The Size and Incidence of the Losses from Noise Trading

Recent empirical research has identified a significant amount of volatility in stock prices that cannot easily be explained by changes in fundamentals; one interpretation is that asset prices respond not only to news but also to irrational “noise trading.” We assess the welfare effects and incidence of such noice trading using an overlapping-generations model that gives investors short horizons. We find that the additional risk generated by noise trading can reduce the capital stock and consumption of the economy, and we show that part of that cost may be borne by rational investors. We conclude that the welfare costs of noise trading may be large if the magnitude of noise in aggregate stock prices is as large as suggested by some of the recent empirical litrature on the excess volatility of the market.     

Positive Feedback Investment Strategies and Destabilizing Rational Speculation

Analyses of rational speculation usually presume that it dampens fluctuations caused by “noise” traders. This is not necessarily the case if noise traders follow positive-feedback strategies—buy when prices rise and sell when prices fall. It may pay to jump on the bandwagon and purchase ahead of noise demand. If rational speculators' early buying triggers positive-feedback trading, then an increase in the number of forward-looking speculators can increase volatility about fundamentals. This model is consistent with a number of empirical observations about the correlation of asset returns, the overreaction of prices to news, price bubbles, and expectations.     

REVENUE, POPULATION, AND COMPETITIVE BALANCE IN MAJOR LEAGUE BASEBALL

This article examines the impact of hometown market size on competitive balance in Major League Baseball. We use a four-equation simultaneous model of win percent, team payroll, team total revenue, and team local revenue in order to avoid simultaneity bias in the estimates. Using two-stage least squares, our results show that consolidated metropolitan statistical area population does have a statistically significant positive impact on local revenue. This leads to increased payroll, which has a significantly positive, but small, impact on win percent. Specifically, the estimated impact of an additional one million in population ranges from 0.233 to 1.126 additional wins per season. ( JEL L38)     

Race,Compensation and Contract Length in the NBA: 2001–2002*

We study race and pay in the NBA for 2001–2002. For players who were neither free agents nor on rookie scale contracts, there were large, statistically significant ceteris paribus nonwhite shortfalls in salary, total compensation, and contract duration. But for players under the rookie salary scale (first‐round draft picks) and free agents, race effects were small and insignificant. These results suggest discrimination against marginal nonwhite players.     

The Federal Reserve,the Emerging Markets,and Capital Controls: A High‐Frequency Empirical Investigation

In this paper, I use weekly data from seven emerging nations—four in Latin America and three in Asia—to investigate the extent to which changes in Fed policy interest rates have been transmitted into domestic short‐term interest rates during the 2000s. The results suggest that there is indeed an interest rates “pass‐through” from the Fed to emerging markets. However, the extent of transmission of interest rate shocks is different—in terms of impact, steady state effect, and dynamics—in Latin America and Asia. The results also indicate that capital controls are not an effective tool for isolating emerging countries from global interest rate disturbances. Changes in the slope of the U.S. yield curve, including changes generated by a “twist” policy, affect domestic interest rates in emerging countries. I also provide a detailed case study for Chile.