Knowledge that Transforms

Studies relating accounting and price data often use the COMPUSTAT or related PDE data base as the source for the accounting data. This practice may introduce a look‐ahead bias and an ex‐post‐selection bias into the study. We examine this problem by comparing results from the standard COMPUSTAT data base with those from a data base which suffers from neither bias. We find that rates of return from portfolios chosen on the basis of accounting data from the two data bases differ significantly. Further, we find that these differences imply different conclusions when we test a specific hypothesis relating accounting and price data. Finally, we propose a number of remedies which may reduce the bias when the standard COMPUSTAT data base is used.

The dichotomy between timing ability and the ability to select individual assets has been widely used in discussing investment performance measurement. This paper discusses the conceptual and econometric problems associated with defining and measuring timing and selectivity. In defining these notions we attempt to capture their intuitive interpretation. We offer two basic modeling approaches, which we term the portfolio approach and the factor approach . We show how the quality of timing and selectivity information can be identified statistically in a number of simple models, and discuss some of the econometric issues associated with these models. In particular, a simple quadratic regression is shown to be valid in measuring timing information.

Lawrence Harris, Eitan Gurel, Price and Volume Effects Associated with Changes in the S&P 500 List: New Evidence for the Existence of Price Pressures, The Journal of Finance, Vol. 41, No. 4 (Sep., 1986), pp. 815-829

Capital gains taxes create incentives to trade. Our major finding is that turnover is higher for winners (stocks, the prices of which have increased) than for losers, which is not consistent with the tax prediction. However, the turnover in December and January is evidence of tax‐motivated trading; there is a relatively high turnover for losers in December and for winners in January. We conclude that taxes influence turnover, but other motives for trading are more important. We were unable to find evidence that changing the length of the holding period required to qualify for long‐term capital gains treatment affected turnover.

This paper analyzes an economy in which investors operate under partial information about technology‐relevant state variables. It is shown that for Gaussian information structures under incomplete observations, the consumer's problem can be transformed into an equivalent program with a completely observed state: the conditional expectation of the underlying unobservable state variables. A consequence of this transformation is that classic results in finance remain valid under an appropriate reinterpretation of the state variables.

This paper derives a closed‐form valuation model in a two‐country world in which the domestic investors are constrained to own at most a fraction, δ , of the number of shares outstanding of the foreign firms. When the “ δ constraint” is binding, two different prices rule in the foreign securities market, reflecting the premium offered by the domestic investors over the price under no constraints and the discount demanded by the foreign investors. The premium is shown to be a multiple of the discount, the multiple being the ratio of the aggregate risk aversion of the domestic and foreign investors. Given the aggregate risk‐aversion parameters, the equilibrium premium and discount are determined by the severity of the δ constraint and the “pure” foreign market risk.

This paper derives an arbitrage-free interest rate movements model (AR model). This model takes the complete term structure as given and derives the subsequent stochastic movement of the term structure such that the movement is arbitrage free. We then show that the AR model can be used to price interest rate contingent claims relative to the observed complete term structure of interest rates. This paper also studies the behavior and the economics of the model. Our approach can be used to price a broad range of interest rate contingent claims, including bond options and callable bonds.

I. BACKGROUND. 1. Introduction to Modern Investment Theory. 2. Securities and Markets. 3. Some Statistical Concepts. 4. Combining Individual Securities into Portfolios. II. PORTFOLIO MANAGEMENT. 5. Finding the Efficient Set. 6. Factor Models. 7. Asset Allocation. III. ASSET PRICING THEORIES AND PERFORMANCE MEASUREMENT. 8. The Capital Asset Pricing Model. 9. Empirical Tests of the Asset Pricing Model. 10. The Arbitrage Pricing Theory. 11. Measuring Portfolio Performance with Asset Pricing Models. 12. Measuring Performance without Asset Pricing Models. IV. INTEREST RATES AND BOND MANAGEMENT. 13. The Level of Interest Rates. 14. The Term Structure of Interest Rates. 15. Bond Portfolio Management. 16. Interest Immunization. V. DERIVATIVE SECURITIES. 17. European Option Pricing. 18. American Option Pricing. 19. Additional Issues in Option Pricing. 20. Financial Forward and Futures Contracts. VI. TAXES, STOCK VALUATION, AND MARKET EFFICIENCY. 21. The Effect of Taxes on Investment Strategy and Securities Prices. 22. Stock Valuation. 23. Issues in Estimating Future Earnings and Dividends. 24. Market Efficiency: The Concept. 25. Market Efficiency: The Evidence.

Filter rule profits found in foreign exchange markets in the early days of the current managed float persist in later periods, as shown by statistical tests developed and implemented here. The test is consistent with, but independent of, a wide variety of asset pricing models. The profits found cannot be explained by risk if risk premia are constant over time. Inclusion of the home‐foreign interest rate differential in computing profits has little effect on the comparison of filter returns to those of buy‐and‐hold.