Consumption habit and international stock returns

We use the consumption-based asset pricing model with habit formation to study the predictability and cross-section of returns from the international equity markets. We find that the predictability of returns from many developed countries' equity markets is explained in part by changing prices of risks associated with consumption relative to habit at the world as well as local levels. We also provide an exploratory investigation of the cross-sectional implications of the model under the complete world market integration hypothesis and find that the model performs mildly better than the traditional consumption-based model. the unconditional and conditional world CAPMs and a three-factor international asset pricing model. (C) 2004 Elsevier B.V. All rights reserved.

Forecasting stock returns using model-selection criteria

This paper examines the economic significance of return predictability in Australian equities. In light of considerable model uncertainty, formal model-selection criteria are used to choose a specification for the predictive model. A portfolio-switching strategy is implemented according to model predictions. Relative to a buy-and-hold market investment, the returns to the portfolio-switching strategy are impressive under several model-selection criteria, even after accounting for transaction costs. However, as these findings are not robust across other model-selection criteria examined, it is difficult to conclude that the degree of return predictability is economically significant.

Estimating variable returns to scale production frontiers with alternative stochastic assumptions

Two stochastic production frontier models are formulated within the generalized production function framework popularized by Zellner and Revankar (Rev. Econ. Stud. 36 (1969) 241) and Zellner and Ryu (J. Appl. Econometrics 13 (1998) 101). This framework is convenient for parsimonious modeling of a production function with returns to scale specified as a function of output. Two alternatives for introducing the stochastic inefficiency term and the stochastic error are considered. In the first the errors are added to an equation of the form h(log y, theta) = log f (x, beta) where y denotes output, x is a vector of inputs and (theta, beta) are parameters. In the second the equation h(log y,theta) = log f(x, beta) is solved for log y to yield a solution of the form log y = g[theta, log f(x, beta)] and the errors are added to this equation. The latter alternative is novel, but it is needed to preserve the usual definition of firm efficiency. The two alternative stochastic assumptions are considered in conjunction with two returns to scale functions, making a total of four models that are considered. A Bayesian framework for estimating all four models is described. The techniques are applied to USDA state-level data on agricultural output and four inputs. Posterior distributions for all parameters, for firm efficiencies and for the efficiency rankings of firms are obtained. The sensitivity of the results to the returns to scale specification and to the stochastic specification is examined. (c) 2004 Elsevier B.V. All rights reserved.

Serial correlation in the returns of UK capitalization based portfolios

This article examines whether UK portfolio returns are time varying so that expected returns follow an AR(1) process as proposed by Conrad and Kaul for the USA. It explores this hypothesis for four portfolios that have been formed on the basis of market capitalization. The portfolio returns are modelled using a kalman filter signal extraction model in which the unobservable expected return is the state variable and is allowed to evolve as a stationary first order autoregressive process. It finds that this model is a good representation of returns and can account for most of the autocorrelation present in observed portfolio returns. This study concludes that UK portfolio returns are time varying and the nature of the time variation appears to introduce a substantial amount of autocorrelation to portfolio returns. Like Conrad and Kaul if finds a link between the extent to which portfolio returns are time varying and the size of firms within a portfolio but not the monotonic one found for the USA.

Explaining volatility and serial correlation in opening and closing returns:a study of the FT-30 components

In this paper the performance of opening and closing returns, for the components of the FT-30 will be studied. It will be shown that for these stocks opening returns have higher volatility and a greater tendency towards negative serial correlation than closing returns. Unlike previous studies this contrasting performance cannot solely be attributed to differences in the trading mechanism across the trading day. All the stocks used in our sample trade thought the day using a uniform trading mechanism. In this paper, we suggest that it is differences in the speed that closing and opening returns adjust to new information that causes differences in return performance. By estimating the Amihud and Mendelson (1987) [Amihud, Yakov, & Mendelson, Haim (1987). Trading mechanisms and stock returns: An empirical investigation, Journal of Finance, 62 533-553.] partial adjustment model with noise, we show that opening returns have a tendency towards over-reaction, while closing returns have a tendency towards under-reaction. We suggest that it is these differences that cause a substantial proportion (although not all) of the asymmetric return patterns associated with opening and closing returns. © 2005 Elsevier Inc. All rights reserved.

Opening returns, noise and overreaction

In this article a partial-adjustment model, which shows how equity prices fail to adjust instantaneously to new information, is estimated using a Kalman filter. For the components of the Dow Jones Industrial 30 index I aim to identify whether overreaction or noise is the cause of serial correlation and high volatility associated with opening returns. I find that the tendency for overreaction in opening prices is much stronger than for closing prices; therefore, overreaction rather than noise may account for differences in the return behavior of opening and closing returns.

Do external funds yield lower returns? Recent evidence from East Asian economies

One of the central explanations of the recent Asian Crisis has been the problem of moral hazard as the source of over-investment and excessive external borrowing. There is however rather limited firm-level empirical evidence to characterise inefficient use of internal and external finances. Using a large firm-level panel data-set from four badly affected Asian countries, this paper compares the rates of return to various internal and external funds among firms with low and high debt financing (relative to equity) among financially constrained and other firms. Selectivity-corrected estimates obtained from random effects panel data model do suggest evidence of significantly lower rates of return to long-term debt, even among firms relying more on debt relative to equity in our sample. There is also evidence that average effective interest rates often significantly exceeded the average returns to long-term debt in the sample countries in the pre-crisis period. © 2006 Elsevier Inc. All rights reserved.