Gur Huberman

Minimum cost spanning tree games

We consider the problem of cost allocation among users of a minimum cost spanning tree network. It is formulated as a cooperative game in characteristic function form, referred to as a minimum cost spanning tree (m.c.s.t.) game. We show that the core of a m.c.s.t. game is never empty. In fact, a point in the core can be read directly from any minimum cost spanning tree graph associated with the problem. For m.c.s.t. games with efficient coalition structures we define and construct m.c.s.t. games on the components of the structure. We show that the core and the nucleolus of the original game are the cartesian products of the cores and the nucleoli, respectively, of the induced games on the components of the efficient coalition structure.

A simple approach to arbitrage pricing theory

AbstractThe following sections are included:INTRODUCTIONARBITRAGE PRICINGDISCUSSIONREFERENCESdiscussion: Notes on the Arbitrage Pricing TheoryPURE ARBITRAGE PRICING THEORYAPPROXIMATE ARBITRAGE AND THE APTAPPROXIMATE FACTOR MODELSTHE COMPETITIVE EQUILIBRIUM VERSION OF THE APTCONCLUSIONNOTEREFERENCES (This abstract was borrowed from another version of this item.)

Optimal Insurance Policy Indemnity Schedules

We focus on two commonly observed insurance policy provisions: upper limits on coverage and deductibles. We suggest that upper limits on coverage result from the effective limited liability obtained through the bankruptcy statutes. We show that absent moral hazard, if the administrative cost structure has fixed costs and scale economies, deductibles are not optimal. But the optimal contractual form leads to a moral hazard problem, which deductibles control.

Arbitrage Pricing Theory

Focusing on capital asset returns governed by a factor structure, the Arbitrage Pricing Theory (APT) is a one-period model, in which preclusion of arbitrage over static portfolios of these assets leads to a linear relation between the expected return and its covariance with the factors. The APT, however, does not preclude arbitrage over dynamic portfolios. Consequently, applying the model to evaluate managed portfolios is contradictory to the no-arbitrage spirit of the model. An empirical test of the APT entails a procedure to identify features of the underlying factor structure rather than merely a collection of mean-variance efficient factor portfolios that satisfies the linear relation.

Portfolio Turnpike Theorems, Risk Aversion, and Regularly Varying Utility Functions

MODELS WHICH INCORPORATE both uncertainty and the dynamic behavior of economic agents are difficult to analyze.2 Moreover, even when a solution is obtained, it can seldom be simply stated and rarely lends itself to straightforward interpretations. An example of an appealingly understood result is a turnpike theorem, which states that if the planning horizon is distant then the optimal policy can be approximated by a wealth-independent policy. Our paper develops an analogous result in a stochastic intertemporal model of portfolio selection. In fact, we obtain necessary and some sufficient conditions for a turnpike. The problem considered in this essay is that of an investor-a von NeumannMorgenstern expected utility maximizer-who invests for a finite horizon and consumes only his terminal wealth. At the beginning of the first period the investor allocates his wealth, w, among various assets, and at the end of the first

Information Aggregation, Inflation, and the Pricing of Indexed Bonds

Using daily prices of indexed bonds between 1970 and 1979, we test whether announcements of the Israeli CPI contain information that is not already reflected in bond prices. The results indicate that bond prices reflect about 85 percent of the new information about inflation as it occurs (i.e., when the Central Bureau of Statistics samples prices). The announcement of the CPI 15 days after the end of the sampling period causes the remaining 15 percent adjustment in bond prices. This evidence raises questions about the empirical importance of misperceptions about inflation as a source of nonneutrality in monetary policy.

Market Efficiency and Value Line's Record

The Value Line investment record is frequently interpreted as evidence of market inefficiency. This article reconciles the record with market efficiency as one implication of a model that assumes a semistrong form of market efficiency and autoregressive state variables, which need not be identified. In the model, expected returns on assets depend on these state variables and can vary over time. Value Lines rankings are assumed to reflect knowledge of these state variables. The Value Line data are consistent with the models implications, suggesting the Value Lines rankings predict systematic marketwide factors. The purported abnormal returns of positions based on Value Lines rankings are seen as compensation for the systematic risk associated with these positions. Copyright 1990 by the University of Chicago.

The Relationship Between Convex Games and Minimum Cost Spanning Tree Games: A Case for Permutationally Convex Games

Notwithstanding the apparent differences between convex games and minimum cost spanning tree (m.c.s.t.) games, we show that there is a close relationship between these two types of games. This close relationship is realized with the introduction of the group of permutationally convex (p.c.) games. It is shown that a p.c. game has a nonempty core and that both convex games and m.c.s.t. games are permutationally convex.

Value Line Rank and Firm Size

This paper studies the relation between Value Lines successful record in predicting relative stock-price movements and the firm size effect. The data suggest little direct relation between the two phen omena. Value Line tends not to rank small-firm stocks, and small-firm stocks that are ranked are more likely to receive a low rank than la rge-firm stocks. Within each size-sorted quintile of the market, the mean payoffs on costless positions constructed according to Value Lin es recommendations are positive. Copyright 1987 by the University of Chicago.

On the incentives for money managers: A signalling approach

Abstract Money managers select weights of managed portfolios to enhance their reputation in the spot market for their services, inevitably using their actions to signal their quality. We develop a two-asset signalling model of money managers. A unique screening equilibrium and (under certain parameter configurations) a host of pooling equilibria survive the Cho-Kreps Intuitive Criterion. In all the equilibria managers behave more aggressively than they would in the absence of the signalling motive, exaggerating their position in the risky asset.