From edgeworth to fisher to vickrey: A comment on Michael J. Boskin's Vickrey lecture

Irving Fisher has been overlooked as an influence on William Vickrey's work on taxation and as a link between Edgeworth and Vickrey. Vickrey was Fisher's last and greatest student.     

A Study of Arbitrage Efficiency Between the FTSE‐100 Index Futures and Options Contracts

Despite the importance of the London markets and the significance of the relationship for market makers, little published research is available on arbitrage between the FTSE‐100 Index futures and the FTSE‐100 European index options contracts. This study uses the put–call–futures parity condition to throw light on the relationship between options and futures written against the FTSE Index. The arbitrage methodology adopted in this study avoids many of the problems that have affected prior research on the relationship between options or futures prices and the underlying index. The problems that arise from nonsynchroneity between options and futures prices are reduced by the matching of options and futures prices within narrow time intervals with time‐stamped transaction data. This study allows for realistic trading and market‐impact costs. The feasibility of strategies such as execute‐and‐hold and early unwinding is examined with both ex‐post and ex‐ante simulation tests that take into consideration possible execution time lags for the arbitrage trade. This study reveals that the occurrence of matched put–call–futures trios exhibits a U‐shaped intraday pattern with a concentration at both open and close, although the magnitude of observed mispricings has no discernible intraday pattern. Ex‐post arbitrage profits for traders facing transaction costs are concentrated in at‐the‐money options. As in other major markets, despite important microstructure differences, opportunities are generally rapidly extinguished in less than 3 min. The results suggest that arbitrage opportunities for traders facing transaction costs are small in number and confirm the efficiency of trading on the London International Financial Futures and Options Exchange. © 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22:31–58, 2002     

A MULTINOMIAL APPROXIMATION FOR AMERICAN OPTION PRICES IN LÉVY PROCESS MODELS

This paper gives a tree-based method for pricing American options in models where the stock price follows a general exponential Lévy process. A multinomial model for approximating the stock price process, which can be viewed as generalizing the binomial model of Cox, Ross, and Rubinstein (1979) for geometric Brownian motion, is developed. Under mild conditions, it is proved that the stock price process and the prices of American-type options on the stock, calculated from the multinomial model, converge to the corresponding prices under the continuous time Lévy process model. Explicit illustrations are given for the variance gamma model and the normal inverse Gaussian process when the option is an American put, but the procedure is applicable to a much wider class of derivatives including some path-dependent options. Our approach overcomes some practical difficulties that have previously been encountered when the Lévy process has infinite activity.     

Are Fundamentals Priced in the Bond Market?*

To date, the discussion of the Lev and Thiagarajan 1993 fundamentals in the prior literature has been exclusively in the context of the stock market. Our study is the first to examine the value‐relevance of these fundamentals for default risk. By focusing on the market for new bond issues, we examine the value‐relevance of the fundamental score using expected rather than realized returns. Also, by focusing on the bond market we provide a different perspective than that brought by prior studies relying solely on stock prices. We find the fundamentals to be priced in the market for new bond issues as indicators of expected future earnings and to be value‐relevant in enabling the market to discern differences in bond credit quality over and above the published bond ratings.     

Analysing Materials and Energy Flows in an Industrial District using an Enterprise Input–Output Model

Recent approaches to sustainable development leave much room for policies at a local level. In fact, it is becoming evident that targets such as increasing resource productivity, preserving natural cycles, or extending the present level of welfare, are best pursued within the confines of a local area. In particular, environmental changes are best brought about by considering local systems of firms as cornerstones of cooperative strategies and using data on materials and energy use in physical terms. In this paper, an enterprise input–output model is developed for an industrial district, i.e. a local group of firms specialized in the production of a single final output. The model allows for a detailed quantitative analysis of materials and energy flows and the consequent generation of waste and pollution. As a planning tool, the model may be used to evaluate alternative scenarios, such as the possibility of re- using waste taking account of sustainability requirements. An empirical case study applies the model to an industrial district in Southern Italy producing leather sofas.     

Demand for durable and nondurable goods,environmental policy and consumer welfare

If a tax on energy affects the demand for a nondurable good, the stock of a durable good, and the proportion of the energy consumption per unit of service of the durable good, an integrated approach for investigating consumer demand for durables and nondurables is required. The purpose of this paper is to employ the concept of a variable expenditure function with quasi-fixed durable goods as arguments in order to derive a demand system for nondurable goods in prices of the nondurables, in the stocks of durables, and in variable expenditure. From the envelope condition desired stocks of durables can be calculated and investment demand for durables can be determined. For an application we choose a variable expenditure function based on the almost ideal demand specification, and evaluate alternative environmental policy measures using the equivalent variation for comparing the welfare effects.     

INDEPENDENT EXPERT'S REPORTS IN TAKEOVER BIDS

This paper reports an empirical examination of independent expert reports in takeover bids using the 170 reports that were issued in the 364 cash-based bids that occurred between January 1988 and December 1991. It was found that bid premia offered in takeover bids where an expert's report was issued were not significantly lower than bid premia in other bids. This may be attributable to independent experts acting as a countervailing influence on bidders holding a superior pre-bid bargaining position. Next, some dimensions of the “fair and reasonable” criterion that experts are required to use are examined. These are the single-test and dual-test interpretations of the phrase, the relation between offer price, market price and the expert's valuation of the target, the cost and length of expert's reports and, finally, the influence an expert has on the outcome of a bid.     

A note on securities market response to pension fund termination*

Abstract. A recent article in this journal (Hsieh, Ferris, and Chen, 1990) presents evidence demonstrating that financially distressed firms that terminate overfunded pension plans experience significantly positive abnormal returns, while nondistressed terminating firms experience returns not different from zero. The article concludes from this evidence that the market regards the property rights to excess assets as residing fully with the sponsoring firm prior to termination, particularly when the sponsoring firm is not financially distressed. Accordingly, the reporting requirements of Statement of Financial Accounting Standards (SFAS) No. 88, which require immediate recognition of gains resulting from termination, are inconsistent with the market's view of the ownership rights to excess plan assets. Similarly, the article suggests that the excise tax imposed on asset reversions is “punitive” because property rights to fund assets resided with the company prior to termination. This paper questions three aspects of the Hsieh, Ferris, and Chen article: (1) the plausibility of the theory explaining differential reaction to the announcement to terminate for distressed and nondistressed firms; (2) the effect of the distressed/nondistressed classification criteria, event date specification, and event window length on the results; and (3) the appropriateness of using the empirical results, if reliable, to evaluate accounting treatment or federal tax policy. Résumé. Dans un récent article paru dans cette même publication, Hsieh, Ferris et Chen (1990) soumettaient des faits démontrant que les entreprises en difficulté financière qui mettent fin à un régime de retraite surprovisionné enregistrent des rendements anormaux positifs importants, tandis que les entreprises qui mettent fin à un régime de retraite sans être en difficulté financière enregistrent des rendements qui ne sont pas différents de zéro. De là, les auteurs concluaient que le marché estime que les droits à l'excédent d'actif appartiennent exclusivement à l'entreprise responsable du régime avant la cessation, en particulier lorsque cette dernière n'est pas en difficulté financière. Par conséquent, les exigences de la norme SFAS No. 88 en matière d'information à fournir, qui prévoient la constatation immédiate du produit de la cessation du régime, ne sont pas conformes à la façon de voir du marché relativement aux droits à l'excédent d'actif du régime. De la même façon, selon les auteurs, la taxe d'accise imposée en cas de retour de l'actif est “punitive”, étant donné que les droits à l'actif du régime appartenaient à l'entreprise avant la cessation du régime. Les auteurs s'interrogent ici sur trois aspects de l'article de Hsieh, Ferris, et Chen: 1) la pertinence de la théorie expliquant la réaction marginale à l'annonce de la cessation d'un régime pour les entreprise qui sont en difficulté financière et celles qui ne le sont pas; 2) l'incidence sur les résultats des critères permettant de classer les entreprises comme étant en difficulté financière ou ne l‘étant pas, de la précision de la date de l’événement et de la longueur de la période pré-post relative à l‘événement; et 3) l'opportunité de l'utilisation des résultats empiriques, s'ils sont fiables, pour évaluer le traitement comptable ou la politique fiscale fédérale.     

VARIANCE BOUND TESTS OF BOND MARKET EFFICIENCY

In this paper we examine variance bound tests of the joint hypothesis that (1) bond markets are efficient and (2) the term structure is determined by the expectations hypothesis. Both the Singleton and Shiller tests are shown to be seriously biased toward rejecting the joint hypothesis in finite samples. Flavin's test is unbiased but has a very high variance leading to many false rejections of the joint hypothesis. When corrected as suggested by Flavin, Shiller's test is unbiased and has a relatively low variance. Unfortunately, it is also sensitive to measurement error.     

THE EFFECTS OF THE INSIDER TRADING SANCTIONS ACT OF 1984: THE CASE OF SEASONED EQUITY OFFERINGS

Previous empirical research indicates that corporate insiders tend to increase (decrease) their shareholdings before events that increase (decrease) firm value. More recent evidence suggests, however, that passage of the Insider Trading Sanctions Act of 1984 (ITSA) may have deterred this behavior. Our results indicate that before passage of the ITSA, insiders exploited their access to nonpublic information by selling shares before the announcement of equity issues. However, after passage of the ITSA insiders no longer displayed this behavior. We conclude the ITSA has a deterrent effect, which is more heavily concentrated on insiders at the highest level of the firm who are most visible to regulators and other market participants.