ON THE RATIONALITY OF COMMON STOCK RETURN VOLATILITY

This paper derives the relationship between the population unconditional variance of common stock returns and the variance of expected returns conditional on a well-specified information set. As a consequence, a lower bound is obtained for the variance of common stock returns. The sample counterpart of this bound is then empirically tested against the sample variance of returns. The paper's main conclusion can be stated as follows: the observed volatility of real (inflation-adjusted) common stock returns is not “irrationally” large. The paper admits of this conclusion because the point estimate of the lower-bound variance derived in this model is actually larger than the point estimate of common stock return volatility. However, since these point estimates are found to have a statistically insignificant difference, equality of the two variances cannot be ruled out. Hence, “rationality” of common stock returns—as implied by a utility-based valuation conditional on a specified information set—cannot be rejected.     

THE CROSS-SECTIONAL EFFECTS OF OPTION LISTING ON FIRM STOCK RETURN VARIANCES

We develop a set of hypotheses to explain cross-sectional differences in variance changes associated with option listing. Transactions variance is decomposed into three components: the bid-ask spread, return autocorrelations, and intrinsic variance. Each is investigated separately. We find support for hypotheses that link: (1) changes in dealer transactions costs to changes in the bid-ask spread following option listing; (2) changes in the quantity and quality of information and the value of new information to movements of the return autocorrelation structure toward zero; and (3) changes in trading volume and the clientele that trades the underlying security to changes in intrinsic variance following option listing.     

股票期权激励在国有独资商业银行的应用分析

建立行之有效的激励机制是国有独资商业银行的改革目标之一.股票期权激励不仅在理论上而且在实践中被证明是比较有效的激励措施,并且在西方国家得到了广泛应用.建立股票期权制度是提高激励效果和经营效益的有效途径,符合国有独资商业银行的改革需要.国有独资商业银行实施股票期权激励可以采取分步走的办法.在现有条件下实行虚拟的股票期权制度;随着条件的成熟,逐步过渡到真正的股票期权制度.从而要根据国情和行情选择激励范围、监督机制、授予额度、行权时间和行权价格.同时要加快国有独资商业银行的改革步伐,为实施股票期权激励创造一个良好的内外部环境.     

AN EMPIRICAL TEST OF AN EX-ANTE MODEL OF THE DETERMINATION OF STOCK RETURN VOLATILITY

The assumption that changing expected cash flows and discount factors affect a security's return is at the foundation of many financial models. This study examines empirically the hypothesis that expected stock return variability is a function of cash flow and discount rate uncertainty. Maximum likelihood estimation techniques and expectational data are employed. Strong, positive relationships are found, verifying the foundations of the ex-ante models with ex-ante data and providing a better understanding of security markets by explaining, in part, the causes of expected stock price variability.     

AN ANALYSIS OF REGULATED RATES OF RETURN FOR WHOLLY OWNED SUBSIDIARIES

Two methods are used by public utility regulators to set the allowed rate of return to a wholly owned subsidiary: the “independent firm” approach and the “double leverage” approach. Neither approach is consistent with any existing theory of firm valuation. The contribution of this paper is to derive from standard valuation theory a “divisional cost of capital” specification of the allowed rate of return to a wholly owned subsidiary. On the basis of this specification it is shown that the independent firm approach allows shareholders to capture the value created by the interest tax savings on parent debt. It is also reconfirmed that the double leverage approach induces cross-subsidization since it allows each subsidiary to earn the same rate of return on equity regardless of the level of risk specific to the subsidiary.     

THE EFFECTS OF THE ANNOUNCEMENTS OF DIVIDEND INCREASES ON STOCK RETURN VOLATILITY: THE EVIDENCE FROM THE OPTIONS MARKET

This paper examines the impact of the announcements of dividend increases on the volatility of underlying stock returns implied by option prices, and analyses whether the impact is related to the label associated with the dividend increase. The results suggest that the announcements of labelled dividend increases are accompanied by a decrease in implied volatility, while the announcements of unlabelled increases in dividends are associated with no change in implied volatility. These results are consistent with the hypothesis that signal implicit in the announcements of dividend increases provides noisy information about the firm's volatility.