The exchange rate and purchasing power parity in arbitrage-free models of asset pricing.

Exchange; Purchasing; Purchasing power; Power; Models; Model; Asset pricing; Pricing;

Privately and socially optimal take-overs when acquisition and exclusion strategies are endogenous.

The case for one share, one vote is quite robust to the way the takeover game is played, provide done goes all the way and allows not just toeholds or multiple bids and revisions but also bargaining. But a rule that exclusion should never harm the non-voting shares, or tha tthese shares should be taken over at the pre-bidprice,will do as well, without so severely curtailing a firm's room for security design. Under either rule, all privately beneficial takeovers are socially desirable and vice versa, and the value gains are shared fairly between the current shareholders and the bidder.Research; Impact; Determinants; Firms; Product; Market; Competition; Ownership; Performance; Characteristics; Belgian firms; Control; Companies; Firm performance; International; Portfolio; Variables; Size; Growth; Model; Job; Pricing; Factors; Rules; Data; Benchmarking; Prices; Value; Models; Work; Bias; Variance; Trade; Estimator; Bids; Optimal; Takeovers; Strategy;

Peso effects in the forward bias: evidence from the private ECU.

Forward rates of European currencies against the private and official ECU exhibit a bias similar to the one found in other data: the Cumby-Obstfeld-Fama (COF) regression coefficients are systematically below unity, and two thirds of them are negative. We use the discount of the private ECU relative to the official ECU as a measure of 'diffidence', a term that may cover both sharply fluctuating risk premia as well as Peso risk. Peso risk, in this context, covers not only fears of realignments but also the risk of a meltdown of the private ECU relative to the official one (a notion that receives some support from a time-series analysis of these data). Dichotomizing the data on the basis of the size of the discount in the private ECU), we find that the COF beta strongly depends on the degree of diffidence and that the negative COF coefficients are generated by typically less than 20 percent of the data. If the diffidence factor contains a risk premium, then this risk premium is definitely not the one predicted by Bansal (1997). Nor is the diffidence factor proxying for Huisman et al. (1997)'s transaction-cost effects. Thus, Peso risk remains as a strong candidate explanation for the forward bias in this sample.Effects; Currency; Data; Risk; Time series;

Exchange rate volatility and trade: a general equilibrium analysis.

In this paper, we use insights from the literature on financial options to analyze the effect of exchange rate volatility on the volume of trade between countries. In contrast to existing work, this analysis is carried out in a model where the exchange rate is determined endogenously, and the volatility of the exchange rate depends on the volatility of the amounts available for consumption of the traded and non-traded goods. Our main result is to show that, in a one-good world, and contrary to the popular conjecture, an increase in exchange rate volatility is associated with an increase in the volume of trade. If a non-traded good is added, the above remains true when the source of exchange rate volatiliy is the uncertainty in the traded goods sector. However, when the source of exchange rate volatility is the non-traded goods sector then the volume of trade may decline. Thus, our model offers at least a partial explanation for the results of empirical studies that find only a weak relation between exchange rate volatility and trade. A policy implication of the model is that the volatility of the real exchange rate can be reduced, and welfare increased, in two ways: by reducing the volatility of fundamentals and by reducing the barriers to trade. However, while a reduction in trade barriers is associated with an increase in trade, a reduction in the volatility of fundamentals leads to a reduction in trade. Thus, more trade does not always mean a higher welfare.Equilibrium; Trade; Volatility;

Estimating the costs of international equity investments.

We generalize the Cooper and Kaplanis (1994) methodology for estimating the costs that couldreconcile international portfolio holdings with CAPM predictions. First, we simultaneouslyestimate inward and outward investment costs and even interactions between home and hostcountry. Second, the risk aversion parameter is estimated rather than postulated. Third, wedetect costs for domestic investments. We ¯nd that the home bias in equity portfolios is relatedto a mixture of market frictions, such as information asymmetries, institutional factors andexplicit costs. Over the period 2001-2004, the average implicit investment costs range from0.26 (US) to 16 (Turkey) percent per annum.Determinants; Investments; Variability; Companies; Size; Variables;

Selecting a bond-pricing model for trading: benchmarking, pooling, and other issues.

Does one make money trading on the deviations between observed bond prices and values proposed by bond-pricing models? We extend Sercu and Wu (1997)'s work to more models and more data, but we especially refine the methodology. In particular, we provide a normal-return benchmark that markedly improves upon the Sercu-Wu ones in terms of noisiness and bias. Trading on the basis of deemed mispricing is profitabe indeed no matter what model one uses, and there is remarkably little difference across models, at least when one re-estimates and trades daily. We observe no relation with various measures of fit in the estimation stage. We also obtain an impression as to how much of the typical deviation consists of mispricing and how much is model mis-estimation or mis-specification. Lastly, we find that pooled time-series and cross-sectional estimation, as applied by e.g. De Munnik and Schotman (1994), does help in stabilizing the parameter, but hardly improves the trader's profits.Benchmarking; Bias; Bonds; Data; Model; Models; Prices; Term structure of interest rates; Time series; Trade; Value;

Selecting a bond-pricing model for trading: benchmarking, pooling, and other issues.

Does one make money trading on the deviations between observed bond prices and values proposed by bondpricing models? We extend Sercu and Wu (1997)'s work to more models and more data, but we especially refine the methodology. Inparticular, we provide a normal-return benchmark that markedly improves upon the Sercu-Wu ones in terms of noisiness and bias, and we demonstrate that model errors contribute more to the variance of residuals-actual minus fitted prices-than pricing errors made by the market. Trading on the basis of deemed mispricing is profitable indeed no matter what model one uses. But there is remarkably little difference across models, at least when on ere-estimates and trades daily;and with pooling and/or longer holding periods the results seem to be all over the place, without any relation with various measures of fit in the estimation stage. We also derive and implement an estimator of how much of the typical deviation consists of mispricing and how much is model mis-estimation or mis-specification.Lastly,we find that pooled time-series and cross-sectional estimation, as applied by e.g. De Munnik and Schotman (1994), does help in stabilizing the parameter, but hardly improves the trader's profits.Research; Impact; Determinants; Firms; Product; Market; Competition; Ownership; Performance; Characteristics; Belgian firms; Control; Companies; Firm performance; International; Portfolio; Variables; Size; Growth; Model; Job; Pricing; Factors; Rules; Data; Benchmarking; Prices; Value; Models; Work; Bias; Variance; Trade; Estimator;

The information content in bond model residuals: an empirical study on the Belgian bond market.

We estimate daily Vasicek, CIR, and spline models on Belgian data and compare the trading profits that can be made on the basis of the model residuals. Abnormal returns are negatively related to lagged mispricing. Contrarian strategies - buying underpriced bonds, and especially selling overpriced bonds- yield significant abnormal returns even when the trade is delaved by up to five days after observing the mispricing. The sline model seems to overfit the data and is least able to detect mispricing. Large model residuals are more likely to be the result of model misspecification or -estimation than are small or medium-sized residuals.Model; Residuals; Studies;

One share, one vote ?.

In the theoretical framework considered in the two seminal contributions, Grossman and Hart (GH, 1988) and Harris and Raviv (HR, 1989), the 'one share, one vote' (1S1V) rule is optimal whether private benefits are enjoyed by the incumbent or the rival. In practice, deviations from 1S1V are frequent. We complete the GH-HR analysis in three ways. First, we give both incumbent and rival management private benefits. Second, we not only examine the behaviour and optimality of feasible rules in a local or ex post sense (i.e. at the moment the rival appears and his characteristics are observed), but we also consider the ex ante problem where the entrepreneur-founder only knows the distribution from which the rival will be drawn. The issue is what set of rules the entrepreneur will put in place, re take-overs, so as to maximise the IPO value of the firm. Lastly, we go beyond the dual-class case, explaining the role and usefulness of multiple-class structures.Characteristics; Corporate control; Takeovers; Management control;