AN ANALYSIS OF THE JANUARY EFFECT IN STOCKS AND INTEREST RATES UNDER VARYING MONETARY REGIMES

In this paper the meaning of the January effect is clarified. The early literature indicates that differing views on the existence of such an effect were based on different data sets, various time periods, and different measurement tools. A model is formulated to test the January effect hypothesis with seven assets from 1871 to 1986, including tests performed for subperiods corresponding to different monetary regimes. The hypothesis tests incorporate an unbiased estimator to avoid the biases caused by heteroscedasticity and autocorrelation. Findings suggest that asset return behavior differs among assets and regimes.     

THE BEHAVIOR OF U.S. SHORT-TERM INTEREST RATES SINCE OCTOBER 1979

Short-term interest rates in the United States have been “too high” since October 1979 in the sense that both unconditional and conditional forecasts, based on an estimated vector autoregression model summarizing the prior experience, underpredict short-term interest rates during this period. Although a nonstructural model cannot directly answer the question of why this has been so, comparisons of alternative conditional forecasts point to the post-October 1979 relationship between the growth of real income and the growth of real money balances as closely connected to the level and pattern of short-term interest rates. This finding is consistent with the authors' earlier conclusion, based on analysis of a small structural macroeconometric model, that the high average level of interest rates has been due to a combination of slow growth of (nominal) money supply and continuing price inflation, which together have kept real balances small in relation to prevailing levels of economic activity.     

INTEREST RATE PARITY AND THE BEHAVIOR OF THE BID-ASK SPREAD

We use a stochastic frontier regression model to test interest rate parity (IRP) with bid- ask spreads for the Belgian franc, the Deutschmark, and the Swiss franc. The forward markets tested have become efficient in the sense that IRP holds well. The bounds provided by IRP do not appear to be binding, however. We provide evidence that in spite of the overall goodness of fit of the model, the arbitrage margins are sometimes violated, implying possible arbitrage opportunities. The percentage bid-ask spread is consistently higher for the Belgian franc than for the Deutschmark and the Swiss franc. Spreads are increasing functions of the time to maturity and volatility. Spread-size clustering is more severe than price-level clustering and appears to be inversely related to volatility and positively related to the trading volume. We find no evidence of significant calendar-day effects on spread size.