This paper establishes liquidity linkage between stock and Treasury bond markets. There is a lead-lag relationship between illiquidity of the two markets and bidirectional Granger causality. The effect of stock illiquidity on bond illiquidity is consistent with flight-to-quality or flight-to-liquidity episodes. Monetary policy impacts illiquidity. The evidence indicates that bond illiquidity acts as a channel through which monetary policy shocks are transferred into the stock market. These effects are observed across illiquidity of bonds of different maturities and are especially pronounced for illiquidity of short-term maturities. The paper provides evidence of illiquidity integration between stock and bond markets.

Hans G. Heidle, Roger D. Huang, Information-Based Trading in Dealer and Auction Markets: An Analysis of Exchange Listings, The Journal of Financial and Quantitative Analysis, Vol. 37, No. 3 (Sep., 2002), pp. 391-424

We propose a link between market structure and the resulting market characteristics—tick size, bid-ask spreads, quote clustering, and market depth. We analyze transactions data of stocks traded on the London Stock Exchange, a dealer market. We conclude that market charateristics are endogenous to the market structure. The London dealer market does not have a mandated tick size, and it exhibits higher spreads, higher quote clusterings, and higher market depth than the NYSE auction market. Clustering of trade prices is similar in London and New York.

We examine the impact of merger announcements on portfolios of acquiring firm and target firm common stock from 1919 to 1930. Despite vast changes in the economic and regulatory environment, overall acquisition profitability has remained remarkably constant over the last 70 to 80 years. Target firm shareholders in the 1920s clearly gained from takeovers, averaging abnormal returns in excess of 15%, while acquiring firm shareholders essentially broke even. Synergistic or monopolistic gains from consolidation were minimal. Unlike the more recent experience, target firm and acquiring firm abnormal returns were largely unaffected by the mode of acquisition, the means of financing, or the degree of industrial relatedness.

Assuming that individual investors account for most odd-lot transactions, we examine oddlot purchases and sales around the turn of the year and find a pattern that is related to the well-known January effect in stock returns. A significant change in the ratio of odd-lot sales to odd-lot purchases occurs at the turn of the year, which supports the hypothesis that the January effect results from trading by individual investors. The trading patterns that we find are not due entirely to tax considerations.

This paper examines the pricing of exchange-traded long-term corporate bond portfolios. Observable instruments measuring the term structure of interest rates, levels of bond and stock prices, and a January dummy are found to predict excess returns on corporate bonds. An intertemporal asset pricing model with changing expectations and unobservable factors is then estimated for the predictable excess returns using Hansen's Generalized Method of Moments. The results show that a multibeta linear time-varying model of con? ditional expected returns with constant betas can successfully value corporate bonds. Spe? cifically, the tests indicate the presence of two time-varying hedge portfolios. The data, however, support a single latent variable specification when all January observations are excluded. This result suggests the existence of a strong January seasonal in one of the latent variables.

This paper presents an empirical analysis of firms that are delisted from a major stock exchange. The delisting process is described and stock price movements surrounding delisting are analyzed. For firms with prior announcements, equity values decline by approximately 8.5 percent on announcement day. For firms without prior announcements, a similar adjustment takes place between the last day of trading in the initial market and the close of the first day of trading in the new market. Four hypotheses concerning the decline in firm value are examined. These are the liquidity hypothesis, the management signalling hypothesis, the exchange certification hypothesis, and the downward sloping demand curve hypothesis. Evidence consistent with the liquidity hypothesis is presented in the paper. Unlike evidence onstock exchange listings, returns in the post-delisting period do not appear to be anomalous.

A key assumption behind the traditional capital asset pricing model (CAPM) is the joint normality of security returns. Recently, however, this assumption has been relaxed in at least two directions. First, the emergence of continuous-time models has shifted emphasis from discrete-time random variables to continuous-time diffusion processes, with log-normality (as opposed to normality) for security prices in the stationary case. Second, the recognition that the CAPM is difficult to test empirically has led to the development of an asset pricing theory based on an arbitrage argument in large markets and free of any distributional assumption.

David C. Emanuel, James D. MacBeth, Further Results on the Constant Elasticity of Variance Call Option Pricing Model, The Journal of Financial and Quantitative Analysis, Vol. 17, No. 4, Proceedings of the 17th Annual Conference of the Western Finance Association, June 16-19, 1982, Portland, Oregon (Nov., 1982), pp. 533-554

Of the many conglomerate studies to date, some have dealt with the risk-return performance of conglomerates in the context of the capital asset pricing model [2, 7, 10, 14], others have considered the motives for the formation of conglomerates [4, 5, 6, 13], and still others have examined the operating characteristics of conglomerates [9, 12, 15]. Within the last group, Weston and Mansinghka [15, p. 928] argued that the primary motivation for conglomerate formation is defensive diversification, “…defined as diversification to avoid adverse effects on profitability from developments taking place in the firm's traditional product market areas.” Another motivation is provided by Levy and Sarnat [4] and Lewellen [5] who demonstrated that the only economic gain from a purely conglomerate merger may be the increased debt capacity resulting from the combination of entities having imperfectly correlated earnings streams.