A Nonlinear Factor Analysis of S&P 500 Index Option Returns

Growing evidence suggests that extraordinary average returns may be obtained by trading equity index options, and that at least part of this abnormal performance is attributable to volatility and jump risk premia. This paper asks whether such priced risk factors are alone sufficient to explain these average returns. To provide an answer in as general as possible a setting, I estimate a flexible class of nonlinear models using all S&P 500 Index futures options traded between 1986 and 2000. The results show that priced factors contribute to these expected returns but are insufficient to explain their magnitudes, particularly for short‐term out‐of‐the‐money puts.     

Heteroskedasticity in Stock Return Data: Volume versus GARCH Effects

This paper provides empirical support for the notion that Autoregressive Conditional Heteroskedasticity (ARCH) in daily stock return data reflects time dependence in the process generating information flow to the market. Daily trading volume, used as a proxy for information arrival time, is shown to have significant explanatory power regarding the variance of daily returns, which is an implication of the assumption that daily returns are subordinated to intraday equilibrium returns. Furthermore, ARCH effects tend to disappear when volume is included in the variance equation.     

Retailing from the margins - the re-emergence of a food co-operative movement?

The disadvantage faced by low-income food consumers has long been recognized, with such groups likely to pay more for their food products, which are commonly limited in terms of range and quality. Such disadvantage stems not only from economic constraints, but also from geographical, sociodemographic and infrastructural factors, such as low car ownership levels (which limit mobility), age, family structure and infirmity. Issues of access and mobility are especially pertinent given that the majority of U.K. food retailers have sought to achieve increased market share through the pursuit of economies of scale, the inherent benefit of high margin maintenance, large format development and the relocation to edge-of-town/out-of-town and affluent suburban sites. To date, little attention in the form of research has been directed to examining strategies adopted by those on low incomes to address such circumstances. This paper outlines the initial findings of a wider longitudinal study that examines the activities of food co-operatives and food groups within the Glasgow area, which are run by, and are for the benefit of, those on low incomes. Through semi-structured interviews with relevant local government departments and funding bodies, management committees and volunteers involved in the daily operation of food groups, the initial aim was to identify the operational and organizational characteristics of food cooperative initiatives. The next stage was to determine what those involved perceived as the contribution made to the members and wider community, and finally, future opportunities for food cooperatives were identified. The results therefore, provide an invaluable insight, not only into the workings of food co-operatives, but also into the experience of those on low incomes in respect of food shopping. The research findings, perhaps ironically, provide a possible strategic direction for food retailers who, in the face of traditional market saturation, must identify new market growth opportunities within areas that they have previously neglected.     

Relationship-Specific Assets and the Pricing of Underwriter Services

This paper investigates the effect of setup costs on the pricing of investment banking services. The existence of setup costs is predicted to result in lower underwriter spreads in IPOs for firms that are expected to issue again. Consistent with this prediction, I find significantly lower spreads for firms that make subsequent issues. I also find that a firm's likelihood of changing underwriters in a subsequent offer is related to the time between offerings and the underwriter's pricing performance in the IPO. These results suggest that the deviations from optimal IPO pricing carry a penalty for the underwriter.     

CAUSALITY IN POLITICAL BUSINESS CYCLES

One can easily identify four general models of political business cycles: office-motivated models (both forward and backward looking) and partisan models (again, both forward and backward looking). Each model makes different assumptions about the direction and timing of causal links between the economy and polity. This paper uses Granger causality tests to investigate the causal links between presidential popularity and different measures of aggregate economic performance and aggregate economic policy. The paper's aim is to investigate whether any existing theories receive substantive support and, if not, to suggest the properties that any new theories should display. The results indicate no overwhelming support for any existing theories, though partisan models receive more support than do office-motivated models. The data appear to be most consistent with Ellis and Thoma's reputational partisan model.     

When It's Not The Only Game in Town: The Effect of Bilateral Search on the Quality of a Dealer Market

We report results from experimental asset markets with liquidity traders and an insider where we allow bilateral trade to take place, in addition to public trade with dealers. In the absence of the search alternative, dealer profits are large—unlike in models with risk-neutral, competitive dealers. However, when we allow traders to participate in the search market, dealer profits are close to zero. Dealers compete more aggressively with the alternative trading avenue than with each other. There is no evidence that price discovery is less efficient when the specialists are not the only game in town.     

Are There Tax Effects in the Relative Pricing of U.S. Government Bonds?

We investigate the impact of the Tax Reform Act of 1986 on the relative pricing of U.S. Treasury bonds. We obtain positive statistically and economically significant estimates for the implicit tax rates of a “representative” investor in the late 1970s and early 1980s. After the 1986 Tax Reform, the point estimates for the tax rate are close to zero. Tests for a regime shift associated with the 1986 Tax Reform support the hypothesis that this event largely eliminated tax effects from the term structure. We discuss both institutional and statutory explanations for this change.