Knowledge that Transforms

This article examines the relationship between the volatility of the crude oil futures market and changes in initial margin requirements. To closely match changes in futures market volatility with the corresponding changes in margin requirements, we infer the volatility of the futures market from the prices of crude oil futures options contracts. Using a mean-reverting diffusion process for volatility, we show that changes in margin policy do not affect subsequent market volatility.

This article compares the predictions of finite-shareholder models of conditional and unconditional takeover offers with the outcomes of laboratory experiments. In addition to differentiating between types of offers, the experimental designs span small and large firms as well as different levels of offer premiums. It is found that in unconditional offers to large groups of subjects (28–40), the symmetric Nash equilibrium predicts observed tendering frequencies quite accurately. For other experimental designs, the results are mixed. The analysis of shareholder tendering strategies from the experiment yields insights into (I) the effects of takeover offer designs, (ii) the appropriateness of finite-shareholder models for research, and (iii) the costs of free riding when shareholders are nonatomistic.

This article develops theoretical insight into the effect in expected volatility, which means that large shocks are less persistent in volatility than small shocks. The model uses the Kyle-Admati-Pfleiderer setup with liquidity traders, informed traders, and a market maker. Information is modeled as a GARCH process. It is shown that the GARCH process for information is transformed into a TARCH process (for threshold GARCH) for the market price changes. Working with information flows allows one to derive implications for trading volume and market liquidity which provide the basis for a more complete test of the model. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

This article synthesizes some recent progress in the theories of corporate control and political lobbying to model the proxy campaign as a political campaign. The model yields a number of testable implications, only some of which have been examined in the literature. For example, if the loss from voting for a "bad" dissident exceeds the gain from voting for a "good" dissident, the model predicts that as communication costs fall, the number of proxy fights increases, announcement day returns decrease, and the fraction of dissident wins first increases and then decreases. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Multivariate density estimation (MDE) suggests that mortgage-backed security (MBS) prices can be well described as a function of the level and slope of the term structure. We analyze how this function varies across MBSs with different coupons. An important finding is that the interest rate level proxies for the moneyness of the option, the expected level of prepayments, and the average life of the cash flows, while the term structure slope controls for the average rate at which these cash flows should be discounted. Though the origination and prepayment behavior of mortgages differ substantially across coupons, there remains an unexplained common factor in MBS prices. This factor does not seem to be related to the usual suspects and therefore presents a puzzle to financial economists.

Von Neumann-Morgenstern preferences over terminal consumption can be inferred from wealth on a single sample path when markets are complete and returns follow a known law in a neo-classical investment problem in either a discrete-time i.i.d. binomial model or a continuous-time diffusion model with a Gaussian state variable. Numerical results suggest that useful information about preferences can be obtained from even a single noisy sample of monthly observations of a portfolio over 5 years.

Swedish government lottery bonds have coupon payments determined by lottery. They offer a unique opportunity to study a security with uncertain payoffs having a known, observable distribution. The risk associated with the lotteries is idiosyncratic by construction and should not command a risk premium in equilibrium. The bonds are traded in two forms, allowing us to evaluate the rewards to bearing extra lottery risk. Despite its idiosyncratic nature, we find prices appear to reflect aversion to this risk. We evaluate the empirical determinants of this differential pricing and possible explanations for it.

The probability of entry and exit of dealers on the NASDAQ National Market (NNM) is significantly affected by trading intensity, volatility and the quoted bid-ask spread. Entry and exit of market makers is a pervasive phenomenon. Large-scale entry (exit) is associated with substantial declines (increases) in quoted end-of-day inside spreads, even after controlling for the effects of changes in volume and volatility. The spread changes are larger in magnitude for issues with few market makers; however, even for issues with a large number of market makers, substantial changes in quoted spreads take place. The results are consistent with the competitive model of dealer pricing.

We study the information content of implied volatility from several volatility specifications of the Heath–Jarrow–Morton (1992) (HJM) models relative to popular historical volatility models in the Eurodollar options market. The implied volatility from the HJM models explains much of the variation of realized interest rate volatility over both daily and monthly horizons. The implied volatility dominates the GARCH terms, the Glosten et al. (1993) type asymmetric volatility terms, and the interest rate level. However, it cannot explain that the impact of interest rate shocks on the volatility is lower when interest rates are low than when they are high.