The time-series literature reports two stylized facts about output dynamics in the United States: GNP growth is positively autocorrelated, and GNP appears to have an important trend-reverting component. This paper investigates whether current real-business-cycle (RBC) models are consistent with these stylized facts. Many RBC models have weak internal propagation mechanisms and must rely on external sources of dynamics to replicate both facts. Models that incorporate labor adjustment costs are partially successful. They endogenously generate positive autocorrelation in output growth, but they need implausibly large transitory shocks to match the trend-reverting component in output.

Closed-end country funds can trade at large premiums and discounts from their foreign asset values (NAVs). Investigating this anomaly, we find that individual fund premiums move together, primarily because of the comovement of their stock prices with the U.S. market. Moreover, an index of country fund premiums differentiates size-ranked U.S. portfolio returns and forecasts country fund stock returns. These findings suggest that international equity prices are affected by local risk. In particular, we show that country fund premium movements reflect a U.S.-specific risk, which may be interpreted as U.S. market sentiment.

This article examines the price formation process during dividend announcement day using daily closing prices and transactions data. The authors find that the unconditional positive excess returns, first documented by A. Kalay and U. Loewenstein (1985), are higher for small-firm and low-priced stocks. Price volatility and trading volume also increase during this period. Examination of trade prices relative to the bid-ask spread and volume of trades at bid and asked prices shows that the excess returns cannot be attributed to measurement errors or to spillover effects of tax-related ex-day trading. Rather, the price behavior is related to the absorption of dividend information.

This article examines the robustness of the evidence on predictability of U.S. stock returns, and addresses the issue of whether this predictability could have been historically exploited by investors to earn profits in excess of a buy-and-hold strategy in the market index. We find that the predictive power of various economic factors over stock returns changes through time and tends to vary with the volatility of returns. The degree to which stock returns were predictable seemed quite low during the relatively calm markets in the 1960s but increased to a level where, net of transaction costs it could have been exploited by investors in the volatile markets of the 1970s.

We study the implications for shareholder wealth of interfirm antitrust litigation and how the costs of the dispute affect the propensity to settle. Upon filing, defendants experience significant wealth losses that are ten million dollars larger than the wealth gains of plaintiffs. Financial distress, behavioral constraints, and follow-on suits are sources of wealth leakage and influence settlement behavior. Since the threat of a monetary transfer has little power to explain either wealth effects or the likelihood of settlement, the central concern of defendants may be the potential prohibition of profitable business practices.

This paper examines how national income and trading opportunities interact to determine the level and incidence of world pollution. We find that (i) free trade raises world pollution if incomes differ substantially across countries; (ii) if trade equalizes factor prices, human-capital-abundant countries lose from trade, while human-capital-scarce countries gain; (iii) international trade in pollution permits can lower world pollution even when governments' supply of permits is unrestricted; (iv) international income transfers may not affect world pollution or welfare; and (v) attempts to manipulate the terms of trade with pollution policy leave world pollution unaffected.

When governments meet in the international arena, their actions reflect the political situations at home. Previous studies of trade relations have focused on governments that are immune from political pressures and that act as benevolent servants of the public interest. Here we introduce domestic politics into the analysis of international economic relations. We study the interactions between national leaders who are concerned with both providing a high standard of living to the general electorate and collecting campaign contributions from special-interest groups. Our analysis sheds light on the determinants of the structure of protection in noncooperative and cooperative policy equilibria.

A fundamental equilibrium condition underlying most utility-based asset pricing models is the equilibration of intertemporal marginal rates of substitution (IMRS). Previous empirical research, however, has found that the comovements of consumption and asset return data fail to satisfy the restrictions imposed by this equilibrium condition. In this paper, we examine whether market frictions can explain previous findings. Our results suggest that a combination of short-sale, borrowing, solvency, and trading cost frictions can drive a large enough wedge between IMRS so that the apparent violations may not be inconsistent with market equilibrium.