Estimating the Intertemporal Risk-Return Tradeoff Using the Implied Cost of Capital

We reexamine the time-series relation between the conditional mean and variance of stock market returns. To proxy for the conditional mean return, we use the implied cost of capital, computed using analyst forecasts. The usefulness of this proxy is shown in simulations. In empirical analysis, we construct the time series of the implied cost of capital for the G-7 countries. We find strong support for a positive intertemporal mean-variance relation at both the country level and the world market level. Some of our evidence is consistent with international integration of the G-7 financial markets.

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Management. We thank the participants at the University of Michigan brown bag workshop for helpful comments and suggestions. Any errors are our own. Do stock prices underreact to SEO announcements? Evidence from SEO Valuation This paper examines whether the market underreacts to the negative information implicit in SEO announcements. We find that it does but conditional on the valuation of SEO firms prior to the SEO issue date. SEO firms that are overvalued relative to their industry peers experience a smaller decline in market value on the SEO announcement day but experience a larger decline over the next five years. The results are robust to various ways of choosing industry peers and valuation multiples and various methodologies for computing risk-adjusted abnormal returns. Cross-sectional regressions indicate SEO P/V ratios (offer-price to value ratio based on relative valuation techniques) are significantly positively related to announcement day returns and significantly negatively related to long-run returns even after controlling for expected growth rates, accruals, and B/M ratios. Additional tests indicate overvalued SEOs earn lower returns around future quarterly earnings announcement dates and do not exhibit superior ex-pos

Trading volume and cross-autocorrelations in stock returns

This paper finds that trading volume is a significant determinant of the lead-lag patterns observed in stock returns. Daily and weekly returns on high volume portfolios lead returns on low volume portfolios, controlling for firm size. Nonsynchronous trading or low volume portfolio autocorrelations cannot explain these findings. These patterns arise because returns on low volume portfolios respond more slowly to information in market returns. The speed of adjustment of individual stocks confirms these findings. Overall, the results indicate that differential speed of adjustment to information is a significant source of the cross-autocorrelation patterns in short-horizon stock returns. BOTH ACADEMICS AND PRACTITIONERS HAVE LONG BEEN interested in the role played by trading volume in predicting future stock returns. 1 In this paper, we examine the interaction between trading volume and the predictability of short horizon stock returns, specifically that due to lead-lag cross-autocorrelations in stock returns. Our investigation indicates that trading volume is a significant determinant of the cross-autocorrelation patterns in stock returns. 2 We find that daily or weekly returns of stocks with high trading volume lead daily or weekly returns of stocks with low trading volume. Additional tests indicate that this effect is related to the tendency of high volume stocks to respond rapidly and low volume stocks to respond slowly to marketwide information

Are Institutions Momentum Traders?

participants at the University of Miami for helpful comments. Are Institutions Momentum Traders? This paper examines institutional trading in momentum portfolios. The key result is that institutions engage in momentum trading over the subsequent 3 quarters, buying winners and selling losers, in response to past returns but not past earnings news. Momentum trading is strengthened, however, when returns are accompanied by earnings news of the same sign. While past high returns predict future institutional buying, past institutional buying does not predict future stock returns. Among institutions, investment advisors (e.g. mutual funds and brokerage firms) are the most active momentum traders; banks and insurance companies the least active. Additional tests indicate that institutional momentum trading is concentrated among high volume winners and losers and among low B/M winners and high B/M loser

Chromosome aberrations, changes in DNA content and frequency and spectrum of mutations induced by X-rays and neutrons in polyploids

A study of the relationship between polyploidy and radiation sensitivity was carried out in diploid, tetraploid and hexaploid species of wheat and in diploid and auto-tetraploid barley using X-rays and fast and thermal neutrons as radiation sources. Survival, frequency of chromosome aberrations, DNA content of nuclei, seed fertility and frequency of mutations in the second and third generations were used as indices of radiosensitivity. Survival was better in 4x barley in comparison with the diploid in X-ray treatments, while an increase in radiation resistance with an increase in chromosome number was evident in the wheat series with fast neutrons. Data on the frequency of chromosome aberrations and reduction in DNA content observed in root-tip nuclei indicated a possible interaction between polyploidy and the LET of the radiation employed. Seed fertility was less affected in polyploids than in diploids. The frequency of chlorophyll mutations decreased with increasing ploidy in both wheat and barley while the frequency of viable mutations registered the opposite trend in wheat. Recessive mutations could be detected in 4x barley only in the M<SUB>3</SUB> generation. The relative proportion of chlorophyll and morphological mutations observed in 4x barley during the M<SUB>3</SUB> generation was similar to that found in 6x wheat in M<SUB>2</SUB> and M<SUB>3</SUB> generations. Though a high frequency of viable mutations was observed in 6x wheat, the spectrum of the induced variation was very narrow thereby indicating that this species is a functional diploid only for a few loci