No Arbitrage and Arbitrage Pricing: A New Approach

We argue that arbitrage-pricing theories (APT) imply the existence of a low-dimensional nonnegative nonlinear pricing kernel. In contrast to standard constructs of the APT, we do not assume a linear factor structure on the payoffs. This allows us to price both primitive and derivative securities. Semi-nonparametric techniques are used to estimate the pricing kernel and test the theory. Empirical results using size-based portfolio returns and yields on bonds reject the nested capital asset-pricing model and linear APT and support the nonlinear APT. Diagnostics show that the nonlinear model is more capable of explaining variations in small firm returns.     

Banking Panics,Information, and Rational Expectations Equilibrium

This paper shows that bank runs can be modeled as an equilibrium phenomenon. We demonstrate that some aspects of the intuitive “story” that bank runs start with fears of insolvency of banks can be rigorously modeled. If individuals observe long “lines” at the bank, they correctly infer that there is a possibility that the bank is about to fail and precipitate a bank run. However, bank runs occur even when no one has any adverse information. Extra market constraints such as suspension of convertibility can prevent bank runs and result in superior allocations.     

Sequential Tests of the Arbitrage Pricing Theory: A Comparison of Principal Components and Maximum Likelihood Factors

We examine the cross-sectional pricing equation of the APT using the elements of eigenvectors and the maximum likelihood factor loadings of the covariance matrix of returns as measures of risk. The results indicate that, for data assumed stationary over twenty years, the first vector is a surprisingly good measure of risk when compared with either a one- or a five-factor model or a five-vector model. We conclude that in some circumstances principal components analysis may be preferred to factor analysis.     

On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks

We find support for a negative relation between conditional expected monthly return and conditional variance of monthly return, using a GARCH-M model modified by allowing (1) seasonal patterns in volatility, (2) positive and negative innovations to returns having different impacts on conditional volatility, and (3) nominal interest rates to predict conditional variance. Using the modified GARCH-M model, we also show that monthly conditional volatility may not be as persistent as was thought. Positive unanticipated returns appear to result in a downward revision of the conditional volatility whereas negative unanticipated returns result in an upward revision of conditional volatility.     

Volatility,the Macroeconomy,and Asset Prices

How important are volatility fluctuations for asset prices and the macroeconomy? We find that an increase in macroeconomic volatility is associated with an increase in discount rates and a decline in consumption. We develop a framework in which cash flow, discount rate, and volatility risks determine risk premia and show that volatility plays a significant role in explaining the joint dynamics of returns to human capital and equity. Volatility risk carries a sizable positive risk premium and helps account for the cross section of expected returns. Our evidence demonstrates that volatility is important for understanding expected returns and macroeconomic fluctuations.     

Enterprise Resource Planning Systems — Implications for Managers and Management

Enterprise resource planning systems have been adopted by many businesses, large and small, to take advantage of their typical features: information integration, business process perspective, transaction processing efficiency and instantaneous availability of information for decision support. The systems are expected to affect almost every aspect of business including structures, procedures, supervision, decision-making, performance and workloads, and the roles of functional and professional groups such as engineers, accountants, production and warehousing personnel and managers. This paper analyses the implications of enterprise resource planning systems for organisations in general and for managers and professionals in particular.     

Context and Task Effects on Choice Deferral

This article reviews recent research that has examined consumer decision making when the option of not choosing any of the alternatives is provided. The attractiveness of the decision outcomes and the difficulty of choosing are posited to be two key factors that determine the preference for a no-choice option. Building on the notion that preferences are often constructed, it is proposed that task and contextual variables can alter how the choice situation is evaluated on the two factors and consequently choice incidence. Several experiments that explore and manipulate decision attractiveness and decision difficulty are reviewed, and areas for future research are suggested. We conclude with a discussion of the implications of these results for research on consumer choice.     

RELATIVITY,INEQUALITY, AND OPTIMAL NONLINEAR INCOME TAXATION

How does concern for consumption relative to others (“relativity”) affect the structure of optimal nonlinear income taxation? Our article provides three sets of answers to this general question. First, it supports the conclusion in the literature that relativity leads to higher marginal tax rates. In doing so, it both generalizes some of the conditions under which this result is obtained in the literature and fleshes out the detailed structure for optimal marginal tax rates for specific functional forms for distribution, utility function, and social welfare function. Second, the article goes beyond the literature and examines the impact of relativity on the progression of optimal marginal tax rates. By and large, we find support for greater progressivity, defined as the steepness of the rise of the marginal tax rate schedule, as relativity concern increases. Third, none of the papers in the literature, to our knowledge, examines the interplay of relativity and inequality in determining the optimal structure of income taxes. Our special analytical cases and more general numerical calculations support the conclusion that higher inequality dampens the positive impact of greater relativity on the level and the progression of marginal tax rates. More work is needed to further explore this interaction between relativity and inequality that our analysis has uncovered.     

A New Approach to International Arbitrage Pricing

This paper uses a nonlinear arbitrage-pricing model, a conditional linear model, and an unconditional linear model to price international equities, bonds, and forward currency contracts. Unlike linear models, the nonlinear arbitrage-pricing model requires no restrictions on the payoff space, allowing it to price payoffs of options, forward contracts, and other derivative securities. Only the nonlinear arbitrage-pricing model does an adequate job of explaining the time series behavior of a cross section of international returns.