Alternative ways of conducting inference and measurement for long-horizon forecasting are explored with an application to dividend yields as predictors of stock returns. Monte Carlo analysis indicates that the L. Hansen and R. Hodrick (1980) procedure is biased at long horizons, but the alternatives perform better. These include an estimator derived under the null hypothesis as in M. Richardson and T. Smith (1991), a reformulation of the regression as in N. Jegadeesh (1990), and a vector autoregression (VAR) as in J. Campbell and R. Shiller (1988), S. Kandel and R. Stambaugh (1988), and J. Campbell (1991). The statistical properties of long-horizon statistics generated from the VAR indicate interesting patterns in expected stock returns. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Two homogeneous stocks of physical capital are located in two different countries, separated by an "ocean." They are consumed by local residents, invested in a random production process yielding real returns, or transferred abroad. Under proportional transfer costs, trade, consumption, and capital imbalances are shown to be persistent. The heteroskedastic process for the relative price of capital in the two countries has a nonlinear, mean-reverting drift. Nevertheless, the conditional probability of the price moving from the parity value of unity is greater than the probability of it moving toward parity. The real interest-rate differential incorporates a simple risk premium. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

The author reports a bound on the variance of price-dividend ratios and a decomposition of their variance into terms that reflect changes in dividend growth and discount rates. The specification is not restrictive. The test statistics do not require construction of ex post present values; instead, they are restrictions on means, variances, and covariances of price-dividend ratios, dividend growth, and discount rates. He considers implications for the mean price-dividend ratio, and he evaluates whether a low mean discount rate can rationalize the mean and variance of price-dividend ratios. The results do not indicate any striking rejections of present-value models. However, the bulk of the variance of price-dividend ratios must be accounted for by changing forecasts of discount rates, and discount rates must possess some unusual characteristics. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

I provide a general equilibrium theory of the term structure of real interest rates in a discrete-time economy. I derive the prices for one-period and two-period real bonds and a simple recursive formula for general k-period bonds, and prove that the price formula with appropriately specified parameters converges to that of the Cox, Ingersoll, and Ross model (1985). In addition, I consider the behavior of nominal bond prices in a partial equilibrium setting in which an exogenous price level process is correlated with the real economy. Finally, I provide an illustrative empirical investigation of the model. The results indicate a significant correlation between the price level and the growth rate of consumption, which does not support the "money nuetrality" assumption underlying Cox, Ingersoll, and Ross's nominal bond prices and related empirical studies, such as Gibbons and Ramaswamyu (1992), Heston(1991), and Pearson and Sun (1991). Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Weekly data for foreign currency futures prices are examined for evidence of risk premiums. Covariance risks are measured with respect to the excess returns from benchmark portfolios for consumption and wealth. When the parameters representing the prices of the covariance risks are held constant, no risk premiums are detected. However, when these prices are allowed to vary with the conditional expected returns and variances of the benchmark portfolios, possibly reflecting changing investment opportunities, strong evidence of risk premiums is obtained.

It is shown that the arbitrage pricing theory holds in each infinitesimal period of a continuous trading model under the assumption that dividend payoffs are functionals of factor and idiosyncratic uncertainty. This generalizes the one-period model's result that the arbitrage pricing theory holds under the assumption that price changes in a given period satisfy a factor structure. Since instantaneous returns in a multiperiod model are endogenously determined, the theory is derived under assumptions that may be viewed as restricting more primitive characteristics of the economy than the assumptions made for the one-period model. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

I develop a multitarget takeover model with bid revisions, in which bidders desire a reputation for having low valuations. Such a reputation increases the likelihood that future targets will accept low premium bids. Bidders develop reputation by using low take-it-or-leave-it offers. Consequently, tender premiums bid revision rates, and success rates are lower for continuing bidders than for those considering only a single target. Success rates vary within a series, and reputation building is more likely with highly correlated target valuations. I provide an exploratory empirical analysis consistent with lower premiums from continuing bidders and discuss some resulting implications regarding "raiders, " conglomerates, and resistance strategies. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

We undertake a comprehensive investigation of price and volume co-movement using daily New York Stock Exchange data from 1928 to 1987. We adjust the data to take into account well-known calendar effects and long-run trends. To describe the process, we use a seminonparametric estimate of the joint density of current price change and volume conditional on past price changes and volume. Four empirical regularities are found: (i) positive correlation between conditional volatility and volume; (ii) large price movements are followed by high volume; (iii) conditioning on lagged volume substantially attenuates the “leverage” effect; and (iv) after conditioning on lagged volume, there is a positive risk-return relation.

Recent evidence suggests that past mutual fund performance predicts future performance. We analyze the relationship between volatility and returns in a sample that is truncated by survivorship and show that this relationship gives rise to the appearance of predictability. We present some numerical examples to show that this effect can be strong enough to account for the strength of evidence favoring return predictability. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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.