This paper studies a multi-factor, two-country term structure and exchange rate model when a diversification effect for an international bond portfolio is expected. It shows that the diversification gain calls upon certain restrictions on the process of the stochastic discount factor in a factor-structured economy. Existence of local factors is shown to be a necessary condition for the gains from investing in foreign bonds. Further, the exchange rate risk premia are shown to be a function of the differentials of the risk premia of the factors in bond returns. Empirical results reveal the tendency for investors to respond sensitively to rare shocks, which is shown to be a potential solution to the forward premium puzzle.

This article shows that correlated errors in news about fundamentals are an important, rational determinant of excess comovement. Individual analysts’ forecast errors tend to be correlated across stocks. Using a proxy for correlated forecast errors based on analyst coverage, I find that stocks with similar sets of analysts exhibit more excess comovement, controlling for industry and other variables. Exogenous changes in commonality in analyst coverage around i) brokerage firm mergers and ii) additions to an index lead to changes in excess comovement. This information channel explains 10% to 25% of the increase in comovement around additions to the S&P 500 index.

Monte Carlo procedures are used to compare the finite sample performance of several estimators that may be used in cross-sectional regressions with security abnormal returns as the dependent variable. Alternative models of event-induced increases in stock return variance are examined for the “event-clustering” scenario. Event clustering implies crosssectional correlation and heteroskedasticity in market model prediction errors, violating one of the fundamental ordinary least squares (OLS) assumptions (i.i.d. disturbances). Nonetheless, provided that the conditions for asymptotic validity derived by Greenwald (1983) are met, the OLS estimator is well specified in finite samples. Further, for sufficiently large cross sections there is no advantage to several other more complex estimators.

Security behavior in bull and bear markets has received some attention in recent years. Fabozzi and Francis [5] first documented evidence that security betas are not influenced by the alternating forces of bull and bear markets. Their subsequent study of mutual fund betas also indicated that mutual funds generally respond indifferently to bull and bear market conditions. Using the concept of bull and bear market variations, Kim and Zumwa1t [9] developed and tested the risk premiums associated with the upside and the downside portions of returns variation. They concluded that investors expect to receive a risk premium for downside risk and pay a premium for upside variation of returns. From their results, Kim and Zumwalt [9] suggested that the down-market beta measuring downside risk (downside variation of returns) may be a more appropriate measure of portfolio risk than the single beta in the market model.

Using a measure of political risk, relative to the United States, that captures unexpected political conditions, we show that political risk is priced in the cross section of currency momentum and contains information beyond other risk factors. Our results are robust after controlling for transaction costs, reversals, and alternative limits to arbitrage. The global political environment affects the profitability of the momentum strategy in the foreign exchange market; investors following such strategies are compensated for the exposure to the global political risk of those currencies they hold, that is, the past winners, and exploit the lower returns of loser portfolios. The risk compensation is mainly justified by the different exposures of foreign currencies in the momentum portfolio to U.S. political shocks, which is the main component of global political risk.

In testing hypotheses, researchers are almost always faced with the problem of isolating the effect of certain variables. This is a particularly acute problem in the social sciences, where the absence of an experimental environment means that researchers must resort to statistical methods of adjustment.

We study the conflict of interests between the limited partners (LPs) and the general partner (GP) in a venture capital (VC) fund with a limited life span. LPs commit money, while the GP selects and monitors projects. Midway into the project, the GP privately observes the project’s quality and the estimated time to exit. The fund’s limited time horizon and the GP’s informational advantage lead to inefficient decisions at this stage. First, the GP continues bad projects. Second, he may stop monitoring good, but delay-prone projects. We provide empirical predictions and illustrative evidence that the magnitude of the effect is significant.

The 2012 Dividend Tax Reform in China ties individual investors’ dividend tax rates to the length of their shareholding period. We find that firms facing a reduction (increase) in their individual investors’ dividend tax rates are more (less) likely to increase dividend payout. Such an effect is concentrated in firms where incentives of controlling shareholders and minority shareholders are aligned. Furthermore, investors respond to this tax law change by reducing trading activities before the cum-dividend day and successfully lower their dividend tax penalty. Overall, our evidence enhances the notion that individual investors’ tax profiles shape firms’ payout policies.

The trading of securities on multiple markets raises the question of each market’s share in the discovery of the informationally efficient price. We exploit salient distributional features of multivariate financial price processes to uniquely determine these contributions, thereby resolving the main drawback of the widely used Hasbrouck (1995) methodology, which merely provides upper and lower bounds of a market’s information share. We show how tail dependence of price changes, which may emerge as a result of differences in market design, can be exploited to estimate unique information shares. Two empiricalapplications illustrate the practical use of the new methodology.

Material adverse change (MAC) clauses are a ubiquitous feature of acquisitions and exhibit substantial cross-sectional variation in the number and types of events that are excluded from being material adverse events (MAEs). MAEs are the underlying cause of 69% ofacquisition terminations and 80% of renegotiations. These renegotiations lead to substantial changes in the price offered to target shareholders. Acquisitions with fewer MAE exclusions are characterized by wider arbitrage spreads during the acquisition period and are associated with higher offer premiums. We conclude that MAC clauses have an economically important impact on the dynamics of corporate acquisitions.

An important issue in the financial literature concerns the conflict between the stochastic dominance (SD) and the mean-variance (EV) methods of choosing optimal portfolios of risky assets. Much of the recent theoretical and empirical work in portfolio analysis has been devoted to the extension and testing of the Markowitz two-moment model, in which it is assumed that either (a) decision makers have quadratic utility functions with negative second derivatives or (b) the probability functions are from some appropriate two-parameter family and the investor is risk averse.

Research in the area of portfolio management and capital markets has led to the development of a fundamental concept of market risk. Through work with the capital asset pricing model, “risk” has been decomposed into systematic or market risk and specific or diversifiable risk. Recent interest has focused on integrating these portfolio theory and capital market concepts with corporate finance. Hamada [5], and others, provide theoretically-based analyses which suggest that differences in degree of market risk should be related to differences in financial management activities and practices.

Empirical research has played an important role in recent theoretical developments in the theory of finance, particularly in the formulation and testing of various theories of capital asset pricing. A common procedure in much of that empirical research is to use historical price and dividend data to estimate the parameters of a characteristic line which relates the return on an asset or portfolio to the return on the market. While several possible limitations of such procedures have been explored, one recurring question is the appropriate length of each interval used in the estimation. The purpose of this study is to investigate intervaling in greater detail so as to better understand its impact on the results of empirical research and hence of further developments in the field of finance. This is accomplished by examining the effect of different intervals on the return distributions and estimated characteristic lines of 200 common stocks over the two decades 1950–1969. Section II reviews the relevant literature and attempts to place the intervaling effect in perspective. Research design for the investigation is described in Section III, and findings are presented in Section IV. A brief conclusion appears as Section V.

Ofer and Natarajan (1987) report negative, statistically significant cumulative average abnormal returns over five years following convertible bond calls. We show that these results are obtained only if returns preceding the call dates are used for market model parameter estimation. Returns preceding calls tend to be positive and unusually large. This means that predicted post-call returns, based on pre-call parameter estimates, are biased upward. Consequently, the corresponding abnormal returns are biased downward. We also discuss a corrected test statistic. We conclude that the evidence does not indicate market inefficiency in the stock price reaction to convertible calls.

We provide novel evidence on gender differences in insider-trading behavior and the profitability of senior corporate executives. On average, both female and male executives make positive profits from insider trading. Males, however, earn significantly more than females in equivalent positions and also trade more than females. These gender differences disappear when we limit the sample to firms in which female trading is relatively high. Collectively, these results suggest that female executives have a disadvantage relative to males in access to inside information, even if they have equal formal status, and informal networks may play an important role in attenuating this disadvantage.

We document that equity markets become less liquid and equity prices become less efficient when markets for single-name credit default swap (CDS) contracts emerge. This finding is robust across a variety of market quality measures. We analyze the potential mechanisms driving this result and find evidence consistent with negative trader-driven information spillovers that result from the introduction of CDS. These spillovers greatly outweigh the potentially positive effects associated with completing markets (e.g., CDS markets increase hedging opportunities) when firms and their equity markets are in “bad” states. In “good” states, we find some evidence that CDS markets can be beneficial.

Building on the growing literature on interfirm links and limited attention, we find evidence of return predictability across alliance partners. A long–short portfolio sorted on lagged returns of strategic alliance partners provides a return of 89 basis points per month that is robust to a number of specifications. Investor inattention and limits to arbitrage may be the source of the underreaction of a firm’s returns to that of its partners.

We develop a straightforward procedure to price derivatives by a bivariate tree when the underlying process is a jump-diffusion. Probabilities and jump sizes are derived are derived by matching higher order moments or cumulants. We give comparisons with other published results along with convergence proofs and estimates of the order of convergence. The bivariate tree approach is particularly useful for pricing long-term American options and long-term real options because of its robustness and flexibility. We illustrate the pedagogy in an application involving a long-term investment project.

This paper develops a unified approach to comprehensively analyze individual hedge fund return predictability, both in and out of sample. In sample, we find that variation in hedge fund performance across changing market conditions is widespread and economically significant. The predictability pattern is consistent with economic rationale, and largely reflects differences in key hedge fund characteristics, such as leverage or capacity constraints. Out of sample, we show that a simple strategy that combines the funds’ return forecasts obtained from individual predictors delivers superior performance. We exploit this simplicity to highlight the drivers of this performance, and find that in- and out-of-sample predictability are closely related.

Several studies (see [7], [15], [9], and [16]) have attempted to ascertain the empirical relationships that exist between the financing and investment decisions of firms. The primary impetus for these efforts was provided by Modigliani and Miller (MM) [20], [21] when they demonstrated that under the assumption of perfect capital markets, the optimal investment decisions of a firm are separable from its financing decisions. In the presence of market imperfections, interdependencies between these decisions that violate the basic MM propositions may exist. Therefore, the studies referred to above have essentially focused upon determining whether market imperfections have been of sufficient magnitude to lead to joint determination of investment and financing decisions. Though the original MM propositions were introduced more than two decades ago, the nature of the empirical relationship between investment and financing decisions remains a controversial issue. The fact that this matter is still unresolved is not attributable to a lack of attention, for the original propositions have been examined in the presence of taxes, bankruptcy costs, and agency costs with no clear consensus emerging.