[This paper presents a dynamic equilibrium model of bond markets in which two groups of agents hold heterogeneous expectations about future economic conditions. The heterogeneous expectations cause agents to take on speculative positions against each other and therefore generate endogenous relative wealth fluctuation. The relative wealth fluctuation amplifies asset price volatility and contributes to the time variation in bond premia. Our model shows that a modest amount of heterogeneous expectations can help explain several puzzling phenomena, including the "excessive volatility" of bond yields, the failure of the expectations hypothesis, and the ability of a tent-shaped linear combination of forward rates to predict bond returns.]

Les auteurs examinent l’incidence de la demande inhérente que supposent les positions courtes en étudiant dans quelle mesure les réactions des cours boursiers à la publication des résultats dépendent du niveau des positions courtes. Selon leurs constatations, si les nouvelles publiées sont extrêmement positives ou extrêmement négatives, la demande inhérente entraîne à la hausse le cours des actions à proximité de la date de la publication des résultats, la hausse étant plus prononcée dans le cas des nouvelles positives que des nouvelles négatives. Plus précisément, la réaction initiale du marchéà des résultats imprévus extrêmement positifs est plus importante dans le cas d’entreprises ayant des niveaux élevés de positions à découvert. En revanche, lorsque les résultats imprévus sont extrêmement négatifs, la réaction initiale du marché est moins négative dans le cas d’entreprises dont le niveau des positions à découvert est élevé. Les auteurs constatent au surplus que l’ampleur du mouvement réactif suivant la publication des résultats est plus modeste (plus marquée) dans le cas de résultats imprévus extrêmement positifs (négatifs) pour les entreprises dont les positions à découvert sont importantes.

ABSTRACT: This study investigates whether MD&A disclosures have predictive ability for future firm performance in cases of disproportionate inventory increases. Using a sample of 568 manufacturing firms with disproportionate inventory increases, I find that the favorability of explanations for inventory changes in MD&A is positively associated with a firm’s profitability and sales growth in the subsequent three years. I also find that future profitability and sales growth of firms that do not explain disproportionate inventory increases in MD&A fall between those of firms with favorable explanations and firms with unfavorable explanations. These results suggest that the existence and the favorability of MD&A inventory disclosures help users interpret disproportionate inventory increases and predict future firm performance.

We use a novel pricing model to imply time series of diffusive volatility and jump intensity from S&P 500 index options. These two measures capture the ex ante risk assessed by investors. Using a simple general equilibrium model, we translate the implied measures of ex ante risk into an ex ante risk premium. The average premium that compensates the investor for the ex ante risks is 70% higher than the premium for realized volatility. The equity premium implied from option prices is shown to significantly predict subsequent stock market returns.

This article analyses the implications of money illusion for investor behaviour and asset prices in a securities market economy with inflationary fluctuations. We provide a belief-based formulation of money illusion which accounts for the systematic mistakes in evaluating real and nominal quantities. The impact of money illusion on security prices and their dynamics is demonstrated to be considerable even though its welfare cost on investors is small in typical environments. A money-illusioned investor's real consumption is shown to generally depend on the price level, and specifically to decrease in the price level. A general-equilibrium analysis in the presence of money illusion generates implications that are consistent with several empirical regularities. In particular, the real bond yields and dividend price ratios are positively related to expected inflation, the real short rate is negatively correlated with realized inflation, and money illusion may induce predictability and excess volatility in stock returns. The basic analysis is generalized to incorporate heterogeneous investors with differing degrees of illusion.

This paper presents a dynamic equilibrium model of bond markets in which two groups of agents hold heterogeneous expectations about future economic conditions. The heterogeneous expectations cause agents to take on speculative positions against each other and therefore generate endogenous relative wealth fluctuation. The relative wealth fluctuation amplifies asset price volatility and contributes to the time variation in bond premia. Our model shows that a modest amount of heterogeneous expectations can help explain several puzzling phenomena, including the “excessive volatility” of bond yields, the failure of the expectations hypothesis, and the ability of a tent-shaped linear combination of forward rates to predict bond returns.

Unlike the prediction of a frictionless open economy model, long-term average savings and investment rates are highly correlated across countries—a puzzle first identified by Feldstein and Horioka (1980). We quantitatively investigate the impact of two types of financial frictions on this correlation. One is limited enforcement, where contracts are enforced by the threat of default penalties. The other is limited spanning, where the only asset available is noncontingent bonds. We find that the calibrated model with both frictions produces a savings–investment correlation and a volume of capital flows close to the data. To solve the puzzle, the limited enforcement friction needs low default penalties under which capital flows are much lower than those in the data, and the limited spanning friction needs to exogenously restrict capital flows to the observed level. When combined, the two frictions interact to endogenously restrict capital flows and thereby solve the Feldstein–Horioka puzzle.

This paper examines the effect of the inherent demand implied by short interest by studying how stock price reactions to earnings announcements depend on the level of short interest. We find that, for extreme good and bad news events, the inherent demand increases stock prices around the earnings announcement date, with the effect being stronger for good news relative to bad news. Specifically, the initial market reaction to an extreme positive earnings surprise is larger for firms with high levels of short interest. On the other hand, for an extreme negative earnings surprise event, the initial market reaction is less negative for heavily shorted firms. Furthermore, we find that the post-earnings-announcement drift is smaller (larger) in magnitude for extreme positive (negative) earnings surprises for the heavily shorted firms.

This paper examines the effect of the inherent demand implied by short interest by studying how stock price reactions to earnings announcements depend on the level of short interest. We find that, for extreme good and bad news events, the inherent demand increases stock prices around the earnings announcement date, with the effect being stronger for good news relative to bad news. Specifically, the initial market reaction to an extreme positive earnings surprise is larger for firms with high levels of short interest. On the other hand, for an extreme negative earnings surprise event, the initial market reaction is less negative for heavily shorted firms. Furthermore, we find that the post‐earnings‐announcement drift is smaller (larger) in magnitude for extreme positive (negative) earnings surprises for the heavily shorted firms.

We develop a non-tax rationale for leasing in a double-sided asymmetric information setting, and analyze how various contractual provisions in leasing contracts arise in equilibrium. In our model, a manufacturer of capital goods has private information about their quality; entrepreneurs (users of these capital goods) come to learn this quality only by using them over a period of time. Each unit of the capital goods requires a certain level of maintenance in each period. Entrepreneurs differ in their cost of providing this maintenance; this maintenance cost is information private to each entrepreneur. Leasing emerges as an equilibrium solution to this double-sided asymmetric information problem. Various contractual provisions in leasing contracts (e.g., short-term versus long-term leases with non-cancellation provisions, option to buy at lease termination, and service leases) also emerge as equilibrium solutions under alternative settings. Leases with metering provisions emerge in equilibrium when, in addition to the maintenance cost, entrepreneurs differ in other dimensions, such as their intensity of usage of the capital good. Our model has implications for the lease-versus-sell decision, the situations under which various leasing contract provisions will be used, and for the relative magnitudes of sales prices and leasing costs (for leases with different contractual provisions).