A restriction to nonnegative wealth is sufficient to preclude all arbitrage opportunities in financial models that have no arbitrage in limits of simple strategies. Imposing nonnegative wealth does not constrain agents from making the choice they would make under the standard integrability condition. These conclusions do not depend on whether markets are complete.
In this article we model the financing decisions of a firm as a sequential signaling game. We prove that, when insiders have perfect information regarding the firm's future cash flows, the application of “refinements” to the set of admissible equilibria leads to the dominance of debt over equity financing. However, we show that when insiders observe the firm's cash flows imperfectly, there may exist sequential equilibria in which this “pecking order” breaks down and some firms strictly prefer equity to debt financing. We also prove that, despite the breakdown of the pecking order, the announcement effect of equity financing will be negative relative to debt financing.
While most takeover models assume atomistic stockholders, we analyze a single-raider model with finitely many stockholders. Because the raider can always make some stockholders pivotal, he can overcome the free-rider problem identified by Grossman and Hart (1980) and others in atomistic-stockholder models and profitably take over even without exclusion. One might expect that it would be harder for the raider to make stockholders of more widely held firms pivotal and that exclusion would thus become necessary; however, the infinite-stockholder game cannot yield this conclusion. We also consider the limit of the finite-stockholder game and give conditions under which exclusion is unnecessary. Finally, we show that exclusion leads to the possibility of inefficient takeovers.
Journal Article Inefficient Dynamic Portfolio Strategies or How to Throw Away a Million Dollars in the Stock Market Get access Phillip H. Dybvig Phillip H. Dybvig Yale University Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 1, Issue 1, January 1988, Pages 67–88, https://doi.org/10.1093/rfs/1.1.67 Published: 03 April 2015
How should new securities be designed? Traditional theories have little to say on this: the literature on capital structure and general equilibrium theories with incomplete markets takes the securities firms issue as exogenous. This article explicitly incorporates the transaction costs of issuing securities and develops a model in which the instruments that are traded are chosen optimally and the economy's market structure is endogenous. Among other things, it is shown that the firm's income stream should be split so that in every state all payoffs are allocated to the security held by the group that values it most.
Trading costs, in the form either of explicit charges or of the costs of becoming informed, limit the participation of some classes of traders in commodity future markets. When speculators face a fixed cost of participating in a futures market that is used by commodity producers to hedge their stochastic revenues, the futures risk premium deviates from the perfect market prediction. The deviation rises in absolute value with the square root of the trading cost and with the standard deviation of residual returns, and it is unrelated to the covariance of the futures price with producers' nonmarketable wealths. The residual-risk premium depends not on the total magnitude of the risk that producers hedge (i.e., aggregate revenue variance), but on the variability of their revenue relative to its mean (i.e., the coefficient of variation). Hence, even a commodity that constitutes a minor fraction of aggregate consumption may have a large premium for residual risk if the revenue derived from it has a large coefficient of variation.
Journal Article Foundations for Financial Economics Get access Foundations for Financial Economics. Chi-fu Huang and Robert H. Litzenberger. New York: North Holland, 1988. 365 pp. ISBN 0-444-01310-5. Paul Pfleiderer Paul Pfleiderer Stanford University Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 1, Issue 4, October 1988, Pages 447–449, https://doi.org/10.1093/rfs/1.4.447 Published: 14 March 2015
This article investigates the existence of discontinuities in the sample path of exchange rates and of a stock market index. Maximum-likelihood estimation of a mixed jump-diffusion process reveals that exchange rates exhibit systematic discontuinities, even after allowing for conditional heteroskedasticity in the diffusion process. The results are much more significant in the foreign exchange market than in the stock market, which suggests differences in the structure of these markets. Finally, this jump component is shown to explain some of the empirically observed mispricings in the currency options market.
This study uses 90 years of daily data on the Dow Jones Industrial Average to test for the existence of persistent seasonal patterns in the rates of return. Methodological issues regarding seasonality tests are considered. We find evidence of persistently anomalous returns around the turn of the week, around the turn of the month, around the turn of the year, and around holidays.
This article develops a theory in which concentrated-trading patterns arise endogenously as a result of the strategic behavior of liquidity traders and informed traders. Our results provide a partial explanation for some of the recent empirical findings concerning the patterns of volume and price variability in intraday transaction data.