Single Beta Models and Currency Futures Prices

The conditional capital asset pricing model is applied to foreign currency futures prices, covariance risk being measured relative to excess returns from a broadly diversified international portfolio of equities. Positive time-varying risk premia are found in all five currencies tested when the difference between the US and the average foreign interest rates is used as an instrumental variable for the expected excess return from the common stock portfolio.     

Evidence on the Extent and Potential Sources of Long Memory in U.S. Treasury Security Returns and Yields

Unlike equity returns, many fixed-income return measures appear to display long memory. We show that the extent of long memory differs strongly for gross and excess holding period returns on U.S. Treasury securities. Granger and others have argued that long memory may only reflect infrequent structural breaks. We explore the impact of structural instability on tests for long memory and find only weak indications that it lies behind the long memory in our return series. The evidence of long memory remains strong for yield and term premia series even after accounting for a series of potential underlying structural changes.     

The CAPM is Wanted,Dead or Alive

Kothari, Shanken, and Sloan (1995) claim that βs from annual returns produce a stronger positive relation between β and average return than βs from monthly returns. They also contend that the relation between average return and book-to-market equity (BE/ME) is seriously exaggerated by survivor bias. We argue that survivor bias does not explain the relation between BE/ME and average return. We also show that annual and monthly βs produce the same inferences about the β premium. Our main point on the β premium is, however, more basic. It cannot save the Capital asset pricing model (CAPM), given the evidence that β alone cannot explain expected return.     

Risk Management: Coordinating Corporate Investment and Financing Policies

This paper develops a general framework for analyzing corporate risk management policies. We begin by observing that if external sources of finance are more costly to corporations than internally generated funds, there will typically be a benefit to hedging: hedging adds value to the extent that it helps ensure that a corporation has sufficient internal funds available to take advantage of attractive investment opportunities. We then argue that this simple observation has wide ranging implications for the design of risk management strategies. We delineate how these strategies should depend on such factors as shocks to investment and financing opportunities. We also discuss exchange rate hedging strategies for multinationals, as well as strategies involving “nonlinear” instruments like options.     

Building State Capacity: Reforming Mexican State Food Aid Programmes in the 1990 s

Recent studies of state food aid to poor households in Mexico by the International Food Policy Research Institute (IFPRI) and Food First point to a rare case of successful second-generation reform in the social sector. This article analyses a critical juncture at the start of the 1990 s in which policy-makers predisposed to reform gained an upper hand and over time improved state capacity in an area in which prolific corruption, middle class and urban favouritism and pervasive partisan clientelism reigned for decades. Across Latin America, crisis-inspired state downsizing (“first-generation reform”) has given way to a desire to build state capacity (“second-generation reform”). To date, the regional record is mixed; however, one thing is certain, the context for first-generation reform—macroeconomic instability and foreign lender conditionality—offers an unsatisfactory guide to why and under what circumstances governments embrace, delay or reject second-generation reform.     

Luck versus Skill in the Cross‐Section of Mutual Fund Returns

The aggregate portfolio of actively managed U.S. equity mutual funds is close to the market portfolio, but the high costs of active management show up intact as lower returns to investors. Bootstrap simulations suggest that few funds produce benchmark‐adjusted expected returns sufficient to cover their costs. If we add back the costs in fund expense ratios, there is evidence of inferior and superior performance (nonzero true α) in the extreme tails of the cross‐section of mutual fund α estimates.     

Two Views of Social Justice: A Catholic/Georgist Dialogue

Sixteen scholars have come together in this issue to examine eight social‐justice themes from the perspectives of Catholic Social Thought and the philosophy of Henry George. The themes they address are natural law, human nature, the nature of work, the nineteenth‐century papal encyclical Rerum novarum, causes of war, immigration, development, and wealth, and neighborhood revitalization. While they sometimes wrangle with each other, their common aspiration is the same as their nineteenth‐century predecessors: to find solutions to the human suffering caused by injustice.