Relative Pricing of Eurodollar Futures and Forward Contracts

Past research explains observed spreads between futures and forward Eurodollar yields as being due to the futures contract's mark-to-market feature. We derive closed form solutions for this yield spread and show that, theoretically, it should be small. Also, differences in liquidity, taxation, and default risk cannot account for the large spreads observed. We also present evidence that the spreads, which are nonnegligible primarily in the first half of the sample period, are likely to be attributable to the mispricing of futures contracts relative to the forward rates and that the mispricing was gradually eliminated over time.     

On The Robustness of Size and Book-to-Market in Cross-Sectional Regressions

We use a robust regression estimator to analyze the risk premia on size and book-to-market. We find that the risk premium on size that was estimated by Fama and French (1992) completely disappears when the 1 percent most extreme observations are trimmed each month. We also show that the negative average of the monthly size coefficients reported by Fama and French can be entirely explained by the 16 months with the most extreme coefficients. We argue that further investigation of these results could lead to an understanding of the economic forces underlying the size effect, and may also yield important insights into how firms grow.     

Slack and Cyclically Sensitive Inflation

We investigate the flattening Phillips relation by making two departures from standard specifications. First, we measure slack using real activity variables that are bandpass filtered or year-over-year changes in activity (these are similar), instead of gaps. Second, we study the components of inflation instead of the standard aggregates. We find that some inflation components have strong and stable correlations with the cyclical component of real activity; these components tend to be relatively well-measured and domestically determined. Other components, typically prices that are poorly measured or internationally determined, have weak and/or unstable correlations with cyclical activity. We construct a new inflation index, cyclically sensitive inflation, that weights the components by their joint cyclical covariation with real activity. The index has strong and stable correlations with cyclical activity and provides a real-time measure of cyclical movements in inflation.     

Is the Corporate Loan Market Globally Integrated? A Pricing Puzzle

We offer evidence that interest rate spreads on syndicated loans to corporate borrowers are economically significantly smaller in Europe than in the United States, other things equal. Differences in borrower, loan, and lender characteristics do not appear to explain this phenomenon. Borrowers overwhelmingly issue in their natural home market and bank portfolios display home bias. This may explain why pricing discrepancies are not competed away, though their causes remain a puzzle. Thus, important determinants of loan origination market outcomes remain to be identified, home bias appears to be material for pricing, and corporate financing costs differ across Europe and the United States.     

The Effects of Wealth and Income on Subjective Well‐Being and Ill‐Being*

The accepted view among psychologists and, increasingly, economists is that household income has statistically significant but only small effects on measures of subjective well‐being. Income, however, is clearly an imperfect measure of the economic circumstances of households. Using data drawn from the 2002 wave of the Household, Income and Labour Dynamics in Australia (HILDA) Survey, this paper demonstrates that wealth, which can be viewed as providing a degree of economic security, is at least as important to well‐being and ill‐being as income.     

The Price Impact and Survival of Irrational Traders

Milton Friedman argued that irrational traders will consistently lose money, will not survive, and, therefore, cannot influence long‐run asset prices. Since his work, survival and price impact have been assumed to be the same. In this paper, we demonstrate that survival and price impact are two independent concepts. The price impact of irrational traders does not rely on their long‐run survival, and they can have a significant impact on asset prices even when their wealth becomes negligible. We also show that irrational traders' portfolio policies can deviate from their limits long after the price process approaches its long‐run limit.     

The Limits of Investor Behavior

Many models use noise trader risk and corresponding violations of the Law of One Price to explain pricing anomalies, but include a storage technology in perfectly elastic supply or unlimited asset liability. Storage allows aggregate consumption risk to differ from exogenous fundamental risk, but using aggregate consumption as a factor for asset returns can make noise trader risk superfluous. Using (i) limited asset liability and limited storage withdrawals, or (ii) an endogenous locally riskless interest rate eliminates violations of the Law of One Price. Our main results use only budget equations and market clearing, and require virtually no assumptions about behavior.