Past financial crises,the current financial turmoil,and the need for a new macrofinancial stability framework

While it is tempting to focus on new financial innovations in helping explain recent financial turmoil, more traditional causes should not be overlooked. As on many previous occasions, very rapid credit growth led to major increases in asset prices, which in turn encouraged consumption and investment decisions which could yet prove unsustainable. The natural “procyclicality” of the financial system could perhaps be contained through the introduction of a “new macrofinancial stability framework”. There are many practical impediments to realising such a suggestion, but there are also grounds for belief that these impediments could be removed.     

The affect heuristic and stock ownership: A theoretical perspective

We consider asset prices and informational efficiency in a setting where owning stock confers direct utility due to an affect heuristic. Specifically, holding equity in brand name companies or those indulging in “socially desirable” activities (e.g., environmental consciousness) confers positive consumption benefits, whereas investing in “sin stocks” yields the reverse. In contrast to settings based on wealth considerations alone, expected stock prices deviate from expected fundamentals even when assets are in zero net supply. Stocks that yield high direct utility are, on average, more informationally efficient as they stimulate more entry into the market for these stocks and, consequently, more information collection. The analysis also accords with a value effect, high valuations of brand‐name stocks, abnormally positive returns on “sin stocks,” volume premia in the cross‐section of returns, proliferation of mutual funds and ETFs, and yields untested implications. If, as psychological literature suggests, agents derive greater utility from successful companies by “basking in reflected glory,” then asset prices react to public signals non‐linearly, leading to booms and busts, as well as crashes and recoveries.     

Tax Arbitrage and the Existence of Equilibrium Prices for Financial Assets

In models where both investors and securities are subject to differential taxation, there may be no set of prices that rule out infinite gains to trade, or “tax arbitrage.” This paper characterizes the joint restrictions on financial-asset returns and investors' tax schedules that preclude tax arbitrage in the absence of short-sale constraints. The authors show that, if there exists any configuration of marginal tax rates on investors' tax schedules that rule out infinite gains to trade, then “no-tax-arbitrage” prices will exist. They also show that the existence of “no-tax-arbitrage” prices ensures the existence of equilibrium prices.     

CONVERTIBLE BOND VALUATION: AN EMPIRICAL TEST

This research applies the options pricing model to the valuation of convertible bonds. A numeric algorithm is used to obtain theoretical values for a sample of 103 convertible bond issues. When market prices are compared with model valuations, the means are not significantly different, and 90 percent of model predictions are within 10 percent of market values. As a further test, the sample is divided on the basis of whether the model prices are (1) greater or (2) less than market prices. Returns are compared over a subsequent three-year holding period. The results indicate that without risk adjustment, the returns for the subsample identified by the model as “undervalued” (model prices exceed market prices) are significantly greater than returns for the subsample identified by the model as “overvalued” (market prices exceed model prices).     

Policy models in accounting: A critical commentary

The accounting profession, through its rule-making apparatus, employs a particular choice model for identifying and resolving policy issues. This model is referred to in this article as the “constitional” approach. It is of interest to inquire why accountants have adopted this paradigm and eschewed other policy models, such as the “legal” or “scientific” approaches, even though the latter have generated considerable advocacy within the recent history of the profession. This paper examines the interesting hypothesis that the choice of the “constitutional” approach is consistent with the Group Self-Interest Hypothesis. By forming an associative group the major accounting firms have a primary interest in achieving higher prices for the industry's products. These higher prices can be achieved in three ways: (1) restricting entry, (2) restraining supply and (3) increasing demand. The “constitutional” approach is more efficacious in achieving these results than are the proposed alternative policy models.     

Implications of the Discreteness of Observed Stock Prices

Stock prices on the organized exchanges are restricted to be divisible by ?. Therefore, the “true” price usually differs from the observed price. This paper examines the biases resulting from the discreteness of observed stock prices. It is shown that the natural estimators of the variance and all of the higher order moments of the rate of returns are biased. An approximate set of correction factors is derived and a procedure is outlined to show how the correction can be made. The natural estimators of the “beta” and of the variance of the market portfolio, on the other hand, are “nearly” unbiased.     

Price sensitivity of the consumer-investor: Evidence from energy prices and mutual fund fees

This study documents a significant relation between changes in commodity prices and investors' price sensitivity in the market for mutual funds. Specifically, price sensitivity⸺defined as the negative relation between fund-level flows and a fund's cost of ownership⸺is more pronounced in periods when energy commodity prices increase sharply. Aggregate flows into actively managed funds relative to the cheaper passively managed funds decrease (increase) when energy prices rise (fall). The results furnish novel evidence supporting an integrated view of the representative “consumer-investor,” whose price sensitivity in choosing financial products is related to price shocks in household consumption goods.     

Do LBO Supermarkets Charge More? An Empirical Analysis of the Effects of LBOs on Supermarket Pricing

This article examines changes in supermarket prices in local markets following supermarket leveraged buyouts (LBOs). I find that prices rise following LBOs in local markets in which the LBO firm's rivals are also highly leveraged and that LBO firms have higher prices than their less leveraged rivals, suggesting that LBOs create incentives to raise prices. However, I also find that prices fall following LBOs in local markets in which rival firms have low leverage and are concentrated. These price drops are associated with LBO firms exiting the local market, suggesting that rivals attempt to “prey” on LBO chains.     

Expectations Models of Asset Prices: A Survey of Theory

This paper identifies restrictions on preferences under which various classes of “expectations” theories of asset prices—i.e., uncertainty models of asset prices which coincide with the corresponding certainty theory except that expected future prices replace actual future prices—are valid. Major classes of expectations models surveyed are martingale models, the expectations hypothesis of the term structure of interest rates, and models of exhaustible resources and futures markets. In each case the required restriction is related to the assumptiono f risk—neutrality, but the precise nature of the required restriction is shown to differ significantly among the various classes of expectations theories.     

“好”的不确定性、“坏”的不确定性与股票市场定价——基于中国股市高频数据分析

不确定性并不是都是“坏”的,“好”的不确定性也同样存在。本文采用Barndorff-Nielsen et al.(2010)提出的已实现半方差作为股票市场“好”的不确定性和“坏”的不确定性的代理指标,并在此基础上构建了相对符号变差(RSV),分析RSV对中国股市定价的影响。基于2007-2017年中国A股5分钟高频数据的实证研究发现:(1)与理论解释相一致,RSV与股票收益之间呈现负相关关系。无论是基于单变量分组、双变量分组还是公司层面的截面回归,这种影响在经济上和统计上都显著。(2)RSV是独立于已实现偏度的一个重要定价因子,且RSV对股票的定价能力强于已实现偏度的定价能力。(3)RSV对中国股市的影响是状态依存的,相对于经济景气程度高的状态,在经济景气程度低的状态下RSV定价影响更大。(4)基于RSV构建的投资组合的表现明显优于市场超额收益率组合、SMB组合和HML组合的表现。     

OPTION PRICING THEORY AND ASSET EXPECTATIONS: A Review and Discussion in Tribute to James Boness

James Boness shared with other early option theorists the hope that options could be used to infer investor expectations revealed in observed market prices. His research unfortunately pre-dated theoretical tools that might have helped that hope become a reality. Moreover, the modern option theory of Black and Scholes, Merton, Rubinstein, and others appeared to have “doomed to failure” any attempt to pursue the original “expectations intuition,” since expectations terms are not explicit terms in their option pricing equations. A subsequent theoretical advance by O'Brien, following Brennan, along with some observations by Figlewski, have furthered the possibility that obtaining implied expectations from observed option prices can become a reality. This review discussion of the literature is in honor of James Boness. The review is confined to the fundamental theory of valuing dividend-protected European “equity” options.     

Explaining the volatility smile: non-parametric versus parametric option models

We employ a “non-parametric” pricing approach of European options to explain the volatility smile. In contrast to “parametric” models that assume that the underlying state variable(s) follows a stochastic process that adheres to a strict functional form, “non-parametric” models directly fit the end distribution of the underlying state variable(s) with statistical distributions that are not represented by parametric functions. We derive an approximation formula which prices S&P 500 index options in closed form which corresponds to the lower bound recently proposed by Lin et al. (Rev Quant Financ Account 38(1):109–129, 2012). Our model yields option prices that are more consistent with the data than the option prices that are generated by several widely used models. Although a quantitative comparison with other non-parametric models is more difficult, there are indications that our model is also more consistent with the data than these models.     

An Information‐Based Theory of Time‐Varying Liquidity

We propose an information‐based theory to explain time variation in liquidity and link it to a variety of patterns in asset markets. In “normal times,” the market is fully liquid and gains from trade are realized immediately. However, the equilibrium also involves periods during which liquidity “dries up,” which leads to endogenous liquidation costs. Traders correctly anticipate such costs, which reduces their willingness to pay. This foresight leads to a novel feedback effect between prices and market liquidity, which are jointly determined in equilibrium. The model also predicts that contagious sell‐offs can occur after sufficiently bad news.     

Does the Stock Market Overreact?

Research in experimental psychology suggests that, in violation of Bayes' rule, most people tend to “overreact” to unexpected and dramatic news events. This study of market efficiency investigates whether such behavior affects stock prices. The empirical evidence, based on CRSP monthly return data, is consistent with the overreaction hypothesis. Substantial weak form market inefficiencies are discovered. The results also shed new light on the January returns earned by prior “winners” and “losers.” Portfolios of losers experience exceptionally large January returns as late as five years after portfolio formation.     

Divergence of Opinion in Complete Markets: A Note

We consider an Arrow-Debreu model with agents who have different subjective probabilities. In general, asset prices will depend only on aggregate consumption and the distribution of subjective probabilities in each state of nature. If all agents have identical preferences then an asset with “more dispersed” subjective probabilities will have a lower price than an asset with less dispersed subjective probabilities if risk aversion does not decline too rapidly. It seems that this condition is likely to be met in practice, so that increased dispersion of beliefs will generally be associated with reduced asset prices in a given Arrow-Debreu equilibrium.     

基于EGARCH模型的黄金周对中国股市影响研究

现行国内外学者在股票市场发现“周末效应”、“节日效应”及“休市效应”等现象,但并未对这一现象给出合理性解释。本文针对中国独有的黄金周长假,以上证指数为例进行实证研究,发现中国股市存在效应为正的黄金周节前效应。这一结论验证了股票价格的异常波动与休市有关。结合中国股市的实际情况,得到需要“提高市场信息公开的透明程度”和“提升投资者自身的投资素质”两个启示。     

The role of “other information” in analysts’ forecasts in understanding stock return volatility

This study identifies “other information” in analysts’ forecasts as a legitimate proxy for future cash flows and examines its incremental role in explaining stock return volatility. We suggest that “other information” contains information about fundamentals beyond that reflected in current financial statements and reflects firms’ fundamentals on a more timely basis than dividends or earnings. Using standardized regressions, we find volatility increases when current “other information” is more uncertain and increases more in response to unfavorable news compared to favorable news. Variance decomposition analysis shows that the variance contribution of “other information” dominates that of expected-return news. The incremental role of “other information” is at least half of the effect of earnings in explaining future volatility. The results are more pronounced for firms with poor information environments. Overall, our results highlight the importance of including “other information” as an additional cash-flow proxy in future studies of stock prices and volatility.     

The Structure of Asset Prices and Socially Useless/Useful Information

This paper relates the value of additional information to asset prices in a pure exchange setting. The price structure of interest revolves around a “pricing-hypothesis”: the prices in an economy with less information are unbiased estimators of the prices that would obtain in a more informative economy. Two basic results are developed. First, if the incremental information is useless then the pricing-hypothesis applies. Second, if the pricing hypothesis is assumed valid, then the information is valuable in a weak sense. The results are also considered in the context of empirical research. The case is made for viewing statistical tests of association between prices and signals as tests of the social value of information.     

Asymmetric dynamic relations between stock prices and mutual fund units in Japan. An application of hidden cointegration technique

This paper examines “causality” effects between mutual fund flows and stock index prices in Japan. In particular, both the short and long run dynamics between stock prices and fund units are investigated. The novelty of our paper is the use of the hidden cointegration technique which attempts to capture heterogeneous fund flow reactions when stock index prices move up or down. Moreover, we employ the crouching error correction model (CECM) to assess the relationship between stock market movements and fund flow changes. The results show that stock prices and mutual fund units are cointegrated. In the case of positive movements there is a bi-directional effect interconnecting them, whereas for negative movements, causality runs only from fund flows to stock prices. The dynamics structure provides evidence that market microstructure, taxation and investors' sentiment affect stock price and unit formation.     

On the relationship between the number of a broker’s real estate listings and transaction outcomes

This paper documents that sellers who employ brokerage offices that list a large number of properties (“active brokerages”) obtain higher selling prices, smaller negotiated discounts from the corresponding list prices, and shorter times on the market for their listed properties. Sellers who employ active brokerages list their properties at prices that are closer to our hedonic model’s predicted prices. Interestingly, properties that are listed at discounts relative to their predicted prices are snapped up more quickly only if they are associated with brokerages that list a relatively small number of properties. In addition, properties listed by active brokerages are less likely to be listed “as is” and are more likely to have their defects repaired prior to being listed. Moreover, because the efficacy of brokerage services varies across brokerage offices, the results also suggest that the use of an indicator variable for the use of brokerage services is not sufficient to capture the complete impact of the use of a real estate broker on transaction outcomes. In addition, the Appendix discusses the concern for potential endogeneities between the number of brokerage listings and transaction outcomes. It documents that the Durban–Wu–Hausman test indicates that exogeneity cannot be rejected.