Vol. 36, No. 1 - February 2001
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“Forced Versus Voluntary Dividend
Reduction: An Agency Cost Explanation”
Ranjan D'Mello,
Tarun Mukherjee, and Oranee Tawatnuntachai
“Aggregate Dividend Behavior and Permanent
Earnings Hypothesis”
Ming-Shiun Pan
“Selectivity and Market Timing Performance
of Fidelity Sector Mutual Funds”
Wilfred L. Dellva,
Andrea L. DeMaskey, and Colleen A. Smith
“Is Volatility Risk for the British Pound
Priced in U.S. Options Markets?”
Ghulam Sarwar
“Index Options-Futures Arbitrage: A
Comparative Study with Bid/Ask and Transaction Data”
Joseph K.W. Fung,
Henry M.K. Mok
“Further Evidence on Mean Reversion in Index
Basis Changes”
Yan He and Chunchi
Wu
“The Effects of the Asian Crisis on Global
Equity Markets”
Sorin A. Tuluca and
Burton Zwick
“Forced Versus Voluntary Dividend Reduction: An
Agency Cost Explanation”
Ranjan D'Mello,
Tarun Mukherjee, and Oranee Tawatnuntachai
Volume 36, No. 1, pp. 1-22
We examine whether the agency cost arising from
shareholder-bondholder conflict is an important
determinant of the timing of dividend reduction
decisions. Firms forced to reduce dividends owing
to bond covenant violations experience lower earnings,
more frequent losses, and greater earnings declines
around the dividend reduction year than do firms that
voluntarily reduce dividends. Relative to
voluntary-reduction firms, forced-reduction firms have
higher debt-to-equity ratios and managerial holdings.
These findings coupled with the increased dividend
payout ratios and lower announcement period returns
suggest that financially distressed firms that
anticipate poor performance have greater incentives to
delay reducing dividends to avoid a wealth transfer to
bondholders.
“Aggregate Dividend Behavior and Permanent Earnings
Hypothesis”
Ming-Shiun Pan
Volume 36, No. 1, pp. 23-38
The study examines the aggregate
dividend behavior of U.S. corporations based on the
permanent earnings hypothesis. Using annual data
of aggregate earnings and dividends from 1871-1993, I
find that although managers change dividends
proportional to permanent earnings changes, they make
revisions with a larger percentage change in dividends
than in permanent earnings. The results from the
post-war data show that firms follow a partial
adjustment policy with a long-term dividend payout
target in mind and make revisions with a delay.
The quarterly data analysis yields results similar to
those of the post-war annual data.
“Selectivity and Market Timing Performance of Fidelity Sector
Mutual Funds”
Wilfred
L. Dellva, Andrea L. DeMaskey, and Colleen A. Smith
Volume 36, No. 1, pp. 39-54
In this paper, we test the
selectivity and timing performance of the Fidelity
sector mutual funds during the 1989-1998 time period.
We use the S&P 500, the Dow Jones Industry Group Total
Return Indexes, and the Dow Jones Subgroup Total Return
Indexes as benchmarks. When we use the Dow Jones
Industry benchmarks, our results indicate that many
sector fund managers have positive selectivity but
negative timing ability. We also find that the
results are sensitive to our choice of benchmark and
timing model.
“Is Volatility Risk for the British Pound Priced in
U.S. Options Markets?”
Ghulam Sarwar
Volume 36, No. 1, pp. 55-70
This paper estimates the premium
for volatility risk for European currency options
written on British pounds. The average annualized
premiums for volatility risk is neither statistically
different from zero nor invariant to the option’s
moneyness. However, the risk premium is positively
and nonproportionaly related to the level of volatility,
except for out-of-the-money options. Finding a
zero premium for volatility risk does not undermine the
assumption of a zero-price volatility risk in many
extant stochastic-volatility option pricing models and
the option pricing formulas in those models.
“Index Options-Futures Arbitrage: A Comparative Study with
Bid/Ask and Transaction Data”
Joseph K.W. Fung, Henry M.K. Mok
Volume 36, No. 1, pp. 71-54
We can infer from bid/ask
quotations and transaction prices that where options
contracts are traded under a competitive open-outcry
market-making system, the options and futures markets
are dynamically efficient. Ex-ante analysis shows
that potential arbitrage opportunities disappear within
five minutes. Transaction price data understate
both the frequency and magnitude of arbitrage
opportunities that are signaled by bid/ask quotes.
Quotes stale fast, so opportunities are short-lived and
some of the arbitrage opportunities are deceptive.
Nonetheless, the evidence suggests that bid/ask quotes
provide valuable trading signals to arbitrageurs.
Profitability from exploiting the quotes is negatively
related to execution delay and execution risk.
“Further Evidence on Mean Reversion in Index Basis
Changes”
Yan He and Chunchi Wu
Volume 36, No. 1, pp. 95-124
We provide further evidence on the
stochastic behavior of the futures minus cash index
basis. In addition to infrequent trading, we
identify index aggregation as an additional source of
mean reversion in basis changes. An aggregation of
individual stocks in the index portfolio produces a
moving average component that induces a negative
autocorrelation in basis changes. Our empirical
results show that index price and basis changes often
contain a moving average component. After the
effects of infrequent trading and index aggregation are
purged, we find that the autocorrelation of the adjusted
index basis changes is significantly reduced.
“The Effects of the Asian Crisis on Global Equity Markets”
Sorin A. Tuluca and Burton Zwick
Volume 36, No. 1, pp. 125-142
We investigate the comovement of
daily returns from 13 Asian and non-Asian markets before
and after the advent of the Asian crisis in July 1997.
For individual pairs of markets, our analysis shows a
seven-fold increase in feedback relations. For the
markets as a group, we find a reduction in the number of
common factors that generate returns. Since the
post-crisis period included the collapse of the Russian
market and attack on the Brazilian real, we also analyze
six three-month subperiods surrounding the crisis.
We find that the perceived increase in comovement during
the post-crisis interval was the result of subperiod
transitory shocks.