Mean Reversion of Standard & Poor's 500 Index Basis Changes: Arbitrage-induced or Statistical Illusion?

Mean reversion in stock index basis changes has been presumed to be driven by the trading activity of stock index arbitragers. We propose here instead that the observed negative autocorrelation in basis changes is mainly a statistical illusion, arising because many stocks in the index portfolio trade infrequently. Even without formal arbitrage, reported basis changes would appear negatively autocorrelated as lagging stocks eventually trade and get updated. The implications of this study go beyond index arbitrage, however. Our analysis suggests that spurious elements may creep in whenever the price-change or return series of two securities or portfolios of securities are differenced.     

Futures Markets and Informational Efficiency: A Laboratory Examination

Through the use of laboratory market methodology, the effect of a futures market on the time path of asset prices is studied and competing models of asset pricing are analyzed. With replication of market conditions, the predictions of a rational expectations equilibrium model are relatively accurate whether or not futures markets are present. However, the presence of futures markets increases the speed with which an efficient equilibrium is achieved. While this more rapid adjustment can increase the variance of spot market prices as they move to equilibrium, this increased variance reflects efficiency gains due to better information.     

IGNORING ECONOMICS IN DEALING WITH THE SAVINGS AND LOAN AND COMMERCIAL BANKING CRISIS

This paper describes how the government has largely ignored economics in its recent attempts to deal with the deterioration of federally insured depository institutions. The most recent example was the Financial Institutions Recovery, Reform, and Enforcement Act (FIRREA) of 1989. Well documented and widely distributed studies have pointed out the decline of commercial banks. However, the FIRREA completely ignored commercial banks. The paper discusses the pervasive regulatory laxity and forbearance that existed toward banks during the 1980s despite the consequences of similar regulatory behavior toward savings and loans. The paper also shows how the FIRREA's major provisions regarding savings and loans ignore economic analyses. The paper discusses the implications of economic analysis for more appropriate government responses to the continuing deterioration of depositories.     

The Effect of Volatility Changes on the Level of Stock Prices and Subsequent Expected Returns

This paper estimates volatility changes in daily returns to the Dow Jones Industrial Average over the sample period 1897 through 1988. This allows a direct investigation of the reaction of the level of stock prices and subsequent expected returns to these estimated changes in volatility. We provide empirical evidence consistent with relatively large and systematic revisions in stock prices and subsequent expected returns to volatility changes. However, there appears to be an asymmetry in the market's reaction to volatility increases as opposed to volatility decreases. A majority of our volatility changes cannot be associated with the release of significant economic information.     

Organizational Change within the Stockbroking Industry: A Contracting Perspective

Teece (1982) extended Coase's (1937) theory of the firm to explain firm amalgamations. This explanation is centred around three fundamental constructs: excess capacity, market imperfections and the nature of assets, together with the frequency of their exchange. This paper provides an application of Teece's work to explain recent organizational change within the stockbroking industry in Australia and concludes by developing testable explanations of why, following deregulation, stockbroking firms countenanced moves by financial institutions, particularly banks, to acquire large equity positions.     

DISAGGREGATION OF STRUCTURAL CHANGE IN THE AMERICAN ECONOMY: 1947–1966

This paper utilizes input-output techniques to disaggregate and analyze structural change in the American economy between 1947 and 1966, focussing on the subperiods 1947-58, 1958-63, and 1963-66-periods determined by the availability of input-output tables for the terminal years. There was wide variability in the changes in output requirements among industries, but in all periods changes in final demand and in input-output coefficients tended to reinforce each other. Increases in final demand for an industry's output tended to be accompanied by increases in demand for its product as intermediate input, and vice versa. Plastics, utilities, drugs, and computing machines showed increases for both final consumption and intermediate consumption, whereas such industries as coal, wooden containers, and leather products were of declining importance for both consumption and production.     

Capital Asset Pricing Compatible with Observed Market Value Weights

We show that the set of expected return vectors, for which an observed portfolio is mean variance (MV) efficient, is a two-parameter family. We identify ten ways to specify the time series behavior of the two parameters; the result highlights a number of inconsistencies involved in MV modelling. For each of the cases, it permits the inference of the time series of expected return vectors, as well as all the other Capital Asset Pricing Model (CAPM) variables, compatible with a known covariance matrix and the observed time series of market value weights. The empirical work shows that there are substantial case-to-case differences in the time series of mean vectors and many of them are quite different from the constant mean vector envisioned in tests of the CAPM.