Knowledge that Transforms

Brokerage contracts for many categories of real assets are characterized by a common, constant commission rate payable upon sale, exclusive agency, and contractual asking prices. For a large market in steady state, these conventional contracts produce in equilibrium no agency problem between a broker and his clients. Each broker spends the same time or effort selling each client's asset as the broker would spend on his own assets. As in standard agency problems, extra effort by a broker generates first-order stochastically dominant distributions of bids by potential buyers. Unlike standard agency problems, each broker can allocate his time or effort between selling the assets of his multiple clients and searching for new clients in competition with other brokers. Because brokers' time spent searching for new sellers is dissipative, entry by brokers is excessive in equilibrium.

Journal Article The Econometrics of Financial Markets Get access The Econometrics of Financial Markets. John Y. Campbell, Andrew W. Lo, and A. Craig MacKinlay. Princeton, N.J.: Princeton University Press, 1997. xviii + 611 pp., $49.50. ISBN 0-691-04301-9. Maurizio Tiso Maurizio Tiso University of Minnesota Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 11, Issue 1, January 1998, Pages 233–238, https://doi.org/10.1093/rfs/11.1.233 Published: 03 June 2015

This article examines the relation between two factors affecting stock returns, the bid-ask spread and price discreteness, and the increase in return variance after ex-dates of stock splits and stock dividends. Controlling for these effects, the variance of daily returns still increases significantly. The variance of weekly returns also increases significantly, and the variance of returns for a control sample of nonsplitting firms shows no significant increase. Variance ratio tests show that bid-ask errors are small for these stocks and therefore cannot explain the large increase in variance. Spreads and price discreteness do not explain increased variance after stock distributions.

Journal Article The Restrictions on Predictability Implied by Rational Asset Pricing Models Get access Chris Kirby Chris Kirby University of Texas at Dallas Address correspondence to Chris Kirby, School of Management, University of Texas at Dallas, P.O. Box 830688, Richardson, TX 75083-0688. Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 11, Issue 2, April 1998, Pages 343–382, https://doi.org/10.1093/rfs/11.2.343 Published: 03 June 2015

This article presents evidence on persistence in the relative investment performance of large, institutional equity managers. Similar to existing evidence for mutual funds, we find persistent performance concentrated in the managers with poor prior-period performance measures. A conditional approach, using time-varying measures of risk and abnormal performance, is better able to detect this persistence and to predict the future performance of the funds than are traditional methods.

Fama (1977) and Miller (1977) predict that one minus the corporate tax rate will equate after tax yields from comparable taxable and tax-exempt bonds. Empirical evidence shows that long-term tax-exempt yields are higher than theory predicts. Two popular explanations for this empirical puzzle are that, relative to taxable bonds, municipal bonds bear more default risk and include costly call options. I study U.S. government secured municipal bond yields which are effectively default-free and noncallable. These municipal yields display the same tendency to be too high. I conclude that differential default risk and call options do not explain the municipal bond puzzle.

A number of empirical studies have reached the conclusion that stock price volatility cannot be fully explained within the standard dividend discount model. This article proposes a resolution based upon a model that contains both a random supply of risky assets and finitely lived agents who trade in a multiple security environment. As the analysis shows there exist 2^K equilibria when K securities trade. The low volatility equilibria have properties analogous to those found in the infinitely lived agent models of Campbell and Kyle (1991) and Wang (1993, 1994). In contrast, the high-volatility equilibria have very different characteristics. Within the high-volatility equilibria very large price variances can be generated with very small supply shocks. Adding securities to the economy further reduces the required supply shocks. Using previously established empirical results the model can reconcile the data with supply shocks that are less than 10% as large as observed return shocks. These results are shown to hold even when the dividend process is mean reverting.

Exchange-mandated discrete pricing restrictions create a wedge between the underlying equilibrium price and the observed price. This wedge permits a competitive market maker to realize economic profits that could help recoup fixed costs. The optimal tick size that maximizes the expected profits of the market maker can equal to $1/8 for reasonable parameter values. The optimal tick size is decreasing in the degree of adverse selection. Discreteness per se can cause time-varying bid-ask spreads, asymmetric commissions, and market breakdowns. Discreteness, which imposes additional transaction costs, reduces the value of private information. Liquidity traders can benefit under certain conditions.

Constraints on the gamma of the replicating portfolio, constraints on portfolio amounts, and constraints on the number of shares are also considered.

Recent empirical evidence indicates that capital structure changes affect pricing strategies. In most cases, prices increase following the implementation of a leveraged buyout of a major firm in an industry, with the more leveraged firm in the industry charging higher prices on average. Notable exceptions exist, however, when the leverage increasing firm's rival is relatively unlevered. The first observation is consistent with a model where firms compete for market share on the basis of price. The second observation can be explained within the context of a Stackelberg model where the relatively unlevered rival acts as the Stackelberg price leader.