An International Analysis of Earnings, Stock Prices and Bond Yields

Abstract:  This paper assesses the contemporaneous relationship between stock prices, earnings and long-term government bond yields for a large number of countries. The time period of our data spans several decades. In a time series framework our analysis first tests the presence of a long-term contemporaneous relationship between these three variables (the so-called Fed model). Next, we assess if government bond yields play a significant role in the long-run relationship. Our empirical results question the validity of the Fed model in the sense that we show that long-term market movements are mainly driven by the earnings yield and not the differential between bond and earnings yields. As such, our analysis validates the results of Asness (2003) for a much larger collection of countries while using a dynamic time series (cointegration) framework. Finally, we also show that changes in long-term government bond yields have a short-term impact on stock prices.     

Dual VATs and Cross-Border Trade: Two Problems, One Solution?

In recent years, two distinct but related questions have been raised with respect to value-added taxes (VATs). Concern has been expressed over whether it is desirable or even possible for both national and subnational governments in federal countries such as India, Argentina, and Russia to impose VATs. One reason for thinking that such subnational VATs are unlikely to be workable on a destination basis is the problem of cross-border trade. Of course, this same problem also arises within the European Union, where there is no EU VAT. Drawing upon Canadian experience, we argue that not only is it possible to have two-tier or dual VATs on a destination basis in a single country but that the existence of dual VATs may help deal with some of the problems of cross-border trade.     

Quality control mechanisms under capitation payment for medical services

As a result of rising health care costs, many countries, including the United States, have turned to managed care organizations and the use of capitation payment systems. Although this type of system is an effective mechanism for reducing excessive utilization of health care, it may lead to the underprovision of medical services. In this paper propensity to underprovide medical services in a prepayment system as well as the effects of auditing/monitoring on physician behaviour and patient well-being are examined. Conditions are found under which managed care yields more efficient outcomes than traditional fee-for-service care.
Suite à la croissance importante des coûts des soins, plusieurs pays, y compris les Etats Unis, ont commencéà se tourner vers des organisations spécialisées pour gérer la prestation des services et à faire usage de systèmes de rémunération per capita. Même si ce genre de système est un mécanisme efficace pour réduire l'usage excessif des service de santé, il peut entraîner une offre déficiente de services médicaux. Ce mémoire examine la propensitéà fournir moins de services dans un système de pré-paiement. On examine aussi les effets de la surveillance et de la vérification sur le comportement des médecins et sur le bien-être des patients. On met en lumière les conditions qui assurent que les soins fournis dans un tel système donneront de meilleurs résultats que la rémunération à l'acte.     

The cultural dimension of development

Development, both in its essential meaning and in its aims, is an inclusive, multidimensional phenomenon whose various aspects cannot be understood in isolation from each other. Economic development affects, and is affected by, culture. Our author discusses the significance of this fact for the countries of the Third World today.     

The role of fiscal policy in the St. Louis model: An evaluation and some new evidence

This paper re-examines the role of high employment budget expenditures (fiscal policy) in the St. Louis expenditure equation by using spectral analysis and the spectral estimates of a two-sided distributed lag model. The analysis is undertaken with quarterly U.S. data from 1947:1 to 1984:IV in the rate of change form. A salient conclusion is that fiscal policy has statistically significant partial coherences with (nominal) income, with the latter leading the former over the business cycle. We find that income is jointly related to lead terms of fiscal policy in a two-sided distributed lag model. Some explanations for these results are provided.     

The Role of Knowhow Acquisition in the Formation and Duration of Joint Ventures

We analyze the role of knowhow acquisition in the formationand duration of joint ventures. Two parties become partnersin a joint venture to benefit from each other’s knowhow.Joint operations provide each party with the opportunity toacquire part of its partner’s knowhow. A party’sincreased knowhow provides the impetus for the dissolution ofthe joint venture. We characterize the conditions under whichdissolution takes place, identify the party that buys out itspartner, determine the time to dissolution, establish its comparativestatics, and examine the implications of knowledge acquisitionfor the desirability of joint venture formation. (JEL code:G34)     

Intraday Value at Risk (IVaR) using tick-by-tick data with application to the Toronto Stock Exchange

This paper investigates the use of tick-by-tick data for intraday market risk measurement. We propose a method to compute an Intraday Value at Risk based on irregularly spaced high-frequency data and an intraday Monte Carlo simulation. A log-ACD–ARMA–EGARCH model is used to specify the joint density of the marked point process of durations and high-frequency returns. We apply our methodology to transaction data for three stocks actively traded on the Toronto Stock Exchange. Compared to traditional techniques applied to intraday data, our methodology has two main advantages. First, our risk measure has a higher informational content as it takes into account all observations. On the total risk measure, our method allows for distinguishing the effect of random trade durations from the effect of random returns, and for analyzing the interaction between these factors. Thus, we find that the information contained in the time between transactions is relevant to risk analysis, which is consistent with predictions from asymmetric-information models in the market microstructure literature. Second, once the model has been estimated, the IVaR can be computed by any trader for any time horizon based on the same information and with no need of sampling the data and estimating the model again when the horizon changes. Backtesting results show that our approach constitutes reliable means of measuring intraday risk for traders who are very active in the market.     

Price competition during and after promotions

We provide a framework for setting regular prices and using promotional discounts in a duopoly where long‐term promotional effects are present and the firms' pricing and promotional strategies are common knowledge (e.g., as in online markets). We show that at equilibrium, the two firms may not promote and instead adopt an Everyday Low Price (EDLP) strategy. Consumers' tendency to stockpile promoted products, the level of brand loyalty and product differentiation, and the possibility of a postpromotional sales increase critically influence regular prices, price discount rates, and profits. Under some conditions consumer stockpiling intensifies promotional competition and reduces firms' profits while the possibility of attracting new consumers reduces the need to heavily promote and ensures better profits. Managerial implications are discussed. Copyright © 2007 ASAC. Published by John Wiley & Sons, Ltd.