management failure; and risk of leadership failure.Finally, three clusters of venture capitalists were identified: those who carefully assess the competitive and implementation risks: those who seek easy bail out; and those who deliberately keep as many options open as possible.     

Risk premiums on inventory assets: the case of crude oil and natural gas

This study tested for the presence of risk premiums on crude oil and natural gas. The econometric analysis followed from a stochastic model in which the equilibrium value of inventories depends on a convenience yield and an option value related to price uncertainty. The empirical findings provide rather strong support for the presence of risk premiums and also evidence for the existence of convenience yields. The risk premiums rose sharply with greater price volatility and help to explain why prices for immediate sales often exceed prices for future delivery. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:109–126, 2001     

The error learning hypothesis: The evidence reexamined

This paper reexamines the error learning hypothesis, taking explicit account of both the measurement error in forward rates and the nonstationary of liquidity premiums. The evidence is consistent with the model, but with lower explanatory power than the previous results of Meiselman (1962) and Van Horne (1965).     

Statistical classification models applied to common stock analysis

The application of statistical classification techniques to various aspects of equity financing and returns performance has been an attractive and fairly prolific area of research in the last 10–15 yrs. The various aspects of equity analysis relevant to classification techniques are more diverse than fixed income analysis and, until recently, presented more interesting empirical as well as theoretical challenges.The purpose of this paper is to review and comment upon numerous classification studies related to several aspects of common stock analysis, and, in so doing, to provide a clear picture of the variety of application areas amenable to statistical classification techniques. These areas include (1) common stock investment categories; (2) price-earnings and return-risk equity classification; (3) information content and return performance; and (4) capital structure questions.     

Price elasticity and bid-ask price spreads in the treasury bond market

Typical analyses of transactions costs in the bond markets explain these costs in terms of yield, term to maturity, coupons, and issue size. However, these analyses do not recognize the price elasticity of bonds to interest rate movements, which provides better measures of market risk and bid-ask price spreads. Elasticity or duration and issue size together display stronger associations with bid-ask price spreads than do the traditional variables. The association is also less subject to multicollinearity of the independent variables. Finally, stepwise regressions show that coupon and yield data add no information about bid-ask price spreads not already impounded in the duration statistic. This casts doubt on the nonduration arguments often used to support these variables as separately meaningful in transactions cost analyses.     

Note,advance refunding and municipal bond market efficiency

This study uses the public announcement of an advance refunding to examine the informational efficiency of the secondary market for municipal bonds. The data show that bond yields respond quickly and in the direction predicted. The text discusses methodological considerations and the data sources used in the tests. The results of the study indicate that even for infrequently traded bonds, yields can be expected to reflect fully changes in default risk.     

Earnings announcement timing,uncertainty, and volatility risk premiums

We examine the relationship between firms’ quarterly earnings report timing and uncertainty before quarterly earnings announcements. Prior research provides conflicting predictions on how investor uncertainty and report timing are related. Using implied volatilities from equity options and the realized returns to straddle positions, we find evidence that uncertainty and volatility risk premiums are higher for firms that report later in the quarter. Further tests show that the increase in option premiums is unexplained by risk factors suggesting a mispricing by investors. These results are not associated with static firm-level factors and our findings are concentrated in high growth firms.     

Hedging costs and joint determinants of premiums and spreads in structured financial products

Evaluating more than 317,000 discount certificates in the German secondary market, we find that premiums and spreads are endogenous and negatively related but depend on different key determinants. The fundamental determinants of the premiums are mainly profit-related, that is, dividends of the underlying, issuers’ credit risk, lifecycle effect, and competition, whereas hedging costs are less important. However, initial hedging costs (IHC) are priced into the premium in the case of large inventory changes. The spread is mostly determined by hedging costs and risk components, such as IHCs, rebalancing costs, volatility, scalper risk, and overnight gap risk—but also by dividends.     

Valuation of housing index derivatives

This study analyzes the valuation of housing index derivatives traded on the Chicago Mercantile Exchange (CME). Specifically, to circumvent the nontradability of housing indices, we propose and implement an equilibrium valuation framework. Assuming a mean-reverting aggregate dividend process and a utility function characterized by constant relative risk aversion, we show that the value of a housing index derivative depends only on parameters characterizing the underlying housing index, the endogenized interest rate and their correlation. We also analytically and numerically examine risk premiums for the CME futures and options and obtain three important findings. First, risk premiums are significant for all contracts with maturities longer than one year. Second, the expected growth rate of the underlying index is the key determinant for risk premiums. Third, risk premiums can be positive or negative, depending on whether the expected growth rate of the underlying index is higher or lower than the risk-free yield-to-maturity. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:660–688, 2010     

Culture and organizational control

The influence of socio-cultural processes on organizational control is explored. The concepts of external and internal control are developed and related to several key dimensions of socio-cultural analysis which vary cross-culturally. Ethnographic evidence is presented to illustrate these different relationships.     

Automatic adjustment clauses and allocative efficiency in public utilities

This paper presents a formal analysis of the efficiency effects of automatic adjustment clauses (AACs) is regulated industries. Using a two-input model of ex ante/ex post input choice and a general putty-clay technology, we analyze the relative extent of allocative distortions due to each of three alternative regulatory policies—periodic rate review with and without an AAC, and an AAC without any rate review—for the case of a regulated firm that chooses an ex post technology to maximize the present value of future profits.Our results indicate that the economic rationale for using AACs in industries already subject to intermittent rate review is not unambiguous, even in the face of severe cost inflation, and is particularly sensitive to the magnitude of the price elasticity of demand for output and the rate and direction of input price changes. We are forced to conclude that the use of AACs in regulated industries such as electric power, while originally justified on the basis of financial viability, may well carry significant economic costs in the form of allocative inefficiency that may outweigh the benefits.     

Yield curve risks in currency carry forwards

We provide empirical evidence that cross-country yield curve gaps (parallel gap, twist gap, and butterfly gap) are predictive to the expected currency carry premiums using currency forward contracts. We find that the expected currency gains are more notable as these yield curve risk factors at time t indicate short-term bond prices of investment currencies to go up (positive parallel movement, negative twist, and positive butterfly). We also find carry gains are more sensitively affected by cross-country monetary shocks than currency-country inflation pressures and business cycles. Our findings support that cross-country yield curve risk premiums still exist even after considering transaction costs.     

A Jump/Diffusion Consumption-Based Capital Asset Pricing Model and the Equity Premium Puzzle

This paper derives the equilibrium excess returns on risky assets in an exchange economy where the underlying exogenous uncertainty is a combination of a pure multidimensional jump process and a diffusion model. We derive closed-form solutions for the interest rate and the risk premiums on risky assets for a traditional class of separable utility indices. Our analysis demonstrates that when the underlying jumps of the aggregate consumption process are not negligible, then the traditional form of the consumption-based capital asset princing model need not hold and the asset risk premiums may be larger than predicted by the traditional CCAPM in continuous time, based on pure Itô diffusion processes. Our analysis suggests an explanation for the large estimates of the risk premiums reported in empirical tests of the single-beta CCAPM.     

Analyzing Price Premiums for Foods in Japan: Measuring Consumers' Willingness to Pay for Quality-Related Attributes

This study attempts to elucidate the characteristics of price premiums for food products from the consumers' viewpoint. After conducting a survey, consumers' willingness to pay (WTP) for 13 important food elements is analyzed for 10 food categories. The main findings were first, the categories that can easiest achieve a price premium are fruit and vegetables and meat and fish with the hardest being snacks and sweets and frozen foods. Second, the food element most related to price premiums is safety while the least related is convenience. Finally, an appropriate level for price premiums for food products is generally about 20%.     

A note on the association between systematic risk and common stock and bond rating classifications

Relative risk classifications for both common stock and bonds are provided by several financial services, based upon their analysis of the financial and operating data of the issuer. Systematic risk, on the other hand, is a quantitative measure of relative risk based upon market-generated data. Using several multivariable statistical techniques and a sample of 443 listed companies, this note provides empirical evidence of the association between 1) systematic risk and common stock rankings, 2) systematic risk and bond ratings, 3) two popular common stock ranking classification systems, and 4) common stock rankings and bond ratings.     

Pricing American options on foreign currency with stochastic volatility,jumps, and stochastic interest rates

By applying the Heath–Jarrow–Morton (HJM) framework, an analytical approximation for pricing American options on foreign currency under stochastic volatility and double jump is derived. This approximation is also applied to other existing models for the purpose of comparison. There is evidence that such types of jumps can have a critical impact on earlyexercise premiums that will be significant for deep out‐of‐the‐money options with short maturities. Moreover, the importance of the term structure of interest rates to early‐exercise premiums is demonstrated as is the sensitivity of these premiums to correlation‐related parameters. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:867–891, 2007