Inflationary Finance, Capital Controls, and Currency Substitution

This paper studies currency substitution in an environment where agents' inflation tax-evasive demand for foreign money is balanced by the concern for the possibility that the government may impose economy-wide capital controls under which foreign currency transactions are costly. Under the assumption of endogenous beliefs, the results show a persistent demand for foreign money despite efforts by the government to reduce inflation. In addition, the economy can exhibit multiple, Pareto-ranked steady states with different levels of currency substitution. The stability analysis suggests that the economy converges to the inferior steady state, on the "wrong side" of the Laffer curve.     

Informed Trading around Merger Announcements: An Empirical Test Using Transaction Volume and Open Interest in Options Market

This paper provides empirical evidence on the level of trading activity in the stock options market prior to the announcement of a merger or an acquisition. Our analysis shows that there is a significant increase in the trading activity of call and put options for companies involved in a takeover prior to the rumor of an acquisition or merger. This result is robust to both the volume of option contracts traded and the open interest. The increased trading suggests that there is a significant level of informed trading in the options market prior to the announcement of a corporate event. In addition, abnormal trading activity in the options market appears to lead abnormal trading volume in the equity market. This finding supports the hypothesis that the options market plays an important role in price discovery.     

Pricing Interest Rate Derivatives: A General Approach

The relationship between affine stochastic processes and bondpricing equations in exponential term structure models has beenwell established. We connect this result to the pricing of interestrate derivatives. If the term structure model is exponentialaffine, then there is a linkage between the bond pricing solutionand the prices of many widely traded interest rate derivativesecurities. Our results apply to m-factor processes with n diffusionsand l jump processes. The pricing solutions require at mosta single numerical integral, making the model easy to implement.We discuss many options that yield solutions using the methodsof the article.     

The information content of stock split announcements: Do options matter?

We provide a new test of the informational efficiency of trading in stock options in the context of stock split announcements. These announcements tend to be associated with positive abnormal returns. Our traditional event study results show abnormal returns that are significantly lower for optioned than non-optioned stocks, whether traded on the NYSE, Amex, or Nasdaq. After controlling for market returns, capitalization, book-to-market ratio, and trading volume, we find that the abnormal returns are significantly lower for NYSE/Amex optioned than non-optioned stocks. Although the results for Nasdaq stocks are not as clear, the overall effects tend to be lower after optioning. These findings are consistent with the hypothesis that the prices of optioned stocks embody more information, diminishing the impact of the stock split announcement. They provide new evidence of the beneficial effects of options on their underlying stocks.     

Reexamining the uncertain information hypothesis on the S&P 500 Index and SPDRs

This paper examines the uncertain information hypothesis on one major index and its corresponding exchange-traded fund: the S&P 500 Index and SPDRs in the pre-SPDRs (01/63–12/93) and post-SPDRs (01/94–12/03) periods. Two strategies are used to measure the economic significance of the uncertain information hypothesis. Overall, we present evidence confirming the uncertain information hypothesis in the post-SPDRs period. However, we fail to convert the statistically significant gains observed into economic gains under a conservative approach. In addition, the degree of difference in the volatilities of the 5-day post-event returns (in both the S&P 500 and the SPDR) among the three subgroups diminishes in the post-SPDR period. Hence, we conclude that the market is in fact short-term efficient in a more realistic setting.     

Catering effects in corporate dividend policy: The international evidence

This study tests for the international presence of dividend catering across a sample of twenty-three countries. We find evidence of catering among firms incorporated in common law countries but not for those in civil law nations. Catering persists even after controlling for the effect of the firm’s lifecycle. We conclude that when the legal regime and its accompanying set of investor protections permit, investors force dividends from managers, but they also attempt to extract such payouts indirectly by placing a high value on dividend paying firms. The relative failure of civil law firms to cater might be explained by idiosyncratic behaviors in the consumption of the private benefits of control or a lack of interest in responding to temporary market misevaluations of their equity.     

Accounting-based versus market-based cross-sectional models of CDS spreads

Models of financial distress rely primarily on accounting-based information (e.g. [Altman, E., 1968. Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. Journal of Finance 23, 589–609; Ohlson, J., 1980. Financial ratios and the probabilistic prediction of bankruptcy. Journal of Accounting Research 19, 109–131]) or market-based information (e.g. [Merton, R.C., 1974. On the pricing of corporate debt: The risk structure of interest rates. Journal of Finance 29, 449–470]). In this paper, we provide evidence on the relative performance of these two classes of models. Using a sample of 2860 quarterly CDS spreads we find that a model of distress using accounting metrics performs comparably to market-based structural models of default. Moreover, a model using both sources of information performs better than either of the two models. Overall, our results suggest that both sources of information (accounting- and market-based) are complementary in pricing distress.     

Identifiability of the misspecified split hazard models

Unlike standard models, a split population hazard model allows the exit probability to be less than one. Although conceptually attractive, split models are prone to identification problems. In the reduced form estimation of the hazard function, the influence of split may not be distinguishable from that of neglected heterogeneity. For illustration, I use Monte Carlo simulations to highlight the problem of interpreting the structural parameters of the split Weibull and the Weibull-gamma models.     

Does stardom affect the informativeness of a CEO's insider trades?

This study examines whether the celebrity or star status of a chief executive officer (CEO) affects the informativeness of his insider trades. Using three different measures to identify star CEOs in a sample of S&P 1500 firms, we find that trades of non‐star CEOs predict future abnormal returns and earnings innovations and that trades of star CEOs do not. The predictive power of non‐star CEO trades is mostly attributable to opportunistic trades, not routine trades. We also find evidence suggesting that the abnormal returns associated with non‐star CEO insider trades are due to the lower visibility and consequently less scrutiny of non‐star CEOs compared with star CEOs.