Vested Interest and Biased Price Estimates: Evidence from an Auction Market

This study employs a new data set from art auctions to examine the relationship between auctioneer presale price estimates and the long‐term performance of artworks. We find that the price estimates for expensive paintings have a consistent upward bias over a long period of 30 years. High estimates at the time of purchase are associated with adverse subsequent abnormal returns. Moreover, the estimation error for individual paintings tends to persist over time. These results are consistent with the view that auction house price estimates are affected by agency problems and that some investors are credulous.     

The Market Impact of Trends and Sequences in Performance: New Evidence

Bloomfield and Hales (2002) find strong evidence that experimental market subjects are influenced by trends and patterns in a manner supportive of the shifting regimes model of Barberis, Shleifer, and Vishny (1998) . We subject the model to further empirical scrutiny using the football wagering market as our price laboratory. Sports betting markets have several advantages over traditional capital markets as an empirical setting, and commonalities with traditional markets allow for useful insights. We find scant evidence that investors behave in accordance with the model.     

Emerging Evidence of Early Indian Accounting

The paper examines the extant late-eighteenth-century accounting record books of Kantababu, a Bengali property owner and silk trader. These annual records, in part destroyed by white ants and other insects, do not make up a complete set for more than any two Bengali solar years. Yet from the available evidence it is possible to make a case that some elements of the accounting systems used by Kantababu and his clerks have similarities to medieval and later European methods and to eleventh-century methods used by Cairo merchants as evidenced by documents stored in the Genizah of the Old Cairo synagogue.     

The Impact of Collateralization on Swap Rates

Interest rate swap pricing theory traditionally views swaps as a portfolio of forward contracts with net swap payments discounted at LIBOR rates. In practice, the use of marking‐to‐market and collateralization questions this view as they introduce intermediate cash flows and alter credit characteristics. We provide a swap valuation theory under marking‐to‐market and costly collateral and examine the theory's empirical implications. We find evidence consistent with costly collateral using two different approaches; the first uses single‐factor models and Eurodollar futures prices, and the second uses a formal term structure model and Treasury/swap data.     

Communication by Central Bank Committee Members: Different Strategies, Same Effectiveness?

The paper assesses the communication strategies of the Federal Reserve, the Bank of England, and the European Central Bank and their effectiveness. We find that the effectiveness of communication is not independent from the decision-making process. The paper shows that the Federal Reserve has been pursuing a highly individualistic communication strategy amid a collegial approach to decision making, while the Bank of England is using a collegial communication strategy and highly individualistic decision making. The European Central Bank (ECB) has chosen a collegial approach both in its communication and in its decision making. Assessing these strategies, we find that predictability of policy decisions and the responsiveness of financial markets to communication are equally good for the Federal Reserve and the ECB. This suggests that there may not be a single best approach to designing a central bank communication strategy.     

A Simple Nonparametric Approach to Derivative Security Valuation

Canonical valuation uses historical time series to predict the probability distribution of the discounted value of primary assets' discounted prices plus accumulated dividends at any future date. Then the axiomatically-rationalized maximum entropy principle is used to estimate risk-neutral (equivalent martingale) probabilities that correctly price the primary assets, as well as any predesignated subset of derivative securities whose payoffs occur at this date. Valuation of other derivative securities proceeds by calculation of its discounted, risk-neutral expected value. Both simulation and empirical evidence suggest that canonical valuation has merit.     

Discrimination in Mortgage Lending: A Critical Review of the Literature

This article surveys the diverse research that examines racial disparities in mortgage lending markets in the context of the fair housing legislation of recent decades. A review of the theoretical models, data, and empirical methods reveals deficiencies in all three areas. A new research agenda focusing on development of more complete models of mortgage lending together with panel data tracking mortgage loan performance over time is needed.     

Optimal Transfer Pricing Method and Fixed Cost Allocation

Prior empirical research on transfer pricing only reported what firms do but seldom explained why. This study moves the research forward by introducing hypothesis testing.
Atkinson (1987) shows that pricing transfers at variable cost when capacity is in excess. as prescribed by economic theory. would induce the buying unit to overstate expected demand at the capacity planning stage and cause a waste of resources. To test whether the strategic issue affects transfer pricing decisions, the study compares pricing methods for long- term transfer situations. which were provided for at the capacity planning stage, and ad hoc transfers.
As well. while the two-step method of charging full cost -charging variable cost for each unit transferred and separately charging a flat fee each period for capacity on reserve -has many good control qualities, it remained just an academic curiosity: there was no evidence of its wide use among firms. This study finds that the two-step method is as widely in use as the one-step method -charging variable cost plus unit fixed costs for each unit transferred.     

Equity Issuance and Adverse Selection: A Direct Test Using Conditional Stock Offers

We conduct a unique test of adverse selection in the equity issuance process. While common stock is the dominant means of payment in bank mergers, stock acquisition agreements provide target shareholders with varying degrees of protection against adverse price movements in the bidder's stock between the time of the merger agreement and the time of merger completion. We show that it is the degree of protection against adverse price changes and not the percent of stock offered in a bank merger that explains bidder merger announcement abnormal returns. This result is difficult to explain outside of an adverse selection framework.