Dennis W. Draper, Discussion: Information Sets, Macroeconomic Reform, and Stock Prices, The Journal of Financial and Quantitative Analysis, Vol. 16, No. 4, Proceedings of 16th Annual Conference of the Western Finance Association, June 18-20, 1981, Jackson Hole, Wyoming (Nov., 1981), pp. 511-513

Louis Bachelier would be pleased with the findings reported in John T. Emery's paper, even though Bachelier wrote in 1900 before there was any popular support for technical analysis. Considering technical analysis historically, the Dow Theory was the first popular technical approach, although Charles H. Dow, editor of The Wall Street Journal at about the time of Bachelier's writing, did not consider his theory a forecasting method. Later William P. Hamilton began to forecast with Dow's Theory, and then in 1932 Robert Rhea's publication of The Dow Theory popularized this technical approach. Earlier Bachelier had struck the first blow of an obviously continuing quest to execute the technical security analysts. (A technical security analyst, often called a chartest, develops esoteric charts or computer printouts which he hopes will allow him to make better than average returns in the stock market.) In the United States serious economic and statistical testing of technical analysis did not begin until the early 1950s; these academic tests continue today. Test results support the efficient capital market theory or, put more bluntly, technical analysis does not lead to greater than average profits in the stock market. On the other hand, perhaps technical analysis does work, but no statistical method used in testing has uncovered this fact. In short, perhaps our statistical tools are not sophisticated enough to disclose the relation between stock price and “daily market indicators.”

Recent research focused on the market for first public offerings of common stock has indicated that investors who purchase new issues at the offering price will quickly achieve relatively large systematic profits. This is attributable to either the inability or the reluctance of investment bankers to reoffer the shares in which they deal at market-clearing prices. This paper examines factors that influence investment bankers in their pricing decisions and subsequently determine the short-run performance of new issues.

We investigate the relative importance of various factors in explaining the volatility skew observed in the prices of stock options traded on the Chicago Board Options Exchange. The skewness of the risk-neutral density implied by individual stock option prices tends to be more negative for stocks that have larger betas, suggesting that market risk is important in pricing individual stock options. Also, implied skewness tends to be more negative in periods of high market volatility, and when the risk-neutral density for index options is more negatively skewed. Other firm-specific factors, including firm size and trading volume a so help explain cross-sectional variation in skewness. However, we find no robust relationship between skewness and the firm's leverage. Nor do we find evidence that skewness is related to the put/call ratio, which may be viewed as a proxy for trading pressure or market sentiment. Overall, firm-specific factors seem to be more important than systematic factors in explaining the variation in the skew for individual firms.

We study the dynamic relation between daily stock returns and daily innovations in optionderived implied volatilities. By simultaneously analyzing innovations in index- and firmlevel implied volatilities, we distinguish between innovations in systematic and idiosyncratic volatility in an effort to better understand the asymmetric volatility phenomenon. Our results indicate that the relation between stock returns and innovations in systematic volatility (idiosyncratic volatility) is substantially negative (near zero). These results suggest that asymmetric volatility is primarily attributed to systematic market-wide factors rather than aggregated firm-level effects. We also present evidence that supports our assumption that innovations in implied volatility are good proxies for innovations in expected stock volatility.

Dennis W. Draper, James W. Hoag, Financial Intermediation and the Theory of Agency, The Journal of Financial and Quantitative Analysis, Vol. 13, No. 4, Proceedings of Thirteenth Annual Conference of the Western Finance Association, June 20-26, 1978 (Nov., 1978), pp. 595-611

This study presents theory and some exploratory empirical work on several separate strands of monetarism in an international context and reports the results of tests of the two interrelated hypotheses: (a) the United States' monetary expansion was responsible forthe exportation of inflation to the rest of the world during the period of generally fixed exchange rates that lasted from the end of World War II until August 1971 (followed by the Smithsonian revaluations and generalized floating in March 1973), and (b) foreign nations could not control their money supplies, even in the short run, to prevent importing inflation. Succinctly stated, the monetarist approach to macroeconomic phenomena holds that money is preeminent in determining the short-run shocks to real output and the long-run price level of an economy. However, received theory is simply not clear as to whose money is most important in an international context. Is it the domestic money stock which is kept relativelyindependent of foreign forces under fixed exchange rates through astute central bank policy, at least in the short run? Is it the rest of the world money stock which, under fixed exchange rates, is a close substitute for domestic money? Or is it the money stock of the so-called world's banker, the United States, which drives foreign economies? We address these issues and others in our empirical analysis.

In this paper the traditional capital asset pricing model is reformulated as a system of simultaneous equations in which returns on similar securities are treated as endogenous variables and in which pertinent financial data for particular firms and a market factor are treated as exogenous variables. Such a system is estimated, and serious questions are raised concerning the tenability of the simple linear model so often used to explain capital asset prices under uncertainty.

Is liquidity better when a trade counterparty’s brokerage firm is unknown (anonymous) or known (transparent)? We examine a quasinatural experiment where some firms switched from transparent to anonymous trading and then, 1 year later, switched back. Our results for inside spread, price impact, and limit order book depth suggest that liquidity improves when anonymous post-trade reporting is introduced and liquidity worsens when anonymous post-trade reporting is reversed.

This paper examines the price dynamics in the S&P 500 and Nasdaq-100 index futures contracts. By utilizing transactions data with attached trader type identification codes, we are able to analyze price dynamics for trades initiated by exchange locals and off-exchange customers. The empirical results show that price discovery appears to be initiated in the E-mini index futures contracts and that trades initiated by exchange locals seem to be more informative than those initiated by off-exchange traders. Furthermore, results show that exchange locals appear to make informed trades on the E-mini contracts around large trades that occur on the open outcry floor. We maintain that the exchange locals' ability to observe pit dynamics may contribute toward explaining the price leadership of the Emini contracts. Overall, the results are consistent with the notion that exchange locals are informed traders who derive their informational advantage from the proximity to order flow.