David C. Schirm

Balance of trade announcements and asset prices: influence on equity prices, exchange rates, and interest rates

Abstract This paper examines the informational impact of traded balance announcements on asset prices including equities, currrencies, long- and short-term debt instruments, and financial futures. This study finds that in the 1980s, prior to the 1985 ‘Plaza Agreement’ for International economic cooperation, information in trade balance announcements seem to have influenced only interest rates. However, in the 1985–1987 period such announcements also influenced stock prices and currency values. These influences intensity further in the 1987–1988 period. Thus, asset prices are sensitive to news in trade balance announcements and this sensitivity seems to have increased significantly in recent years with important implications for asset pricing models and economic policy formulation. (JEL F30).

Asymmetric impact of trade balance news on asset prices

Abstract This study documents significant asymmetrical impact of information in trade balance announcements on prices of assets such as equities and foreign exchange rates. Interestingly, foreign exchange rates and equity prices were less responsive to large surprises in the trade balance but more responsive to surprises within one standard deviation of the average. This asymmetry in market reaction to trade balance news seems consistent with the asymmetric nature of central bank intervention policy commitments during the late 1980s. These results documenting the asymmetric impact of news on asset prices may have important implications for asset pricing models and economic policy formulation.

A Comparative Analysis of the Rationality of Consensus Forecasts of U. S. Economic Indicators

The purpose of this article is to investigate the rationality of two survey forecasts of selective U.S. macroeconomic performance measures that were widely followed in the financial markets during the 19902000 period. The research compares the rationality of survey forecast data from Money Market Services, Inc., and Thomson Financial. This article extends prior research that has evaluated the rationality of Money Market Services data for earlier time periods while also evaluating similar consensus forecast data from Thomson Financial that were widely reported in both Barrons and the Wall Street Journal during the 1990s.

Investor expectations about callable warrants

I n the ea.rly 1980s, corporations began to issue ered from Value Line Convertibles. The sample includes stock purchase warrants with call features. The typical warrant includes a provision permitting the firm to accelerate the warrant’s expiration date and force its exercise when the stock price exceeds a specified level. While there are certain restrictions related to specified deferment periods and maxiinum decreases in a warrant’s life, the call feature gives a company substantial control over a warrant’s time to expiration. Thus far, firms have used the provisions unpredictably. Some corporations have retired warrants early, others have appeared reluctant to do so. Such reluctance has a precedent: As Ingersoll shows in a study of callable convertible bonds (1977), many firms delay calling long past the time when it has become both profitable and permitted. This study examines investor expectations on the likelihood of firms to call warrants. To do this we derive the implicit expected lives (or ”maturities”) of callable warrants from their market prices. The technique we use to obtain the market estimates of remaining life follows procedures used in previous studies to derive the implicit stock return variances from the option premiums.’ We also analyze whether implicit lives are consistently below corresponding nominal maturities and are related to variables that influence the firm in its 84 3 2 o 3 L every outstanding warrant followed by Value Line from January through May of 1986 that meets four criteria: The warrant is callable, either immediately or at a future date; the warrant has a fixed exercise price and a limited, nominal (or maximurn) life longer than one year, as of January; the firm’s mean dividend yield is not more than 2% over the five months; and the warrant was not called before July 1986. The number of such warrants is 34.’ We obtained five end-of-mon th prices (‘January through May) for these warrants and their stocks from Value Line, Standard & Poor’s Daily Stock Price Record, and the Wall Street Journal (which ’was the source of risk-free rates of various maturities). Closing or bid prices were available for most warrants, but in a few cases the only recorded price was Value Line’s average of dealers’ ask prices. In all, the data contain 170 observations on warrant prices. Value Line also provided information on each warrant’s “relative size” (the ratio of new warrant shares to outstanding common shares) and an estimate of each stock‘s return volatility. The estimate is the standard deviation of the natural log of weekly percentage price changes over the previous five years. Table 1 gives summary statistics for the sample’s important aspects. decision regarding call. Findings that implicit lives are both relatively low and sensitive to determinants of call would indicate that investors believe firms will readily force (early exercise. Results showing no significant difference between ex ante and nominal maturities woulcl suggest that investors expect firms to be reluctant to call. DERIVATION OF IMPLICIT MATURITIES

The predictive power of January returns and the political-business cycle

Abstract This study investigates if and how the previously documented predictive power of January returns is affected by the political-business cycle. The evidence presented here shows that January returns are a particularly significant indicator of rest-of-the-year returns for years following presidential and congressional elections.

U.S. Trade Balance, Protectionism, and Japanese Equity Prices: International Influence of National Macroeconomic News

This paper provides new evidence of the international influence of national macroeconomic news. It is documented that announcements of U.S. trade balances significantly influence equity prices for a number of Japanese industry groups especially in the second half of the 1980s. Larger than expected U.S. trade deficits and, perhaps, the associated higher probabilities of protectionist activities in the U.S., are associated with lower stock prices for Japanese firms in export oriented industries. The opposite effects are observed for Japanese firms in domestic industries with higher U.S. trade deficits indicating their possibly higher relative international competitiveness. These findings of a differential industry influence of U.S. trade balance announcements on Japanese stock prices have important implications for portfolio diversification, international asset pricing, trade negotiations, and other policies for international economic coordination.