Business Cycles and the Behavior of Metals Prices

The theory of storage says that the marginal convenience yield on inventory falls at a decreasing rate as inventory increases. The authors test this hypothesis by examining the relative variation of spot and futures prices for metals. As the hypothesis implies, futures prices are less variable than spot prices when inventory is low, but spot and futures prices have similar variability when inventory is high. The theory of storage also explains inversions of “normal” futures-spot price relations around business-cycle peaks. Positive demand shocks around peaks reduce metal inventories and, as the theory predicts, generate large convenience yields and price inversions.     

Piecewise linear incentive scheme and participative budgeting

This paper studies the economic incentives of participative budgeting through the design of incentive schemes within the agency theory framework. In particular, a piecewise linear incentive scheme (PLIS), an optimal version of Weitzman's New Soviet Incentive Scheme (NSIS), is derived. The characteristics of PLIS are: first, unlike NSIS, the bonus (penalty) rates of the optimal PLIS vary according to the agent's type in order to improve the principal's welfare, second, a penalty may be imposed on the overfulfillment of the agent's performance in order to maintain incentive compatibility, and finally, it is shown that if the coefficients are constant as in NSIS, there is no need for participative budgeting. Also, PLIS is compared with a quadratic incentive scheme. Both incentive schemes achieve the optimal solution, but each incentive scheme has its own advantage over the other depending on the situation.     

Tasks and Organizations: A Signal Detection Model of Organizational Decision Making

This paper presents a mathematical model to study the joint impact of organizational design and of the task environment on the decision performance of hierarchical organizations with limited internal communication. The problem context is a special class of distributed situation assessment problems, where possible patterns of binary variables are to be classified on the basis of partial and noise-corrupted information. Structural properties of tasks and organizations are described using a graph formalism, and optimal decision strategies at all decision makers are determined. Organizational expertise is characterized in the form of a Team Relative Operating Characteristic (TROC) curve, thereby replacing the organization by an equivalent single decision maker. Implementing the model, issues of task decomposition and the process of matching organizations with tasks are discussed.     

Statistical properties of returns: Financial assets versus commercial real estate

This study examines the distribution of commercial real estate returns by region (east, midwest, south, and west), by property type (office, retail, R&D office, and warehouse) and in the aggregate, and compares their distributions to those of financial assets. Nominal and real returns are examined for quarterly, semiannual, and annual periods. The quarterly nominal returns on the financial assets are mostly normal with very little indication of autocorrelation. In contrast, non-normality and autocorrelation are present in most of the nominal quarterly real estate series. The non-normality is greatly reduced when semiannual or annual returns are considered or when the quarterly series are corrected for autocorrelation. The non-normality is also lower for real returns than it is for nominal returns.     

The pricing of initial public offerings: tests of adverse-selection and signaling theories

We test the empirical implications of several models of IPOunderpricing. Consistent with the winner's-curse hypothesis,we show that in markets where investors know a priori that theydo not have to compete with informed investors, IPOs are notunderpriced. We also show that IPOs underwritten by reputableinvestment banks experience significantly less underpricingand perform significantly better in the long run. We do notfind empirical support for the signaling models that try toexplain why firms underprice. In fact, we find that (1) firmsthat underprice more return to the reissue market less frequently,and for lesser amounts, than firms that underprice less, and(2) firms that underprice less experience bigger earnings andpay higher dividends, contrary to the models' predictions.     

Bid,ask and transaction prices in a specialist market with heterogeneously informed traders

The presence of traders with superior information leads to a positive bid-ask spread even when the specialist is risk-neutral and makes zero expected profits. The resulting transaction prices convey information, and the expectation of the average spread squared times volume is bounded by a number that is independent of insider activity. The serial correlation of transaction price differences is a function of the proportion of the spread due to adverse selection. A bid-ask spread implies a divergence between observed returns and realizable returns. Observed returns are approximately realizable returns plus what the uninformed anticipate losing to the insiders.