If returns on some stocks systematically lead or lag those of others, a portfolio strategy that sells “winners” and buys “losers” can produce positive expected returns, even if no stock’s returns are negatively autocorrelated as virtually all models of overreaction imply. Using a particular contrarian strategy we show that, despite negative autocorrelation in individual stock returns, weekly portfolio returns are strongly positively autocorrelated and are the result of important cross-autocorrelations. We find that the returns of large stocks lead those of smaller stocks, and we present evidence against overreaction as the only source of contrarian profits.
Perhaps no issue has generated as much controversy among economists in the past decade as the proposition that an increase in the government deficit induces an equal offsetting increase in private saving. The truth of this so-called Ricardian equivalence proposition is central to whether budget deficits reduce capital accumulation, to the feasibility of expansionary tax reductions, and to the effects of Social Security on private saving and aggregate capital accumulation. Although the basic idea that the future tax liabilities associated with government deficits and debt induce individuals to increase their saving has been around since the time of David Ricardo and was treated explicitly by Don Patinkin (1965), Martin Bailey (1971) and Levis Kochin (1974), the current debate was launched by Robert Barro (1974). The voluminous theoretical literature of recent years has shown that complete Ricardian equivalence would be expected to prevail only under very special conditions; see Douglas Bernheim (1987) for an especially useful survey and analysis. But the theoretical restrictiveness of the assumptions required for complete Ricardian equivalence does not constitute a practical refutation. Defenders of Ricardian equivalence can argue that the theory is only an approximation and can claim that, although the stringent conditions required for complete Ricardian equivalence do not hold, the economy's behavior in practice is close to the predictions of Ricardian equivalence. There are two key empirical questions. The first is whether a higher level of taxes (with government spending constant) induces individuals to reduce their spending on consumption as traditional theory holds or has no effect on consumer spending as the Ricardian equivalence proposition predicts. The second deals with the effect of government outlays on goods and services. Although the absence of a negative effect on consumer spending of such government outlays is clearly contrary to the Ricardian equivalence proposition, the existence of a moderate negative effect of government outlays on consumer spending is not in itself evidence in favor of the Ricardian equivalence proposition that individuals increase their saving to finance anticipated debt service. As Feldstein (1982) explained, consumers may correctly believe that a rise in current government spending is a good indicator of a higher level of future government spending. Once a program is launched or budgets increased, the process is unlikely to be reversed. An increase in current government spending is therefore a good indication that future taxes will have to be higher to finance a higher level of future government spending. Individuals may rationally reduce their own spending when government outlays increase without a concurrent increase in taxes because they anticipate higher future taxes to finance higher future government spending even if they give little or no weight to the debt service implications of the current deficit. The strongest direct evidence in favor of Ricardian equivalence is Roger Kormendi's 1983 article in the American Economic Review. He presents consumption regression equations that relate an estimate of consumption' to net national product, wealth, *Martin Feldstein is Professor of Economics at Harvard University and President of the National Bureau of Economic Research. Douglas Elmendorf is Assistant Professor of Economics at Harvard University. We are grateful to Greg Mankiw and Lawrence Summers for comments on an earlier draft. The research reported here is part of the NBER study of the Government Budget and the Private Economy. 'iKormendi defines consumption as the sum of current expenditures on services and nondurables plus 10
This paper proposes a theory that predicts low levels of protection during periods of "normal" trade volume coupled with episodes of "special" protection when trade volumes surge. This dynamic pattern of protection emerges from a model in which countries choose levels of protection in a repeated game facing volatile trade swings. High trade volume leads to a greater incentive to defect unilaterally from cooperative tariff levels. Therefore, as the volume of trade expands, the level of protection must rise in a cooperative equilibrium to mitigate the rising trade volume and hold the incentive to defect in check.
We examine an exhaustive set of initial public offerings (IPOs) by venture-capital-backed companies between 1978 and 1987. We find that venture capitalists specialize their investments in firms to provide intensive monitoring services. Consistent with their monitoring role, the venture capitalists take concentrated equity positions, maintain their investment beyond the IPO, and serve on the boards of their portfolio firms. The quality of their monitoring services appears to be recognized by capital markets through lower underpricing for IPOs with better monitors.
Abstract This paper presents a partially revealing rational expectations model of competitive trading to identify two effects of information releases; an informedness effect and a consensus effect. The informedness effect measures the extent to which agents become more knowledgeable, and the consensus effect measures the extent of agreement among agents at the time of an information release. We demonstrate that informedness and consensus generally occur jointly when information is disseminated, and that unexpected price changes and trading volume are each influenced by both informedness and consensus. Thus, interpretations of unexpected price changes and volume associated with information releases are conceptually similar. Since informedness and consensus each affect both the variance of price changes and volume, our paper provides an economic rationale for examining both price and volume effects at the time of information releases.
[This paper presents a partially revealing rational expectations model of competitive trading to identify two effects of information releases; an informedness effect and a consensus effect. The informedness effect measures the extent to which agents become more knowledgeable, and the consensus effect measures the extent of agreement among agents at the time of an information release. We demonstrate that informedness and consensus generally occur jointly when information is disseminated, and that unexpected price changes and trading volume are each influenced by both informedness and consensus. Thus, interpretations of unexpected price changes and volume associated with information releases are conceptually similar. Since informedness and consensus each affect both the variance of price changes and volume, our paper provides an economic rationale for examining both price and volume effects at the time of information releases.]