Knowledge that Transforms

Journal Article Derivatives: A PowerPlus Picture Book Get access Derivatives: A PowerPlus Picture Book. Mark Rubinstein. Kathleen Hagerty Kathleen Hagerty Northwestern University Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 13, Issue 1, January 2000, Pages 253–256, https://doi.org/10.1093/rfs/13.1.253 Published: 15 June 2015

"We examine the implications of portfolio theory for the cross-sectional behavior of equity trading volume. Two-fund separation theorems suggest a natural definition for trading activity: share turnover...We find strong evidence against two-fund separation, and a principal-components decomposition suggests that turnover is well approximated by a two-factor linear model" -- Abstract.

Journal Article Financial Analysis and Corporate Strategy Get access Financial Analysis and Corporate Strategy. Mark Grinblatt and Sheridan Titman. Irwin/McGraw-Hill, 1998. 864 pp., $78.75 (hardcover). ISBN 0-256-09939-1. Gilles Chemla Gilles Chemla University of British Columbia THEMA(CNRS), and CEPR Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 13, Issue 1, January 2000, Pages 249–253, https://doi.org/10.1093/rfs/13.1.249 Published: 15 June 2015

It appears that volatility in equity markets is asymmetric: returns and conditional volatility are negatively correlated. We provide a unified framework to simultaneously investigate asymmetric volatility at the firm and the market level and to examine two potential explanations of the asymmetry: leverage effects and time-varying risk premiums. Our empirical application uses the market portfolio and portfolios with different leverage constructed from Nikkei 225 stocks, extending the empirical evidence on asymmetry to Japanese stocks. Although volatility asymmetry is present and significant at the market and the portfolio levels, its source differs across portfolios. We find that it is important to include leverage ratios in the volatility dynamics but that their economic effects are mostly dwarfed by the volatility feedback mechanism. Volatility feedback is enhanced by a phenomenon that we term covariance asymmetry: conditional covariances with the market increase only significantly following negative market news. We do not find significant asymmetries in conditional betas.

We analyze a distressed firm indebted to many creditors. The firm's owners have the option of choosing the sequence of restructuring negotiations with the creditors. We show that sequencing flexibility is beneficial to firm owners, and that the optimal sequencing of restructuring negotiations involves exploiting the firm's liabilities to some creditors so as to moderate the demands of others. Moderately distressed firms will eschew renegotiations with creditors in strong bargaining positions. Severely distressed firms will extract concessions from all creditors. In this case, owners can gain if they can credibly commit to conditional restructuring agreements that link the concessions of one creditor to concessions by others.

We examine the extent to which an investor's tastes and beliefs can be jointly recovered from knowledge of his/her consumption choice. More precisely, we assume that the investor's preferences admit an expected utility representation, but with subjective (unknown) probabilities, and investigate what joint restrictions can be placed on utility functions and beliefs. If the investor draws utility from intertemporal consumption, we show that the set of utility functions and beliefs that are consistent with a given consumption choice can be characterized by a martingale condition. In the Markovian case, this characterization can be restated in terms of a Riccati differential equation that must be satisfied by the investor's relative risk aversion function. To each solution of this differential equation is associated a unique utility function and a unique set of beliefs supporting the given consumption choice. Moreover, we show that the differential equation has at most one solution in the class of utility functions displaying infinite absolute risk aversion at the origin. Thus, preferences (and associated beliefs) can be uniquely recovered within this class.

We view debt and outside equity as serving to elicit credible information from different specialists about the value of an enterprise in its various uses. The equity valuation specialist provides a price forecast for equity that reveals information about the value of the enterprise in its primary use. The debt valuation specialist provides a price forecast for debt that reveals information about the value of the enterprise in its alternative use. The prices forecast by the valuation specialists credibly reveal their private information because they are required to buy the associated claims at the forecast prices, thereby bonding their valuations.

This article develops a model of spread and depth setting under asymmetric information where the equilibrium depth is proportionally more sensitive than the spread to changes in the degree of information asymmetry. The analysis uses a one-period model in which a risk-neutral, monopolistic market maker faces a price-sensitive liquidity trader and a better informed trader who is alternatively risk neutral and risk averse. The equilibrium depth can take values ranging from 0 to infinity, depending on the information asymmetry, the asset volatility, and the strength of the liquidity demand, while the spread remains positive and finite.

Journal Article Regulatory and Legal Pressures and the Costs of Nasdaq Trading Get access Paul Schultz Paul Schultz University of Notre Dame Address correspondence to Paul Schultz, College of Business Administration, University of Notre Dame, Notre Dame, IN 46556, or e-mail: [email protected]. Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 13, Issue 4, October 2000, Pages 917–957, https://doi.org/10.1093/rfs/13.4.917 Published: 15 June 2015

An important group of traders in the foreign exchange market is governments who often adhere to a foreign exchange rate policy of occasional interventions with otherwise floating rates. In this article we provide a theoretical model and empirical evidence that government foreign exchange interventions create significant adverse selection problems for dealers. In particular, our model shows that the adverse selection component of the foreign exchange spread is positively related to the variance of unexpected intervention and that expected intervention has no impact on the spread. After controlling for inventory and order processing costs, we find that bid-ask spreads increase with U.S. dollar and German deutsche mark foreign exchange rate intervention during the period 1976–1994. Furthermore, when the intervention is decomposed into expected and unexpected components, we find a statistically and economically significant increase in spreads with the variance of unexpected intervention, while expected intervention has no significant impact on spreads.