Knowledge that Transforms

We investigate the conditional covariances of stock returns using bivariate exponential ARCH (EGARCH) models. These models allow market volatility, portfolio-specific volatility, and beta to respond asymmetrically to positive and negative market and portfolio returns, i.e., “leverage” effects. Using monthly data, we find strong evidence of conditional heteroskedasticity in both market and non-market components of returns, and weaker evidence of time-varying conditional betas. Surprisingly while leverage effects appear strong in the market component of volatility, they are absent in conditional betas and weak and/or inconsistent in nonmarket sources of risk.

This study examines the behavior of share prices around the ex‐dividend dates before and after the introduction of the 1988 Income and Corporation Taxes Act that reduced substantially the tax differential between dividends and capital gains in the United Kingdom. We find that, in the pre‐1988 period when the differential taxation of dividends and capital gains is high, ex‐day returns are positive and significant. In contrast, in the post‐1988 period, ex‐day returns are, in most cases, negative and insignificant. Further analysis reveals that, while ex‐day returns are significantly related to dividend yield and to the length of the settlement period, they are not affected by the commonly used measures of transaction costs, such as the bid‐ask spread and trading volume, or by the day of week, month of the year, type of dividend distribution, or number of days to the actual receipt of the cash dividend. We conclude that taxation affects significantly ex‐day share prices in the United Kingdom.

Markets have an allocational role; even in the absence of news about payoffs, prices change to facilitate trade and allocate resources to their best use. Allocational price changes create noise in the signal extraction process, and markets where such trading is important are markets in which we may expect to find a failure of informational efficiency. An important source of allocational trading is the use of dynamic trading strategies caused by the incomplete equitization of risks . Incomplete equitization causes trade. Trade implies the inefficiency of passive strategies, thus requiring investors to determine whether price changes are informational or allocational.

This article investigates market reactions to initiations and omissions of cash dividend payments. Consistent with prior literature we find that the magnitude of short-run price reactions to omissions are greater than for initiations. In the year following the announcements, prices continue to drift in the same direction, though the drift following omissions is stronger and more robust. This post-dividend initiation/omission price drift is distinct from and more pronounced than that following earnings surprises. A trading rule employing both samples earns positive returns in 22 out of 25 years. We find little evidence for clientele shifts in either sample.

American Finance Association, Report of the Managing Editor of the Journal of Finance for the Year 1994, The Journal of Finance, Vol. 50, No. 3, Papers and Proceedings Fifty-Fifth Annual Meeting, American Finance, Association, Washington, D.C., January 6-8, 1995 (Jul., 1995), pp. 1013-1024

Since people can hold currency at a zero nominal interest rate, the nominal short cannot be negative. The real interest can be and has been negative, since low risk real investment opportunities, like filling in the Mississippi delta, do not guarantee positive returns. The inflation can be and has been negative, most recently (in the U.S.) during the Great Depression. The nominal short is the shadow real interest rate (as defined by the investment opportunity set) plus the inflation rate, or zero, whichever is greater. Thus the nominal short is an option. Longer term interest rates are always positive, since the future short may be positive even when the current short is zero. We can easily build this option element into our interest trees for backward induction or Monte Carlo simulation: just create a distribution that allows negative nominal rates, and then replace each negative with zero.

This article examines the predictable variation in long-maturity government bond returns in six countries. A small set of global instruments can forecast 4 to 12 percent of monthly variation in excess bond returns. The predictable variation is statistically and economically significant. Moreover, expected excess bond returns are highly correlated across countries. A model with one global risk factor and constant conditional betas can explain international bond return predictability if the risk factor is proxied by the world excess bond return, but not if it is proxied by the world excess stock return.

This article examines the price formation process during dividend announcement day, using daily closing prices and transactions data. We find that the unconditional positive excess returns, first documented by Kalay and Loewenstein (1985) , are higher for small‐firm and low‐priced stocks. Price volatility and trading volume also increase during this period. Examination of trade prices relative to the bid‐ask spread and volume of trades at bid and asked prices shows that the excess returns cannot be attributed to measurement errors or to spillover effects of tax‐related ex‐day trading. Rather, the price behavior is related to the absorption of dividend information.

This article examines changes in supermarket prices in local markets following supermarket leveraged buyouts (LBOs). I find that prices rise following LBOs in local markets in which the LBO firm's rivals are also highly leveraged and that LBO firms have higher prices than their less leveraged rivals, suggesting that LBOs create incentives to raise prices. However, I also find that prices fall following LBOs in local markets in which rival firms have low leverage and are concentrated. These price drops are associated with LBO firms exiting the local market, suggesting that rivals attempt to “prey” on LBO chains.