Treasury Bill Futures as Hedges Against Inflation Risk

An important risk facing agents in a monetary economy arises from inflation uncertainty: in the U.S. for the 1953-84 period, unexpected quarterly inflation had a standard deviation of 2.1%. The costs of such uncertainty are likely to be even higher for multi-year contracts, since we estimate that a 1% unexpected inflation this year implies an upward revision of 0.43% for expected inflation for the forthcoming year and 1% for the years beyond that. The prospect of hedging inflation risk exposure using conventional financial instruments is bleak, as has been widely documented. We develop a theoretical case for Treasury bill futures as a inflation risk hedge by jointly assuming that (1) the Fisher Hypothesis applies to Treasury bill yields, (2) the Unbiased Expectations Hypothesis (UEH) applies to futures prices, and (3) inflation is an autoregressive process. Our empirical analysis shows that Treasury bill futures can reduce single-period inflation risk by about 30-40%. The expected cost of using such futures is close to zero, since we find that the Unbiased Expectations Hypothesis for Treasury bill futures cannot be rejected. Our results provide new indirect support for the Fisher Hypothesis.

Nonrational Actors and Financial Market Behavior

The insights of descriptive decision theorists and psychologists, we believe, have much to contribute to our understanding of financial market macrophenomena. We propose an analytic agenda that distinguishes those individual idiosyncrasies that prove consequential at the macro-level from those that are neutralized by market processes such as poaching. We discuss five behavioral traits - barn-door closing, expert/reliance effects, status quo bias, framing, and herding - that we employ in explaining financial flows. Patterns in flows to mutual funds, to new equities, across national boundaries, as well as movements in debt-equity ratios are shown to be consistent with deviations from rationality.

Hot Hands in Mutual Funds: The Persistence of Performance, 1974-87

The net returns of no-load mutual growth funds exhibit a hot-hands phenomenon during 1974-87. When performance is measured by Jensen's alpha, mutual funds that perform well in a one year evaluation period continue to generate superior performance in the following year. Underperformers also display short-run persistence. Hot hands persists in 1988 and 1989. The success of the hot hands strategy does not derive from selecting superior funds over the sample period. The timing component -- knowing when to pick which fund -- is significant. These results are robust to alternative equity portfolio benchmarks, such as those that account for firm-size effects and mean reversion in returns. Capitilizing on the hot hands phenomenon, an investor could have generated a significant, risk-adjusted excess return of 10% per year.

Purchasing Power Parity as a Long-Run Relation.

Dickey-Fuller and Stock-Watson tests of purchasing power parity (PPP) as a long-run proposition are provided within the cointegration framework proposed by Granger. Since different countries use different weights to construct price indices, the traditional constraint that the coefficients on the price indices should be unity in the log-linear PPP relations is relaxed. The absence of a general PPP relation cannot be rejected. At most, a PPP relation is indicated in five out of fifteen country pairs that are examined. Even if a long-run PPP relation exists, it is not found to be useful in predicting future nominal exchange rates, which is consistent with efficient speculative markets. Copyright 1990 by John Wiley & Sons, Ltd.

Earnings Management to Exceed Thresholds.

Earnings provide important information for investment decisions. Thus, executives--who are monitored by investors, directors, customers, and suppliers--acting in self-interest and at times for shareholders, have strong incentives to manage earnings. The authors introduce behavioral thresholds for earnings management. A model shows how thresholds induce specific types of earnings management. Empirical explorations identify earnings management to exceed each of three thresholds: report positive profits, sustain recent performance, and meet analysts' expectations. The positive profits threshold proves predominant. The future performance of firms suspect for boosting earnings just across a threshold is poorer than that of control group firms. Copyright 1999 by University of Chicago Press.

The J-Shape Of Performance Persistence Given Survivorship Bias

Performance may enhance survival probability. When it does, the induced lack of randomness challenges robust and unbiased inference. If survivors are sorted into two groups based on past performance, spurious persistence has been demonstrated if variance in performance is heterogeneous. However, as we show both theoretically and with simulations, if performance is categorized finely, the spurious persistence will be J - shaped; that is, at the bottom better performance in one period "predicts" worse performance for another period. We propose a simple t - test applied to the quadratic coefficient in a regression to distinguish between a spurious J - shape and monotonic patterns. Mutual funds, our example, exhibit the monotonically increasing pattern produced by true performance persistence. © 1997 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

Hot Hands in Mutual Funds: Short-Run Persistence of Relative Performance, 1974-1988.

The relative performance of no-load, growth-oriented mutual funds persists in the near term, with the strongest evidence for a one-year evaluation horizon. Portfolios of recent poor performers do significantly worse than standard benchmarks; those of recent top performers do better, though not significantly so. The difference in risk-adjusted performance between the top and bottom octile portfoli os is six to eight percent per year. These results are not attributable to known anomalies or survivorship bias. Investigations with a differen t (previously used) data set and with some post-1988 data confirm the finding of persistence. Copyright 1993 by American Finance Association.

Earnings management to exceed thresholds

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