Price distortion induced by a flawed stock market index

Despite the introduction of sophisticated stock market indices, investors often trade portfolios of the flawed indices to change their exposure to the market. In this study, we show that these transactions cause significant mispricing in individual stocks, especially during periods of significant market movement. As an influential, albeit flawed, stock index, we focus on the Nikkei 225. We find index constituents that are excessively weighted on the index, experience buying (selling) pressure when the stock market surges (falls), and experience price corrections after such periods of change. In contrast, non-constituent stocks do not experience such trading pressure.     

Error correction exchange rate modeling: Evidence for Mexico

A set of error correction models are proposed for the nominal exchange rate between the Mexican peso and the United States dollar. The basic theoretical frameworks utilize balance of payments and monetary constructs. Empirical estimation results are fairly weak for both specifications irrespective of the interest rate variable selected. Although dynamic simulation properties of the equations are acceptable, in no case do they generate levels of accuracy that exceed those associated with a random walk. Partial funding support for this research was provided by El Paso Electric Company, the Fulbright Council for International Exchange of Scholars, the Center for Inter American and Border Studies at the University of Texas at El Paso, and the Federal Reserve Bank of Dallas. Econometric research assistance was provided by David Torres and Roberto Tinajero. Helpful comments were provided by two anonymous referees, Joachim Zietz, Luis Berrnardo Torres, and participants at the 2001 American Statistical Association meetings in Atlanta.     

The Fable of the Keiretsu

Central to so many accounts of post-war Japan, the keiretsu corporate groups lacked economic substance from the start. Conceived by Marxists committed to locating "domination" by "monopoly capital," they found an early audience among western scholars searching for evidence of culture-specific group behavior in Japan. By the 1990s, they had moved into mainstream economic studies, and keiretsu dummies appeared in virtually all econometric regressions of Japanese industrial or financial structure. Yet the keiretsu began as a figment of the academic imagination, and they remain that today. Regardless of the keiretsu definition used, cross-shareholdings within the "groups" were trivial, even during the years when keiretsu ties were supposedly strongest. Neither does membership proxy for "main bank" ties. Econometric studies basing "keiretsu dummies" on the available rosters produce predictably haphazard and unstable results. In the end, the only reliably robust results are the artifacts of the sample biases created by the definitions themselves.     

Relative Performance of U.S. and Japanese Electricity Distribution: An Application of Stochastic Frontier Analysis

Journal of Productivity Analysis -     

Relative Performance of U.S. and Japanese Electricity Distribution: An Application of Stochastic Frontier Analysis

This paper estimates and compares the technical efficiency of the U.S. and Japanese electric utilities during the period 1982–1997 using a stochastic frontier analysis. Our focus is on electricity distribution services of major investor-owned utilities. We employ translog input distance functions to represent the technology of electricity distribution. Empirical results show that after controlling for environmental variables, on average, the Japanese electric utilities are more efficient. It is shown, however, that some U.S. utilities are as efficient as the most efficient Japanese utilities, indicating that the estimated frontier is not necessarily dominated by Japanese utilities.An erratum to this article can be found at     

Does Ownership Matter? Evidence from the Zaibatsu Dissolution Program

In 1985, Demsetz and Lehn argued both that the optimal corporate ownership structure was firm-specific, and that market competition would drive firms toward that optimum. Because ownership was endogenous to expected performance, any regression of profitability on ownership patterns would yield insignificant results. To test this hypothesis, we use the zaibatsu dissolution program from late-1940s Japan as a natural experiment: an exogenous shock to the equilibrium ownership structure. Through that program, the US-run occupation removed the more prominent shareholders from many of the most successful Japanese companies. By focusing on the way firms and investors responded to the mandated selloff, we accomplish two goals: (a) we avoid the endogeneity problem that has plagued much of the other research on the subject, and (b) we clarify the equilibrating dynamics by which competitive markets move firms toward their optimal ownership structure. With a sample of 637 Japanese firms for 1953 and 710 for 1958, we confirm the equilibrating mechanism behind the Demsetz-Lehn hypothesis: between 1953 and 1958, the ex-zaibatsu firms did retructure their ownership patterns. As of 1953, the unlisted ex-zaibatsu and new firms still had not been able to negotiate the transactions necessary to approach their profit-maximizing ownership structures. Even the listed firms had not fully undone the effect of the occupation-induced changes on managerial practices. By 1958 the firms had done this, and the earlier correlation between profitability and ownership disappeared. By then, firm profitability showed no correlation with ownership, whether under linear, quadratic, or piecewise specifications. We further find no evidence that ex-zaibatsu firms sought to strengthen their ties to banks over 1953–1958.     

Welfare Effects of Endogenous Information Acquisition and Disclosure in Duopoly Markets

Abstract

This paper investigates the interaction between firms' information acquisition decisions and disclosure of internally acquired information in a Cournot duopoly market under demand uncertainty. The main results are as follows. When the correlation between firms' demands is positive and sufficiently high, disclosure of information on demand uncertainty can enhance social welfare, given that the quality of firms' private information is constant. However, in the setting where firms' private information is endogenously determined, mandatory disclosure is not always desirable. This is because, when disclosure is mandated, firms acquire less precise information compared with the case where the acquired information is not disclosed; hence, their internal information environments are deteriorated. This can lead to unintended consequences such that disclosure regulation decreases social welfare.     

Strategic Voting for Noncooperative Environmental Policies in Open Economies

In this paper, we construct a political-economy model of strategic environmental policymaking with different degrees of product differentiation and different market structures, and examine how strategic voting decisions are affected by the choice of environmental policy instruments (tax or standard). We show that in a Cournot market structure, voters elect tax-setting policymakers who are more green than themselves when product differentiation and/or environmental externalities are more prominent. In a Bertrand market structure, they elect more green tax-setting policymakers than themselves. On the other hand, they elect standard-setting policymakers who are less green than themselves. The results confirm the advantage of the overall use of emission tax over that of emission standard regarding the welfare effect of strategic voting.     

Is Technological Progress Pareto-Improving for a World with Global Public Goods?

This paper investigates the welfare effects of unilateral or multilateral technological progress in a world with global public goods. We focus on the consumption relation between the private and the public good, and then show that technological progress may beself-centered (benefit oneself but harm others), self-sacrificing (harm oneself but benefit others), or self-defeating (harm all) if two goods are substitutable. In addition, any type of technological progress improves every countrys welfare if the private and the public good are close complements.