Knowledge that Transforms

[The intraday lead-lag relation between returns of the Major Market cash index and returns of the Major Market Index futures and S&P 500 futures is investigated. Empirical results show strong evidence that the futures leads the cash index and weak evidence that the cash index leads the futures. The asymmetric lead-lag relation holds between the futures and all component stocks, including those that trade in almost every five-minute interval. Evidence indicates that when more stocks move together (market-wide information) the futures leads the cash index to a greater degree. This suggests that the futures market is the main source of market-wide information.]

[Asset pricing theory is presented with representative-agent utility given by a stochastic differential formulation of recursive utility. Asset returns are characterized from general first-order conditions of the Hamilton-Bellman-Jacobi equation for optimal control. Homothetic representative-agent recursive utility functions are shown to imply that excess expected rates of return on securities are given by a linear combination of the continuous-time market-portfolio-based capital asset pricing model (CAPM) and the consumption-based CAPM. The Cox, Ingersoll, and Ross characterization of the term structure is examined with a recursive generalization, showing the response of the term structure to variations in risk aversion. Also, a new multicommodity factor-return model, as well as an extension of the "usual" discounted expected value formula for asset prices, is introduced.]

[An integrated econometric view of maximum likelihood methods and more traditional two-pass approaches to estimating beta-pricing models is presented. Several aspects of the well-known "errors-in-variables problem" are considered, and an earlier conjecture concerning the merits of simultaneous estimation of beta and price of risk parameters is evaluated. The traditional inference procedure is found, under standard assumptions, to overstate the precision of price of risk estimates and an asymptotically valid correction is derived. Modifications to accommodate serial correlation in market-wide factors are also discussed.]

[We examine an adverse selection model of trading in which both informed and uninformed traders are rational, maximizing agents. Replacing the price inelastic "noise" or "liquidity" traders with strategic, utility-maximizing hedgers permits an explicit analysis of the uninformed traders' welfare, and demonstrates that several comparative statics obtained from the standard paradigm of Kyle (1984, 1985) are altered significantly upon endogenizing the trading motives of these agents. In contrast to extant models, market liquidity and price efficiency are both nonmonotonic in the number of uninformed hedgers in the market. Also, the welfare of hedgers monotonically decreases with the number of informed traders, despite greater competition between the informed.]

[It is generally agreed that speculators can make profits from insider trading or from the release of false information. Both forms of stock-price manipulation have now been made illegal. In this article, we ask whether it is possible to make profits from a different kind of manipulation, in which an uninformed speculator simply buys and sells shares. We show that in a rational expectations framework, where all agents maximize expected utility, it is possible for an uninformed manipulator to make a profit, provided investors attach a positive probability to the manipulator being an informed trader.]