This paper tests models of mutual fund market timing that allow the manager's payoff function to depend on returns in excess of a benchmark, and distinguish timing based on publicly available information from timing based on finer information. We simultaneously estimate parameters which describe the public information environment, the manager's risk aversion, and the precision of the fund's market-timing signal. Using a sample of more than 400 U.S. mutual funds for 1976–94, our findings suggest that mutual funds behave as highly risk averse, benchmark investors. Conditioning on public information improves the model specification. After controlling for the public information, we find no evidence that funds have significant market-timing ability.

Abstract Building on the work of Bernard and Thomas 1990, we develop a model to infer the degree to which the information in an earnings announcement is incorporated into investors' expectations for the subsequent earnings announcement at any point in time between the two announcements. We are unable to reject the null hypothesis that investors' earnings expectations are based on a seasonal random walk and reflect none of the implications of the immediately prior earnings announcement up to 15 trading days after that announcement. By mid‐quarter, expectations are significantly more sophisticated than a seasonal random walk. Two trading days before the next earnings announcement, as much as one half of the information in the prior earnings announcement is reflected in earnings expectations. We also find that the dissemination of information, albeit predictable information, speeds the incorporation of prior earnings information into earnings expectations. Our results suggest that as information about future earnings that could have been discerned from the earlier announcements (because past earnings surprises predict future ones) is disseminated in a more transparent form, investors revise their earnings expectations to reflect this information. Thus, the investors' expectations appear to incorporate more and more of the serial correlation in earnings surprises as the quarter progresses, even though they do not consider per se the serial correlation in earnings surprises in forming their expectations.

The canonical model of strategic complementarities between individual actions, which exhibits multiple equilibria under perfect information, is extended with heterogeneous agents and imperfect information. Agents observe their own cost of action and the history of the levels of aggregate activity. The distribution of individual characteristics evolves through a random process, and individuals are rational Bayesians. Under plausible conditions, there is a unique equilibrium with phases of high and low activity and random switches. Applications may be found in macroeconomics and revolutions.

This article uses bond market data to empirically test the asset pricing model of Kazemi (1992). According to this model the rate of return on a long-term, pure-discount, default-free bond will be perfectly correlated with changes in the marginal utility of the representative investor. The covariability between financial asset returns and returns on such a bond can therefore serve as a measure of the riskiness of assets. The aim of this study is to determine whether the model can explain cross-sectional differences in the monthly returns of bonds with different maturity dates. We estimate and test the restrictions imposed by the model on returns of default-free bonds, while allowing the conditional distribution of bond returns to be time varying. The model is rejected during the full sample period (1973–1995) and the subperiod (1973–1980) when the Federal Reserve's focus is on interest rates, while the model is not rejected during the subperiod (1981–1995) when the Federal Reserve's focus is on money supply.

Abstract An important determinant of option prices is the elasticity of the pricing kernel used to price all claims in the economy. In this paper, we first show that for a given forward price of the underlying asset, option prices are higher when the elasticity of the pricing kernel is declining than when it is constant. We then investigate the implications of the elasticity of the pricing kernel for the stochastic process followed by the underlying asset. Given that the underlying information process follows a geometric Brownian motion, we demonstrate that constant elasticity of the pricing kernel is equivalent to a Brownian motion for the forward price of the underlying asset, so that the Black–Scholes formula correctly prices options on the asset. In contrast, declining elasticity implies that the forward price process is no longer a Brownian motion: it has higher volatility and exhibits autocorrelation. In this case, the Black–Scholes formula underprices all options.

The focus of academic discussions of exchange rate policy has shifted in recent years. The new literature on exchange rate regime choice emphasizes considerations relating to the problems of credibility in exchange rate targeting and the connections between exchange rate regime choices and choices of monetary and fiscal policy. Arguments for exchange rate targeting are reviewed. Under most circumstances and for most countries, a system of freely floating exchange rates is likely to be a better choice than attempting to peg the exchange rate.

Using data on union certification elections, we estimate the impact of unionization on firms' investment behavior. Employing both a standard q model and an “investment surprises” technique, we find that union certification significantly reduces investment in the year following the election. We find that a winning certification election has, on average, about the same effect on investment in the year following the event as would—given the elasticity measures taken from the public finance literature—a 33 percentage‐point increase in the corporate tax. The magnitude of the response in years further away from the election is less certain.

Abstract Previous empirical research on the informativeness of earnings has focused on stockholders, and has not examined differences in earnings' informativeness for stockholders and bondholders. Because stockholders are residual claimants and bondholders are fixed claimants, the informativeness of earnings should differ for these two types of investors. When a firm's default risk is low, changes in its financial condition should be of limited relevance to bondholders, but should be relevant to stockholders. In contrast, as the likelihood of financial distress increases, stockholders' limited liability allows them to abandon the firm to the bondholders (Fischer and Verrecchia 1997). Accordingly, as a firm's default risk increases, changes in its financial condition should be increasingly important to bondholders and less important to shareholders. Because earnings provide information on firm value, the stock return‐earnings association should decrease as the firm's financial strength declines, while the bond return‐earnings association should increase. We use two measures of a firm's financial strength: the firm's bond rating and its reporting of a loss. Consistent with our hypotheses, we find that the association between stock returns and changes in annual earnings decreases as bond ratings decline, while the association between bond returns and changes in annual earnings increases. These results suggest that as the company's financial condition deteriorates, earnings become less relevant for stock valuation and more relevant for bond valuation. When we partition firms based on their loss status, we find a stronger association between stock returns and annual earnings changes for firms with positive earnings (profit firms) than for firms with losses, consistent with earlier studies. In contrast, we find that the association between bond returns and earnings changes is greater for loss firms than for profit firms. These results suggest that losses reduce the informativeness of earnings for stockholders but increase informativeness for bondholders, suggesting that investors view losses as indicating increased credit risk.

Long–short equity strategies allow investors to benefit potentially from both undervalued and overvalued securities. The present study develops a normative portfolio model under the practical conditions that a market-neutral strategy entails. The offsetting long and short equity holdings are established jointly and without any constraints by the underlying market index. While accurately capturing institutional procedures for short selling, the model contains the analytical and economic properties as required for a ranking approach to filter out any undesirable securities under consideration. In view of its practical features, the analysis should be of interest to practitioners for assisting their long–short investment decisions.