Weekly returns of stock portfolios exhibit substantial autocorrelation. Analytical studies suggest that nonsynchronous trading is capable of explaining from 5% to 65% of the autocorrelation. The varying importance of nonsynchronous trading in these studies arises primarily from differing assumptions regarding nontrading periods of stocks. We simulate the effects of nonsynchronous trading by sampling stock returns from a return generating process using transactions data to obtain the precise time of each stock's last trade. We find that simulated weekly portfolio returns exhibit autocorrelations that are roughly 25% that of their observed (CRSP) weekly returns.

Recently, several central banks have lost their bank supervisory responsibilities, in part because it has not been shown that supervisory authority improves the conduct of monetary policy. This paper finds that confidential bank supervisory information could help the Board staff more accurately forecast important macroeconomic variables and is used by FOMC members to guide monetary policy. These findings suggest that the complementarity between supervisory responsibilities and monetary policy should be an important consideration when evaluating the structure of the central bank.

Journal Article Time-Varying Risk and Return in the Bond Market: A Test of a New Equilibrium Pricing Model Get access Cynthia J. Campbell, Cynthia J. Campbell Iowa State University Address correspondence to Cynthia J. Campbell, Department of Finance, College of Business, Iowa State University, Ames, IA 50011, or e-mail: [email protected]. Search for other works by this author on: Oxford Academic Google Scholar Hossein B. Kazemi, Hossein B. Kazemi University of Massachusetts, Amherst Search for other works by this author on: Oxford Academic Google Scholar Prasad Nanisetty Prasad Nanisetty Prudential Securities, New York Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 12, Issue 3, July 1999, Pages 631–642, https://doi.org/10.1093/revfin/12.3.0631 Published: 01 June 2015

The dynamics of the unobservable short rate are frequently estimated directly using a proxy. We examine the biases resulting from this practice (the “proxy problem”). Analytic results show that the proxy problem is not economically significant for single-factor affine models. In the two-factor affine model of Longstaff and Schwartz (1992), the proxy problem is only economically significant for pricing discount bonds with maturities of more than five years. We also describe two different numerical procedures for assessing the magnitude of the proxy problem in a general interest rate model. When applied to a nonlinear single-factor model, they suggest that the proxy problem can be economically significant.

This paper examines how market prices, volume, and traders' dividend expectations respond to public information releases in laboratory markets for a long‐lived financial asset. The objective is to study deviations from the symmetric information risk‐neutral rational expectations (RE) benchmark, which predicts no trade in such settings. The results of a series of double‐auction and call markets are reported in which traders manage a portfolio of cash and asset shares over 15 rounds of trading. A public signal regarding the value of the liquidating dividend is released every third round, and traders' subjective expectations of the liquidating dividend are elicited each round as cash‐motivated forecasts. We find that, despite the public dividend signal, traders' dividend forecasts are heterogeneous. Forecasts and prices both underreact to the public signals, with prices under‐reacting more than forecasts. In general, price changes are not closely associated with public signals, and there is greater excess price volatility in double auctions than in call markets. Forty‐three percent of trades are inconsistent with the trader's forecasts, and inconsistent trades occur more frequently in the double‐auction markets. On average, approximately 10 percent of the outstanding shares are traded in each round, and trading volume is increasing in the mean absolute forecast revision and decreasing in the contemporaneous dispersion in forecasts. These results suggest that differential processing of the public signal and/or speculative trading for short‐term gain may help to explain why symmetric information RE predictions are often not supported in empirical and experimental settings. They also suggest that market reactions to public information releases may be influenced by market microstructure.

We analyze the impact of a contract's length, callability, amortization, and original discount by arbitrage methods. Among instruments that are callable without penalty, longer instruments command a higher interest rate because the borrower possesses the option of repaying relatively more slowly. However, the rate on longer self‐amortizing loans cannot be substantially larger than for shorter ones because the payments decrease with contract length. Bounds on the trade‐off between points and rate for callable debt are characterized using the trade‐off for noncallable debt and the property that the value of the prepayment option increases with the loan's interest rate.

We analyze the impact of a contract's length, callability, amortization, and original discount by arbitrage methods. Among instruments that are callable without penalty, longer instruments command a higher interest rate because the borrower possesses the option of repaying relatively more slowly. However, the rate on longer self‐amortizing loans cannot be substantially larger than for shorter ones because the payments decrease with contract length. Bounds on the trade‐off between points and rate for callable debt are characterized using the trade‐off for noncallable debt and the property that the value of the prepayment option increases with the loan's interest rate.

Unfettered nationwide bank branching raises the issue of whether consolidation of banks’ “back-office” operations, such as their payment processing, reduces operating costs. Whether centralized processing of payments reduces costs depends on the size and range of scale economies, the relative prices of data processing and telecommunication inputs, and changes in technology in addition to the number of sites operated. While consolidating payment operations into fewer sites may reduce average data processing costs, those cost savings may be more than offset by associated increases in telecommunications expenses. To investigate the potential effects of consolidation on future banking operations, we look at the experience of the Federal Reserve in consolidating its Fedwire electronic funds transfer operation over 1979 to 1996. Previous research suggested that scale economies in Fedwire payment processing were minimal and that the observed declines in average Fedwire production costs were largely attributable to technical advance. Our estimates suggest more nearly the opposite. We find that the Fedwire funds transfer operation exhibited large scale economies but little technical advance beyond that already embodied in the technology-adjusted input prices of data processing and telecommunication inputs. We also find that the consolidation of Fedwire into fewer offices contributed around one-fourth of the overall reduction in Fedwire average cost.

A century ago, Francis Galton proposed a simple yet powerful model of inheritance. Gary Backer's human capital model is often used to analyze important empirical and policy questions, but does it dominate Galton's from a positive point of view? I derive nine implicatiions of the human capital approach that are distinct from Galton's. Evidence from the PIS, SCF, and NLSY micro data sets as well as results reported in previous literatures suggest that four of the unique implications are refuted. two implications are verified, and mixed results are obtained for three others. Some extensions of economics recently developed by Becker and others, when applied to inheritance, may improve economics' predictions.

As a consequence of optimal investment choices, a firm's assets and growth options change in predictable ways. Using a dynamic model, we show that this imparts predictability to changes in a firm's systematic risk, and its expected return. Simulations show that the model simultaneously reproduces: (i) the time‐series relation between the book‐to‐market ratio and asset returns; (ii) the cross‐sectional relation between book‐to‐market, market value, and return; (iii) contrarian effects at short horizons; (iv) momentum effects at longer horizons; and (v) the inverse relation between interest rates and the market risk premium.