THE ESTIMATION OF MORTGAGE PREPAYMENT RATES

This paper uses a model in which prepayment rates on large pools of mortgages are a function of the differential between the prevailing market rate for mortgages and the contract rate at which the mortgages were originally issued. The empirical part of the paper shows a significant inverse relationship between the interest-rate differential and prepayment rates. The relationship is most elastic whenever the current market rate for mortgages is between one and three percent below the contract rate of the pool. For a given interest-rate differential, the estimated prepayment rate generally decreases and the elasticity increases as the contract rate rises.     

ESTIMATION OF THE CURRENT COST OF GOODS SOLD*

In recent years current cost accounting (CCA) has received considerable attention and has resulted in the Financial Accounting Standards Board (FASB) in the USA issuing FAS33 and the Accounting Standards Committee in the UK issuing SSAP16. Similar Statements have been issued in Australia, Canada and New Zealand. The requirement to provide current cost information introduces new measurement problems. Amongst the most intractable of these is the estimation of the current cost of goods sold. The paper considers the problems associated with the techniques for estimating the current cost of goods sold which have been suggested in FAS33 and SSAP16. Alternative methods of estimating current cost of goods sold using the discipline of numerical mathematics are then reviewed. It is shown that for individual inventory lines polynomial interpolating methods provide more reliable results than those recommended in the Statements. Where a firm possesses a large numbei of inventory lines it is likely to be impracticable to apply the interpolating methods to every item of inventory. In such cases a technique referred to as STAPOL is recommended.     

THE ACCURACY OF CASH FLOW ESTIMATION PROCEDURES

Prior research uses mechanical procedures to estimate cash flow data. This study examines the accuracy of these procedures by measuring errors between estimated cash flows and reported cash flows. The results indicate that mechanical rules provide poor estimates for reported cash flows. We also show that the errors between cash flow estimates and reported cash flows can be reduced by adjustments made from footnote disclosures. However, large errors remain, even after adjustments are made from footnote disclosures. These remaining errors are correlated with firm specific characteristics such as sales (firm size), extraordinary items, foreign currency gains and losses, and changes in inventory.     

THIN TRADING AND THE ESTIMATION OF BETAS: THE EFFICACY OF ALTERNATIVE TECHNIQUES

Infrequent trading induces biased estimates of the beta risk coefficient. This paper reports on the efficacy of approaches that seek to correct for this bias and documents the extent of thin trading among New Zealand securities. Parameter estimates free of the thin-trading bias are obtained. These are compared with estimates obtained using ordinary least squares (OLS) applied in the conventional manner to nonsynchronous data, with and without bias-correcting procedures. OLS beta estimates are found to be less biased, more efficient, and as consistent when compared with Dimson or Scholes-Williams estimators. Lower beta estimates are associated with lower trading frequencies.     

THE ARBITRAGE PRICING THEORY AND COST-OF-CAPITAL ESTIMATION: THE CASE OF ELECTRIC UTILITIES

Capital asset pricing model (CAPM) and alternative arbitrage pricing theory (APT) methodologies are used to estimate the cost of capital for a sample of electric utilities. The statistical factors APT method is found to produce significantly different estimates depending on the number of factors specified and the set of firms factor analyzed. The use of macroeconomic factors is explored, and it is shown that this methodology has advantages over the statistical factors APT and the market model.     

A BIAS-CORRECTING PROCEDURE FOR BETA ESTIMATION IN THE PRESENCE OF THIN TRADING

In this paper, an alternative technique is developed for obtaining consistent estimates of beta in the presence of thin trading. The new estimator is tested on simulated data and the results are compared with those obtained from the Dimson [ 4 ] Scholes and Williams [ 9 ] techniques. The new estimator is found to have approximately the same bias as the others, but it has a considerably lower variance.     

CONSISTENT ESTIMATION OF RESIDUAL VARIANCE IN REGULATORY EVENT STUDIES

This study presents new evidence on alternative methods used to test for abnormal returns in regulatory event studies where cross-sectional correlation in residuals is significant. Results contradict earlier studies that find no advantages to using joint generalized least squares (JGLS) methods over ordinary least squares (OLS). We find that in an actual regulatory event study cross-correlation is significant, and that failing to correct for this correlation results in substantially higher calculated F-statistics. In Monte Carlo simulations we find that OLS test statistics are not well specified when residuals exhibit cross-sectional correlation at levels that are reasonable to expect in daily return data, while JGLS test statistics are well specified. The study includes tests of the effective power of the OLS and JGLS statistics.