Knowledge that Transforms

A framework is presented for investigating the mean-variance efficiency of an unobservable portfolio based on its correlation with a proxy portfolio. A sensitivity analysis derives the highest correlation between the proxy and a portfolio that reverses the inference of a test of SHarpe-Lintner tangency. For example, the maximum correlation between the value-weighted NYSE-AMEX portfolio and a portfolio inferred tangent ranges from 0.76 to 0.48. We also test whether the correlation between the proxy and the tangent portfolio exceeds a given level. This hypothesis is often rejected for the NYSE-AMEX proxy at a correlation of 0.7.

Upper bounds on the expected payoff of call and put options are derived. These bounds depend only on the mean and variance of the terminal stock price and not on its entire distribution, so they are termed semi-parametric. A corollary of this result is a set of upper bounds for option prices obtained by the risk-neutral valuation approach of Cox and Ross. As an example, these bounds are shown to obtain across both lognormal diffusions and mixed diffusion-jump processes for any given data set. We present an illustrative example that suggests these bounds may be of considerable practical value.

We measure the differential effects on shareholder wealth and tendering behavior of any-or-all, two-tier and partial tender offers and find no evidence that shareholders are disadvantaged by front-end-loaded corporate takeovers. Shareholders fare as well when the terms of an offer for control are negotiated with target-firm management as when they are not. Most cash tender offers executed between 1981 and 1984 were negotiated, and almost all two-tier offers were negotiated.

This paper evaluates the power of multivariate tests of the Capital Asset Pricing Model. The results indicate that when employing an unspecified alternative hypothesis, the ability of the tests to distinguish between the CAPM and other pricing models is poor. An upper bound is derived for the distance the alternative distribution of the test statistic can be from the null distribution when the deviations from the CAPM are due to missing factors. This upper bound explains the low power of the tests.

This study uses capital market data to measure the effects of REIT mergers on the wealth of the acquiring trust's shareholders. A significant increase in shareholder wealth is detected. This differs from the findings of other acquisition studies. The primary source of the value gain seems to be improved management of the acquired trust's assets.

A framework is developed in which inferences can be made about the validity of an equilibrium asset pricing relation, even though the central aggregate in this relation is unobservable. A multivariate proxy for the true market portfolio, consisting of an equal-weighted stock index and a long-term government bond index, is employed in an investigation of the Sharpe-Lintner CAPM. The empirical evidence suggests that we can reject the joint hypothesis that (a) CAPM is valid, and (b) multiple correlation between the true market portfolio and proxy assets exceeds 0.7. Connections to the equilibrium factor pricing literature are also explored.

This study analyzes both the causes and effects of mutual S&L conversions to corporate charter. Changes in technology and government policies have substantially increased S&L competition, riskbearing, and potential scale and scope economies. Evidence indicates that these changes have decreased the relative operating advantages of mutual S&Ls, encouraging conversions to stock charter. The S&L's financial and operating characteristics, which affect the success of the conversion effort, are also explored.

This paper develops a Bayesian test of portfolio efficiency and derives a computationally convenient posterior-odds ratio. The analysis indicates that significance levels higher than the traditional 0.05 level are recommended for many test situations. In an example from the literature, the classical test fails to reject with p-value 0.082, yet the odds are nearly two to one against efficiency under apparently reasonable assumptions. Procedures for testing approximate efficiency and for aggregating subperiod results are also considered.

This paper documents the effects of large (block) transactions on the prices of common stocks traded on the New York Stock Exchange. We examine whether mean temporary and permanent price effects associated with large and small transactions differ and whether the price effects vary cross-sectionally according to the size of the block. Alternative definitions of block size are investigated – percentage of the equity traded, block volume in relation to normal trading volume, and dollar value of the block. The results suggest that price effects are predominantly temporary for seller-initiated transactions and permanent for buyer-initiated transactions.