Risk and the cross section of stock returns

This paper mathematically transforms unobservable rational expectation equilibrium model parameters (information precision and supply uncertainty) into a single variable that is correlated with expected returns and that can be estimated with recently observed data. Our variable can be used to explain the cross section of returns in theoretical, numerical, and empirical analyses. Using Center for Research in Security Prices data, we show that a −1σ$-1\sigma$ to +1σ$+1\sigma$ change in our variable is associated with a 0.31% difference in average returns the following month (equaling 3.78% per annum). The results are statistically significant at the 1% level. Our results remain economically and statistically significant after controlling for stocks' market capitalizations, book-to-market ratios, liquidities, and the probabilities of information-based trading.     

Leadership run amok. The destructive potential of overachievers

The desire to achieve is a major source of strength in business, and it is on the rise. The authors' consulting firm has seen a steady increase in the extent to which achievement motivates managers. There's a dark side to the trend, however. By relentlessly focusing on tasks and goals, an executive or company can damage performance. Overachievers tend to command and coerce, stifling subordinates. Psychologist David McClelland identified three drivers of behavior: achievement, meeting a standard of excellence; affiliation, maintaining close relationships; and power, having an impact on others. He said the power motive comes in two forms: personalized, in which the leader draws strength from controlling people, and socialized, where the leader derives strength from empowering people. Studies show that great charismatic leaders are highly motivated by socialized power. To look at how motives and leadership style affect a group's work climate and performance, the authors studied 21 senior managers at IBM.The leaders who created high-performing and energizing climates got more lasting results by using a broad range of styles, choosing different ones for different circumstances. Rather than order people around, they provided vision, sought buy-in and commitment, and coached. If you're an overachiever seeking to broaden your range, you can study your actions and ask your team, peers, and manager to give you honest feedback. You can adopt specific new behaviors, such as engaging your team in a discussion of how to achieve goals, rather than issuing a set of directives. The company as a whole can play a part, too: Organizations must learn when to draw on the achievement drive and when to rein it in.     

MEASURING LIMITS OF ARBITRAGE IN FIXED‐INCOME MARKETS

An emerging literature relies on an index of limits of arbitrage in fixed‐income markets. We analyze the benefits of an index that is model‐free, robust, and intuitive. This new index strengthens the evidence that limits of arbitrage proxy for risks priced in the cross‐section of returns. Trading simulations show that the new index improves identification of limits of arbitrage because it bypasses a noisy estimation step. Relative value indices in the United States, United Kingdom, Japan, Germany, Italy, France, Switzerland, and Canada exhibit strong commonality and high correlations with local volatility and funding conditions. The indices are updated regularly and available publicly.     

Menger, Jevons, and Walras Un-homogenized, De-homogenized, and Homogenized: A Comment on Peart

Abstract . Response to Sandra J, Peart, “Jevons and Menger Re-homogenized?: Jaffé After 20 Years,” 1998. The American Journal of Economics and Sociology 57(July): 307-325.     

The role of customer satisfaction in enhancing customer loyalty in Malaysian Islamic banks

This study examines the role of customer satisfaction in enhancing the loyalty of Muslim and non-Muslim customers in the Malaysian Islamic banking industry. Respondents are the customers (Muslim and non-Muslim customers) visiting the bank counters and have an account with Islamic banks. A total of 660 questionnaires were distributed, and 440 were returned. The results indicate that customer satisfaction has a statistically significant positive effect on customer loyalty and intentions to switch for Muslim and non-Muslim customers. However, there were significant differences in the effects of customer satisfaction on customer loyalty and intention to switch for Muslim and non-Muslim customers. The effect of customer satisfaction on customer loyalty and intention to switch is greater for the non-Muslim than the Muslim customers.     

Making use of the past: theorists and historians on the economics of altruism

While deriving their explanation of positive utility interdependence from Edgeworth's presupposition that concern for others' welfare varies with the ‘social distance’ between individuals, economic theorists have overlooked both Smith's idea that sympathy can also develop on the basis of empathy and Wicksteed's idea that sympathy and altruism operate on different levels of analysis. In retrieving past ideas that have not been followed up in the modern theories of altruism, historians of economics should be able not only to shed some light on the main stages in its development but also to show that its achievements cannot be assessed independently of its limits.     

Implied volatility and skewness surface

The Homoscedastic Gamma (HG) model characterizes the distribution of returns by its mean, variance and an independent skewness parameter. The HG model preserves the parsimony and the closed form of the Black–Scholes–Merton (BSM) while introducing the implied volatility (IV) and skewness surface. Varying the skewness parameter of the HG model can restore the symmetry of IV curves. Practitioner’s variants of the HG model improve pricing (in-sample and out-of-sample) and hedging performances relative to practitioners’ BSM models, with as many or less parameters. The pattern of improvements in Delta-Hedged gains across strike prices accord with predictions from the HG model. These results imply that expanding around the Gaussian density does not offer sufficient flexibility to match the skewness implicit in options. Consistent with the model, we also find that conditioning on implied skewness increases the predictive power of the volatility spread for excess returns.