David M. Modest, Tests of the Fisher Hypothesis with International Data: Theory and Evidence: Discussion, The Journal of Finance, Vol. 38, No. 2, Papers and Proceedings Forty-First Annual Meeting American Finance Association New York, N.Y. December 28-30, 1982 (May, 1983), pp. 564-567

This paper uses maximum-likelihood factor analysis of large cross-sections to examine the validity of the arbitrage pricing theory (APT). We are unable to explain the expected returns on firm size portfolios, although we do explain the expected returns on portfolios formed on the basis of dividend yield and own variance, where risk adjustment using the usual CAPM market proxies fails. We also compare alternate versions of the APT and sharply reject the hypothesis that basis portfolios formed to mimic the factors span the mean-variance frontier of the individual assets.

In this paper we examine the Henriksson-Merton test of market timing and its potential usefulness in evaluating investment advice. The paper proposes a natural extension of the test that is valid under more general assumptions about the distribution of asset returns. We show that the Henriksson-Merton test and its more general counterpart are special cases of standard tests of market rationality and efficiency. Both tests are applied to a group of foreign exchange advisory services.

The trading mechanism for equities on the Tokyo Stock Exchange (TSE) stands in sharp contrast to the primary mechanisms used to trade stocks in the United States. In the United States, exchange-designated specialists have affirmative obligations to provide continuous liquidity to the market. Specialists offer simultaneous and tight quotes to both buy and sell and supply sufficient liquidity to limit the magnitude of price changes between consecutive transactions. In contradistinction, the TSE has no exchange-designated liquidity suppliers. Instead, liquidity is provided through a public limit order book, and liquidity is organized through restrictions on maximum price changes between trades that serve to slow down trading. In this article, we examine the efficacy of the TSE's trading mechanisms at providing liquidity. Our analysis is based on a complete record of transactions and best-bid and best-offer quotes for most stocks in the First Section of the TSE over a period of 26 months. We study the size of the bid-ask spread and its cross-sectional and intertemporal stability; intertemporal patterns in returns, volatility, volume, trade size, and the frequency of trades; and market depth based on the response of quotes to trades and the frequency of trading halts and warning quotes.

Abstract The trading mechanism for equities on the Tokyo Stock Exchange (TSE) stands in sharp contrast to the primary mechanisms used to trade stocks in the United States. In the United States, exchange‐designated specialists have affirmative obligations to provide continuous liquidity to the market. Specialists offer simultaneous and tight quotes to both buy and sell and supply sufficient liquidity to limit the magnitude of price changes between consecutive transactions. In contradistinction, the TSE has no exchange‐designated liquidity suppliers. Instead, liquidity is provided through a public limit order book, and liquidity is organized through restrictions on maximum price changes between trades that serve to slow down trading. In this article, we examine the efficacy of the TSE's trading mechanisms at providing liquidity. Our analysis is based on a complete record of transactions and best‐bid and best‐offer quotes for most stocks in the First Section of the TSE over a period of 26 months. We study the size of the bid‐ask spread and its cross‐sectional and intertemporal stability; intertemporal patterns in returns, volatility, volume, trade size, and the frequency of trades; and market depth based on the response of quotes to trades and the frequency of trading halts and warning quotes.

ABSTRACT The authors' main goal in this paper is to ascertain whether conventional measures of abnormal mutual fund performance are sensitive to the benchmark chosen to measure normal performance. They employ the standard CAPM benchmarks and a variety of APT benchmarks to investigate this question. They find little similarity between the absolute and relative mutual fund rankings obtained from these alternative benchmarks, which suggests the importance of knowing the appropriate model for risk and return in this context. In addition, the rankings are not insensitive to the method used to construct the APT benchmark. Finally, they find statistically significant measured abnormal performance using all the benchmarks. The economic explanation for this phenomenon appears to be an open question.

A Corrparison of

Alan J. Marcus, David M. Modest, The Valuation of a Random Number of Put Options: An Application to Agricultural Price Supports, The Journal of Financial and Quantitative Analysis, Vol. 21, No. 1 (Mar., 1986), pp. 73-86

A fundamental equilibrium condition underlying most utility-based asset pricing models is the equilibration of intertemporal marginal rates of substitution (IMRS). Previous empirical research, however, has found that the comovements of consumption and asset return data fail to satisfy the restrictions imposed by this equilibrium condition. In this paper, we examine whether market frictions can explain previous findings. Our results suggest that a combination of short-sale, borrowing, solvency, and trading cost frictions can drive a large enough wedge between IMRS so that the apparent violations may not be inconsistent with market equilibrium.