This paper reexamines long-horizon stock returns and finds that previous work overstates the evidence of mean reversion. The overstatement is largely due to the implicit weighting of ordinary least-squares tests, which place more weight on the Depression and World War II observations, which have both large error variances and stronger mean-reverting tendencies. Additionally, the reliance on asymptotic statistics and the improper focus on only the most negative estimates of mean reversion contribute to the overstatement. Using generalized least-squares randomization tests on the 1926 to 1987 period, the random walk cannot be rejected for value- or equally-weighted real returns at any of 10 return horizons or by joint tests over all 10 horizons simultaneously. Additionally, the random walk cannot be rejected for the extended 1871 to 1987 period.

This paper identifies five universal currency hedge ratio (UHR) definitions. These are hedge positions in foreign bonds, stated as a fraction of national or global equity portfolios, that are the same for all investors, regardless of nationality. The first three involve the total demand for foreign bonds and depend on equities not being held for hedging purposes. The last two are associated with variance-minimizing regression hedges. These hold, in general, but are designed exclusively for hedging other traded asset positions. Jensen's inequality makes the choice of measurement currency irrelevant and makes the HRs universal without affecting their values.

Even if true abnormal returns are uncorrelated, estimated abnormal returns are not. This paper presents a simple formula for the variance of estimated cumulative abnormal returns. Both returns and dummy variable procedures for estimating the standard error correctly, taking account of both intertemporal and contemporaneous correlation of estimated residuals, are discussed. They are then applied to an event study of post-merger performance. It is shown that ignoring either the intertemporal or contemporaneous correlation of residuals can result in significant underestimates of standard errors.

This paper provides a theoretical and empirical investigation of the role of the secondary market in the pricing of initial public offerings. We argue that incomplete spanning of the primary issues in the secondary market and limited investor access play an important role in the pricing of initial public offerings. Utilizing a segmented market approach wherein IPO offering values are determined in the primary market and after-market bid prices are determined in the centrally accessed secondary market, we derive a price differential in the primary and secondary markets that is consistent with the received notion of IPO underpricing. Empirical tests on a large sample of IPOs provide results that are consistent with the predictions of our theoretical analysis.

This paper develops a specialized principal-agent model of the investor-investment advisor relationship and embeds the standard advisory compensation schedule in the model. Advisors are endowed with information-gathering abilities and investors are endowed with funds. Information-gathering services are traded indirectly through the investor's receipt of portfolio returns net of advisory fees. Model results show that the parameters of the compensation schedule are both a function of the idiosyncracies of an advisor's information services and the degree of risk sharing between the advisor and investor. Several predictions of the model are supported using data on mutual fund advisors. Unsupported predictions may be due to self-selection of advisors by risk tolerance.

This paper provides closed form solutions for futures and European futures options on pure discount bonds under the Ornstein-Uhlenbeck (normal) process. A significant difference between Black's model (1976) and the model in this paper for futures options is discussed.

This study examines the average abnormal returns, average abnormal trading volume, and reported insider trading of corporate control target firms during a period of possibly informed trading. This period begins on the unpublicized initiation date (as reported in a postannouncement date proxy statement or 14-D1) and ends on the publication date of the first Wall Street Journal story signalling an impending change in corporate control. We find that the preannouncement date average abnormal return noted by other researchers begins after the unpublicized initiation date of the transaction. We find no evidence of the preannouncement date average abnormal trading volume noted by previous researchers; instead, we find average abnormal volume beginning with the first public information regarding the transaction.

Previous research has separately addressed the problem of estimating risk in the presence of infrequent trading and the problem of estimating quality-adjusted returns in markets with quality variation in the observed price series. This paper simultaneously addresses both problems by applying a signal extraction method for unequally spaced data to decompose the observed price series with varying times between transactions into a quality-adjusted, permanent component (which would be observable in the absence of quality variation) plus a stationary, transitory quality variation component. Stamp auction transaction prices provide an application. Auction quality grading is treated in a manner analogous to bond ratings. Almost all of the observed variance is attributed to the auction quality variation. The observed auction returns and stock index returns are not well related.

This paper examines the relationships among capital regulation, deposit insurance, and the optimal bank interest margin. In a model where loan losses are the source of uncertainty, changes in capital regulation or deposit insurance premiums have direct effects on the bank's interest margin. An increase in bank capital requirement or in deposit insurance premiums results in a reduced interest margin under nonincreasing risk aversion. Comparative static analysis also explores the relation between asset quality and interest margin. It is shown that a mean-preserving spread of the distribution of loan losses results in a reduced margin.