A COMPARISON OF INTERVENTION AND RESIDUAL ANALYSIS

By comparing intervention and residual analysis abnormal return metrics, this study illustrates the impact that cross-sectional return dependencies can have on empirical tests of the semi-strong form of the efficient market hypothesis. The source of the dependencies encountered in this study appears to be the result of nine value altering information releases (e.g., events) that occurred in a seven-month period in 1982. For one sample of bank equity returns, the abnormal return metrics obtained with residual analysis are generally smaller than those obtained with intervention analysis. In addition, the intervention analysis results suggest that two of the nine events led to significant shifts in the banks' systematic risk. These findings suggest that tests of the semi-strong form of the efficient market hypothesis conducted with a less-than randomly constructed sample need to examine the restrictions that accompany the specification of an expected return metric.     

An Economic Perspective on the Information Content of Magazine Advertisements

Numerous researchers have examined the information content of advertising. Most studies indicate that product category profoundly affects information content. This paper builds on previous research by applying Nelson's search-experience classification of product categories to examine the impact of product type on the information content of magazine advertisements. The results support Nelson's framework, but primarily for price, quality and availability information cues. The most surprising result is the high information content for experience durable goods.     

Informal Credit Markets and the Transmission of Monetary Policy: Evidence from South Korea

This paper is an empirical investigation of the transmission of monetary policy in South Korea. It combines modern mainstream macroeconomics with aspects of a developing economy with financial dualism through a simple IS-LM type model that explicitly incorporates an informal credit market. Vector autoregression analysis, with both semistructural and structural identifications, confirms the importance of a credit variable as a policy tool. The results show direct credit allocation by the central bank had a significant impact on output, prices, and the interest rate in the informal sector. Previous theoretical and empirical findings of "stagflationary" effects of monetary policy are refuted.     

Can capacity markets be designed by democracy?

In the United States, Regional Transmission Organizations (RTOs) operate the power grid serving nearly 70% of electricity customers and are critical organizations for ensuring reliable system operations and facilitating the integration of new technologies and market participants. RTOs are designed to be stakeholder-driven organizations, with rules and policies crafted through a highly participatory process. While the decisions that RTOs make have implications for industry, society and the environment, their decision processes have not been modeled in any systematic way. In this paper, we develop a modeling framework for the stakeholder process of PJM, an RTO serving thirteen states plus the District of Columbia, adapting some of the seminal literature from political science and political economy on the theory of voting systems. This modeling framework can generate predictions of stakeholder process outcomes, identify strong coalitions among stakeholders and identify shifts in political power in the formulation of RTO market rules. We illustrate this analysis framework using a detailed data set from stakeholder deliberations of capacity market reform in PJM. Our model predicts that the current structure of the stakeholder process in PJM makes the passage of capacity market reforms through the stakeholder process virtually impossible because it creates strong coalitions that would favor or oppose changes to capacity market rules. In the capacity market case, we also identify a small subset of voters that act as swing voters and confirm that political power is shifted to these voters by deviations from otherwise strong coalitions and abstentions from the voting process altogether. Our framework represents the first attempt to model the decision-making behavior of RTOs in any systematic way, and points towards emerging research needs in evaluating the governance structure of RTOs.     

The absorption effect of US Treasury auctions

An event study methodology shows that the relative yields of off-the-run Treasury securities are not insulated from the effects related to the auction calendar. A statistically significant but short-lived increase in relative yields is associated with the introduction of additional cashflows at corresponding and neighboring horizons. This absorption effect, where the additional supply of cashflows is associated with lower prices, is identified separately from the liquidity effect, where newly auctioned issues obtain higher prices. While sensitive to the specification of event window, an analogous methodology employed for on-the-run bonds, finds a 1-day negative effect at the benchmark 5-, 10-, and 30-year horizons.