The purpose of this paper is to analyze the errors made by professional forecasters (analysts) in estimating earnings per share for a large number of firms over a number of years. We have demonstrated in a previous paper that consensus (average) estimates of earnings per share play a key role in share price determination. In this paper, we examine consensus estimates with respect to the following questions: (1) What is the size and pattern of analysts' errors? (2) What is the source of errors? (3) Are some firms more difficult to predict than others? (4) Is there an association between errors in forecasts and divergence of analysts' estimates?

This paper demonstrates the strong linkages that exist between currency risk, represented by inflation risk and exchange rate changes, and relative price risk. These linkages affect the optional quantities of forward exchange contracts, nominal debt, and fixed price sales (purchase) contracts to use in hedging against these risks. It is shown that the existence of as many hedging mechanisms as there are forms of price risk allows for the precise targeting of specific price risks with specific hedging instruments. Moreover, even though each hedging mechanism specializes in protecting against a particular form of price risk, the optimal quantitiy of each influences and is influenced by the optimal quantities of the others.

In this paper, a general treatment of identifying the set of unbiased estimators of N-period mean returns is advanced and a new unbiased estimator, which promises near-minimum variance and minimal computation, is formulated. The new estimator is also equally applicable to other processes of compound growth.

Previous analyses of market structures characterized by gradual information dissemination presume the equilibrium price existing after all market participants are informed is independent of the order of information dissemination. In these papers, final market clearing price, given the investors' posterior beliefs, is known a priori and is assumed to equal the price that would exist if data were disseminated simultaneously. We demonstrate that final equilibrium price is dependent, in general, on the order of information dissemination. This implies that, if the dissemination sequence is stochastic, price is unknown prior to the complete dissemination of information, even if the investors' posterior beliefs given the information event are known. We derive a necessary and sufficient condition for equilibrium price to be independent of the dissemination sequence in our economy. Our analysis highlights the importance of the wealth redistribution dynamics inherent in the information dissemination process.

This paper examines the implied standard deviation (ISD) estimated from transactons data on options, using the Black-Scholes pricing model. It was found that the distribution of the ISD is symmetric, though not normal. Also, the ISD based on the last daily observation deviates significantly from the daily average ISD. It is suggested that the daily average is a more reliable estimate of the standard deviation.

This paper develops an approximate analytical solution to a two state-variable model of the term structure similar to the one proposed by Brennan and Schwartz. Unlike the BS model, which was based on the consol rate and the short rate of interest, our model is based on the consol rate and the spread (i.e., the difference) between the consol rate and the short rate. This change, merely a redefinition of variables, is made to exploit an assumption, for which there is substantial empirical evidence, that these two variables (the consol rate and the spread) are orthogonal. Employing orthogonal state variables provides the key simplification in providing an approximate solution to the fundamental valuation equation.

This paper reexamines the empirical relation between inflation and interest rates concentrating on the tax effect proposed by Darby and Feldstein. Using the random walk intercept model, relative responses of taxable yields and tax-exempt yields to expected inflation are estimated. The results show that for the sample period 1953–1982, the nominal yields on Treasury bills rise at a rate greater than one-for-one with expected inflation, while the nominal yields on default-free municipal bonds rise approximately one-for-one with expected inflation. Thus, the tax-adjusted Fisher hypothesis by Darby and Feldstein is empirically supported. The components of Treasury bills are also extracted and their variances are compared. It is shown that variation of expected inflation is not overwhelmingly larger than that of the after-tax real rate. Therefore, on an after-tax basis, changes in the real rate explain a substantial portion of changes in the nominal rate of interest.

Studies of size and earnings/price ratio effects together have produced contradictory results. Does one effect subsume the other or are there two separate effects? This paper demonstrates that equity returns are related to both size and earnings/price ratio as well as the month of January. Reinganum [20] and Basu [4] are reexamined to find the reasons for their contradictory results. Reinganum's finding that size subsumes earnings/price ratio is caused by a fortuitous choice of methods. Basu's finding that earnings/price ratio subsumes size appears to be sample-specific.

This paper examines the implied standard deviation (ISD) estimated from transactions data on options, using the Black-Scholes pricing model. It was found that the distribution of the ISD is symmetric, though not normal. Also, the ISD based on the last daily observation deviates significantly from the daily average ISD. It is suggested that the daily average is a more reliable estimate of the standard deviation.

Pricing municipal debt is a process substantially different from the valuation of corporate liabilities. Municipalities are not seized upon default. Therefore, they might own additional assets that could he made available to retire debt even when the value of pledged revenues is insufficient to do so. However, if the value of the municipality's additional assets is only observable privately, moral hazard can deter payments from these alternative revenue sources. A second consequence of lack of seizure is that the municipality survives and might return to the capital markets to raise additional funds in the future. This opens an opportunity to induce “extraordinary” payments from the value of the additional assets through multiperiod pricing controls (e.g., by following defaults with poor pricing for subsequent securities issues).