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Volume 38: Issue 3 (June 1983)


Front Matter

Pages: i-vii  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb00780.x  |  Cited by: 0


Back Matter

Pages: viii-xvi  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb00781.x  |  Cited by: 0


Stock Market Returns and Inflation Forecasts

Pages: 663-673  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02495.x  |  Cited by: 19

N. BULENT GULTEKIN

This study uses data from the Livingston survey of expectations to examine the Fisher hypothesis as a model relating expected stock returns and expected inflation. We show that the Fisher hypothesis holds much better for ex ante expectations than ex post realizations.


Taxes and the Pricing of Stock Index Futures

Pages: 675-694  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02496.x  |  Cited by: 72

BRADFORD CORNELL, KENNETH R. FRENCH

Stock index futures prices are generally below the level predicted by simple arbitrage models. This paper suggests that the discrepancy between the actual and predicted prices is caused by taxes. Capital gains and losses are not taxed until they are realized. As Constantinides demonstrates in a recent paper, this gives stockholders a valuable timing option. If the stock price drops, the investor can pass part of the loss on to the government by selling the stock. On the other hand, if the stock price rises, the investor can postpone the tax by not realizing the gain. Since this option is not available to stock index futures traders, the futures prices will be lower than standard no‐tax models predict.


Optimal Aggregation of Money Supply Forecasts: Accuracy, Profitability and Market Efficiency

Pages: 695-710  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02497.x  |  Cited by: 29

STEPHEN FIGLEWSKI, THOMAS URICH

We present a general procedure for aggregating expert forecasts which exploits regularities in the structure of information within the forecaster population. Specific information structures lead to aggregation methods which adjust for additive bias, differences in individual accuracy, and correlation among forecasts. As an application, we construct composite predictions of the weekly change in the money supply from forecasts made by twenty major securities dealers, for which high positive correlation is found to be a significant characteristic. Due to instability in the information structure, our methods cannot improve on the accuracy of a simple average in this case. However, they do capture information about the correlation among money supply forecasts which is not fully impounded in short‐term interest rates. Forecasts from our models accurately predict the direction of price changes for Treasury bills and Treasury bill futures after a money supply announcement.


A New Approach to Testing Asset Pricing Models: The Bilinear Paradigm

Pages: 711-743  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02498.x  |  Cited by: 50

STEPHEN J. BROWN, MARK I. WEINSTEIN

We propose a new approach to estimating and testing asset pricing models in the context of a bilinear paradigm introduced by Kruskal [18]. This approach is both simple and at the same time quite general. As an illustration we apply it to the special case of the arbitrage pricing model where the number of factors is pre‐specified. The data appear to be generally in conflict with a five or seven factor representation of the model used by Roll and Ross [30]. When we consider the number of replications of our test and the large number of observations on which it is performed, the frequency with which we reject the three factor APM does not lead us to conclude that this model is unrepresentative of security returns. Further, the rejection of the five and seven factor versions is to be expected if the three factor version is correct. The paradigm gives insight into the appropriate specification of the model and suggests that there may be a small number of economy wide factors that affect security returns.


On the Class of Elliptical Distributions and their Applications to the Theory of Portfolio Choice

Pages: 745-752  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02499.x  |  Cited by: 102

JOEL OWEN, RAMON RABINOVITCH

It is shown that the class of elliptical distributions extend the Tobin [14] separation theorem, Bawa's [2] rules of ordering uncertain prospects, Ross's [12] mutual fund separation theorems, and the results of the CAPM to non‐normal distributions, which are not necessarily stable. Further, the mean‐covariance matrix framework is generalized to a mean‐characteristic matrix framework in which the characteristic matrix is the basis for a spread or risk measure, and a generalized equilibrium pricing equation is arrived at. The implications to empirical testing of the CAPM and modeling the empirical distribution of speculative prices are discussed.


The Stability of UK Risk Measures and The Problem of Thin Trading

Pages: 753-783  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02500.x  |  Cited by: 43

E. DIMSON, P. R. MARSH

This paper examines the problems of estimating risk measures and their stability in thin markets. It shows analytically that conventional approaches used in previous studies can lead to serious overestimates of the stability of risk measures when shares are subject to thin trading. It then demonstrates, using UK data, that this is, in fact, a serious practical problem, and that the resultant biases are of precisely the form predicted. Finally, the paper presents reliable evidence on the stability of UK risk measures by using an estimation method designed to avoid thin trading bias. Using this approach, risk measures are found to be as stable in the UK as they are in the USA.


The Irrelevance of Capital Structure for the Impact of Inflation on Investment

Pages: 785-794  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02501.x  |  Cited by: 2

SHALOM HOCHMAN, ODED PALMON


The Allocation of Capital Between Residential and Nonresidential Uses: Taxes, Inflation and Capital Market Constraints

Pages: 795-812  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02502.x  |  Cited by: 8

PATRIC H. HENDERSHOTT, SHENG CHENG HU

We have constructed a simple two‐sector model of the demand for housing and corporate capital. Economic growth and an increase in the inflation rate were then simulated with a number of model variants. The model and simulation experiments illustrate both the tax bias in favor of housing and the manner in which the increase in inflation between 1965 and 1978 magnified it. The existence of capital‐market constraints offsets the bias against corporate capital, but it introduces a sharp, inefficient reallocation of housing from less wealthy, constrained households to wealthy households who do not have gains on mortgages and are not financially constrained.


An Empirical Analysis of the Role of the Medium of Exchange in Mergers

Pages: 813-826  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02503.x  |  Cited by: 39

WILLARD T. CARLETON, DAVID K. GUILKEY, ROBERT S. HARRIS, JOHN F. STEWART

In empirical studies of differences between firms which are acquired and those which are not, researchers typically divide firms into two groups‐acquired and nonacquired. In this paper, we argue that cash takeovers may be sufficiently different from noncash acquisitionst hat failure to distinguish between them may lead to inappropriateg eneralizations. We provide evidence from the mid 1970s that three categories of firms can be distinguished:n onacquireda, cquiredi n a cash takeover, and acquired in an exchange of securities.


Controlling Monetary Aggregates: The Discount Window

Pages: 827-843  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02504.x  |  Cited by: 2

ANTHONY M. SANTOMERO

This paper argues that current discount window policy, coupled with non‐borrowed reserve targeting of the Federal Reserve, makes the quantity of high‐powered money endogenous. Examination of the advisability of this procedure in a stochastic environment is conducted using a general equilibrium financial model. It is concluded that the current policy reduces the destabilizing effects of shifts between various depository financial assets, but increases the effect of other asset portfolio shifts and aggregate supply disturbances. These results are consistent with the work of Poole inasmuch as the current debate over discount policy is a repackaging of the debate over interest rate or aggregates control for monetary policy.


The Carry-Forward Provision and Management of Bank Reserves

Pages: 845-855  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02505.x  |  Cited by: 1

RICHARD M. FRIEDMAN, WILLIAM W. ROBERTS

The 1968 amendment to Regulation D of the Federal Reserve Code permits banks to carry forward one sequential reserve excess or deficiency into the next reserve accounting period. This was intended to reduce the weekly pressure on individual banks to adjust their reserve position. We find, instead, that the carry‐forward provision gives individual banks an incentive to alternate weekly between reserve excesses and reserve deficiencies. Thus, the carry‐forward provision tends to induce reserve position adjustments even in the absence of changes in the level of deposits. In addition, the carry‐forward provision reduces the impact of interest‐rate changes on the desired level of excess reserves.


Valuation, Capital Structure, and Shareholder Unanimity for Depository Financial Intermediaries

Pages: 857-871  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02506.x  |  Cited by: 10

C. W. SEALEY

The theory of corporate finance is not directly applicable to financial intermediary decision‐making. The lack of applicability stems largely from the particular conditions that distinguish intermediary operations from those of the nonfinancial firm. First, when intermediaries accept deposit financing, they must produce services such as liquidity and convenience at considerable expense for real resources. Second, the introduction of intermediation is likely to be accompanied by incomplete markets so that shareholder unanimity is not in general valid. In this paper, a model with incomplete markets is developed and a shareholder approved rule for intermediary capital structure decisions is derived.


Lending Policies of Financial Intermediaries Facing Credit and Funding Risk

Pages: 873-886  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02507.x  |  Cited by: 8

SUDHAKAR D. DESHMUKH, STUART I. GREENBAUM, GEORGE KANATAS

This paper compares the optimal lending decisions of financial intermediaries that differ in their risk exposure. All intermediaries are assumed to face a loan demand described by a random applicant arrival process with each applicant offering a unique risk‐adjusted rate of return; loan demand is therefore uncertain in both quantity and quality. The intermediaries differ in terms of their risk exposure because of disparate funding practices. Intermediaries functioning as brokers minimize their exposure by borrowing funds only as demand is realized, whereas those behaving as asset‐transformers borrow in advance of realizing loan demand, thereby maintaining a loanable funds inventory and sustaining the related exposure. The optimal sequential lending policy is shown to involve setting a credit standard that becomes stricter with the length of the intermediary's planning horizon and the volume of loans outstanding. Most importantly, it is shown that brokers adopt stricter credit standards than asset‐transformers and therby reduce their volume of lending.


Economies of Scale and Economies of Scope in Multiproduct Financial Institutions: A Study of British Columbia Credit Unions

Pages: 887-902  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02508.x  |  Cited by: 65

JOHN D. MURRAY, ROBERT W. WHITE

This paper investigates the production technology facing computerized credit unions in Canada. A full system of translog cost equations is estimated in order to test for economies of scale, economies of scope, and other production characteristics in a multiproduct context. The regression results indicate that most of the credit unions in our sample experience significant increasing returns to scale as they expand their level of output. There is also evidence of cost complementarity or economies of scope in their mortgage and other lending activities. As a result, legislation which limits the ability of credit unions to grow and diversify will likely raise the operating costs of this important group of financial institutions. Additional structural tests of the most general translog specification suggest that none of the restrictive production conditions commonly imposed by other researchers using Cobb‐Douglas and CES specifications provide a valid representation of credit union technology. The results of many earlier studies are therefore open to question.


Consensus Beliefs Equilibrium and Market Efficiency

Pages: 903-911  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02509.x  |  Cited by: 1

DAVID EASLEY, ROBERT A. JARROW

This paper presents an analysis of the concept of consensus beliefs and its relation to market efficiency. We show that unless traders have rational expectations, the two published interpretations of consensus beliefs are not useful for considerations of market efficiency. One interpretation (see Verrecchia [6]) has no implication for market efficiency. Under the second interpretation (see Verrecchia [7], [8]) consensus beliefs equilibria are efficient, but they typically do not exist unless traders have rational expectations.


Optimality of the Disclosure of Private Information in a Production-Exchange Economy

Pages: 913-924  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02510.x  |  Cited by: 0

BRETT TRUEMAN

This study provides an analysis of the effects on individual welfare of information revelation in a production‐exchange economy. It is shown that the total effect of information revelation on an agent's utility level may be decomposed into three elements: a price effect, a shareholding effect, and a production effect. Through this decomposition, it is demonstrated that, although a Pareto improvement need not result from information revelation, there are perspectives from which the release can be considered beneficial.


International Portfolio Choice and Corporation Finance: A Synthesis

Pages: 925-984  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02511.x  |  Cited by: 291

MICHAEL ADLER, BERNARD DUMAS


Exact Pricing in Linear Factor Models with Finitely Many Assets: A Note

Pages: 985-988  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02512.x  |  Cited by: 29

NAI-FU CHEN, JONATHAN E. INGERSOLL


The Cost of Liquidity Services in Listed Options: A Note

Pages: 989-995  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02513.x  |  Cited by: 4

JEROME B. BAESEL, GEORGE SHOWS, EDWARD THORP


The Information Content of Municipal Bond Rating Changes: A Note

Pages: 997-1003  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02514.x  |  Cited by: 29

ROBERT W. INGRAM, LEROY D. BROOKS, RONALD M. COPELAND


Beta Nonstationarity and the Use of the Chen and Lee Estimator: A Note

Pages: 1005-1009  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02515.x  |  Cited by: 2

BILL McDONALD


Money Market Mutual Funds: An Experiment in Ad Hoc Deregulation: A Note

Pages: 1011-1017  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02516.x  |  Cited by: 5

KENNETH T. ROSEN, LARRY KATZ


The Effect of Common-Stock Dividend Reductions on the Returns of Nonconvertible Preferred Stocks: A Note

Pages: 1019-1024  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02517.x  |  Cited by: 1

JAMES ROSENFELD


The Effect of Bank Deregulation on Small Business: A Note

Pages: 1025-1031  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02518.x  |  Cited by: 1

PETER L. STRUCK, LEWIS MANDELL


Stochastic Choice in Insurance and Risk Sharing: A Comment

Pages: 1033-1035  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02519.x  |  Cited by: 1

YORAM KROLL


Stochastic Choice in Insurance and Risk Sharing: A Reply

Pages: 1037-1038  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02520.x  |  Cited by: 2

NEIL A. DOHERTY


Yield Approximations: A Historical Perspective: A Correction

Pages: 1039-1039  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02521.x  |  Cited by: 0

RICHARD P. BRIEF


Debt, Dividend Policy, Taxes, Inflation, and Market Valuation: Erratum

Pages: 1041-1042  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02522.x  |  Cited by: 1

FRANCO MODIGLIANI


BOOK REVIEWS

Pages: 1043-1050  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02523.x  |  Cited by: 0

Book reviewed in this article:


MISCELLANEA

Pages: 1051-1051  |  Published: 6/1983  |  DOI: 10.1111/j.1540-6261.1983.tb02524.x  |  Cited by: 0