Knowledge that Transforms

By identifying the possibility of imposing a creditable threat of liquidation as the key role of informed (bank) finance in a moral hazard context, we characterize the circumstances under which a mixture of informed and uninformed (market) finance is optimal, and explain why bank debt is typically secured, senior, and tightly held. We also show that the effectiveness of mixed finance may be impaired by the possibility of collusion between the firms and their informed lenders, and that in the optimal renegotiation-proof contract informed debt capacity will be exhausted before appealing to supplementary uninformed finance.

This article demonstrates that a potential acquirer with a toehold bids aggressively and possibly overpays in equilibrium. The aggressiveness of a bidder with a toehold increases further if he is able to renege on his winning bid. A bidder without a toehold, however, responds by shading his bids. The target firm can increase competition and the expected sale price if it only entertains nonretractable bids. This article provides testable implications on the probability of bidder success, stock price reactions on bid revisions and on resolution of the contest, and expected gains to bidders and the target firm.

Journal Article Optimal Financial Contracting: Debt versus Outside Equity Get access Zsuzsanna Fluck Zsuzsanna Fluck New York University Address correspondence to Zsuzsanna Fluck, Department of Finance, Stern School of Business, New York University, 44 West 4th Street, Suite 9-190, New York, NY 10012, or e-mail: [email protected]. Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 11, Issue 2, April 1998, Pages 383–418, https://doi.org/10.1093/rfs/11.2.383 Published: 03 June 2015

While the literature usually justifies informational efficiency in the context of rationality, this article shows informational efficiency by applying the evolutionary idea of natural selection. In a dynamic futures market, speculators are assumed to merely act upon their predetermined trading types (buyer or seller), their predetermined fractions of wealth allocated for speculation, and their inherent abilities to predict the spot price, reflected in their distributions of prediction errors with respect to the spot price. This article shows that the proportion of time that the futures price equals the spot price converges to one with probability 1.

Written by three well-known scholars in the field, this text is an ambitious effort to elucidate a wide range of important topics in financial econometrics using an innovative combination of data analysis and sophisticated economic theory. For the first time, we have available in a single volume a large collection of topics previously found in specialized journals or advanced monographs only. Are asset returns predictable? Why are portfolio returns strongly positively autocorrelated when individual security returns are negatively correlated? Does the CAPM hold? How do we explain the large body of evidence that excess returns on stocks and other risky assets are predictable? These are just a few of the questions raised in the book for which an answer is provided or the state of the art presented. This book is sophisticated, yet accessible; full of details, yet intriguing. At the beginning of each chapter, the authors clearly identify the type of problems they are going to cope with and introduce the necessary analytical tools right after. A careful effort has been made to develop the statistical techniques within the context of particular financial applications. Students are going to like this approach. Instructors will appreciate the attempt to make each chapter as self-contained as possible, leaving them free to choose specified sequences of topics. Professionals will be pleased with the quick and authoritative introductions to important areas of finance.

A number of recent papers have used nonparametric density estimation or nonparametric regression to study the instantaneous spot interest rate, and to test term structure models. However, little is known about the performance of these methods when applied to persistent time-series, such as U.S. interest rates. This paper uses the Vasicek [1977] model to study the performance of kernel density estimates of the ergodic distribution of the instantaneous spot rate. The model's tractability allows me to analyze the MISE of the kernel estimate as a function of persistence, variance of the ergodic distribution, span of the data, sampling frequency, and kernel bandwidth. Our principle result is that persistence has an important impact on optimal bandwidth selection and on finite sample performance. We also find that sampling the data more frequently has little effect on estimator quality. We also examine one of Ait-Sahalia's [1996a] new nonparametric tests of parametric continuous-time Markov ...

This article proposes to price an American option by approximating its early exercise boundary as a multipiece exponential function. Closed form formulas are obtained in terms of the bases and exponents of the multipiece exponential function. It is demonstrated that a three-point extrapolation scheme has the accuracy of an 800-time-step binomial tree, but is about 130 times faster. An intuitive argument is given to indicate why this seemingly crude approximation works so well. Our method is very simple and easy to implement. Comparisons with other leading competing methods are also included.

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.

In this article we study the effects of transaction costs on asset prices. We assume an overlapping generations economy with a riskless, liquid bond, and many risky stocks carrying proportional transaction costs. We obtain stock prices and turnover in closed form. Surprisingly, a stock's price may increase in transaction costs, and a more frequently traded stock may be less adversely affected by an increase in transaction costs. Calculations based on the “marginal” investor overestimate the effects of transaction costs. For realistic parameter values, transaction costs have very small effects on stock prices but large effects on turnover.

This article solves the equilibrium problem in a pure-exchange, continuous-time economy in which some agents face information costs or other types of frictions effectively preventing them from investing in the stock market. Under the assumption that the restricted agents have logarithmic utilities, a complete characterization of equilibrium prices and consumption/ investment policies is provided. A simple calibration shows that the model can help resolve some of the empirical asset pricing puzzles. It is well documented that even in well-developed capital markets, a large fraction of households does not participate in the stock market. For example, Mankiw and Zeldes (1991) report that 72.4 % of the households in a representative sample from the 1984 Panel Study of Income Dynamics held no stocks at all. 1 These households earned 62 % of the aggregate disposable income and accounted for 68 % of aggre-We thank Steve Shreve for several conversations on this topic and Kerry