Option Trading and the Intervalling Effect Bias in Beta

Prior studies show that the beta coefficient of a security changes systematically as the length of measurement interval is varied. This phenomenon, which is called the intervalling effect bias in beta, has been attributed to the friction in the trading system that causes the delays in the price-adjustment process. This study shows that option listing is associated with a decline in the beta intervalling effect bias. The decline is most pronounced for small firms. We also find that our sample firms grow significantly after option listing. Since prior research indicates that market value is a major determinant of the magnitude of the intervalling effect, we re-examine our results using a subsample that controls for market value. The results indicate that the decline in the beta bias from the pre-listing to post-listing period is still prevalent after we control for the change in firm size. Overall, the evidence is consistent with the notion that option trading reduces the delays in the price-adjustment process, which in turn reduces the intervalling effect bias in beta.     

The market reaction to announced deep cuts in capital expenditures

The objective of the study reported in this paper was to examine the role of deep cuts in capital expenditures as a firm's strategy for becoming more efficient and, in turn, more competitive. Based on an empirical study, support is provided for the argument that deep cuts in capital expenditures may be a viable strategy for realigning corporate priorities toward a more efficient operation. The measure of performance utilized in this paper is the stock market reaction to announced deep cuts.     

Bayesian inference for periodic regime-switching models

We present a general class of nonlinear time-series Markov regime-switching models for seasonal data which may exhibit periodic features in the hidden Markov process as well as in the laws of motion in each of the regimes. This class of models allows for non-trivial dependencies between seasonal, cyclical and long-term patterns in the data. To overcome the computational burden we adopt a Bayesian approach to estimation and inference. This paper contains two empirical examples as illustration, one uses housing starts data while the other employs US post-Second World War industrial production. © 1998 John Wiley & Sons, Ltd.     

Estimation and efficiency evaluation of stochastic frontier models with interval dependent variables

Journal of Productivity Analysis - This paper considers the maximum likelihood estimation of a stochastic frontier production function with an interval outcome. We derive an analytical formula for...     

Risk sensitivity in distribution channel partnerships: implications for manufacturer return policies

The manufacturer return policy is widely regarded as a means for channel partners to share risk. However, existing studies of this popular institutional practice use frameworks that assume risk-neutrality of all parties.This report analyzes how sensitivity to risk affects both sides of the manufacturer-retailer relationship under various scenarios of strategic power, and how these dynamics are altered by a return policy. A key finding is that the penalty for ignoring risk sensitivity can be substantial. This will suggest an informational motive affecting the use of return policies, a consequence of the potential difficulty of inferring another party’s risk sensitivity and the positive incentive for deception.     

AN EVALUATION OF THE PERFORMANCE OF PORTFOLIOS SELECTED FROM VALUE LINE RANK ONE STOCKS: 1976–1982

In this study, the performance of portfolios selected from among Value Line rank one stocks is compared with portfolios consisting of randomly selected New York Stock Exchange and American Stock Exchange stocks. Results indicate that before considering transactions costs, active traders who invest in Value Line rank one stocks can earn positive excess returns. However, after considering transaction costs, neither active traders nor passive investors in rank one stocks can earn returns that are statistically greater than returns achieved by portfolios of randomly selected stocks. These results are not sensitive to variations in portfolio size.     

Co-integration constraint and forecasting: An empirical examination

Does co-integration help long-term forecasts? In this paper, we use simulation, real data sets, and multi-step-ahead post-sample forecasts to study this question. Based on the square root of the trace of forecasting error-covariance matrix, we found that for simulated data imposing the ‘correct’ unit-root constraints implied by co-integration does improve the accuracy of forecasts. For real data sets, the answer is mixed. Imposing unit-root constraints suggested by co-integration tests produces better forecasts for some cases, but fares poorly for others. We give some explanations for the poor performance of co-integration in long-term forecasting and discuss the practical implications of the study. Finally, an adaptive forecasting procedure is found to perform well in one- to ten-step-ahead forecasts.     

A simple closed-form approximation for the cumulative distribution function of the composite error of stochastic frontier models

This paper derives an analytic closed-form formula for the cumulative distribution function (cdf) of the composite error of the stochastic frontier analysis (SFA) model. Since the presence of a cdf is frequently encountered in the likelihood-based analysis with limited-dependent and qualitative variables as elegantly shown in the classic book of Maddala (Limited-dependent and qualitative variables in econometrics. Cambridge University Press, Cambridge, 1983), the proposed methodology is useful in the framework of the stochastic frontier analysis. We apply the formula to the maximum likelihood estimation of the SFA models with a censored dependent variable. The simulations show that the finite sample performance of the maximum likelihood estimator of the censored SFA model is very promising. A simple empirical example on the modeling of reservation wage in Taiwan is illustrated as a potential application of the censored SFA.     

An intervention analysis for the relationship between capital expenditure decisions and the market value of firms

This article is meant to explore the relationship between corporate capital expenditure decisions and the market value of firms using the intervention technique. The article shows that deep cuts in capital expenditures may, for sink-hole type projects, provide a positive signal to the marketplace. For non-sink-hole type projects, our findings are not quite consistent with those reported in McConnell and Muscarella (1985).