We reevaluate the IPO underpricing phenomenon using the stochastic frontier methodology. The advantage of the stochastic frontier is that it can be used to measure the level of deliberate underpricing in the premarket without using after-market information. This is accomplished through the estimation of a systematic one-sided error term that measures “inefficiency” or the difference between the maximum predicted offer price and the actual offer price. Data for the analysis are comprised of 1,035 IPOs of common stock issued by firm commitment between 1975 and 1984. IPOs appear to be deliberately underpriced in the premarket in both hot-market and nonhot-market periods. Moreover, the determinants of the maximum IPO price have different effects in the two time periods.

[We reevaluate the IPO underpricing phenomenon using the stochastic frontier methodology. The advantage of the stochastic frontier is that it can be used to measure the level of deliberate underpricing in the premarket without using aftermarket information. This is accomplished through the estimation of a systematic one-sided error term that measures "inefficiency" or the difference between the maximum predicted offer price and the actual offer price. Data for the analysis are comprised of 1,035 IPOs of common stock issued by firm commitment between 1975 and 1984. IPOs appear to be deliberately underpriced in the premarket in both hot-market and nonhot-market periods. Moreover, the determinants of the maximum IPO price have different effects in the two time periods.]

This paper takes a novel approach to derive a central bank intervention reaction function. A GARCH model for exchange rates is amended to allow interventions to have an effect on both the mean and the variance of exchange rate returns. An intervention reaction function is obtained by combining the model with a loss function for the central bank. Estimation results for the implied friction model reproduce the familiar ‘leaning against the wind’ policy by the Bundesbank and the Federal Reserve. Furthermore, the central banks appear to have reacted to increases in the conditional variance of daily DM/$-returns.

In May 1991, one month after seizing Executive Life, California regulators seized First Capital Life (FCLIC). Both insurers were Drexel clients with large junk bond holdings, and both had experienced ‘bank runs’. FCLIC's run followed regulators' televised comments that its poor condition necessitated a substantial cash infusion. Yet FCLIC's statutory capital — with junk bonds, real estate, and mortgages marked to market — was far from lowest among major insurers with California policyholders. It becomes lowest if junk bonds alone are marked to market at year-end 1990 (ignoring larger market declines in real estate/mortgages and the junk bond market's 21% return in early 1991). Our findings suggest a regulatory bias against junk bonds in the political backlash against the 1980s.

Our general subject is model determination methods and their use in the prediction of economic time series. The methods suggested are Bayesian in spirit but they can be justified by classical as well as Bayesian arguments. The main part of the paper is concerned with model determination, forecast evaluation, and the construction of evolving sequences of models that can adapt in dimension and form (including the way in which any nonstationarity in the data is modelled) as new characteristics in the data become evident. The paper continues some recent work on Bayesian asymptotics by the author and Werner Ploberger (1995), develops embedding techniques for vector martingales that justify the role of a class of exponential densities in model selection and forecast evaluation, and implements the modelling ideas in a multivariate regression framework that includes Bayesian vector autoregressions (BVAR's) and reduced rank regressions (RRR's). It is shown how the theory in the paper can be used: (i) to construct optimized BVAR's with data-determined hyperparameters; (ii) to compare models such as BVAR's, optimized BVAR's, and RRR's; (iii) to perform joint order selection of cointegrating rank, lag length, and trend degree in a VAR; and (iv) to discard data that may be irrelevant and thereby reset the initial conditions of a model.

We study the implied volatility behavior of call options around scheduled news announcement days. Implied volatilities increase significantly during the pre-event period and reach a maximum on the eve of the news announcement. After the news release, implied volatility drops sharply and gradually moves back to its long-run level. Only on the event date are movements in the price of the underlying significantly larger than expected. These results confirm the theoretical results of Merton (1973).

We provide comprehensive data on the attributes and outcomes of the restructuring process for a sample of 49 financially distressed firms that restructured by means a prepackaged bankruptcy. Our findings complement previous research on out-of-court restructurings and traditional Chapter 11 filings. By most measures, including the time spent in reorganization, the direct fees as a percent of pre-distress assets, the recovery rates by creditors, and the incidence of violation of absolute priority of claimholders, we find that prepacks lie between out-of-court restructurings and traditional Chapter 11 bankruptcies.

Using a panel of 51 prices from 48 cities in the United States, we provide an upper bound estimate of the rate of convergence to purchasing power parity. We find convergence rates substantially higher than typically found in cross-country data. We investigate some potentially serious biases induced by i.i.d. measurement errors in the data, and find our estimates to be robust to these potential biases. We also present evidence that convergence occurs faster for larger price differences. Finally, we find that rates of convergence are slower for cities farther apart. However, our estimates suggest that distance alone can only account for a small portion of the much slower convergence rates across national borders.