Hypothesis Testing in Predictive Regressions

We propose a new hypothesis testing method for multi-predictor regressions with finite samples, where the dependent variable is regressed on lagged variables that are autoregressive. It is based on the augmented regressiom method (ARM; Amihud and Hurvich (2004)), which produces reduced-bias coefficients and is easy to implement. The method's usefulness is demonstrated by simulations and by an empirical example, where stock returns are predicted by dividend yield and by bond yield spread. For single-predictor regressions, we show that the ARM outperforms bootstrapping and that the ARM performs better than Lewellen's (2003) method in many situations.Augmented Regression Method (ARM); Bootstrapping; Hypothesis Testing

Liquidity and Asset Prices

We review the theories on how liquidity affects the required returns of capital assets and the empirical studies that test these theories. The theory predicts that both the level of liquidity and liquidity risk are priced, and empirical studies find the effects of liquidity on asset prices to be statistically significant and economically important, controlling for traditional risk measures and asset characteristics. Liquidity-based asset pricing empirically helps explain (1) the cross-section of stock returns, (2) how a reduction in stock liquidity result in a reduction in stock prices and an increase in expected stock returns, (3) the yield differential between on- and off-the-run Treasuries, (4) the yield spreads on corporate bonds, (5) the returns on hedge funds, (6) the valuation of closed-end funds, and (7) the low price of certain hard-to-trade securities relative to more liquid counterparts with identical cash flows, such as restricted stocks or illiquid derivatives. Liquidity can thus play a role in resolving a number of asset pricing puzzles such as the small-firm effect, the equity premium puzzle, and the risk-free rate puzzle.Liquidity; Liquidity Risk; Asset Prices

Some Aspects of Light in the Forest

In this present investigation an attempt is made to determine experimentally to what extent light controls the vegetation on the forest floor and, consequently, succession of the forest flora, and whether under natural canopies light can be looked upon as a limiting factor in plant survival. The general conclusion reached is that the intensity and quality of the light reaching the forest floor are not the determining factors in accounting for the presence or absence of reproduction in the fully stocked forest where the investigation was made

Mutual Fund’s R^2 as Predictor of Performance

We propose that fund performance is predicted by its R^2, obtained by regressing its return on the Fama-French-Carhart four benchmark portfolios. Lower R2, or higher idiosyncratic risk relative to total risk, measures selectivity or active management. We show that lagged R2 has significant negative predictive coefficient in predicting alpha or Information Ratio. This is consistent with Cremers and Petajisto’s (2008) results on the effect of selectivity. Funds ranked into lagged lowest-quintile R2 and highest-quintile alpha produce significant alpha of 2.8%. Also, both fund RMSE and return volatility predict the following year’s performance with significant positive and negative coefficients, respectively. Across funds, R^2 is an increasing function of fund size and a decreasing function of its age, its manager tenure and its past performance, but better performance induces funds to subsequently increase their R^2

The Declining Information Content of Dividend Announcements and the Effect of Institutional Holdings

We propose an explanation for the "disappearing dividend" phenomenon: the decline in the information content of dividend announcements. This reduces the propensity of firms to pay or increase dividends, since dividends are costly. The decline in the information content of dividend, is partly because of the rise in stockholding by institutional investors that are more sophisticated and informed. Our results show a decline in the stock price reaction to announcements of dividend changes since the mid 1970s. Across firms, the price reaction to dividend news is smaller in firms with high institutional holdings. Institutional investors exploit their superior information by buying before dividend increases and selling afterwards. And, firms with high institutional holdings are less likely to raise dividends

Political News and Stock Prices: The Case of Saddam Hussein Contracts

This paper studies the association between the market’s expectations of Saddam Hussein’s fall from power, reflected in "Saddam contract" prices, and stock prices, oil prices and exchange rates. During the war, a rise in the probability of Saddam’s fall, which also indicated a speedy end to the war, was positively and significantly associated with stock prices, strengthened the dollar against the Euro, and lowered oil prices. Before the war, a rise in the probability of Saddam’s fall, which may have also indicated the probability of a costly war breaking out, lowered stock prices, which adjustment gradually to this information

Political News and Stock Prices: The Case of Saddam Hussein Conacts

This paper studies the association between the market’s expectations of Saddam Hussein’s fall from power, reflected in "Saddam conact" prices, and stock prices, oil prices and exchange rates. During the war, a rise in the probability of Saddam’s fall, which also indicated a speedy end to the war, was positively and significantly associated with stock prices, sengthened the dollar against the Euro, and lowered oil prices. Before the war, a rise in the probability of Saddam’s fall, which may have also indicated the probability of a costly war breaking out, lowered stock prices, which adjustment gradually to this information

POLITICAL NEWS AND STOCK PRICES: THE CASE OF SADDAM HUSSEIN CONTRACTS

This paper studies the association between the market’s expectations of Saddam Hussein’s fall from power, as reflected in “Saddam contract” prices, and stock prices, oil prices and exchange rates. During the war, a rise in the probability of Saddam’s fall, which also indicated a speedy end to the war, was positively and significantly associated with stock prices, strengthened the dollar against the Euro, and lowered oil prices. Before the war, a rise in the probability of Saddam’s fall, which may also have indicated the probability of a costly war breaking out, lowered stock prices, which adjusted gradually to this information