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Volume 49: Issue 1 (March 1994)


Front Matter

Pages: i-vi  |  Published: 3/1994  |  DOI: 10.1111/j.1540-6261.1994.tb00660.x  |  Cited by: 0


ASSOCIATION MEETINGS

Pages: vii-viii  |  Published: 3/1994  |  DOI: 10.1111/j.1540-6261.1994.tb04415.x  |  Cited by: 0


ANNOUNCEMENTS

Pages: ix-x  |  Published: 3/1994  |  DOI: 10.1111/j.1540-6261.1994.tb04416.x  |  Cited by: 0


Back Matter

Pages: xi-xxxiii  |  Published: 3/1994  |  DOI: 10.1111/j.1540-6261.1994.tb00661.x  |  Cited by: 0


SMITH BREEDEN PRIZES FOR 1993

Pages: 1-1  |  Published: 3/1994  |  DOI: 10.1111/j.1540-6261.1994.tb04417.x  |  Cited by: 1


The Benefits of Lending Relationships: Evidence from Small Business Data

Pages: 3-37  |  Published: 3/1994  |  DOI: 10.1111/j.1540-6261.1994.tb04418.x  |  Cited by: 1041

MITCHELL A. PETERSEN, RAGHURAM G. RAJAN

This paper empirically examines how ties between a firm and its creditors affect the availability and cost of funds to the firm. We analyze data collected in a survey of small firms by the Small Business Administration. The primary benefit of building close ties with an institutional creditor is that the availability of financing increases. We find smaller effects on the price of credit. Attempts to widen the circle of relationships by borrowing from multiple lenders increases the price and reduces the availability of credit. In sum, relationships are valuable and appear to operate more through quantities rather than prices.


The Effect of a Rating Downgrade on Outstanding Commercial Paper

Pages: 39-56  |  Published: 3/1994  |  DOI: 10.1111/j.1540-6261.1994.tb04419.x  |  Cited by: 16

LELAND CRABBE, MITCHELL A. POST

Diamond (1991) argues that a firm's reputation determines whether it borrows directly or through an intermediary. We test the Diamond model by examining the quantity response of commercial paper issued by bank holding companies to a rating downgrade. From 1986 to 1991, cumulative abnormal declines averaged 6.69 percent in the first two weeks after the downgrade and 11.05 percent in the subsequent 12 weeks. In contrast to commercial paper issued by bank holding companies, large CDs issued by affiliated banks did not change significantly in the period around a downgrade, suggesting that deposit insurance may have removed market discipline from the CD market.


Investment Bank Reputation, Information Production, and Financial Intermediation

Pages: 57-79  |  Published: 3/1994  |  DOI: 10.1111/j.1540-6261.1994.tb04420.x  |  Cited by: 175

THOMAS J. CHEMMANUR, PAOLO FULGHIERI

We model reputation acquisition by investment banks in the equity market. Entrepreneurs sell shares in an asymmetrically informed equity market, either directly, or using an investment bank. Investment banks, who interact repeatedly with the equity market, evaluate entrepreneurs' projects and report to investors, in return for a fee. Setting strict evaluation standards (unobservable to investors) is costly for investment banks, inducing moral hazard. Investment banks' credibility therefore depends on their equity‐marketing history. Investment banks' evaluation standards, their reputations, underwriter compensation, the market value of equity sold, and entrepreneurs' choice between underwritten and nonunderwritten equity issues emerge endogenously.


Mortgage Redlining: Race, Risk, and Demand

Pages: 81-99  |  Published: 3/1994  |  DOI: 10.1111/j.1540-6261.1994.tb04421.x  |  Cited by: 21

ANDREW HOLMES, PAUL HORVITZ

Charges that geographical redlining is widely practiced by mortgage lenders and is associated with racial discrimination have received much attention. However, empirical research in this area has yet to document a convincing answer to the question of whether redlining even exists. Much of the previous research in this area has suffered from failure to account for variations in risk, and/or failure to adequately control for geographical differences in demand. This study addresses these problems in an effort to determine whether the disparity in the flow of mortgage credit can be explained by differences in risk and demand.


On the Cross-sectional Relation between Expected Returns and Betas

Pages: 101-121  |  Published: 3/1994  |  DOI: 10.1111/j.1540-6261.1994.tb04422.x  |  Cited by: 77

RICHARD ROLL, STEPHEN A. ROSS

There is an exact linear relation between expected returns and true “betas” when the market portfolio is on the ex ante mean‐variance efficient frontier, but empirical research has found little relation between sample mean returns and estimated betas. A possible explanation is that market portfolio proxies are mean‐variance inefficient. We categorize proxies that produce particular relations between expected returns and true betas. For the special case of a zero relation, a market portfolio proxy must lie inside the efficient frontier, but it may be close to the frontier.


Testing Volatility Restrictions on Intertemporal Marginal Rates of Substitution Implied by Euler Equations and Asset Returns

Pages: 123-152  |  Published: 3/1994  |  DOI: 10.1111/j.1540-6261.1994.tb04423.x  |  Cited by: 23

STEPHEN G. CECCHETTI, POK-SANG LAM, NELSON C. MARK

The Euler equations derived from intertemporal asset pricing models, together with the unconditional moments of asset returns, imply a lower bound on the volatility of the intertemporal marginal rate of substitution. This paper develops and implements statistical tests of these lower bound restrictions. While the availability of short time series of consumption data often undermines the ability of these tests to discriminate among different utility functions, we find that the restrictions implied by a number of widely studied financial data sets continue to pose quite a challenge to the current generation of intertemporal asset pricing theories.


Market Statistics and Technical Analysis: The Role of Volume

Pages: 153-181  |  Published: 3/1994  |  DOI: 10.1111/j.1540-6261.1994.tb04424.x  |  Cited by: 239

LAWRENCE BLUME, DAVID EASLEY, MAUREEN O'HARA

We investigate the informational role of volume and its applicability for technical analysis. We develop a new equilibrium model in which aggregate supply is fixed and traders receive signals with differing quality. We show that volume provides information on information quality that cannot be deduced from the price statistic. We show how volume, information precision, and price movements relate, and demonstrate how sequences of volume and prices can be informative. We also show that traders who use information contained in market statistics do better than traders who do not. Technical analysis thus arises as a natural component of the agents' learning process.


Volume, Volatility, and New York Stock Exchange Trading Halts

Pages: 183-214  |  Published: 3/1994  |  DOI: 10.1111/j.1540-6261.1994.tb04425.x  |  Cited by: 65

CHARLES M. C. LEE, MARK J. READY, PAUL J. SEGUIN

Trading halts increase, rather than reduce, both volume and volatility. Volume (volatility) in the first full trading day after a trading halt is 230 percent (50 to 115 percent) higher than following “pseudohalts”: nonhalt control periods matched on time of day, duration, and absolute net‐of‐market returns. These results are robust over different halt types and news categories. Higher posthalt volume is observed into the third day while higher posthalt volatility decays within hours. The extent of media coverage is a partial determinant of volume and volatility following both halts and pseudohalts, but a separate halt effect remains after controlling for the media effect.


The Value of Wildcard Options

Pages: 215-236  |  Published: 3/1994  |  DOI: 10.1111/j.1540-6261.1994.tb04426.x  |  Cited by: 15

JEFF FLEMING, ROBERT E. WHALEY

Wildcard options are embedded in many derivative contracts. They arise when the settlement price of the contract is established before the time at which the wildcard option holder must declare his intention to make or accept delivery and the exercise of the wildcard option closes out the underlying asset position. This paper provides a simple method for valuing wildcard options and illustrates the technique by valuing the sequence of wildcard options embedded in the S&P 100 index (OEX) option contract. The results show that wildcard options can account for an economically significant fraction of OEX option value.


Circuit Breakers and Market Volatility: A Theoretical Perspective

Pages: 237-254  |  Published: 3/1994  |  DOI: 10.1111/j.1540-6261.1994.tb04427.x  |  Cited by: 44

AVANIDHAR SUBRAHMANYAM

This paper examines ex ante effects of circuit breakers (mandated trading halts). We show that circuit breakers, by causing agents to suboptimally advance trades in time, may have the perverse effect of increasing price variability and exacerbating price movements. We next consider a situation in which a circuit breaker causes trading to be halted in both a dominant (more liquid) and a satellite market. As agents switch from the dominant market to the satellite market, price variability and market liquidity decline on the dominant market and increase on the satellite market.


Stock Returns following Large One-Day Declines: Evidence on Short-Term Reversals and Longer-Term Performance

Pages: 255-267  |  Published: 3/1994  |  DOI: 10.1111/j.1540-6261.1994.tb04428.x  |  Cited by: 77

DON R. COX, DAVID R. PETERSON


Market Efficiency and the Favorite-Longshot Bias: The Baseball Betting Market

Pages: 269-279  |  Published: 3/1994  |  DOI: 10.1111/j.1540-6261.1994.tb04429.x  |  Cited by: 67

LINDA M. WOODLAND, BILL M. WOODLAND

This paper examines the efficiency of the legal gambling market for major league baseball. Weak‐form tests of market efficiency within and across odds lines are performed. Surprisingly, the consistently observed favorite‐longshot bias in racetrack betting is shown to exist in reverse for baseball bettors. However, these and other deviations from efficiency are shown to be insufficient to allow for profitable betting strategies when commissions are considered.


The Effect of Dividend Changes on Stock and Bond Prices

Pages: 281-289  |  Published: 3/1994  |  DOI: 10.1111/j.1540-6261.1994.tb04430.x  |  Cited by: 38

UPINDER S. DHILLON, HERB JOHNSON

This study examines stock and bond price reactions to dividend changes. The positive stock market response to dividend increases has several potential explanations, two of the more commonly discussed being information content and wealth redistribution between stockholders and bondholders. The evidence presented supports the wealth redistribution hypothesis but does not rule out the information content hypothesis. Typically we find that the bond price reaction to announcements of large dividend changes is opposite to the stock price reaction. Our results differ from those of Handjinicolaou and Kalay.


Trading Profits in Dutch Auction Self-Tender Offers

Pages: 291-306  |  Published: 3/1994  |  DOI: 10.1111/j.1540-6261.1994.tb04431.x  |  Cited by: 1

PALANI-RAJAN KADAPAKKAM, SARABJEET SETH

We document abnormal trading profits in Dutch auction self‐tenders. Tender period profits—buying after announcement and selling just before expiration—are 1.74 percent (Bhagat, Brickley, and Lowenstein (1987) report similar profits for interfirm tenders). Buying just before expiration and tendering yields abnormal profits of 1.36 percent (Lakonishok and Vermaelen (1990) report 9 percent for fixed‐price self‐tenders using a filter rule). Total profits from buying just after announcement and tendering remain positive after adjusting for bid‐ask spreads. Trading profits are higher for smaller firms, and positively correlated with tender period unsystematic risk, suggesting that they arise due to the pricing of event risk.


Holiday Trading in Futures Markets

Pages: 307-324  |  Published: 3/1994  |  DOI: 10.1111/j.1540-6261.1994.tb04432.x  |  Cited by: 16

FRANK J. FABOZZI, CHRISTOPHER K. MA, JAMES E. BRILEY

In this paper, we find significantly higher preholiday returns in futures contracts compared to nonholiday returns. The findings are consistent with the inventory adjustment hypothesis, since higher preholiday returns associated with lower trading volume are most pronounced for exchange‐closed holidays. There is evidence of positive postholiday returns associated with higher trading volume for exchange‐open holidays. This is consistent with positive holiday sentiments. The holiday effect is uniquely independent: The magnitude of excess holiday returns is the largest among all seasonal variations.


The Interaction between Nonexpected Utility and Asymmetric Market Fundamentals

Pages: 325-343  |  Published: 3/1994  |  DOI: 10.1111/j.1540-6261.1994.tb04433.x  |  Cited by: 9

MAO-WEI HUNG

This paper studies a nonexpected utility, general equilibrium asset pricing model in which market fundamentals follow a bivariate Markov switching process. The results show that nonexpected utility is capable of exactly matching the means of the risk‐free rate and the risk premium. Asymmetric market fundamentals are capable of generating a negative sample correlation between the risk‐free rate and the risk premium. Moreover, an equilibrium asset pricing model endowed with asymmetric market fundamentals is consistent with all five first and second moments of the risk‐free rate and the risk premium in the U.S. data.


Parameter-based Decision Making under Estimation Risk: An Application to Futures Trading

Pages: 345-357  |  Published: 3/1994  |  DOI: 10.1111/j.1540-6261.1994.tb04434.x  |  Cited by: 9

SERGIO H. LENCE, DERMOT J. HAYES

This study shows how the standard portfolio model of futures trading should be modified when there is less than perfect information about the relevant parameters (estimation risk). The standard and the optimal decision rules for futures trading in the presence of estimation risk are compared and discussed. An operational model of futures trading for use under estimation risk is advanced. In the presence of relevant prior and sample information, the model can be used to optimally blend both types of information.


Book Reviews

Pages: 359-368  |  Published: 3/1994  |  DOI: 10.1111/j.1540-6261.1994.tb04435.x  |  Cited by: 0

Investment Mathematics and Statistics. By ANDREW ADAMS, DELLA BLOOMFIELD, PHILIP BOOTH, and PETER ENGLAND


MISCELLANEA

Pages: 369-370  |  Published: 3/1994  |  DOI: 10.1111/j.1540-6261.1994.tb04436.x  |  Cited by: 0