Knowledge that Transforms

This paper's findings suggests that the New York City fiscal crisis by itself did not lead to a fundamental change in risk perceptions of investors, resulting in higher interest rates in the municipal bond market. The monthly prediction errors generated by time series tests were relatively small and none were statistically significant. Only the signs on the prediction errors for June, July, and August were consistent with a New York City effect. Thus, if the New York City default had an impact on aggregate interest rates, it was at most small and of short duration.

This paper examines the adjustments in a firm's common stock price during the eleven months before and during the month of announcement of a bond rating change. Based on several different measures of abnormal security return, the findings are consistent with the proposition that bond downgradings convey information to common stockholders. For bond upgradings, the price adjustments were statistically insignificant in the month of announcement, although in the eleven preceding months, upgraded firms exhibited positive abnormal returns. While the results do not fully support earlier research, we stress that the main contribution of this article lies in the scrutiny it gives to issues of methodology in assessing the possible price effects of bond reclassifications.

In this paper several powerful distribution‐free tests for heteroscedasticity are introduced and are used to test the hypothesis of constant variance in the market model. These tests are noted for their flexibility in specifying alternative hypotheses. It is found that the assumption of homoscedasticity is untenable for the majority of stocks analyzed. The implications of this finding for the efficient estimation of the parameters of the market model are also discussed.

This paper presents evidence that the yield differential between revenue bonds and similar general obligation bonds varies contracyclically with the level of economic activity. The evidence also indicates that significant investor‐borrower induced market segmentation exists in the municipal bond market. An increase in the relative demand by commercial banks for tax‐exempt securities and/or an increase in the supply of revenue bonds relative to the supply of general obligation bonds increase the yield spread between the two classes of debt. These findings were the result of a series of empirical tests with both macroeconomic and microeconomic data.

This paper tests whether forward prices equal the traders' expectations of the future spot prices at maturity, under two different models of expectations formation: full information rational expectations and incomplete information mechanical forecasting rule. The tests are performed, over the period January 1970 through September 1980, on the forward markets for the primary metals—copper, tin, lead, and zinc‐traded in the London Metals Exchange. We find evidence consistent with the existence of time varying risk premia.

An increase in the anticipated rate of inflation causes distortions in the housing market due to a nonindexed tax system. Since nominal rather than real interest payments are tax deductible, an increase in inflation decreases the aftertax cost of capital for homeowners, which in turn increases the demand for housing and increases its real price. This tax gain is shown to be larger for rental housing than for owner‐occupied housing. In a competitive market, this implies that although the real price of housing increases with a rise in anticipated inflation, real rental rates fall.