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Introduction
Skills and Expertise
Publications
Publications (167)
In this paper we present empirical tests of an extended version of the capital asset pricing model (CAPM) that replaces the single-period horizon with a probability distribution over different horizons. Adopting a simple parameterization of the probability distribution of the length of the horizon, we estimate the parameters of the distribution as...
We explore the dynamics of informed trading around corporate announcements of merger bids, dividend initiations, SEOs, and quarterly earnings by calculating daily posterior probabilities of informed buying and selling. We find evidence of informed trading before the announcements and a significant part of the news in announcements is impounded in s...
We offer evidence of a new stylized feature of corporate financing decisions: the tendency of managers to rely more on debt financing when earnings prospects are poor. We term this ‘leaning against the wind’ and consider three possible explanations: market timing, precautionary financing, and ‘making the numbers’. We find no evidence in favor of th...
We decompose PIN, the probability of informed trading, into good-news (PIN_G) and bad-news (PIN_B) components, which we estimate at a quarterly frequency. We first assess the validity of PIN as a measure of informed trading by calculating its association with measures of the adverse-selection component of the cost of trading. We then provide new ev...
We offer evidence of a new stylized feature of corporate financing decisions: the tendency of managers to rely more on debt financing when earnings prospects are poor. We term this 'leaning against the wind' and consider three possible explanations: market timing, precautionary financing, and 'making the numbers'. We find no evidence in favor of th...
We decompose PIN into components representing informed trading on good news (PIN_G) and bad news (PIN_B). We then identify cross-sectional determinants of these components, and show that they are relatively high prior to positive and negative earnings announcements, respectively, consistent with informed trading. Then, recognizing that informed tra...
In this paper we provide new evidence that corporate financing decisions are associated with managerial incentives to report high equity earnings. Managers rely most heavily on debt to finance their asset growth when their future earnings prospects are poor, when they are under pressure due to past declines in earnings, negative past stock returns,...
We document the existence of a debt anomaly that is in addition to the asset growth anomaly: for a given asset growth rate, firms that issue more debt, as well as firms that retire more debt, have lower stock returns in the 12 months starting 6 months after the calendar year of asset growth. Exploring the reasons for debt issuance, we find that man...
In this paper we present empirical tests of an extended version of the Capital Asset Pricing Model that replaces the single period horizon with a probability distribution over different horizons. Adopting a simple parameterization of the probability distribution of the length of the horizon, we estimate the parameters of the distribution as well as...
We estimate buy- and sell-order illiquidity measures (lambdas) for a comprehensive sample of NYSE stocks. We show that sell-order liquidity is priced more strongly than buy-order liquidity in the cross-section of equity returns. Indeed, our analysis indicates that the liquidity premium in equities emanates predominantly from the sell-order side. We...
In this paper we summarise and extend the agency‐based model of asset pricing of Brennan (1993) to show that the implied agency effects on asset pricing are too small to be empirically detectable: empirical tests confirm this and we show that the positive findings of Gomez and Zapatero (2003) are due to their choice of sample. We also derive new em...
This paper analyzes the Amihud (2002) measure of illiquidity and its role in asset pricing. It is shown first that the effect
of illiquidity on asset pricing is clarified by using the turnover version of the Amihud measure and including firm size as
a separate variable. When we decompose the Amihud measure into elements that correspond to positive...
Overall activity during the 2011 eastern North Pacific hurricane season was near average. Of the 11 tropical storms that formed, 10 became hurricanes and 6 reached major hurricane strength (category 3 or stronger on the Saffir-Simpson hurricane wind scale). For comparison, the 1981-2010 averages are about 15 tropical storms, 8 hurricanes, and 4 maj...
In this paper we provide new evidence on the predictability of aggregate stock market returns, and new time series of the expected excess returns on common stocks. We extract aggregate discount rate news from equity portfolio returns and use this information to construct estimates of expected excess market returns. We find that a linear combination...
We show that, when stock prices are subject to stochastic mispricing errors, expected rates of return may depend not only
on the fundamental risk that is captured by a standard asset pricing model, but also on the type and degree of asset mispricing,
even when the mispricing is zero on average. Empirically, the mispricing induced return premium, ei...
We use a model of stock price behavior in which the expected rate of return on stocks follows an Ornstein- Uhlenbeck process
to show that levels of return predictability that cause large variation in valuation ratios and offer significant benefits
to dynamic portfolio strategies are hard to detect or measure by standard regression techniques, and t...
In this paper we analyse the source and magnitude of marketing gains from selling structured debt securities at yields that reflect only their credit ratings, or specifically at yields on equivalently rated corporate bonds. We distinguish between credit ratings that are based on probabilities of default and ratings that are based on expected defaul...
Following the recent financial crisis, a number of commentators have suggested that liquidity disappears in falling markets. It is when investors try to convert assets to cash that a lack of liquidity is felt most acutely. In other words, investor sales receive lower liquidity than investor buys. In this paper, we will attempt to verify whether thi...
Key results of a comprehensive survey of U.S. National Weather Service operational forecast managers concerning the assessment and communication of forecast uncertainty are presented and discussed. The survey results revealed that forecasters are using uncertainty guidance to assess uncertainty, but that limited data access and ensemble underdisper...
In this paper we analyze the arbitrage gains from marketing structured debt securities at yields that reflect only the credit ratings of ratings agencies. The credit ratings considered include one that is based on default probabilities, corresponds to the credit ratings of Standard and Poor's, and one that is based on expected default losses, corre...
The use of the potential vorticity (PV) framework by operational forecasters is advocated through case examples that demonstrate its utility for interpreting and evaluating numerical weather prediction (NWP) model output for weather systems characterized by strong latent heat release (LHR). The interpretation of the dynamical influence of LHR is st...
This paper analyzes the portfolio problem of an investor who can invest in bonds, stock, and cash when there is time variation in expected returns on the asset classes. The time variation is assumed to be driven by three state variables, the short-term interest rate, the rate on long-term bonds, and the dividend yield on a stock portfolio, which ar...
Two general approaches to the problem of valuing assets under uncertainty may be distinguished. The first approach relies on arbitrage arguments of one kind or another, while under the second approach equilibrium asset prices are obtained by equating endogenously determined asset demands to asset supplies, which are typically taken as exogenous. Th...
We test two hypotheses about the determinants of closed-end fund premia and discounts using a comprehensive sample of non-taxable and taxable funds for the period 1988 to 2002. We test whether fund premia reflect agency costs, and the potential tax liability associated with unrealized capital gains by examining changes in fund premia around the dec...
We show that, when stock prices are subject to stochastic mispricing errors, expected rates of return may depend not only on the fundamental risk that is captured by a standard asset pricing model, but also on the type and degree of asset mispricing, even when the mispricing is zero on average. Empirically, the mispricing induced return premium, ei...
We provide statistical estimates of individual security mispricing which is defined as the departure of the market price from the prediction of a fundamental asset pricing model. We show that there is a return premium associated with systematic mispricing risk which is the dependence of the individual security mispricing on a market wide mis-pricin...
In this paper we develop models for stock returns when stock prices are subject to stochastic mispricing errors. We show that expected rates of return depend not only on the fundamental risk that is captured by a standard asset pricing model, but also on the type and degree of asset mispricing, even when the mispricing is zero on average. Empirical...
Previous research has shown that a lower-tropospheric diabatically generated potential vorticity (PV) maximum associated with an area of incipient precipitation (IP) was critical to the moisture transport north of the PV maximum into the Carolinas and Virginia during the 24-25 January 2000 East Coast cyclone. This feature was almost entirely absent...
Relations between foreign exchange risk premia, exchange rate volatility, and the volatilities of the pricing kernels for
the underlying currencies, are derived under the assumption of integrated capital markets. As predicted, the volatility of
exchange rates is significantly associated with the estimated volatility of the relevant pricing kernels,...
Relations between foreign exchange risk premia, exchange rate volatility, and the volatilities of the pricing kernels for the underlying currencies, are derived under the assumption of integrated capital markets. As predicted, the volatility of exchange rates is significantly associated with the estimated volatility of the relevant pricing kernels,...
We analyze the risk characteristics and valuation of assets in an economy in which the investment opportunity set is described by the real interest rate and the maximum Sharpe ratio. We show that, holding constant the beta of the underlying cash flow, the beta of a security is a function of the cash flow maturity. For parameter values estimated fro...
An adaptive tuned vibration absorber (ATVA) with a smart variable stiffness element is capable of retuning itself in response to a time-varying excitation frequency, enabling effective vibration control over a range of frequencies. This paper discusses novel methods of achieving variable stiffness in an ATVA by changing shape, as inspired by biolog...
Dollar Cost Averaging is a strategy for purchasing equity securities that is widely recommended by professional investment
advisors and commentators, but which has been virtually ignored by academic theorists and textbook writers. In this paper
we explore whether the strategy is but another instance of irrational behavior by individual investors, o...
An experimental internship course was conducted at the National Weather Service (NWS) Weather Forecast Office (WFO) involving meteorology students of North Carolina State University (NCSU). The course allowed students to gain operational perspective on meteorology and work 16 hours alongside NWS personnel. The participants performed analysis of air...
This paper develops a noisy rational expectations model of the way in which international investors adjust their expectations of asset payoffs in a given country in response not only to public information signals but also to private information signals whose precision differs across investors. The model predicts that the perceptions of investors in...
The role of a diabatically produced lower-tropospheric potential vorticity (PV) maximum in determining the precipitation distribution of the 24-25 January 2000 U.S. East Coast cyclone is investigated. Operational numerical weather prediction (NWP) models performed poorly with this storm, even within 24 h of the event, as they were unable to properl...
The empirical evidence that the consumption–wealth ratio, cay, has strong in-sample predictive power for future stock returns has been interpreted as evidence that consumers take account of future investment opportunities in planning their consumption expenditures. In this paper we show that the predictive power of cay arises mainly from a “look-ah...
We estimate the parameters of pricing kernels that depend on both aggregate wealth and state variables that describe the investment opportunity set, using FTSE 100 and S&P 500 index option returns as the returns to be priced. The coefficients of the state variables are highly significant and remarkably consistent across specifications of the pricin...
Fischer Black was a remarkable social scientist, one whose contributions range from the lofty perch of highbrow theory to the trenches of practical application. The papers represented in this work span the same range, the contributions of a remarkable array of financial economists who embody in different ways Fischer’s ideal of insight from economi...
This paper presents a theoretical and experimental study of coupled motion due to a matched piezoelectric actuator and sensor pair with a specific thickness ratio (the thickness of piezo transducer over the thickness of the beam) bonded on an infinite beam. Because a matched piezoelectric actuator and sensor pair are coupled in different ways by bo...
A simple valuation model with time-varying investment opportunities is developed and estimated. The model assumes that the investment opportunity set is completely described by the real interest rate and the maximum Sharpe ratio, which follow correlated Ornstein-Uhlenbeck processes. The model parameters and time series of the state variables are es...
On 14 February, 2000, a convective rainband associated with a split cold front moved over the central and southern Appalachian Mountains to the Atlantic Coast by 1200 UTC. As this rainband crossed the Carolinas and Virginia, a strong cold-air damming (CAD) event eroded in association with the rapid inland movement of a coastal front to the western...
Between January 1980 and August 2000 American stock prices as measured by the S&P500 index rose by 1239%; over the same period the dividends on the shares underlying the index rose by only 188%, while the earnings rose by 254%. Between August 2000 and February 2003 the price index fell by 44% and, at the time of writing, some three and a half years...
The relation between the volatilities of pricing kernels associated with dierent currencies and the volatility of the exchange rate between the currencies is derived under the assumption of integrated capital markets, and the volatilities of the pricing kernels are related to the foreign exchange risk premium. Time series of pricing kernel volatili...
This paper discusses the factors that led up to the stock price bubble of the 1990s. Foremost among these, it is argued, was the conventional view that stocks are the investment of choice for the long-run investor regardless of their price. This conventional view was based on a misunderstanding of academic theories developed over the past half cent...
A simple valuation model with time-varying investment opportunities is developed and estimated. The model assumes that the investment opportunity set is completely described by the real interest rate and the maximum Sharpe ratio, which follow correlated Ornstein-Uhlenbeck processes. The model parameters and time series of the state variables are es...
This chapter is concerned with the classical applied problem of capital allocation by a corporation whose securities are traded in competitive and frictionless markets. Under reasonable assumptions that are discussed, this amounts to choosing projects whose market value exceeds their cost, so that the problem becomes one of valuing uncertain future...
Isolating a piece of delicate equipment from the vibration of a base structure is of practical importance in a number of engineering fields. Examples are the isolation of instrument boxes in aeroplane and the isolation of telescopes and antennas in satellites. In the majority of cases, the base is flexible and vibrates with an upredictable waveform...
Wavelength tunable short pulses are generated by passively mode-locking a two- section asymmetric quantum well (AQW) semiconductor laser incorporating a bend in the waveguide. An AQW semiconductor optical amplifier is used for post-amplification. 02000 Optical Society of America
We analyze the risk characteristics and the valuation of assets in an economy in which the investment opportunity set is described by the real interest rate and the maximum Sharpe ratio. It is shown that, holding constant the beta of the underlying cash flow, the beta of a security is a function of the maturity of the cash flow. For parameter value...
We develop a simple framework for analyzing a finite-horizon investor’s asset allocation problem under inflation when only nominal assets are available. The investor’s optimal investment strategy and indirect utility are given in simple closed form. Hedge demands depend on the investor’s horizon and risk aversion and on the maturities of the bonds...
Characterizing the instantaneous investment opportunity set by the real interest rate and the maximum Sharpe ratio, a simple model of time varying investment opportunities is posited in which these two variables follow correlated Ornstein-Uhlenbeck processes, and the implications for stock and bond valuation are developed. The model suggests that t...
When multiple actuators and sensors are used to control the vibration of a panel, or its sound radiation, they are usually positioned so that they couple into specific modes and are all connected together with a centralized control system. This paper investigates the physical effects of having a regular array of actuator and sensor pairs that are c...
The optimal portfolio strategy is developed for an investor who has detected an asset pricing anomaly but is not certain that
the anomaly is genuine rather than merely apparent. The analysis takes account of the fact that the parameters of both the
underlying asset pricing model and the anomalous returns are estimated rather than known. The value t...
The optimal bond-stock mix is examined in light of an apparent inconsistency between the Tobin Separation Theorem and the advice of popular investment advisors which has been pointed out by Canner et al. (1997). It is shown that the apparent inconsistency is largely explicable in terms of the hedging demands of optimising long-term investors in an...
Characterizing the instantaneous investment opportunity set by the real interest rate and the maximum Sharpe ratio, a simple model of time varying investment opportunities is posited in which these two variables follow correlated Ornstein-Uhlenbeck processes, and the implications for stock and bond valuation are developed. The model suggests that t...
A dynamic general equilibrium model of stock prices is developed which yields a stock price volatility and equity premium that are close to the historical values. Non-observability of the expected dividend growth rate introduces an element of learning which increases the volatility of stock price. Calibration to the U.S. dividend and consumption pr...
This paper develops a simple framework for analyzing the asset allocation problem of a longhorizon investor when there is inflation and only nominal assets are available for trade. The investor's optimal investment strategy is given in simple closed form using the equivalent martingale method. The investor's hedge demands depend on both the investm...
The optimal portfolio strategy is developed for an investor who has detected an asset pricing anomaly but is not certain that the anomaly is genuine rather than merely apparent. The analysis takes account of the fact that the parameters of both the underlying asset pricing model and the anomalous returns are estimated rather than known. The value t...
Although the first investor relations department was established by General Electric as long ago as 1952, the role of investor relations (IR) is one that has largely escaped scientific analysis and academic scrutiny. This article attempts to demonstrate the importance of a company's IR activities for its stock price by establishing a clear chain of...
The paper reports Monte Carlo modeling of backscatter returns of a laser beam from ocean water. The Monte Carlo code used for simulations employs the Stokes vector formalism to account for polarization effects at each scattering event, from either water or suspended particles, and at reflection from or transmission through a stochastic sea surface....
This paper is concerned with the relative volatility of international flows of debt and equity capital. It is shown that if foreign investors are less well informed about the domestic economy than domestic investors, then international flows of debt capital will be more volatile than flows of equity capital in the sense that the proportional change...
This article analyses and quantifies the costs of suboptimal decision making for an investor with a multi-period horizon. In light of the empirical evidence that investors are too conservative and hold portfolios that are insufficiently diversified, we evaluate the costs of suboptimal equity participation both analytically and using simulation, and...
The optimal portfolio strategy is developed for an investor who has detected an asset pricing anomaly but is not certain that the anomaly is genuine rather than merely apparent. He analysis takes account of the fact that the parameters of both the underlying asset pricing model and the anomalous returns are estimated rather than known. The value th...
This paper is a brief reply to Jensen's criticisms of my earlier paper 'Incentives, Rationality and Society'. In it, I argue that Jensen misrepresents my position on the role of incentives, offer some further thoughts about the nature of the self-interest assumption in economics and it consequences for society. Finally, I point out that Jensen's ne...
Cross-Sectional Determinants of Expected Returns We analyze the relation between equity returns, risk, and a rich set of security characteristics that includes institutional ownership, S&P 500 index membership, analyst following, and dispersion in analyst forecasts, in addition to previously examined variables such as the book-to-market ratio, firm...
Soil column and serum bottle microcosm experiments were conducted to investigate the potential for in situ anaerobic bioremediation of trichloroethy lene (TCE) and dichloromethane (DCM) at the Pinellas site near Largo, Florida. Soil columns with continuous groundwater recycle were used to evaluate treatment with complex nutrients (casamino acids, m...
We examine the relation between stock returns, measures of risk, and several non-risk security characteristics, including the book-to-market ratio, firm size, the stock price, the dividend yield, and lagged returns. Our primary objective is to determine whether non-risk characteristics have marginal explanatory power relative to the arbitrage prici...
A central, but largely untested, assumption in the modern literature on financial markets is that investors trade strategically, taking account of the effect of their trades on prices. The authors use a simultaneous equations approach motivated by theoretical analysis to test this assumption empirically. The results point to a strong and negative c...
A new market in S&P 500 Index dividend strips, which are claims to a year's dividend on the index, would not only improve risk sharing but, more importantly, would also serve to focus investor attention on the fundamentals that determine the value of the index rather than simply on the future resale value of the index. Such a market would also reve...
Soil column and serum bottle microcosm experiments were conducted to investigate the potential for in situ anaerobic bioremediation of trichloroethylene (TCE) and dichloromethane (DCM) at the Pinellas site near Largo, Florida. Soil columns with continuous groundwater recycle were used to evaluate treatment with complex nutrients (casamino acids, me...
The apparent inconsistency between the Tobin Separation Theorem and the advice of popular investment advisors pointed out by Canner et al (1997) is shown to be explicable in terms of the hedging demands of optimising long-term investors in an environment in which the investment opportunity set is subject to stochastic shocks.
A Re-examination of Some Popular Security Return Anomalies We re-examine the relation between stock returns, measures of risk, and a set of non-risk security characteristics, including the book-to-market ratio, firm size, the bid-ask spread, the stock price, the dividend yield, and lagged returns. Our primary objective is to determine whether these...
In this paper we examine how separation of ownership and control evolves as a result of an Initial Public Offering (IPO) and how the underpricing of the issue can be used by insiders to retain control. Using data from a sample of 69 IPOs in the UK, we show that underpricing is used to ensure oversubscription and rationing in the share allocation pr...
The US economy is arguably following an unsustainable trajectory. The main indicators of this are a large current account deficit, a large federal budget deficit and trend-wise increasing costs of Social Security and Medicare. In this chapter, we will discuss these observations and to what extent the financial and economic crisis may have changed t...
This article develops a model of international equity portfolio investment flows based on differences in informational endowments between foreign and domestic investors. It is shown that, when domestic investors possess a cumulative information advantage over foreign investors about their domestic market, investors tend to purchase foreign assets i...
This paper analyzes the effect of uncertainty about the mean return on the risky asset on the portfolio decisions of an investor
who has a long investment horizon. Building on the earlier work of Detemple (1986), Dothan and Feldman (1986), and Gennotte
(1986), it is shown that the possibility of future learning about the mean return on the risky as...
The determination of stock prices and equilibrium expected rates of return in a general equilibrium setting is still imperfectly understood. In particular, as Grossman and Shiller (1981) and others have argued, stock returns appear to be too volatile given the smooth process for dividends and consumption growth. Mehra and Prescott (1985) claim that...
Models of price formation in securities markets suggest that privately informed investors create significant illiquidity costs for uninformed investors, implying that the required rates of return should be higher for securities that are relatively illiquid. We investigate the empirical relation between monthly stock returns and measures of illiquit...
Hellwig's (1980) model is used to analyze the value of improving trading opportunities by more frequent trading in the underlying asset, or by trading in a derivative asset. With multiple trading sessions, uninformed investors behave as rational trend followers, while more informed investors follow a contrarian strategy. As trading becomes continuo...
This paper investigates the relation between the number of analysts following a security and the estimated adverse selection cost of transacting in the security, controlling for the effects of previously identified determinants of liquidity. Using intraday data for the year 1988, we find that greater analyst following tends to reduce adverse select...
In this paper I address several phenomena that arise from the limited information possessed by individual investors. This limitation focuses attention on the channels by which investors receive information about securities. I find this perspective to have implications for the marketing of financial products, the dissemination of information by brok...
This paper traces developments in the theory of corporate finance over the past 25 years. These include a shift from consideration of how the value of a given cash flow stream is affected by its division among different classes of security holders to a consideration of how structure of claims affects the cash flow stream itself. A major reason for...
