Results 1  10
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157
Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test
 REVIEW OF FINANCIAL STUDIES
, 1988
"... In this article we test the random walk hypothesis for weekly stock market returns by comparing variance estimators derived from data sampled at different frequencies. The random walk model is strongly rejected for the entire sample period (19621985) and for all subperiod for a variety of aggrega ..."
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Cited by 226 (13 self)
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In this article we test the random walk hypothesis for weekly stock market returns by comparing variance estimators derived from data sampled at different frequencies. The random walk model is strongly rejected for the entire sample period (19621985) and for all subperiod for a variety of aggregate returns indexes and sizesorted portofolios. Although the rejections are due largely to the behavior of small stocks, they cannot be attributed completely to the effects of infrequent trading or timevarying volatilities. Moreover, the rejection of the random walk for weekly returns does not support a meanreverting model of asset prices.
Using Experimental Economics to Measure Social Capital and Predict Financial Decisions,” Working Paper
, 2002
"... Abstract: Questions remain as to whether results from experimental economics games are generalizable to real decisions in nonlaboratory settings. I conduct a survey and two experiments, a Trust game and a Public Goods game, to measure social capital. Social capital purports to provide incentives to ..."
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Cited by 97 (15 self)
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Abstract: Questions remain as to whether results from experimental economics games are generalizable to real decisions in nonlaboratory settings. I conduct a survey and two experiments, a Trust game and a Public Goods game, to measure social capital. Social capital purports to provide incentives to individuals to abide by otherwise difficult to enforce contracts. I then examine whether behavior in the games predicts repayment of loans to a Peruvian group lending microfinance program. I find that individuals identified as "trustworthy " by the Trust game are more likely to repay their loans. Individuals identified as "trusting " default more and save less, suggesting that those who “trust ” more in the game are prone to taking bad risks. Behavior in a public goods game does not predict any future decisions in this context. Those with more positive attitudes towards society, as measured by three questions identical to those used in the General Social Survey, are more likely to repay their loans.
Equilibrium in a Dynamic Limit Order Market
, 2004
"... We model a dynamic limit order market as a stochastic sequential game. Since the model is analytically intractable, we provide an algorithm based on Pakes and McGuire (2001) to find a stationary Markovperfect equilibrium. Given the stationary equilibrium, we generate artificial time series and p ..."
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Cited by 92 (5 self)
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We model a dynamic limit order market as a stochastic sequential game. Since the model is analytically intractable, we provide an algorithm based on Pakes and McGuire (2001) to find a stationary Markovperfect equilibrium. Given the stationary equilibrium, we generate artificial time series and perform comparative dynamics. As we know the data generating process, we can compare transaction prices to the true value of the asset, as well as explicitly determine the welfare gains accruing to investors.
Liquidity and Expected Returns: Lessons from Emerging Markets
, 2006
"... Given the crosssectional and temporal variation in their liquidity, emerging equity markets provide an ideal setting to examine the impact of liquidity on expected returns. Our main liquidity measure is a transformation of the proportion of zero daily firm returns, averaged over the month. We find ..."
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Cited by 53 (8 self)
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Given the crosssectional and temporal variation in their liquidity, emerging equity markets provide an ideal setting to examine the impact of liquidity on expected returns. Our main liquidity measure is a transformation of the proportion of zero daily firm returns, averaged over the month. We find that it significantly predicts future returns, whereas alternative measures such as turnover do not. Consistent with liquidity being a priced factor, unexpected liquidity shocks are positively correlated with contemporaneous return shocks and negatively correlated with shocks to the dividend yield. We consider a simple asset pricing model with liquidity and the market portfolio as risk factors and transaction costs that are proportional to liquidity. The model differentiates between integrated and segmented countries and time periods. Our results suggest that local market liquidity is an important driver of expected returns in emerging markets, and that the liberalization process has not fully eliminated its impact.
Is there private information in the FX market? The Tokyo experiment
 Journal of Finance
, 1998
"... It is a common view that private information in the foreign exchange market does not exist. We provide evidence against this view. The evidence comes from the introduction of trading in Tokyo over the lunchhour. Lunch return variance doubles with the introduction of trading, which cannot be due to ..."
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Cited by 33 (5 self)
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It is a common view that private information in the foreign exchange market does not exist. We provide evidence against this view. The evidence comes from the introduction of trading in Tokyo over the lunchhour. Lunch return variance doubles with the introduction of trading, which cannot be due to public information since the flow of public information did not change with the trading rules. Having eliminated public information as the cause, we exploit the volatility pattern over the whole day to discriminate between the two alternatives: private information and pricing errors. Three key results support the predictions of privateinformation models. First, the volatility Ushape flattens: greater revelation over lunch leaves a smaller share for the morning and afternoon. Second, the Ushape tilts upward, an implication of information whose private value is transitory. Finally, the morning exhibits a clear Ushape when Tokyo closes over lunch, and it disappears when trading is introduced.
Trading costs and returns for US equities: estimating effective costs from daily data
 Journal of Finance
, 2009
"... The effective cost of trading is usually estimated from transactionlevel data. This study proposes a Gibbs estimate that is based on daily closing prices. In a validation sample, the daily Gibbs estimate achieves a correlation of 0.965 with the transactionlevel estimate. When the Gibbs estimates ar ..."
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Cited by 32 (1 self)
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The effective cost of trading is usually estimated from transactionlevel data. This study proposes a Gibbs estimate that is based on daily closing prices. In a validation sample, the daily Gibbs estimate achieves a correlation of 0.965 with the transactionlevel estimate. When the Gibbs estimates are incorporated into asset pricing specifications over a long historical sample (1926 to 2006), the results suggest that effective cost (as a characteristic) is positively related to stock returns. The relation is strongest in January, but it appears to be distinct from size effects. INVESTIGATIONS INTO THE ROLE of liquidity and transaction costs in asset pricing must generally confront the fact that while many asset pricing tests make use of U.S. equity returns from 1926 onward, the highfrequency data used to estimate trading costs are usually not available prior to 1983. Accordingly, most studies either limit the sample to the post1983 period of common coverage or use the longer historical sample with liquidity proxies estimated from daily data. This paper falls into the latter group. Specifically, I propose a new approach to estimating the effective cost of trading and the common variation in this cost. These estimates are then used in conventional asset pricing specifications with a view to ascertaining the role of trading costs as a characteristic in explaining expected returns. 1
Consistent Highprecision Volatility from Highfrequency Data
, 2001
"... Estimates of daily volatility are investigated. Realized volatility can be computed from returns observed over time intervals of different sizes. For simple statistical reasons, volatility estimators based on highfrequency returns have been proposed, but such estimators are found to be strongly bi ..."
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Cited by 29 (4 self)
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Estimates of daily volatility are investigated. Realized volatility can be computed from returns observed over time intervals of different sizes. For simple statistical reasons, volatility estimators based on highfrequency returns have been proposed, but such estimators are found to be strongly biased as compared to volatilities of daily returns. This bias originates from microstructure effects in the price formation. For foreign exchange, the relevant microstructure effect is the incoherent price formation, which leads to a strong negative firstorder autocorrelation ρ 1 40 % for tickbytick returns and to the volatility bias. On the basis of a simple theoretical model for foreign exchange data, the incoherent term can be filtered away from the tickbytick price series. With filtered prices, the daily volatility can be estimated using the information contained in highfrequency data, providing a highprecision measure of volatility at any time interval.
The Illiquidity of Corporate Bonds
, 2010
"... This paper examines the illiquidity of corporate bonds and its assetpricing implications. Using transactionlevel data from 2003 through 2009, we show that the illiquidity in corporate bonds is substantial, significantly greater than what can be explained by bidask spreads. We establish a strong li ..."
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Cited by 25 (11 self)
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This paper examines the illiquidity of corporate bonds and its assetpricing implications. Using transactionlevel data from 2003 through 2009, we show that the illiquidity in corporate bonds is substantial, significantly greater than what can be explained by bidask spreads. We establish a strong link between bond illiquidity and bond prices, both in aggregate and in the crosssection. In aggregate, changes in the market level illiquidity explain a substantial part of the time variation in yield spreads of highrated (AAA through A) bonds, overshadowing the credit risk component. In the crosssection, the bondlevel illiquidity measure explains individual bond yield spreads with large economic significance.
The Price of Diversifiable Risk in Venture Capital and Private Equity
, 2002
"... This paper explores the private equity (PE) and venture capital (VC) markets and demonstrates that unavoidable principalagent problems result in equilibrium competitive equity prices that are decreasing in the amount of idiosyncratic risk. The structure of information in these markets means that id ..."
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Cited by 20 (0 self)
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This paper explores the private equity (PE) and venture capital (VC) markets and demonstrates that unavoidable principalagent problems result in equilibrium competitive equity prices that are decreasing in the amount of idiosyncratic risk. The structure of information in these markets means that idiosyncratic risk will be priced even if investors can fully diversify and the private capital markets are competitive. VCs are agents who help investors (the principals) Þnd positive NPV projects. To ensure that VCs screen properly, they must receive compensation based on the performance of their recommendations. Significant time is required to determine if a project is NPV positive, which means that VCs will identify only a small number of investments, exposing them to idiosyncratic risk. Furthermore, VC compensation represents a significant fraction of their wealth. Therefore, they demand returns for the risk they hold. As a result, we show that VC investments have positive alphas while investors in VC funds earn zero alphas. In addition, some positive NPV projects with significant idiosyncratic risk will not be Þnanced. Furthermore, projects or funds that have more idiosyncratic risk will earn higher returns. This last result can be used to empirically distinguish our idea from Þxed compensation or a lack of competition. The
Liquidity of Emerging Markets
 Journal of Financial Economics
, 2005
"... Emerging markets are characterized by volatile, but substantial returns that can easily exceed 75 % per annum. Balancing these lofty returns are the liquidity concerns of trading in emerging markets. Adopting the model of security returns developed by Lesmond, Ogden, and Trzcinka (1999), liquidity m ..."
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Cited by 20 (1 self)
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Emerging markets are characterized by volatile, but substantial returns that can easily exceed 75 % per annum. Balancing these lofty returns are the liquidity concerns of trading in emerging markets. Adopting the model of security returns developed by Lesmond, Ogden, and Trzcinka (1999), liquidity measures are estimated for all securities and time periods (63798 firmyears) for which daily prices are available in 31 emerging markets from 1991 to 2000. Significant crosssectional differences and timeseries variations typify the liquidity measure over the period 1991 to 2000. The liquidity estimates are over 80 % correlated with the proportional bidask spread, where available, and regression tests show high association between the proportional bidask spread and the liquidity estimate. Additionally, as trade difficulty increases, proxied by price, volume, or market capitalization, the proposed liquidity measure increases consistent with the observed proportional bidask spread. Multivariate regression tests show that the proposed liquidity measure remains significant regardless of controlling for all of the trade difficulty variables, as well as turnover. Additionally, the proposed liquidity measure is found to be superior to the trade difficulty variables or turnover at explaining the spreadpluscommission costs in the majority of the 23 emerging markets with Emerging markets are experiencing explosive growth. Not only did the total value of shares traded increase from $15 billion in 1991 to over $200 billion in 2000, but the total market capitalization rose from $306 billion in 1991 to over $1.4 trillion in 2000.