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.

Despite nonstationarities in the factor betas and factor prices of the Chen, Roll, Ross (1986) multifactor model, investors are rewarded for bearing risks associated with the change in expected inflation and industrial production in non-January months; however, variations in these factors have opposite influences on stock prices. These findings may partially explain why several recent studies fail to detect a significant non-January risk premium in the stock market, but this evidence is only suggestive since theoretical and statistical difficulties prevent precise interpretations of specific pricing relations in the Chen, Roll, Ross model.

February and August peaks in the growth rates of the seasonally unadjusted Industrial Production Index follow the stock market peaks documented by Rozeff and Kinney (1976) by one month. Coefficients on one-month lead growth rates in industrial production for small firms are positive and significant in time-series regressions even in the presence of the market factor. Moreover, whereas returns on large firms' stocks unidirectionally Granger cause (i.e., predict) future growth rates in industrial production at least six months in advance, returns on small firms' stocks reflect one-month lead as well as past growth rates in industrial production. For these reasons, we argue that seasonal real growth provides a partial explanation for the January stock seasonal among small firms.

This paper examines the effect of risk differences on the oft-documented negative rela? tionship between stock returns and inflation. We find risk-related patterns of coefficients on our estimates of the level and change in expected inflation and on unexpected inflation. These patterns are consistent with the hypothesis developed in Fama [2] and in Geske and Roll [7] that future real output growth simultaneously helps to determine current stock returns and various measures of inflation.

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

This paper develops an expected utility model of a multinational firm facing exchange rate risk exposure to a foreign currency cash flow. Currency derivative markets do not exist between the domestic and foreign currencies. There are, however, currency futures and options markets between the domestic currency and a third currency to which the firm has access. Since a triangular parity condition holds among these three currencies, the available, yet incomplete, currency futures and options markets still provide a useful avenue for the firm to indirectly hedge against its foreign exchange risk exposure. This paper offers analytical insights into the optimal cross-hedging strategies of the firm. In particular, the results show the optimality of using options in conjunction with futures in the case of currency mismatching, even though cash flows appear to be linear.

Abstract The suitability of complex financial products for household investors is an important issue in light of consumer financial protection. The U.S. Dodd–Frank Act, for instance, mandates that distributors check suitability when selling structured products to retail investors. However, little empirical evidence exists on such transactions. Using data from Hong Kong, we find that investors purchase 8% more structured products, on average, when the suitability is not checked. The effect of suitability checks is more pronounced for less financially literate investors. Moreover, investors tend to buy products with lower risk-adjusted returns when product suitability is not checked.