The liquidity premium in average interest rates

We extend recent models of liquidity to study how a systematic relationship between monetary shocks and output affects the average real short-term interest rate.     

The cross-section of average delta-hedge option returns under stochastic volatility

Existing evidence indicates that average returns of purchased market-hedge S&P 500 index calls, puts, and straddles are non-zero but large and negative, which implies that options are expensive. This result is intuitively explained by means of volatility risk and a negative volatility risk premium, but there is a recent surge of empirical and analytical studies which also attempt to find the sources of this premium. An important question in the line of a priced volatility explanation is if a standard stochastic volatility model can also explain the cross-sectional findings of these empirical studies. The answer is fairly positive. The volatility elasticity of calls and puts is several times the level of market volatility, depending on moneyness and maturity, and implies a rich cross-section of negative average option returns—even if volatility risk is not priced heavily, albeit negative. We introduce and calibrate a new measure of option overprice to explain these results. This measure is robust to jump risk if jumps are not priced.      

The value premium,aggregate risk innovations,and average stock returns

We test whether innovations in aggregate risk, interpolated from a vector autoregressive system that contains the Chen et al. (1986) five factors as in Petkova (2006), are common factors in cross-sectional stock returns. We provide direct evidence that innovation in industrial production growth, a classical business-cycle variable that summarizes the state of the economy, is associated with the cross-sectional return predictability of individual stocks. We conclude that the role of innovation in aggregate risk is not random, and furthermore that it provides guidance concerning an important source of nonfinancial market-based risk in asset returns.     

The case of the unhealthy hospital

On a cold March morning, Bruce Reid, Blake Memorial Hospital's new CEO, visited the Lorris housing project clinic, one of six off-site clinics operated by Blake Memorial. He was not encouraged by what he saw: peeling paint, leaking pipes, and cramped conditions. When he asked Renée Dawson, the clinic's primary care physician, how she endured the conditions, she just stared at him. "What are my options?" she asked. That was a good question. Blake Memorial was in poor financial health, due to rising costs and stagnating revenue. The hospital's quality of care was also a major problem. In addition, the clinics were losing over $250,000 a year. As Reid worked on Blake Memorial's 1992 budget, he saw he would have to cut some services in order to fund others. One of the services he was considering cutting was the clinic program. But there were a number of conflicting forces that Reid had to consider. On the political front, the recently appointed commissioner of health services said she would challenge Blake Memorial's tax-exempt status if Reid dismantled the clinics. Within the hospital were two warring factions. One wanted more high-tech services for the hospital and favored closing the clinics. "Instead of clinics, we should have a shuttle bus from the housing projects to the hospital," one doctor suggested. The other faction wanted to expand the clinics. "Wherever the service is most needed, that is where the hospital should be," argued the clinics' director. Reid must decide what to cut and what to keep. But to do so, he must first settle on Blake Memorial's long-term mission.(ABSTRACT TRUNCATED AT 250 WORDS)     

The new wave of hospital consolidation

Reimbursement challenges, spiraling healthcare costs, and a slow economic recovery are driving the latest wave of hospital consolidation. Health insurance companies and provider systems are forming partnerships in the consolidation field with the goal of reducing healthcare costs and improving quality. The "cost" of the acquisition may include debt and other obligations of the acquired hospital, such as pension liabilities, along with a multiyear capital commitment.     

Profitability,investment and average returns

Valuation theory says that expected stock returns are related to three variables: the book-to-market equity ratio (B_t/M_t), expected profitability, and expected investment. Given B_t/M_t and expected profitability, higher expected rates of investment imply lower expected returns. But controlling for the other two variables, more profitable firms have higher expected returns, as do firms with higher B_t/M_t. These predictions are confirmed in our tests.     

Idiosyncratic risk does not matter: A re-examination of the relationship between average returns and average volatilities

A recent study by Goyal and Santa-Clara [J. Finance 58 (2003) 975] finds a significantly positive relationship between average stock returns and pre-determined average return volatility measures, while finding no relationship between the average return and its own volatility. The result is interpreted as evidence that idiosyncratic risk matters in asset pricing. We re-examine the issue in extended sample periods and find the proclaimed positive relationship is not substantiated. Our analysis indicates that the above-mentioned positive relationship is mainly driven by the data in the 1990s. The trading strategy suggested by Goyal and Santa-Clara to exploit the return predictability by pre-determined volatility does not yield sustained economic gains.     

The accuracy of hospital merger screening methods

This article analyzes the accuracy of various prospective hospital merger screening methods used by antitrust agencies and the courts. The predictions of the screening methods calculated with pre‐merger data are compared with the actual post‐merger price changes of 28 hospital mergers measured relative to controls. The evaluated screening methods include traditional structural measures (e.g., Herfindahl‐Hirschman Index), measures derived from hospital competition models (e.g., diversion ratios, willingness‐to‐pay, and upward pricing pressure), and hospital merger simulation. Willingness‐to‐pay and upward pricing pressure are found to be more accurate at flagging potentially anticompetitive mergers for further investigation than traditional methods.     

Testing moving average trading strategies on ETFs

The evidence for the profitability of MA strategies documented in the literature is usually based on non-tradable indices or portfolios/factors and the use of the zero return or risk-free rate as the benchmark. In this paper we implement MA strategies using ETFs and examine the performance of such strategies using a variety of risk-adjusted performance measures. We find that relative to the buy-and-hold strategy, MA strategies have lower average returns and Sharpe ratios, but fare better under factor-adjusted performance measures such as the CAPM alpha. We also find that MA strategies become less profitable when they are implemented using ETFs than using their underlying indices. In addition, we propose a quasi-intraday version of the standard MA strategy (QUIMA) that allows investors to trade immediately upon observing MA crossover signals. The QUIMA strategy outperforms the standard one that only trades at the close of a trading day, when the long-term MA lag length is no more than 50 days.     

On the inversion of a moving average

Abstract

At the request of the Faculty of Science of Stockholms Högskola I had the pleasure to act as opponent at the doctoral discussion on Mr. HERMAN WOLD?s dissertation: »A Study in the Analysis of Stationary Time Series». Both the reading of the book, the public discussion and a subsequent private correspondance with the author, I have found very interesting and stimulating. I have also had the pleasure to discuss to some extent this matter with Professor CRAMÉR. Some of the points raised during our exchanging of views have been covered by Mr. Wold in his note in this issue of the »Aktuarietidskrift», but not all. It may therefore be worth while to add a few remarks. I need not dwell upon the various merits of the book, they speak for themselves. Here, I shall confine myself to one particular point where some difference of opinion still seems to persist, namely the significance of the formula (255) in the dissertation, which is the same as (13) in Mr. WOLD? note in this issue. This formula is intended as an inversion formula for a moving average on a random variable in the singular case where the characteristic equation of the moving average has at least one root on the unit circle.     

On the theory of moving average graduation

Abstract

In this paper a new criterion for judging the properties of moving averages is given, and moving averages which are optimal according to this criterion under general assumptions are derived. For the standard case where the observations are uncorrelated and have equal variance, our optimal moving averages generalize two well-known optimal moving averages: The minimum-variance and the minimum-R_z moving averages. This case is given some particular attention in the theoretical discussion, and some Monte Carlo experiments throw further light on it. These investigations indicate that our generalization is of practical as well as theoretical interest. The paper also contains the result that Spencer's 21-term moving average is approximately equal to the corresponding minimum-R ₅ moving average.     

The hospital capital crisis: issues for trustees

The erosion of the capital position in the hospital industry--one of the most complex and overregulated industries in the United States--is a major challenge to trustees. Hospital trustees have often neglected to examine their hospitals' capital needs on more than a project-by-project basis. In dealing with their hospitals' capital needs, trustees, most of whom are successful business people, too often take off their "business" hats and put on their "social worker" hats. In doing so they not only neglect to subject their hospitals' capital and operating programs to searching cost-benefit review, but they also overlook much useful knowledge about how to use corporate organization to shelter new ventures and strengthen their hospitals' market position and solvency. In this article, the authors discuss how hospitals can adopt successful corporate restructurings and strategies to respond to the adverse financial developments they will have to face in the coming years.     

The hospital: how will it survive?

The federal government is under pressure to implement and enforce a program to provide economic and social relief from the rapidly escalating health care costs which now consume 8.5% of the Gross National Product. Glick predicts that within the next twenty years, the character of health care institutions will be reshaped and only the most adaptable hospitals, health maintenance organizations and health-related governmental organizations will survive. He urges hospitals to develop appropriate strategies to deal with the problems of cost-containment, state-operated cost review and control agencies, and the competition for limited health care resources. The author warns the health care industry that if it does not adjust to these changes, it runs the risk of becoming heavily rgulated. It is suggested that health care institutions be integrated into comprehensive health care systems and the article includes a model for assigning patients to medical care facilities on a regional basis. Glick forecasts that hospitals will enter into a competition for survival, resulting in mergers of some and the closing of others. He believes that as the number of health care institutions decreases, the remaining ones will become more specialized and geographically dispersed.     

The effects of hospital ownership on medical productivity

To develop new evidence on how hospital ownership and other aspects of hospital market composition affect health care productivity, we analyze longitudinal data on the medical expenditures and health outcomes of the vast majority of nonrural elderly Medicare beneficiaries hospitalized for new heart attacks over the period 1985-1996. We find that the effects of ownership status are quantitatively important. Areas with a presence of for-profit hospitals have approximately 2.4% lower levels of hospital expenditures, but virtually the same patient health outcomes. We conclude that for-profit hospitals have important spillover benefits for medical productivity.     

Uncertainty about average profitability and the diversification discount

The diversification discount (multiple segment firm value below the value imputed using single segment firm multiples) is commonly thought to be generated by agency problems, a lack of transparency, or lackluster future prospects for diversified firms. If multiple segment firms have lower uncertainty about mean profitability than single segment firms, rational learning about mean profitability provides an alternative explanation for the diversification discount that does not rely on suboptimal managerial decisions or a poor firm outlook. Empirical tests which examine changes in firm value across the business cycle and idiosyncratic volatility are consistent with lower uncertainty about mean profitability for multiple segment firms.     

Detailed study of a moving average trading rule

We present a detailed study of the performance of a trading rule that uses moving averages of past returns to predict future returns on stock indexes. Our main goal is to link performance and the stochastic process of the traded asset. Our study reports short-, medium- and long-term effects by looking at the Sharpe ratio (SR). We calculate the Sharpe ratio of our trading rule as a function of the probability distribution function of the underlying traded asset and compare it with data. We show that if the performance is mainly due to presence of autocorrelation in the returns of the traded assets, the SR as a function of the portfolio formation period (look-back) is very different from performance due to the drift (average return). The SR shows that for look-back periods of a few months the investor is more likely to tap into autocorrelation. However, for look-back larger than few months, the drift of the asset becomes progressively more important. Finally, our empirical work reports a new long-term effect, namely oscillation of the SR and proposes a non-stationary model to account for such oscillations.     

Adaptive placement method on pricing arithmetic average options

Since there is no analytic solution for arithmetic average options until present, developing an efficient numerical algorithm becomes a promising alternative. One of the most famous numerical algorithms is introduced by Hull and White (J Deriv 1:21–31, 1993). Motivated by the common idea of reducing the nonlinearity error in the adaptive mesh model in Figlewski and Gao (J Financ Econ 53:313–351, 1999) and the adaptive quadrature method, we propose an adaptive placement method to replace the logarithmically equally-spaced placement rule in the Hull and White’s model by placing more representative average prices in the highly nonlinear area of the option value as the function of the arithmetic average stock price. The basic idea of this method is to design a recursive algorithm to limit the error of the linear interpolation between each pair of adjacent representative average prices. Numerical experiments verify the superior performance of this method for reducing the interpolation error and hence improving the convergence rate. To show that the adaptive placement method can improve any numerical algorithm with the techniques of augmented state variables and the piece-wise linear interpolation approximation, we also demonstrate how to integrate the adaptive placement method into the GARCH option pricing algorithm in Ritchken and Trevor (J Finance 54:377–402, 1999). Similarly great improvement of the convergence rate suggests the potential applications of this novel method to a broad class of numerical pricing algorithms for exotic options and complex underlying processes.     

Time series momentum and moving average trading rules

We compare and contrast time series momentum (TSMOM) and moving average (MA) trading rules so as to better understand the sources of their profitability. These rules are closely related; however, there are important differences. TSMOM signals occur at points that coincide with a MA direction change, whereas MA buy (sell) signals only require price to move above (below) a MA. Our empirical results show MA rules frequently give earlier signals leading to meaningful return gains. Both rules perform best outside of large stock series which may explain the puzzle of their popularity with investors, yet lack of supportive evidence in academic studies.     

The impact of health information technology on hospital productivity

Health information technology (IT) has been championed as a tool that can transform health care delivery. We estimate the parameters of a value‐added hospital production function correcting for endogenous input choices to assess the private returns hospitals earn from health IT. Despite high marginal products, the total benefits from expanded IT adoption are modest. Over the span of our data, health IT inputs increased by more than 210% and contributed about 6% to the increase in value‐added. Not‐for‐profits invested more heavily and differently in IT. Finally, we find no compelling evidence of labor complementarities or network externalities from competitors' IT investment.