Price formation on stock exchanges: the evolution of trading within the day

Prior analyses of prices of the NYSE and other exchanges findthat transitory price volatility is greater at the open of tradingthan at the close. We extend this line of research by using40 years of hourly Dow Jones 65 composite price index data toestimate transitory volatility throughout the trading day. Ourresults indicate that transitory volatility steadily declinesduring the trading day. We find a similar intraday decline intransitory volatility for a 2-year sample of the individualfirms in the Dow Jones 30 Industrials Index. The results areconsistent with the hypothesis that trading aids price formationand do not support the argument that particular trading mechanismsare the source of greater volatility at the open of trading.     

Explaining the variance of price-dividend ratios

I report a bound on the variance of the-dividend ratios anda decomposition of their variance into terms that reflect changesin dividend growth and discount rates. The specification isnot restrictive. The test statistics do not require constructionof ex post present values; instead, they are restrictions onmeans, variances and covariances of price-dividend ratios, dividendgrowth, and discount rates. I consider implications for themean price-dividend ratio, and I evaluate whether a low meandiscount rate can rationalize the mean and variance of price-dividendratios. The results do not indicate any striking rejectionsof present value models. However, the bulk of the variance ofprice-dividend ratios must be accounted for by changing forecastsof discount rates, and discount rates must possess some unusualcharacteristics.     

Decentralization and the search for policy solutions

We use mathematical and computational models to analyze theability of federated organizations to solve difficult problems.Federated organizations may have some inherent advantages forsolving difficult problems since they can empower multiple subunitsto search for policy solutions in parallel and exploit and combinethe mutual information discovered by the subunits to revealeven better solutions. We find that the benefits of these methodsof experimentation first increase and then decrease as the problemof finding good policies increases in difficulty.     

Ex-dividend price behavior of common stocks

This study examines common stock prices around ex-dividend dates.Such price data usually contain a mixture of observations -some with and some without arbitrageurs and/or dividend capturersactive. Our theory predicts that such mixing will result ina nonlinear relation between percentage price drop and dividendyield - not the commonly assumed linear relation. This predictionand another important prediction of theory are supported empirically.In a variety of tests, marginal price drop is not significantlydifferent from the dividend amount. Thus, over the last severaldecades, one-for-one marginal price drop has been an excellent(average) rule of thumb.