This study argues that an interest rate swap, as a non-redundant security, creates surplus which will be shared by swap counterparties to compensate their risks in swaps. This action in turns affects swap spreads. Analyzing the time series impacts of the changes of risks of swap counterparties on swap spreads, we conclude that both lower and higher rating bond spreads have positive impacts on swap spreads. We also derive a risk–spread relation to test if swap counterparties are firms with differential credit ratings. Since the risk allocation between swap counterparties varies over business cycles, hence this factor needs to be controlled. We conclude that (1) similar results hold if the business cycle factor is controlled and (2) swap spreads contain procyclical element and are less cyclical than lower credit rating bond spreads.

SOES bandits are individual investors who use Nasdaq's Small Order Execution System (SOES) for day trading. Their average profit per trade is small, but they trade dozens or hundreds of times per week. Bandits usually establish a position before most market-makers have updated their quotes, and lay off the position at favorable prices through Instinet or SelectNet. It is noteworthy that they trade profitably with market-makers despite having less information. Bandits keep the profits and bear the losses from their trades. Thus they have greater incentives to trade well than the employees of market-making firms.

Data on selling by venture capitalists during the IPOs of their portfolio companies are used to examine the relation between insider selling decisions and reputation. We hypothesize that, in deciding whether to sell, venture capitalists balance the costs of continued managerial/monitoring involvement against the adverse reaction to selling. Further, they facilitate unwinding of investment positions by developing reputations for not selling overpriced shares. Evidence on the timing of IPOs and selling decisions of venture capitalists confirms the importance of reputation as a determinant of the organization of the venture capital market and as a factor affecting insider selling decisions.

[We determine the minimum cost of superreplicating a nonnegative contingent claim when there are convex constraints on portfolio weights. We show that the optimal cost with constraints is equal to the price of a related claim without constraints. The related claim is a dominating claim, that is, a claim whose payoffs are increased in an appropriate way relative to the original claim. The results hold for a variety of options, including some path-dependent options. Constraints on the gamma of the replicating portfolio, constraints on portfolio amounts, and constraints on the number of shares are also considered.]

This paper develops methods for constructing asymptotically valid confidence intervals for the date of a single break in multivariate time series, including I(0), I(1), and deterministically trending regressors. Although the width of the asymptotic confidence interval does not decrease as the sample size increases, it is inversely related to the number of series which have a common break date, so there are substantial gains to multivariate inference about break dates. These methods are applied to two empirical examples: the mean growth rate of output in three European countries, and the mean growth rate of U.S. consumption, investment, and output.

Standard formulas for valuing the equity of going concerns require forecasting payoffs to infinity but practical analysis requires that payoffs be forecasted over finite horizons. This truncation inevitably involves often‐troublesome terminal value calculations. This paper contrasts dividend discount techniques, discounted cash flow analysis, and techniques based on accrual earnings when each is applied with finite‐horizon forecasts. Valuations based on average ex post payoffs over various horizons, with and without terminal value calculations, are compared with ex ante market prices to discover the error introduced by each technique in truncating the horizon. Valuation errors are lower using accrual earnings techniques rather than cash flow and dividend discounting techniques. The accounting features that make a given technique less than ideal for finite horizon analysis are also detailed. Conditions where a given technique requires particularly long forecasting horizons are identified and the performance of the alternative techniques under those conditions is examined.

Paul D. Childs, Steven H. Ott, Alexander J. Triantis, Capital Budgeting for Interrelated Projects: A Real Options Approach, The Journal of Financial and Quantitative Analysis, Vol. 33, No. 3 (Sep., 1998), pp. 305-334

Backward vertical integration by a dominant firm into an upstream competitive industry causes both input and output prices to rise. The dominant firm's cost advantage may or may not offset the negative effect of higher prices on social welfare. Whether it does depends on a simple indicator derived from input and output market shares and the degree of piror vertical integration. A vertical merger is similar to a hypothetical horizontal merger, suggesting that vertical merger policy for this industry should be similar to horizontal merger policy. The dominant firm model yields an observable sufficient indicator of welfare-improving vertical mergers.