Bradford Cornell

Spot rates, forward rates and exchange market efficiency

Abstract This paper examines the relationship between forward exchange rates and subsequently observed spot rates. No evidence is found for a liquidity premium on forward exchange, indicating that the forward rate can be used as a proxy of the markets expectations and that open exchange positions involve little systematic risk. It is also shown that forward exhange is priced as if the exchange rate could be characterized by a diffusion process with a trend, although there is some evidence such a process does not adequately characterize the exchange rate in all cases.

The reaction of bank stock prices to the international debt crisis

Abstract In this paper we develop a cross-sectional regression approach to estimate the impact of foreign loan exposure on the pricing of U.S. bank stocks. A new approach is required because news about foreign loan problems may arrive incremently over time, rather than reaching the market on a few specific dates the way earnings and dividend announcements do. Consistent with this interpretation, we find that foreign loan exposure had a significant impact on the pricing of U.S. bank stocks during the years 1982 and 1983, but that the stock prices adjusted continually over the two-year period rather than jumping on a few particular days.

Money Supply Announcements and Interest Rates: Another View

In this paper I use a new approach to analyze the impact of money supply announcements on the bond market. Before 1980, the only available work on this subject consisted of a few unpublished papers by Conrad (1978), Sivesind (1978), and Urich (1979).1 More recently, published papers by Grossman (1981) and Urich and Wachtel (1981) have appeared. Roley (1982) extends the Grossman study to incorporate data after the Federal Reserve policy statement of October 6, 1979. Both Grossman and Urich and Wachtel are primarily concerned with the question of money market efficiency. Using survey data made available by Money Market Services of San Francisco and data on Treasury bill yields each finds that the market responds quickly to unanticipated changes in the money supply but that anticipated changes have no effect on interest rates. In addition, Grossman finds that when he adds other variables, such as past changes in the money

Money supply announcements, interest rates, and foreign exchange

Abstract This paper presents a test of the joint hypothesis that money supply announcements affect the real interest rate and that changes in the real interest rate affect the exchange rate in the short run. The test results are consistent with the joint hypothesis. For example, it is found that announcement of an unexpected jump in the money supply is accompanied by an increase in interest rates and an appreciation of the dollar. If the rise in interest rates was entirely due to higher inflationary expectations, the dollar should not appreciate.

Risk, Duration, and Capital Budgeting: New Evidence on Some Old Questions

In a provocative article John Y. Campbell and Jianping Mei (1993) suggest that systematic risk arises not because of correlation between a companys cash flow and the market return but primarily because of common variation in expected returns. If true, the Campbell-Mei hypothesis has important implications for capital budgeting, particularly at high-technology companies that have long duration, idiosyncratic investment projects. This article presents some new evidence related to the Campbell-Mei hypothesis and then evaluates the impact of the hypothesis with a case study of Amgen Corporation. Copyright 1999 by University of Chicago Press.

Asymmetric information and portfolio performance measurement

Abstract This note argues that though Dave Mayers and Edward Rice were able to show that the CAPM could be used to detect superior investors in a world of asymmetric information, their demonstration does not resurrect the CAPM as a practical tool for performance measurement. To employ the Mayers-Rice model, an investment advisor would first have to determine that the CAPM holds for uninformed investors. As a means of avoiding the problem of testing the CAPM, a performance measure based only on returns is outlined. The measure is robust in that it would correctly designate superior investors in context of the CAPM, the arbitrage pricing model and many other equilibrium models of security pricing.

Treasury Bill Pricing in the Spot and Futures Markets

STUDIES of the term structure of interest rates have a long tradition in the literature of finance and economics. Two prominent examples are Roll (1970) and Nelson (1971).1 More recently, a parallel literature has evolved on the pricing of commodity contracts, spawned by the work of Dusak (1973) and Black (1976). With the advent of futures trading in Treasury bills on the Chicago Mercantile Exchange (CME) the direct relationship between the theory of the term structure of interest rates and the theory of commodity contract pricing has become apparent. Since arbitrage is possible between the spot and futures markets, appropriately defined returns in both markets should be identical. In this paper we compare the returns in the spot and futures markets over the first 30 months of trading in the CME Treasury bill futures market. Surprisingly, we find that rather large deviations between returns in the two markets have persisted throughout the sample period, i.e., the one price law is violated. For this result to be obtained, arbitrage costs must be large, differential risk must exist, or traders in the two markets must be distinct non-overlapping groups. In the next section an arbitrage condition connecting the two markets is derived. The condition specifies the relationship between returns in the spot and futures markets under the assumption of a perfect capital market. The third section presents the data and demonstrates that the arbitrage condition has not been satisfied. The fourth section offers a possible explanation for the failure of the arbitrage condition. The paper concludes with a summary of the results.

Cross-Sectional Regularities in the Response of Stock Prices to Bond Rating Changes:

This paper examines whether a firms stock price response to the new information provided by a bond rating change is related to its net intangible assets. A variable used to measure net intangible assets, which is based on current cost data, is found to have significant explanatory power in cross-sectional regressions for the set of rating downgrades.

The consumption based asset pricing model: A note on potential tests and applications

Abstract Breedens demonstration that Mertons multi-beta capital asset pricing model can be collapsed into a single-beta model where betas are computed with respect to aggregate consumption is an important theoretical advance. Nonetheless, Breedens model retains many of the empirical problems that beset Mertons earlier version. In general the consumption betas will be nonstationary, so that the state variables must be observable for the model to be estimated.

The impact of data errors on measurement of the foreign exchange risk premium

Abstract In most situations measurement error produces bias which it less likely that the null hypothesis will be rejected. In the case of regression equations designed to estimate the premiums impounded in forward exchange rates, the reverse is true. Because the forward rate appears on both sides of the equation, measurement error makes it more likely that a risk premium will be found. However, the empirical results reported here indicate that there is still evidence of a risk premium even after taking account of measurement error.