Budget deficits and real interest rates: Updated empirical evidence on causality

Using error-correction model (ECM) estimation, the paper empirically examines the causality relationship between the federal government budget deficit and the ex ante real interest rate yield on high grade long term tax free municipal bonds in the U.S. To clarify this deficit or interest rate relationship, the budget deficit is measured by the primary budget deficit, which excludes net interest payments by the Treasury. In a model that includes federal personal income tax rates and net international capital flows, as well as money supply growth, the ECM estimates strongly suggest a bi-directional relationship between the primary budget deficit and the ex ante real interest rate yield. Budget deficits apparently do matter! William Simon's concerns were justified.The author is indebted to P. A. V. B. Swamy for ideas and helpful suggestions and Will Perry for data assembly and processing.     

Non‐linear Predictability of UK Stock Market Returns*

Linear predictability of stock market returns has been widely reported. However, recently developed theoretical research has suggested that due to the interaction of noise and arbitrage traders, stock returns are inherently non‐linear, whereby market dynamics differ between small and large returns. This paper examines whether an exponential smooth transition threshold model, which is capable of capturing this non‐linear behaviour, can provide a better characterization of UK stock market returns than either a linear model or an alternate non‐linear model. The results of both in‐sample and out‐of‐sample specification tests support the exponential smooth transition threshold model and hence the belief that investor behaviour does differ between large and small returns.     

Bond Yields, Ratings, and Financial Information: Evidence from Public Utility Issues

This study investigates the relative roles of bond ratings and financial information in the setting of bond yields. Structural equation modeling techniques are used to learn whether ratings determine yields or whether both ratings and yields are determined by a concurrent set of economic and financial factors. Tests of alternative structural model configurations provide evidence regarding the associations between bond ratings, financial information, and bond yields. Both ratings and financial information are found to play an important role in determining bond yields. In addition, yields are consistent with the higher rating in cases of split ratings.     

THE LOCATION OF NONMETROPOLITAN HIGH-TECH INDUSTRIES: A Comparison of Regional Determinants

A study of the location of three classifications of high-tech industries in rural areas was undertaken using ordinary least squares, Tobit, and a two-step estimation procedure suggested by Heckman (1976). The results indicate that the location decision for high tech firms is influenced primarily by the county population, adjacency to an SMSA, and the expenditures on public infrastructure (exclusive of education expenditures). However, location near interstate highways was generally not a significant factor. Results were similar between branch and unit (single ownership) plants. Some differences in signs of orders of magnitude occurred among the estimation procedures. Making a choice between Tobit and Heckman approaches depends upon the goal of the research.     

The contribution of a satellite market to price discovery: Evidence from the Singapore exchange

The Singapore Exchange (SGX), a small satellite market, successfully competes with a large home market, the Osaka Securities Exchange (OSE), in trading the Nikkei 225 futures index. In this paper, we investigate the contribution of the SGX to price discovery and shed light on the reasons for its continued success. Evidence is provided from information revelation and price discovery of three competing but informationally linked markets of the Nikkei 225 index—domestic spot (Tokyo Stock Exchange), domestic futures (OSE), and foreign futures (SGX), which represents the satellite market. Overall, the futures market contributes 77% to price discovery, with the satellite market contributing 42% of the futures and 33% of the total price discovery. These figures, surprisingly, far exceed the satellite market's share of trading volume. Support is provided for the extended trading hours on the SGX for three of the four non‐overlapping trading sub‐periods. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:981–1004, 2004     

A note on price futures versus revenue futures contracts

Here we consider the hedging roles of a price futures contract versus a revenue futures contract. In the absence of idiosyncratic output risk, the revenue contract almost always dominates the price contract. Idiosyncratic output risk provides conditions under which the price contract should dominate. When production risk is largely idiosyncratic, a producer with an anticipated long actuals position might combine a long revenue futures position with a short price futures position. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:503–512, 2004