O. Maurice Joy

On the Financial Applications of Discriminant Analysis

In recent years the application of discriminant analysis to two-category (dichotomous) classification problems in empirical financial research has substantially increased. However, these studies have given relatively little attention to design and interpretation difficulties associated with discriminant analysis. Consequently, the conclusions and generalizations that can be drawn from such studies are frequently tenuous and questionable. This papers purpose is to discuss the methodology of discriminant analysis. While the paper is oriented toward financial applications of discriminant analysis, our discussion is not peculiar to finance. Furthermore, many of the methodological issues we address are relevant to the general problem of developing and testing dichotomous classification models and arise whether model developing is by discriminant analysis or some other method.

Comovement of International Equity Markets: A Taxonomic Approach

We have been concerned with investigating the structure of rate-of-return comovements among major international equity markets. Working with 12 such markets we have analyzed the structural features of the configurations over alternative time periods (one-, three-, five- and ten-year periods) and the intertemporal stability of the configurations.On the issue of intertemporal stability we found considerable one-year and three-year stability, but somewhat weaker stability in the five-year case. As a measure of stability we used cophenetic correlation coefficients between successive (in time) dendrograms. This technique was described in the methodology section.We uncovered several interesting structural features. There seems to be a core of international markets that have higher degrees of similarity than the other markets. Furthermore, these markets (the United States, Canada, the Netherlands, Switzerland, West Germany and to a lesser extent, Belgium) may be generally described as relatively well developed and open to international capital flows. There is also an obviously strong tie between the United States and Canadian markets. There are less strong, but identifiable ties between France and Belgium, Germany and the Netherlands, and England and Australia. Many of these results parallel Ripleys [14] findings. We also noticed some countries that tend to be least similar to most other countries: Austria and Italy. Ten-year results corroborated these findings.This study is only descriptive. We have only attempted to identify international equity market structure and structural change. A logical subsequent research area is to explain observed structural properties and the causes of structural change. We hope that our research will help provide some basis for this further analysis.

Stochastic Dominance and Mutual Fund Performance

Previous empirical studies of mutual fund performance relative to market performance were conducted using two- and three-moment analysis. This study has applied first-, second-, and third-degree stochastic dominance principles to investigate the same question. Our results support the earlier Sharpe study and oppose the recent Arditti work. From the investors standpoint, mutual fund performance was inferior to market performance over the period 1954–1963.

Ordinal Predictions and the Selection of Common Stocks

rates of return, variances of rates of return, and covariances of rates of return among individual securities. Unfortunately, a feasible method of accurately generating the massive information requirements of the Markowitz model has not been developed. Historical measures of mean rates of return and covariances of rates of return among individual securities have been shown to be unstable over time and to be ineffectual in generating ex ante efficient portfolios.1 Sharpe (10] has dichotomized a securitys total risk into its systematic and residual components. A securitys systematic risk denotes the portion of its standard deviation explained by the market, and its residual risk denotes the portion of its standard ieviation unexplained by the market. The maximum gains from diversification will asymptotically reduce the contribution each security makes to the portfolios standard deviation to the systematic risk of that individual security. That is, as the investor increases the number of securities in his portfolio of common stocks, the residual component of the portfolios standard deviation asymptotically approaches its lower limit of zero*

Open market share repurchases and the free cash flow hypothesis G35

Abstract We investigate the source of shareholder gains when open market share repurchases are announced. We find evidence that abnormal stock market returns are related to the reduction of free cash flow agency costs, which supports Jensens free cash flow hypothesis.

Seasonality in NASDAQ Dealer Spreads

This paper examines the seasonal behavior of proportional dealer spreads for OTC NASDAQ common stocks. Results indicate there is seasonality in dealer spreads. Spreads tend to be larger in the second half of the calendar year, peaking in December. At the turn-ofthe-year, spreads tend to peak in mid- to late December and then recede during January. The last trading day in December produces the largest daily decline in spreads during the turn-of-the-year period.

Some empirical evidence on stock returns and security credit regulation in the OTC equity market

Abstract This paper studies price reactions of OTC stocks that are added to and deleted from the Federal Reserve Boards Official List of OTC Margin Stocks . We interpret any price reactions as economic effects related to the Feds security credit regulatory activities under the 1969 Amendment to the 1934 Securities Exchange Act. We test for three effects: (1) Fed endorsement, (2) credit, and (3) asymmetric information. Using both weekly and daily data we find strong positive stock price reactions when OTC stocks are added to the Feds list. No major effects are discernible when stocks are removed from the Feds list. We interpret these findings to be consistent with a credit convenience effect.

Behavioral Risk Constraints in Investment Analysis

One of the important criticisms of the variance-covariance concept of risk is that it does not adequately describe manager’s risk preferences and risk-evaluation procedures. Good examples of this kind of criticism are found in Mao [21] and in Machol and Lerner [20]. They argue instead for a kind of “failure risk” concept.

CASH FLOWS THAT REQUIRE NEGATIVE DISCOUNT RATES

(1980). CASH FLOWS THAT REQUIRE NEGATIVE DISCOUNT RATES. The Engineering Economist: Vol. 26, No. 2, pp. 154-158.

The Stock market impact of social pressure: The South African divestment case

Using the South African divestment case, this study tests the hypothesis that social pressure affects stock returns. Both short-run (3-, 11-, and 77-day periods) and long-run (13-month periods) tests of stock returns surrounding U.S. corporate announcements of decisions to stay or leave South Africa were performed. Tests of the impact of institutional portfolio managers to divest stocks of U.S. firms staying in South Africa were also performed. Results indicate there was a negative wealth impact of social pressure: stock prices of firms announcing plans to stay in South Africa fared better relative to stock prices of firms announcing plans to leave.