An empirical investigation of international asset pricing

We investigate several asset pricing models in an internationalsetting. We use data on a large number of assets traded in theUnited States, Japan, the United Kingdom, and France. The modeltogether with the hypothesis of capital market integration implytestable restrictions on multivariate regressions relating assetreturns to various benchmark portfolios. We find that multifactormodels tend to outperform single-index models in both domesticand international forms especially in their ability to explainseasonality in asset returns. We also find that the behaviorof the models is affected by change in the regulatory environmentin international markets.     

The capital structure puzzle revisited

Corporate finance researchers have long been puzzled by lowcorporate debt ratios given debt's corporate tax advantage.This article recognizes that firm value typically reflects agrowing stream of earnings, while current debt reflects a nongrowingstream of interest payments. Debt to value is therefore a distortedmeasure of corporate tax shielding. Even with very small debt-relatedcosts, this may explain the observed magnitude and cross-sectionalvariation of debt ratios. Since this variation may be independentof tax shielding, debt ratios provide an inappropriate frameworkfor empirically examining the trade-off theory of capital structure.     

Underestimation of portfolio insurance and the crash of October 1987

We examine market crashes in the multiperiod framework of Glostenand Milgrom (1985). Our analysis shows that if the market'sprior beliefs underestimate the extent of dynamic hedging strategiessuch as portfolio insurance, then the price will be greaterthan that which would be implied by fundamentals if the extentof portfolio insurance were known with certainty. Over time,the market learns of the amount of portfolio insurance, andconsequently reevaluates the previous inferences drawn frompurchases that were erroneously regarded as based on favorableinformation. The result is that the price falls when the amountof portfolio insurance is revealed.     

Time-varying risk and return in the bond market: a test of a new equilibrium pricing model

This article uses bond market data to empirically test the assetpricing model of Kazemi (1992). According to this model therate of return on a long-term, pure-discount, default-free bondwill be perfectly correlated with changes in the marginal utilityof the representative investor. The covariability between financialasset returns and returns on such a bond can therefore serveas a measure of the riskiness of assets. The aim of this studyis to determine whether the model can explain cross-sectionaldifferences in the monthly returns of bonds with different maturitydates. We estimate and test the restrictions imposed by themodel on returns of default-free bonds, while allowing the conditionaldistribution of bond returns to be time varying. The model isrejected during the full sample period (1973-1995) and the subperiod(1973-1980) when the Federal Reserve's focus is on interestrates, while the model is not rejected during the subperiod(1981-1995) when the Federal Reserve's focus is on money supply.     

The informal food marketing system in urban environments: Case studies of Kagiso and Orange Farm

The rapid development of urban townships and the failure of the formal sector to meet the township demand have led to the emergence of informally organised marketing systems, which have certain advantages over their formal counterparts. This note presents the findings of a study on the informal marketing of vegetables and fruit in two townships of Gauteng Province, namely Kagiso and Orange Farm. The data collection procedures are discussed first and then the results are presented with regard to the kinds of vegetables and fruit sold, their pricing, supply and transport, and the constraints faced by informal traders.     

The role of liquidity in futures market innovations

I characterize the optimal design of a new futures market (aninnovation) by an exchange in the presence of market frictions.Futures markets are characterized by both the contract and thelevel of trader participation; both can be determined by anexchange. A game in which exchanges simultaneously design marketsis considered, and a particular equilibrium (not necessarilyunique) is constructed. A game in which exchanges sequentiallydesign markets (and incur design costs) is also considered andthe (generically unique) equilibrium is constructed. The natureof equilibrium with multiple exchanges is discussed in thesesimultaneous and sequential settings, illustrating the roleplayedby liquidity considerations both in market design and in thenature of competition between exchanges.