Knowledge that Transforms

In this study, alternative real and simulated market indexes are examined as proxies for the “common factor” required by the Sharpe portfolio selection model [13]. The ex post performance of efficient and well-diversified portfolios generated by the model based on the different indexes is compared. The results indicate no significant difference in performance between real and simulated indexes, although the degree of diversification is much lower for portfolios based on indexes which relate well to the universe of securities. It is also shown that portfolios which are selected according to the Sharpe model (regardless of the index) outperform strategies which call for investing in the market portfolio.

There is strong theoretical support for the notion that prices in a perfect capital market will vary randomly ([22], [16]). However, the existence of some nonrandomness in stock prices is well documented, see ([10], [11], [13], [14], [20]). Of special importance for this study is the research by Young [24] who finds predominantly negative autocorrelation for a sample of securities using a monthly differencing interval. Autocorrelation coefficients are often used as a measure of nonrandom price behavior; negative autocorrelation is an indication of price reversals.

Since Markowitz [15, pp. 98–101] and Sharpe [19] developed the single-index market model (SIMM hereafter) it has received considerable research attention. Empirical tests have established the model's econometric significance [3, 12, 13] in partial equilibrim analysis. However, research into the relationship between the SIMM and its macroeconomic environment has been meager. It has been shown that the market factor changes intertemporally [13, 16, 18, 20]. However, whether these changes in the market factor and, more basically, changes in the macroeconomic situation affect the SIMM is unknown.

In the literature dealing with bond price volatility, there have been two divergent approaches. On the one hand, theoretical papers have looked at bond price volatility in the instantaneous framework of the calculus. Using the derivative of bond price (P) with respect to yield to maturity (y), it has been shown that volatility is linearly related to this derivative (dP/dy). (See [10].)

Increasing attention has been focused, as of late, on the relatively low rate of rental housing starts and the increase in apartment conversions to condominium ownership. By some estimates, additions to owner–occupied housing stock since 1970 have occurred at twice the rate of addition to the rental stock, a pattern that has caused concern to some policymakers.

Economists generally agree that a basic characteristic of a good tax is economic neutrality. That is, a tax should not influence economic behavior unless it was intentionally designed to produce a specific effect. In this context, the economic effects of the current system of capital gains taxation in the United States have been the subject of considerable concern. Most researchers have concluded that the current system of capital gains taxation has an undesirable and destabilizing effect on the securities markets because the practices of taxing capital gains only when they are realized and, correspondingly, allowing tax deductions for capital losses only upon realization, presumably cause investors to defer the realization of capital gains and to accelerate the realization of capital losses. Based upon this behavioral assumption, many economists infer an effect on the securities markets.

Commonly defined, a market is efficient if prices always fully reflect available information. That market might be viewed as consisting of two major segments: an information market and pricing mechanism. The efficiency has been amply documented elsewhere. The information market, however, should be afforded increased attention. In particular, the efficiency of the information market may vary across securities and with respect to particular securities, across time. Stated another way, the degree of imperfection in the information market may vary across securities and across time, resulting in a relative efficiency phenomenon. The presence of such a phenomenon would offer research opportunities yielding a greater understanding of the functioning of the information market and the pricing of securities.

The assumption that investors can borrow and lend at a riskless interest rate reduces the Mean-Variance (M-V) efficient set to only one optimal unlevered portfolio. However, once we realize that the market is generally imperfect and that the borrowing rate is higher than the lending rate, we can no longer use the mean-variance Separation Theorem. Instead, a number of unlevered portfolios must be included in the efficient set, while the optimal unlevered portfolio is selected on the basis of the investor's preference. The size of the efficient set of unlevered portfolios is a function of the type of empirical data used and of the disparity between the borrowing and lending interest rates.

One of the remarkable features of the mean-variance capital asset pricing model is its robustness with respect to changes in assumption (Jensen [1]). An example of this property is given by David Mayers [4], who shows that the structure of prices of marketable assets is unaffected by relaxing the assumption that all risky assets are marketable. The result has been used in the analysis of public sector investments by Stapleton and Subrahmanyam [6]. However, although relative prices are unaffected, the general level may be due to the effect of marketability on the market price of risk.

In a recent article Lloyd and Shick [3] examined a two-index model of bank stock returns with interest rates as the extra-market source of covariance. Based on their findings, the authors were optimistic that the inclusion of an interest rate index would prove to be worthwhile in market model regressions. The purpose of this comment is to question their conclusions by pointing out some specific deficiencies concerning their data, the statistical tests, and their interpretation of the results.