Abstracts of Volume 41, Number 1, February 2006
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abstracts
Tools for Financial Innovation: Neoclassical versus
Behavioral Finance
Robert J. Shiller
An
Examination of the Differential Impact of Regulation FD
on Analysts' Forecast Accuracy
Scott Findlay, Prem G. Mathew
The
Impact of Inflation Measures on the Real Returns and
Risk of U.S. Stocks
Charles P. Jones, Jack W. Wilson
Inflation data for the Impact of Inflation Measures
on the Real Returns and Risk of U.S. Stocks
Uncertain Demand, Heterogeneous Expectations, and
Unintentional IPO Underpricing
Bruce K. Gouldey
Unpublished appendix to Uncertain Demand,
Heterogeneous Expectations, and Unintentional IPO
Underpricing
Portfolio Effects and Valuation of Weather Derivatives
Patrick L. Brockett, Mulong Wang,
Chuanhou Yang, Hong Zou
Inferring Public and Private Information from Trades and
Quotes
Bart Frijns
Price Movements, Information and Liquidity in the Night
Trading Market
Antoine Giannetti, Stephen J.
Larson, Chun-I Lee, Jeff Madura
Erratum to published version
Variance Spillover and Skewness in Financial Asset
Returns
Bob Korkie, Ranjini Sivakumar,
Harry J. Turtle
Tools for Financial Innovation: Neoclassical versus
Behavioral Finance
Robert J. Shiller
The behavioral finance revolution in academic finance in the
last several decades is best described as a return to a
more eclectic approach to financial modeling. The
earlier neo-classical finance revolution that had swept
the finance profession in the 1960s and 1970s
represented the overly-enthusiastic pursuit of only one
model. Freed from the tyranny of just one model,
financial research is now making faster progress, and
that progress can be expected to show material benefits.
An example of the application of both behavioral finance
and neoclassical finance is discussed: the reform of
Social Security and the introduction of personal
accounts.
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An Examination of the Differential Impact of Regulation FD on
Analysts' Forecast Accuracy
Scott Findlay, Prem G. Mathew
Regulation FD requires companies to publicly disseminate
information, effectively preventing the selective
pre-earnings announcement guidance to analysts common in
the past. We investigate the effects of Regulation FD's
reducing information disparity across analysts on their
forecast accuracy. Proxies for private information,
including brokerage size and analyst company-specific
experience, lose their explanatory power for analysts'
relative accuracy after Regulation FD. Analyst forecast
accuracy declines overall, but analysts that are
relatively less accurate (more accurate) before
Regulation FD improve (deteriorate) after
implementation. Our findings are consistent with
selective guidance partially explaining variation in the
forecasting accuracy of analysts before Regulation FD.
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The Impact of Inflation Measures on the Real Returns and Risk
of U.S. Stocks
Charles P. Jones, Jack W. Wilson
Using different inflation measures produces economically
significant differences in both the inflation record and
inflation-adjusted stock returns. We introduce a more
consistent measure of the monthly CPI inflation rate to
better measure real returns over 1913-2004, for which
the official CPI exists. We also extend the series
backward to 1871 on a monthly basis, an important
addition to the data series. We analyze the impact of
inflation on the real standard deviation of stock
returns and find that, in contrast to the results
for geometric mean returns, inflation adjustments have
little impact on estimates of return variability.
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Uncertain Demand, Heterogeneous Expectations, and
Unintentional IPO Underpricing
Bruce K. Gouldey
Distinguishing between intentional and unintentional
incentives to underprice initial public offerings
(IPOs), I develop sufficient conditions for the winners’
curse postulated by Miller (1977) and implications for
intertemporal changes in the magnitude of underpricing.
Specifically, I show that unintentional underpricing
(and occasional overpricing) of IPOs is a consequence of
investors’ heterogeneous expectations of the uncertain
value of a stock when the supply is constrained and the
underwriter’s price discovery process only partially
identifies aggregate demand. Moreover, an IPO that is
oversubscribed in the premarket sale almost certainly
will experience a short-term price increase in the
secondary market.
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Portfolio Effects and Valuation of Weather Derivatives
Patrick L. Brockett, Mulong Wang,
Chuanhou Yang, Hong Zou
In a mean-variance framework, the indifference pricing
approach is adopted to value weather derivatives, taking
account of portfolio effects. Our analysis shows how the
magnitude of portfolio effects is related to the
correlation between weather indexes and other risky
assets, the correlation between weather indexes, and the
payoff structures of the existing weather derivatives in
an investor’s asset portfolio. We also conduct some
preliminary empirical analysis. This study contributes
to the weather derivatives-pricing literature by
incorporating both the hedgeable and unhedgeable parts
of weather risks in illustrating the portfolio effects
on the indifference prices of weather derivatives.
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Inferring Public and Private Information from Trades and
Quotes
Bart Frijns
We propose a new model that uses non-synchronous, ultra-high
frequency data to analyze the sequential impact of
trades and quotes on the price process. Private
information is related to the impact of trades and
public information to the impact of quotes. The model is
extended to include various other factors that affect
public and private information. For 20 active Nasdaq
stocks, private information causes, on average, 9.43% of
daily stock movements. Additionally, quotes are more
informative when (1) many dealers set the best price and
(2) traditional market makers rather than ECNs set the
best price.
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Price Movements, Information and Liquidity in the Night
Trading Market
Antoine Giannetti, Stephen J.
Larson, Chun-I Lee, Jeff Madura
Night trading provides an ideal laboratory to assess the
behavior of stock markets when institutional liquidity
providers are less active. The evidence indicates that
extreme positive (winner) and negative (loser) stock
price movements during night sessions are followed by
reversals the next day. The reversals are more
pronounced following extreme stock price movements that
are associated with less trading volume and lower
liquidity. Within-the-night sample reversals are less
pronounced for stocks of companies issuing earnings
announcements.
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Erratum to the published version
Variance Spillover and Skewness in Financial Asset Returns
Bob Korkie, Ranjini Sivakumar,
Harry J. Turtle
Bond and stock returns have been observed in the literature
to exhibit unconditional skewness and temporal
persistence in conditional skewness. We demonstrate that
observed persistence in conditional third central
moments can be due to the spillover of conditional
variance dynamics. The confounding of true skewness and
a variance spillover effect is problematic for financial
modeling. Using market data, we empirically demonstrate
that a simple standardization approach removes the
variance-induced skewness persistence. An important
implication is that more parsimonious return and asset
pricing models result if skewness persistence need not
be modeled.
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