The Structure of the US Equity Markets

In 1975, Congress directed the SEC to develop a national market system in which all orders to buy or sell equities would interact. A national market system abhors fragmentation and assumes that one market will best serve the needs of all investors. Such an assumption does not capture the realities of modern markets. Investors have different needs and different markets will develop to serve these needs. Markets are non anonymous, and in such markets, the very concept of “best price” is not defined. Fragmented markets are a natural result of competition. Within the US, the sharing of trade and quote information among markets helps to mitigate any deleterious effects of fragmentation. The markets of tomorrow will be global. In a global market, the SEC will have to give up its goal of a national market system and focus on other issues. For example, it will be a challenge to provide just the sharing of trade information across borders. Further, technology will allow a market center or order-gathering function to be located anywhere in the world. This threat of relocation will place constraints on US regulators, and global trading will make it more difficult for US authorities to regulate investment practices and to protect US investors.

Stale or Sticky Stock Prices? Non-Trading, Predictability, and Mutual Fund Returns

The observed predictability in indexes and domestic mutual funds has been attributed to stale prices. Market timing of mutual funds exploits this predictability. We show that there are few stale prices for stocks in the top few deciles of market value and that mutual funds concentrate their holding in these deciles. Still, we observe predictability in the returns of portfolios and mutual funds holding these stocks. Much of this predictability is due to stickiness, or momentum, in market returns and not stale prices. Thus, the often suggested use of “fairvalue” accounting will not eliminate the profitability of market timing

The Valuation of Callable Bonds

Callable bond indentures contain provisions that allow the issuing entity to retire the bond at a predetermined price before the maturity of the bond.1 As such a callable bond is often viewed as a combination of an otherwise identical but non-callable bond and an option to call that bond. The writer of the call option is the holder of the bond, and the buyer of the call is the stockholder of the issuing corporation. Thus, the price of a callable bond is the value of the straight bond less the value of the call provision

Returns and Volatility of Low-Grade Bonds 1977–1989

This paper examines the risks and returns of long-term low-grade bonds for the period 1977–1989. We find: (1) low-grade bonds realized higher returns than higher-grade bonds and lower returns than common stocks, and low-grade bonds exhibited less volatility than higher-grade bonds due to their call features and high coupons; (2) there is no relation between the age of low-grade bonds and their realized returns; cyclical factors explain much of the observed relation between default rates and bond age; and (3) low-grade bonds behave like both bonds and stocks. Despite this complexity there is no evidence that low-grade bonds are systematically over- or under-priced

Endogenous Constitutions: Politics and Politicians Matter, Economic Outcomes Don’t

We study changes in the form of government as an example of endogenously determined constitutions. For a sample of 202 countries over the period 1950-2006, we find that most changes are relatively small and roughly equally likely to be either in the direction of more parliamentarian or more presidential systems. Based on a fixed effects ordered logit panel data model estimated over the period 1951-2000 for 146 countries, we find that such changes in the constitution can be explained by characteristics of the political system, internal and external political conflicts, and political leaders, whereas economic and socio-demographic variables do not matter

Bounded Rationality and the Emergence of Simplicity Amidst Complexity

The purpose of this essay is to explore the relationship between the simple and the complex in economics by anchoring our analysis on bounded rationality. Much of the conventional literature focuses on ‘un-bounded rationality’ of the rationality-as-consistency variety. Theorizing of bounded rationality tends to assume that the problem to be solved is independent of the nature of bounded rationality. Following the insights from the works of Herbert Simon and contributions from outside economics, both bounded rationality and the environment are inextricably linked. The boundaries between bounded rationality and its environment can shift. The form in which bounded rationality is found depends on the complexity of the environment. Furthermore, if local interactions between bounded rational agents result in the formation of hierarchies – the complexity of the collective system will change. Whether this will occur depends on the nature of bounded rationality at the individual level

Oral medicine acceptance in infants and toddlers: measurement properties of the caregiver-administered Children’s acceptance tool (CareCAT)

BACKGROUND: Developing age-appropriate medications remains a challenge in particular for the population of infants and toddlers, as they are not able to reliably self-report if they would accept and consequently take an oral medicine. Therefore, it is common to use caregivers as proxies when assessing medicine acceptance. The outcome measures used in this research field differ and most importantly lack validation, implying a persisting gap in knowledge and controversy in the field. The newly developed Caregiver-administered Children’s Acceptance Tool (CareCAT) is based on a 5-point nominal scale, with descriptors of medication acceptance behavior. This crosssectional study assessed the measurement properties of the tool with regards to the user’s understanding and its intra- and inter-rater reliability. METHODS: Participating caregivers were enrolled at a primary healthcare facility where their children (median age 6 months) had been prescribed oral antibiotics. Caregivers, trained observers and the tool developer observed and scored on the CareCAT tool what behavior children exhibited when receiving the medicine (n = 104). The videorecords of this process served as replicate observations (n = 69). After using the tool caregivers were asked to explain their observations and the tool descriptors in their own words. The tool’s reliability was assessed by percentage agreement and Cohen’s unweighted kappa coefficients of agreement for nominal scales. RESULTS: The study found that caregivers using CareCAT had a satisfactory understanding of the tool’s descriptors. Using its dichotomized scores the tool reliably was strong for acceptance behavior (agreement inter-rater 84–88%, kappa 0.66–0.76; intra-rater 87–89%, kappa 0.68–0.72) and completeness of medicine ingestion (agreement inter-rater 82–86%, kappa 0.59–0.67; intra-rater 85–93%, kappa 0.50–0.70). CONCLUSIONS: The CareCAT is a low-cost, easy-to-use and reliable instrument, which is relevant to assess acceptance behavior and completeness of medicine ingestion, both of which are of significant importance for developing age-appropriate medications in infants and toddlers

Detecting abnormal and collusive bids in capped tendering

Recent developments in the area of Bid Tender Forecasting have enabled bidders to implement new types of easy-to-use tools for increasing their chances of winning contracts. Although these new tools (such as iso-Score Curve Graphs, Scoring Probability Graphs, and Position Probability Graphs) are designed for bidders in capped tendering (tenders with an upper price limit), some of their principles can also be applied by a Contracting Authority to detect which bidders do not follow a standard pattern, that is, their bids are extremely high or low. Since a collusive bid generally needs to be sufficiently high or low to make an impact on the bid distribution, any person in charge of supervising capped tenders can be alerted to any bidder that might be involved in a cartel after identifying the same abnormal behavior in a series of tenders through simple calculations and a new type of graph