Knowledge that Transforms

This paper tests the Kraus-Litzenberger (1976) three-moment capital asset pricing model using Hansen's (1982) generalized method-of-moments (GMM). The GMM approach does not impose strong distributional assumptions on the asset returns. This is an interesting issue since there is no obvious multivariate distribution for returns that also exhibits co-skewness. Using monthly stock returns to test the model, there is some evidence that systematic skewness is priced.

Randall Morck, Eduardo Schwartz, David Stangeland, The Valuation of Forestry Resources Under Stochastic Prices and Inventories, The Journal of Financial and Quantitative Analysis, Vol. 24, No. 4 (Dec., 1989), pp. 473-487

A large mean price change is observed on the last daily NYSE transaction. This suggests that closing prices may not consistently represent stock values. Transaction prices are studied to further characterize the day-end price rise and to determine whether it is due to any limited subsample of stocks or dates. The results indicate that the phenomenon is pervasive over most firms and days. Some evidence suggests that it is caused by a change in the frequency of ask prices at day-end.

Marc Chesney, Louis Scott, Pricing European Currency Options: A Comparison of the Modified Black- Scholes Model and a Random Variance Model, The Journal of Financial and Quantitative Analysis, Vol. 24, No. 3 (Sep., 1989), pp. 267-284

This paper examines the determinants of commodity futures hedging and of risk premia arising from covariation of the futures price with stock market returns, and with the reve? nues of producers. Owing to supply shocks that stochastically redistribute real wealth (surplus) between producers and consumers, and to limited participation in the futures market, the total risk premium in the model is not proportional to the contract's covariance with aggregate consumption. Stock market variability interacts with the incentive to hedge, causing the producer hedging component of the risk premium to increase (de? crease) with income elasticity, for a normal (inferior) good. Production costs that depend on output raise the premium. We argue that output and demand shocks will typically be positively correlated, raising the premium. High supply elasticity reduces the absolute heding premium by reducing the variability of spot price and revenue.

The purpose of this paper is to provide a link between the various multivariate tests of asset pricing and a performance measure for asset sets. The paper includes a unified summary of various F tests for mean-variance efficiency, intersection, and spanning for sets and subsets of financial assets. Both the risk-free asset and no risk-free asset environments are discussed. These tests are then related to the concept of potential performance for asset sets. The potential performance measure can be viewed as an extension of the Sharpe performance measure for single portfolios. The economic intuition behind the tests is that the multivariate tests of portfolio efficiency, intersection, and spanning are tests of zero potential performance at particular margins between the asset or portfolio subset and the full asset set.

John D. Leeth, Jonathan A. Scott, The Incidence of Secured Debt: Evidence from the Small Business Community, The Journal of Financial and Quantitative Analysis, Vol. 24, No. 3 (Sep., 1989), pp. 379-394

R. Charles Moyer, Robert E. Chatfield, Phillip M. Sisneros, Security Analyst Monitoring Activity: Agency Costs and Information Demands, The Journal of Financial and Quantitative Analysis, Vol. 24, No. 4 (Dec., 1989), pp. 503-512

This paper attempts to characterize liquidity-driven noise in the CRSP Government Bond price data set by comparing these price records to the independently collected Shearson Lehman Brothers (SLB) Bond Data Base. We argue that discrepancies between the data sets are due largely to liquidity-driven price errors, and we show that they are systematically related to certain bond characteristics. On the other hand, these discrepancies are small in magnitude and are approximately mean zero. We examine data filters based on observable bond characteristics and show that these filters can reduce the noise in price records while preserving their mean zero nature. The effects of these errors on performance evaluation are investigated by comparing results using filtered and unfiltered data.

Richard A. Lambert, William N. Lanen, David F. Larcker, Executive Stock Option Plans and Corporate Dividend Policy, The Journal of Financial and Quantitative Analysis, Vol. 24, No. 4 (Dec., 1989), pp. 409-425