Menachem Brenner, David H. Downes, A Critical Evaluation of the Measurement of Conglomerate Performance using the Capital Asset Pricing Model, The Review of Economics and Statistics, Vol. 61, No. 2 (May, 1979), pp. 292-296

In June 2014, the International Risk Management Conference (IRMC) held its 7th edition in the Warsaw School of Economics (Warsaw, Poland). The theme of the conference was “The Safety of the Financial System: From Idiosyncratic to Systemic Risk.” Thirty-three papers were submitted for review for publication in this special issue of the Review of Finance. The papers have been subjected to the same rigorous referring process as other papers submitted to the Journal. Three papers were accepted. One (Fiordilisi and Ricci, 2016) was published in the last issue (Review of Finance 20(6), 2321–2347) and the other two are published here. The first two papers deal with systemic and policy aspects of the financial system while the third deals with an important segment of the financial markets, defaulted bonds. The paper by Oet, Ong and Lyytinen “aims to determine whether policymakers’ discussions of financial stability and other factors systematically explain deviations of observed policy rates from the Taylor-rule-implied rates.” They have two main findings: first, they find that discussion themes obtained from Federal Open Market Committee meeting minutes provide explanatory power beyond standard Taylor rule variables. Second, the tri-mandate policy rule provides additional explanatory power that accounts for changes in the economic and financial system. They conclude that the tri-mandate policy model with financial stability dominates Taylor-type rules in zero lower bound conditions.

This paper examines the implied standard deviation (ISD) estimated from transactons data on options, using the Black-Scholes pricing model. It was found that the distribution of the ISD is symmetric, though not normal. Also, the ISD based on the last daily observation deviates significantly from the daily average ISD. It is suggested that the daily average is a more reliable estimate of the standard deviation.

The purpose of this paper is to examine the effect of illiquidity on the value of currency options. We use a unique dataset that allows us to explore this issue in special circumstances where options are issued by a central bank and are not traded prior to maturity. The value of these options is compared to similar options traded on the exchange. We find that the nontradable options are priced about 21 percent less than the exchange‐traded options. This gap cannot be arbitraged away due to transactions costs and the risk that the exchange rate will change during the bidding process.

We introduce ambiguity in conjunction with risk to study the relation between risk, ambiguity, and expected returns. Distinguishing between ambiguity and attitudes toward ambiguity, we develop an empirical methodology for measuring the degree of ambiguity and for assessing attitudes toward ambiguity from market data. The main findings indicate that ambiguity in the equity market is priced. Introducing ambiguity alongside risk provides stronger evidence on the role of risk in explaining expected returns in the equity markets. The findings also indicate that investors’ level of aversion to or love for ambiguity is contingent on the expected probability of favorable returns.

Edward I. Altman, Menachem Brenner, Information Effects and Stock Market Response to Signs of Firm Deterioration, The Journal of Financial and Quantitative Analysis, Vol. 16, No. 1 (Mar., 1981), pp. 35-51

This paper investigates the effect of inflation and taxes on the optimal duration of investments. The main conclusion is that inflation does not always increase the duration of investments. For example, in the case of equipment with a short replacement cycle, increased inflation tends to decrease the duration of the cycle. Contrary to the common theoretical analysis, these results imply that inflation may increase some forms of capital investments.