Owen A. Lamont

Earnings and Expected Returns

The aggregate dividend payout ratio forecasts aggregate excess returns on both stocks and corporate bonds in post-war US data. Both high corporate profits and high stock prices forecast low excess returns on equities. When the payout ratio is high, expected returns are high. The payout ratios correlation with business conditions gives it predictive power for returns; it contains information about future stock and bond returns that is not captured by other variables. The payout ratio is useful because it captures the temporary components of earnings. The dynamic relationship between dividends, earnings and stock prices shows that a positive innovation in earnings lowers expected returns in the near future, but raises them thereafter.

Macroeconomic news and bond market volatility

We examine the reaction of daily Treasury bond prices to the releaseoof U.S. government macroeconomic news. These news releases (of employment and Producer Price Index data) are of interest because they are released on periodic, preannounced dates and because they cause substantial bond market volatility. We investigate whether these non-autocorrelated announcements give rise to autocorrelated volatility. We find that announcement-day volatility does not persist at all, consistent with a simple efficient markets model in which information is incorporated immediately into prices. We also find a large risk premium on these release dates. In contrast, excess returns over Treasury bills are zero on non-announcement dates in our 1979-1993 sample.

Macroeconomic forecasts and microeconomic forecasters

In the presence of principal-agent problems, published macroeconomic forecasts by professional economists may not measure expectations. Forecasters may use their forecasts in order to manipulate beliefs about their ability. I test a cross-sectional implication of models of reputation and information-revelation. I find that as forecasters become older and more established, they produce more radical forecasts. Since these more radical forecasts are in general less accurate, ex post forecast accuracy grows significantly worse as forecasters become older and more established. These findings indicate that reputational factors are at work in professional macroeconomic forecasts.

Economic Tracking Portfolios

An economic tracking portfolio is a portfolio of assets with returns that track an economic variable. Monthly returns on stocks and bonds are useful in forecasting post-war US output, consumption, labor income, inflation, stock returns, bond returns, and Treasury bill returns. These forecasting relationships define portfolios that track market expectations about future economic variables. Using tracking portfolio returns as instruments for future economic variables substantially raises the estimated sensitivity of asset prices to news about future economic variables. Out-of-sample results show that tracking portfolios are useful in forecasting macroeconomic variables and hedging economic risk.

Anomalies: The Law of One Price in Financial Markets

The Law of One price states that identical goods (or securities) should sell for identical prices. In financial markets the law of one price is thought to hold almost exactly, and is the basis for much of financial economic theory. We present evidence on several examples of violations of this law, including closed-end country funds, twin shares, dual class shares, and corporate spinoffs. We analyze the causes of these violations, and show they all stem from some limits on the extent to which rational arbitrageurs can intervene.

Aggregate Short Interest and Market Valuations

We examine some basic data on the evolution of aggregate short interest, both during the dot-com era, and at other times in history. Total short interest moves in a countercyclical fashion. For example, short interest in NASDAQ stocks actually declines as the NASDAQ index approaches its peak. Moreover, this decline does not seem to reflect a substitution away from outright short-selling and towards put options, as the ratio of put-to-call volume displays the same countercyclical tendency. The evidence suggests that: i) arbitrageurs are reluctant to bet against aggregate mispricings; and ii) short-selling does not play a particularly helpful role in stabilizing the overall stock market.

Relative Price Variability and Inflation: Evidence from U.S. Cities

We test whether the time-series positive correlation of inflation and intermarket relative price variability is also present in a cross section of U.S. cities. We find this correlation to be a robust empirical regularity: cities that have higher than average inflation also have higher than average relative price dispersion, ceteris paribus. This result holds for different periods of time, for different classes of goods, and across different time horizons. Our results suggest that at least part of the relationship between inflation and relative price variability cannot be explained by monetary factors.