An empirical note on bond-yield uncertainty and the demand for money

This paper empirically tests the effect of bond-yield uncertainty on the demand for money, as implied by the capital theory approach to the demand for money, suggested by Friedman and Tobin. It is expected that the demand for money is affected not only by the yield on bonds (which are a substitute asset), but it also in increasing function of their risk. The empirical tests, which employ two alternative measures of uncertainty (mean of squared deviations from the average, and the mean of squared deviation from a predictor obtained by exponential smoothing) seem to support the Friedman-Tobin hypothesis.     

The forward exchange rate and the prediction of the future spot rate: Empirical evidence

This paper examines the characteristics and evaluates the record of the forward exchange rate as a predictor of the future spot rate of three European currencies during the recent period of floating rates. The forward rate (for 1, 3 and 6 months) is compared to a simple predictor of ‘no change’ extrapolations (i.e., a Martingale model) by the use of Theil's inequality ratios. Theil's measures are then applied to assess the relative importance of the various sources of the forward's prediction errors, and the efficiency of the forecast is tested. The results show that the forward rate, while generally producing unbiased forecasts, fails to track the fluctuations in future spot rates and poorly reflects their variations. Further, it does not perform better than the current spot rate in predicting the future spot rate for all the examined forecast leads. Thus its usefulness for the purpose of business decisions is questioned.     

‘Managerialism’, ‘ownerism’ and risk

This paper proposes that managers, having the value of their human capital dependent on the performance of the firm they manage, and being unable to diversify away this risk, are expected to attempt to reduce their employment risk internally by project selection or by income smoothing, intended to stabilize the firm's income stream. An empirical investigation shows that manager-controlled firms exercise ‘income smoothing’ to a greater extent than owner-controlled firms, have relatively lower unsystematic risk and perhaps lower systematic risk.     

Liquidity risk of corporate bond returns: conditional approach

We study the exposure of the US corporate bond returns to liquidity shocks of stocks and Treasury bonds over the period 1973–2007 in a regime-switching model. In one regime, liquidity shocks have mostly insignificant effects on bond prices, whereas in another regime, a rise in illiquidity produces significant but conflicting effects: Prices of investment-grade bonds rise while prices of speculative-grade (junk) bonds fall substantially (relative to the market). Relating the probability of these regimes to macroeconomic conditions we find that the second regime can be predicted by economic conditions that are characterized as “stress.” These effects, which are robust to controlling for other systematic risks (term and default), suggest the existence of time-varying liquidity risk of corporate bond returns conditional on episodes of flight to liquidity. Our model can predict the out-of-sample bond returns for the stress years 2008–2009. We find a similar pattern for stocks classified by high or low book-to-market ratio, where again, liquidity shocks play a special role in periods characterized by adverse economic conditions.     

Robust Policy in Times of Pandemic

Intereconomics - The pandemic exposes policymakers to fundamental uncertainties about future economic scenarios. While policymakers have to act forcefully to mitigate the impact on the economy,...     

Number of Shareholders and Stock Prices: Evidence from Japan

Merton (1987) proposes that an increase in a firm's investor base increases the firm's value. In Japan, companies can reduce their stock's minimum trading unit—the number of shares in a "round lot"—which facilitates trading in the stock by small investors. We find that a reduction in the minimum trading unit greatly increases a firm's base of individual investors and its stock liquidity, and is associated with a significant increase in the stock price. Further, the stock price appreciation is positively related to an increase in the number of shareholders.     

Deviant Behaviour in St Petersburg

Deviant behaviour is one of the most precise barometers of the social, economic, political and moral climate in a society. In this article the author analyses different forms of deviant behaviour in St Petersburg including violent crime, property crime, suicide and drug and alcohol addiction. Two stages in the dynamics of social deviation are identified during the transition period from ‘socialist totalitarianism’ to democracy. The first stage — from mid-1985 to the end of 1987 — can be characterized by the spiritual and psychological elevation of the population, a sense of liberation and release and the expectation of improvement in standards of living. During this period the level of the main forms of deviant behaviour receded. The second stage begins with the deceleration of economic and political reforms in Russia. This process has been accompanied by an impoverishment in the level and the quality of life and in the basic components of socio-demographic development and, as a result, by increasing levels of deviant behaviour. The advent of a third stage of economic, social and political stability is difficult to forecast. Our analysis of the official statistics and interviews with the people of St Petersburg leads to the following observation: the absolute and relative quantitative components of the basic forms of deviant behaviour have risen intensely and are near to critical. In addition, organized criminality has reached the level of criminal communities which control not only the great number of criminal organizations and groups but also the economic structures. On the one side, a process of criminalization of business is taking place, on the other, the politicization of organized criminality. In the author's opinion, this tendency of the social, political and economic processes militates against any optimistic prognosis for the immediate future. Le comportement déviant est un des baromètres les plus précis du climat social, économique, politique et moral d'une société. Dans cet article l'auteur analyse les différentes formes de comportement déviant à Saint Petersbourg, y compris les crimes violents, le crime contre la propriété, le suicide et la dependance à la drogue et l'alcool. Deux étapes dans les dynamiques des déviances sociales sont identifiées durant la période de transition du ‘totalitarisme socialiste’à la démocratie. La première phase — du milieu de 1985 à la fin de 1987 — peut être caractérisée par l'élévation spirituelle et psychologique de la population, un sentiment de libéation et de relâchement et l'espoir d'une amélioration du niveau de vie. Durant cette période le niveau des formes principales de déviance baissa. La seconde phase commence avec le ralentissement des réformes politiques et sociales en Russie. Ce processus a été accompagné par un apprauvissement du niveau et de la qualité de la vie et des éléments de base du développement socio-démographique, et, conséquemment, par un accroîssement des comportements déviants. La venue d'une troisième phase de stabilitééconomique, sociale et politique est difficile à prévoir. Notre analyse des statistiques officielles et des interviews avec les gens de Saint Petesbourg conduit à l'observation suivante: les éléments quantitatifs absolus et relatifs des formes déviantes de base sont beaucoup augmenté et approchent un niveau crucial. De plus, l'organisation criminelle a atteint le niveau de communautés criminelles qui contrôlent non seulement un grand nombre d'organisations et groupes criminels mais aussi les structures économiques. D'un côté, il y a un processus de criminalisation des entreprises et, de l'autre, la politisation des crimes organisés. L'auteur pense que cette tendance des processus sociaux, politicaux et économiques va à l'encontre de tous pronostics optimistes pour le futur immédiat.     

Stock and Bond Liquidity and its Effect on Prices and Financial Policies

An asset is liquid if it can be traded at the prevailing market price quickly and at low cost. We show that in addition to risk, liquidity affects asset prices and returns. Theories of asset pricing suggest that the expected return of an asset is increasing in its risk, because risk-averse investors require compensation for bearing more risk. Because investors are also averse to the costs of illiquidity and want to be compensated for bearing them, asset returns are increasing in illiquidity. Thus, asset prices should depend on two asset characteristics: risk and liquidity. This paper surveys research on the effects of liquidity on asset prices and returns, showing that liquidity is an important factor in capital asset pricing.