Michael E. Solt

On the Efficiency of the Markets for Gold and Silver

Gold and silver have wide-ranging utility, from their use in art and jewelry to their use in the production of electronic equipment. The holding of gold and silver has always been considered a great treasure. Within the last decade a new use has developed for these metals: Individual investors and portfolio managers have recently begun to view them as possible investment assets. This paper examines the workings of the gold and silver markets from the investors point of view. The prices of goods are important in their allocation among competing uses, and the same is true for gold and silver. Investors use the prices of the metals in making buy-and-sell decisions; however, the price changes for gold and silver permit these markets to be analyzed. Current theory maintains that market-determined changes in price-of-investment assets result from a changing set of information and that, given a competitive market system, the price changes tend to move the markets toward equilibrium. This is the essence of the efficient-markets theory. The purpose of this paper is to analyze the price changes for gold and silver to establish if the efficient-markets theory can be applied to the markets for these metals. This paper is divided into four sections and a conclusion. The relationship between the gold and silver markets and market efficiency is ex-

SWORD Financing of Innovation in the Biotechnology Industry

A financing arrangement known as stock warrant off-balance sheet research and development (SWORD) has been used recently in the biotechnology industry to finance innovation. Innovation is important to biotech firms because it provides the competitive edge necessary for survival, yet it is very risky because of the uncertainty about the commercial viability and regulatory approval of new products and technologies. Biotech firms are so small that they cannot diversify this risk internally across projects, and conventional internal financing of innovation is generally not possible because biotech firms tend to be lacking in both profitability and cash resources. Since a SWORD is offered to the investment public, the innovation risk can be diversified across many investors and their portfolios. The SWORD technique may lead to a more efficient allocation of the risk of innovation over the financial markets.

Insider trading: A poor guide to market timing

T he above quotation was made recently by Dan Dorfman, a noted columnist, and is indicative of the significance that Wall Street analysts attach to the aggregate trading activity of insiders.’ Substantial research suggests that access to private information can indeed enable corporate insiders to outperform the market by trading in their own firm’s stock. Insiders tend to buy stock at depressed levels and sell stock at elevated levels. If so, is it not logical to conclude that the trading behavior of insiders in the aggregate should predict the future near-term direction of the market? Perhaps provided corporate insiders do not commit serious errors of judgment. But suppose that stock prices subsequently rise or fall regardless of whether in the aggregate insiders buy or sell? If that is the case, a market timer using aggregate insider trading could suffer significant losses if stock prices

Inflation forecasts, the expected real rate and information efficiency

Abstract This paper examines the inflation forecast accuracy and rationality of a time series predictor, an expected inflation series constructed from surveys undertaken by the University of Michigans Institute for Social Research, and the yield on U.S. Treasury bills. A quadratic loss function is assumed, and Theils inequality ratios are used to decompose the mean squared foreast error (MSE). Although it is the only unbiased forecast, the time series predictor does not appear to be optimal during the recent period of turbulent inflation. As for bias in the other series, the surveys are inconsistent with weak-form rational expectations and the Treasury bill is reflecting variations in more than one factor. In an examination of the latter under the assumption of no liquidity premium, the results suggest that the forecast error is in part attribute to moderate variation in the expected real rate. Given the minimal cost of observing the Treasury bill yield, the findings of this study suggest that the market, although imperfect, has performed reasonably well in forecasting inflation.