Knowledge that Transforms

Chanaka Edirsinghe, Vasanttilak Naik, Raman Uppal, Optimal Replication of Options with Transactions Costs and Trading Restrictions, The Journal of Financial and Quantitative Analysis, Vol. 28, No. 1 (Mar., 1993), pp. 117-138

Eric C. Chang, J. Michael Pinegar, R. Ravichandran, International Evidence on the Robustness of the Day-of-the-Week Effect, The Journal of Financial and Quantitative Analysis, Vol. 28, No. 4 (Dec., 1993), pp. 497-513

Thomas J. George, Francis A. Longstaff, Bid-Ask Spreads and Trading Activity in the S&P 100 Index Options Market, The Journal of Financial and Quantitative Analysis, Vol. 28, No. 3 (Sep., 1993), pp. 381-397

This paper demonstrates that when log price changes are not IID, their conditional density may be more accurate than their unconditional density for describing short-term behavior. Using the BDS test of independence and identical distribution, daily log price changes in four currency futures contracts are found to be not IID. While there appear to be no predictable conditional mean changes, conditional variances are predictable, and can be described by an autoregressive volatility model that seems to capture all the departures from independence and identical distribution. Based on this model, daily log price changes are decomposed into a predictable part, which is described parametrically by the autoregressive volatility model, and an unpredictable part, which can be modeled by an empirical density, either parametrically or nonparametrically. This two-step seminonparametric method yields a conditional density for daily log price changes, which has a number of uses in financial risk management.

This study analyzes the effect of second-hand information on the behavior of security prices and volume using analysts' recommendations published in the monthly “Dartboard” column of the Wall Street Journal. For the two days following the publication of the recommendations, average positive abnormal returns of 4 percent—nearly twice the level of abnormal returns documented in previous research on analyst recommendations—and average volume double normal volume levels on the two days following publication of the recommendations are documented. The positive abnormal return on announcement is partially reversed within 25 trading days. The authors conclude that the positive abnormal return on announcement of the recommendations is a result of naive buying pressure as well as the information content of the analysts' recommendations.

According to the Diamond-Verrecchia hypothesis, if increases in short interest are correlated with information that is not yet public, they should precipitate a price adjustment. Stocks with unexpected increases in short interest are found to generate statistically significant, but small, negative abnormal returns for a short period around the announcement date. When the sample is divided into stocks with and without tradable options, nonoptioned stocks closely mimic these results but the optioned stocks do not. In a cross-sectional analysis of individual firms, the short-term negative abnormal returns are found to be 1) more negative, the higher the degree of unexpected short interest and, 2) less negative if the firm has tradable options.

The purpose of this paper is to explain cross-sectional variations in trade credit terms across firms and industries. This study shows that there is a separating equilibrium in which the size of the cash discount conveys information about product quality. The driving forces of this equilibrium outcome are the risk-sharing motives of the producer and buyer as well as asymmetric information about product quality. The empirical implications of the model are derived and discussed in relation to industry practices.

John Hull, Alan White, One-Factor Interest-Rate Models and the Valuation of Interest-Rate Derivative Securities, The Journal of Financial and Quantitative Analysis, Vol. 28, No. 2 (Jun., 1993), pp. 235-254

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Three major motives have been suggested for takeovers: synergy, agency, and hubris. Existing empirical evidence is unable to clearly distinguish among these motives probably due to the simultaneous existence of all three in any sample of takeovers. This paper suggests a way of distinguishing among these competing hypotheses by looking at the correlation between target and total gains. It is argued that this correlation should be positive if synergy is the motive, negative if agency is the motive, and zero if hubris is the motive. The empirical results show that synergy is the primary motive in takeovers with positive total gains even though the evidence is consistent with the simultaneous existence of hubris in this sample. It is also found that agency is the primary motive in takeovers with negative total gains.