ALL THINGS CONSIDERED,TAXES DRIVE THE JANUARY EFFECT

The multitude of explanations for the January effect leaves the reader confused about its primary cause(s): is it tax‐loss selling, window dressing, information, bid‐ask bounce, or a combination of these causes? The confusion arises, in part, because evidence has generally been presented in support of a particular hypothesis though the same evidence may be consistent with another hypothesis. Furthermore, prior work does not adequately control for the bid‐ask bounce. In this article we try to disentangle different explanations of the January effect and identify its primary cause. We find that tax‐related selling is the most important cause, overshadowing other explanations.     

CAN INEFFICIENT TRADERS CREATE VALUE?

I examine the aggregate expected profit generated by informed traders of diverse ability in a competitive market. I assume that efficient traders get perfect information on asset values whereas inefficient traders get noisy information. In the presence of order size restrictions, I show that the aggregate expected profit generated by efficient and inefficient traders together can be higher than that generated by efficient traders alone. Thus, inefficient traders can create value in a constrained trading environment.     

Liquidity shocks and equilibrium liquidity premia

We study an equilibrium in which agents face surprise liquidity shocks and invest in liquid and illiquid riskless assets. The random holding horizon from liquidity shocks makes the return of the illiquid security risky. The equilibrium premium for such risk depends on the constraint that agents face when borrowing against future income; it is insignificant without borrowing constraint, but can be very high with borrowing constraint. Illiquidity, therefore, can have large effects on asset returns when agents face liquidity shocks and borrowing constraints. This result can help us understand why some securities have high liquidity premia, despite low turnover frequency.     

Foods produced using biotechnology: how does the law protect consumers?

This paper addresses the following subjects: biotechnology and consumers, concern about risks, consumer acceptance, labelling of foods produced using biotechnology, the legal approach to consumer protection, and consumer protection policies relating to biotechnology products in the European Union, the United States, Turkey and global institutions such as the Convention for Biological Diversity (CBD) and the World Trade Organisation (WTO). It is likely that biotechnology will gain ground much more rapidly in the twenty‐first century than in the past. Despite rapid, detailed and precise advances in gene technology, its applications have not been the received with a great deal of consumer enthusiasm. Consumers have approached genetically modified foods with considerable apprehension and opposition. Consumer concerns about bioengineered food products focus on the questions of human health, environmental and social risks and benefits. The most important stages in the process of marketing new foods produced using biotechnology are to demonstrate user need and consumer acceptance. Generally, the technical complexity of biotechnology makes it difficult for consumers to understand details of the product and the specific attributes of biotechnology applications. Scientific uncertainty, the nature of consumer concerns and general reluctance to accept biotechnology products, increase the importance of consumer protection. Legal protection is a very important factor in the solution of new social problems related to technological advances. More specifically, consumer and environmental law support consumer protection related to foods produced with biotechnology. The basic principles of consumer law can be re‐formulated as consumer rights. Environmental law is a new phenomenon, but precautionary principles and public participation in decision‐making for environmental law are relevant to consumer protection relating to bioengineered food products.     

Stock Price and Volume Effects Associated with Compositional Changes in European Stock Indices

This paper provides further evidence of price and volume effects associated with index compositional changes by analysing the inclusions (exclusions) from the French CAC40 and SBF120 indices, as well as the FTSE100. I find evidence supporting the price pressure hypothesis associated with index fund rebalancing, but weak or no evidence for the imperfect substitution, liquidity and information hypotheses. The results improve on recent evidence from the S&P500 index. The evidence for the FTSE100 additions shows, in particular, that markets learn about an imminent inclusion and incorporate this information into prices, even before the announcement date.     

What motivates a subprime borrower to default?

This paper uses a real options approach to analyse the exercise of the default option embedded in mortgages. In particular, it examines a subprime household who borrows at a premium, but hopes to refinance at prime rates if their house appreciates. We show how these optimal default decisions can be used to calculate probabilities of default – an important input for risk management and pricing purposes. Numerical examples are provided, calibrated to US data. In a low interest rate environment, the credit-upgrade potential may discourage subprime borrowers from defaulting. However, default probabilities are highly sensitive to changes in interest rates and house prices. This provides a rational explanation for the prevalence of adjustable rate mortgages among subprime borrowers, and the subsequent large numbers of defaults, when interest rates rose and house prices declined.     

Are Expected Inflation Rates and Expected Real Rates Negatively Correlated? A Long‐Run Test of the Mundell‐Tobin Hypothesis

Some empirical evidence suggests that the expected real interest and expected inflation rates are negatively correlated. This hypothesis of negative correlation is sometimes known as the Mundell‐Tobin hypothesis. In this article we reinvestigate this negative relation from a long‐term point of view using cointegration analysis. The data on the historical interest rate on T‐bills and the inflation rate indicate that the Mundell‐Tobin hypothesis does not hold in the long run for the United States, the United Kingdom, and Canada. We also obtain similar results using the real interest rate on index‐linked gilt traded in the United Kingdom.     

The term structure of real interest rates: theory and evidence from UK index-linked bonds

This paper studies the behavior of the default-risk-free real term structure and term premia in two general equilibrium endowment economies with complete markets but without money. In the first economy there are no frictions as in Lucas (Econometrica 46 (1978) 1429) and in the second risk-sharing is limited by the risk of default as in Alvarez and Jermann (Econometrica 68 (2000) 775; Rev. Financial Studies 14 (2001) 1117). Both models are solved numerically, calibrated to UK aggregate and household data, and the predictions are compared to data on real interest rates constructed from the UK index-linked data. While both models produce time-varying risk or term premia, only the model with limited risk-sharing can generate enough variation in the term premia to account for the rejections of expectations hypothesis.     

Valuing the Option to Purchase an Asset at a Proportional Discount

I analyze the value of a nonstandard call option that allows the holder to purchase an underlying asset at a discount proportional to the asset's market price. Several applications for this type of option exist, including its use in employee compensation contracts. I derive the value of this option for a dividend-paying asset and for an option whose exercise price reflects a time-varying discount factor. The derived value incorporates the optimal time at which the option should be exercised. One application of this option relates to a residential real estate program in China.