George Bulkley

Are U.K. Stock Prices Excessively Volatile? Trading Rules and Variance Bounds Tests

The authors apply the original variance bounds tests to the present value model for the U.K. stock market and amend these tests to take account of revisions in the models parameters. They show that variance bounds tests that correct for this are no longer violated. However, they claim there is excess volatility if agents, restricted to using only current information to compute a trading rule, could make excess profits. They show that a trading rule exists which yields, in the long run, more than twice the wealth from buying than holding a representative market portfolio. Copyright 1989 by Royal Economic Society.

Can the Cross-Sectional Variation in Expected Stock Returns Explain Momentum?

It has been hypothesized that momentum might be rationally explained as a consequence of the cross-sectional variation of unconditional expected returns. Stocks with relatively high unconditional expected returns will on average outperform in both the portfolio formation period and in the subsequent holding period. We evaluate this explanation by first removing unconditional expected returns for each stock from raw returns and then testing for momentum in the resulting series. We measure the unconditional expected return on each stock as its mean return in the whole sample period. We find momentum effects vanish in demeaned returns.

On the membership of decision making committees

The decision of a committee is determined jointly by the votingprocess it adopts and the composition of its membership. The paper analyses the process through which committee members emerge from the eligiblepopulation and traces the consequences of this for the decisions ofthe committee. It is shown that the equilibrium committee will becomposed of representatives from the extremes of the tastedistribution. These extremes balance each other and the committeereaches a moderate decision. However, this mutual negation by theextremes is a socially wasteful use of time. Data from the UK Houseof Lords is used to illustrate these results.

Bargaining over effort

Abstract Employment contracts generally specify both the reward for labour and the conditions of employment. Although it is clear how unions affect the payment received by workers, the effect of unions upon working conditions, particularly the contracted effort level that must be supplied, is not so well-understood. This note analyses the generalised Nash bargain between a union and a firm over employment level and effort level. Under standard assumptions, it is shown that an increase in union power always leads to a reduction in the agreed effort level. The effect upon employment is dependent upon whether the firm has the ‘right-to-manage’.

Individually rational union membership

The Analysis of the determinants of union membership has typically met difficulties with the free-rider problem that union membership is not individually-rational. We assume that workers differ in their reservation wages and hence in their choice of contracts, preventing free-riding on the contarct choice of others.

Trading Rules and Excess Volatility

A number of recent papers have reported evidence that stock prices are more volatile than is consistent with efficient markets. We argue that the excess volatility tests address a definition of efficient markets that makes an extreme information assumption. We go on to test a weaker definition of efficient markets, due to Jensen (1978). We show the existence of a profitable trading rule that earns a significantly higher rate of return than a buy-and-hold strategy, and so conclude that stock prices are too volatile, even when judged by this weaker definition.

The role of loyalty discounts when consumers are uncertain of the value of repeat purchases

Abstract We develop a model of a market where regular customers of a firm with some monopoly power receive better service/lower prices. Loyalty discounts are shown to be the optimal strategy of a monopolist, if customers are uncertain of the value to them of a repeat purchase. We examine how this strategy is affected if consumers are risk averse, and distinguish between the cases where they have, and have not, access to credit markets.

Does inflation uncertainty increase with the level of inflation

Abstract This paper presents evidence that if agents forecast inflation rationally, using an estimate of the reduced form equation which generated the data, then the size of their forecast errors is positively correlated with the level of inflation. Forecast errors are measured first as the residuals from a full sample OLS regression, and secondly from one period ahead, outside sample, forecasts using a regression estimated from only data available at the time of the forecast. Thus, agents who form rational expectations about the variance, as well as the mean, of inflation should form conditional variances dependent on the level of inflation, at the date of the forecast.

A cross-sectional variance bounds test

Abstract Using data on individual stocks we apply a cross-sectional variance bound test for each year 1926–1979. We find that for every year up to 1959, except 1928, the variance bound is satisfied, whereas in all subsequent years the bound is violated.

Is the UK Equity Market Consistent with the “Efficient Markets” Model?

There is now considerable evidence that stock prices are excessively volatile, compared with rational expectations/efficient markets prices. In this paper we argue that volatility tests address a particularly strong definition of efficient markets. We test the UK equity market against Jensen’s weaker definition of market efficiency. We investigate whether a profitable trading rule can be found using synthetic stock price data from the UK 1919–1985, generated by Monte Carlo methods from the model of stock prices estimated over this period.