Knowledge that Transforms

ABSTRACT We use panel data on prices and net asset values to test whether dramatic country‐specific news affects the response of closed‐end country fund prices to asset value. In a typical week, prices underreact to changes in fundamentals; the (short‐run) elasticity of price with respect to asset value is significantly less than one. In weeks with news appearing on the front page of The New York Times , prices react much more; the elasticity of price with respect to asset value is closer to one. These results are consistent with the hypothesis that news events lead some investors to react more quickly.

We show how to construct models of the term structure of interest rates in which the expectations hypothesis holds. McCulloch (1993) presents such a model, thereby contradicting an assertion by Cox, Ingersoll, and Ross (1981), but his example is Gaussian and falls outside the class of finite‐dimensional Markovian models. We generalize McCulloch's model in three ways: (i) We provide an arbitrage‐free characterization of the unbiased expectations hypothesis in terms of forward rates; (ii) we extend this characterization to a whole class of expectations hypotheses; and (iii) we show how to construct finite‐dimensional Markovian and non‐Gaussian examples.

ABSTRACT Drawing on a comprehensive sample of 330 bankruptcy petition filings from 1980 to 1993, we find that most of the market reaction does not occur on the bankruptcy petition filing date when the information becomes publicly available. Rather, most of the reaction occurs when news of the bankruptcy filing is more widely disseminated via the Broadtape. This “Broadtape announcement effect” persists after controlling for firm size, exchange listing, and predisclosure information. These are primarily timing differences since abnormal returns cumulated over an 11–day window centered on the filing date do not differ significantly across Broadtape disclosure date classifications.

We develop a simple commodity model to analyze (i) the effects of hedging with liquidity constraints, due to producers' inability to bear unlimited trading losses, (ii) the role of speculation in the process of risk allocation between consumers and producers, and (iii) the equilibrium implications of government price subsidies to the producers. We find that (1) liquidity constraints can cause futures prices to exhibit mean reversion, which then makes speculation profitable; (2) speculation tends to make futures price volatility an increasing function of futures price; and (3) government price subsidy, if actively hedged by the producers, serves to lower the futures risk premium and reduce futures volatility.

This paper estimates the performance of insider trades on the closely held Oslo Stock Exchange (OSE) during a period of lax enforcement of insider trading regulations. Our data permit construction of a portfolio that tracks all movements of insiders in and out of the OSE firms. Using three alternative performance estimators in a time‐varying expected return setting, we document zero or negative abnormal performance by insiders. The results are robust to a variety of trade characteristics. Applying the performance measures to mutual funds on the OSE, we also document some evidence that the average mutual fund outperforms the insider portfolio.

We examine the bidding patterns and auction profits in the Japanese Government Bond (JGB) auctions and empirically test the predictions of auction theory. We find that the average profit in JGB auctions is not reliably different from zero, and the degree of competition and the level of uncertainty are insignificant in determining auction profits. The winning shares of the U.S. dealers are positively related to auction profits, whereas the winning shares of their Japanese counterparts show a negative association. We also find that the share of winnings of Japanese dealers tends to be correlated with the share of winnings of their compatriot dealers but a similar relation is not found for U.S. dealers.