An empirical note on bond-yield uncertainty and the demand for money

This paper empirically tests the effect of bond-yield uncertainty on the demand for money, as implied by the capital theory approach to the demand for money, suggested by Friedman and Tobin. It is expected that the demand for money is affected not only by the yield on bonds (which are a substitute asset), but it also in increasing function of their risk. The empirical tests, which employ two alternative measures of uncertainty (mean of squared deviations from the average, and the mean of squared deviation from a predictor obtained by exponential smoothing) seem to support the Friedman-Tobin hypothesis.     

The forward exchange rate and the prediction of the future spot rate: Empirical evidence

This paper examines the characteristics and evaluates the record of the forward exchange rate as a predictor of the future spot rate of three European currencies during the recent period of floating rates. The forward rate (for 1, 3 and 6 months) is compared to a simple predictor of ‘no change’ extrapolations (i.e., a Martingale model) by the use of Theil's inequality ratios. Theil's measures are then applied to assess the relative importance of the various sources of the forward's prediction errors, and the efficiency of the forecast is tested. The results show that the forward rate, while generally producing unbiased forecasts, fails to track the fluctuations in future spot rates and poorly reflects their variations. Further, it does not perform better than the current spot rate in predicting the future spot rate for all the examined forecast leads. Thus its usefulness for the purpose of business decisions is questioned.     

A Comparative Analysis of Auditor, Manager and Financial Analyst Interpretations of SFAS 5 Disclosure Guidelines

This study examines empirically whether financial analysts (users), as well as managers (preparers) and external auditors ascribe different interpretations to the SFAS 5 disclosure criteria. We find: (1) financial analysts are, on average, more conservative than managers and auditors in their numerical interpretations of both the 'remote' and 'probable' verbal phrases; (2) managers and auditors share very similar numerical interpretations of these verbal phrases; (3) audit partners' numerical interpretations of the 'remote' region are between those of managers and users, whereas audit managers align their numerical interpretations with those of managers. One danger is that preparers of financial statements may omit loss contingency information that users consider valuable.     

‘Managerialism’, ‘ownerism’ and risk

This paper proposes that managers, having the value of their human capital dependent on the performance of the firm they manage, and being unable to diversify away this risk, are expected to attempt to reduce their employment risk internally by project selection or by income smoothing, intended to stabilize the firm's income stream. An empirical investigation shows that manager-controlled firms exercise ‘income smoothing’ to a greater extent than owner-controlled firms, have relatively lower unsystematic risk and perhaps lower systematic risk.     

Liquidity risk of corporate bond returns: conditional approach

We study the exposure of the US corporate bond returns to liquidity shocks of stocks and Treasury bonds over the period 1973–2007 in a regime-switching model. In one regime, liquidity shocks have mostly insignificant effects on bond prices, whereas in another regime, a rise in illiquidity produces significant but conflicting effects: Prices of investment-grade bonds rise while prices of speculative-grade (junk) bonds fall substantially (relative to the market). Relating the probability of these regimes to macroeconomic conditions we find that the second regime can be predicted by economic conditions that are characterized as “stress.” These effects, which are robust to controlling for other systematic risks (term and default), suggest the existence of time-varying liquidity risk of corporate bond returns conditional on episodes of flight to liquidity. Our model can predict the out-of-sample bond returns for the stress years 2008–2009. We find a similar pattern for stocks classified by high or low book-to-market ratio, where again, liquidity shocks play a special role in periods characterized by adverse economic conditions.     

The ancient art of economics

Abstract

This article reviews ancient texts dedicated to the art of economics, narrating how the master was to manage his wife, slaves and things. The discourse on the economy of things focuses on defining the proper limits of wealth. The economy of the slaves included multiple technologies of classification, management and supervision that were to guide the master and the matron in their ‘use’ of slaves. The wife was a freeborn member of the polis who was doomed to spend her entire life in the economy as a governed subject who partakes in government only within the confines of the oikos.     

Number of Shareholders and Stock Prices: Evidence from Japan

Merton (1987) proposes that an increase in a firm's investor base increases the firm's value. In Japan, companies can reduce their stock's minimum trading unit—the number of shares in a "round lot"—which facilitates trading in the stock by small investors. We find that a reduction in the minimum trading unit greatly increases a firm's base of individual investors and its stock liquidity, and is associated with a significant increase in the stock price. Further, the stock price appreciation is positively related to an increase in the number of shareholders.     

Stock and Bond Liquidity and its Effect on Prices and Financial Policies

An asset is liquid if it can be traded at the prevailing market price quickly and at low cost. We show that in addition to risk, liquidity affects asset prices and returns. Theories of asset pricing suggest that the expected return of an asset is increasing in its risk, because risk-averse investors require compensation for bearing more risk. Because investors are also averse to the costs of illiquidity and want to be compensated for bearing them, asset returns are increasing in illiquidity. Thus, asset prices should depend on two asset characteristics: risk and liquidity. This paper surveys research on the effects of liquidity on asset prices and returns, showing that liquidity is an important factor in capital asset pricing.