Knowledge that Transforms

This paper investigates the month-by-month stability of (a) daily returns and correlation coefficients of stock returns, (b) correlation and covariance matrices, (c) number of return-generating factors, and (d) the APT pricing relationship. The results show that there is a January effect and a small-firm effect in stock returns. Correlation matrices are more stable than covariance matrices, but both types of matrices are not stable across months and across the sample groups. The number of return-generating factors is rather stable most of the time and for most of the sample groups, but there is some significant instability that is related to the average correlation coefficients among stocks. The APT pricing relationship does not seem to be supported by the two-stage process using the maximum-likelihood factor analysis.

The paper tests the null hypothesis of ex ante purchasing power parity. The empirical evidence obtained is inconsistent with the null for major industrialized countries over the current floating exchange rate regime. Expected nominal exchange rate changes appear to deviate systematically from expected inflation rate differentials over the same holding period even though real exchange rate changes appear to be serially uncorrelated. This supports the presence of time-varying risk premia in foreign exchange markets and real determinants of exchange rate movements as suggested by equilibrium theories of international asset markets.

An econometric time‐series model of off‐board trading of NYSE‐listed stocks shows that high NYSE commission rates were an incentive for third‐market trading but that trading on the regional exchanges, which is most of the off‐board trading, has been affected very little by commissions or their deregulation. The effects of some changes in the trading organization and rules are estimated, including several that are part of the emerging National Market System. The estimates imply that the NMS has increased competition for the NYSE, as Congress intended, and has prompted the NYSE to improve its performance to retain market share.

This casebook looks at the world confronting financial managers today. Considering both the domestic and international issues faced by today's companies, the book provides 44 real-life cases, from basic to advanced level.