Philippe Jorion

The Exchange-Rate Exposure of U.S. Multinationals

This article examines the exposure of U.S multinationals to foreign currency risk. Evidence is presented that the relationship between stock returns and exchange rates differs systematically across multinationals. Given these results, the study focuses on the determinants of exchange-rate exposure. The comovements between stock returns and the value of the dollar is found to be positively related to the percentage of foreign operations of U.S. multinationals. Copyright 1990 by the University of Chicago.

Bayes-Stein Estimation for Portfolio Analysis

In portfolio analysis, uncertainty about parameter values leads to suboptimal portfolio choices. The resulting loss in the investors utility is a function of the particular estimator chosen for expected returns. So, this is a problem of simultaneous estimation of normal means under a well-specified loss function. In this situation, as Stein has shown, the classical sample mean is inadmissible. This paper presents a simple empirical Bayes estimator that should outperform the sample mean in the context of a portfolio. Simulation analysis shows that these Bayes-Stein estimators provide significant gains in portfolio selection problems.

The Pricing of Exchange Rate Risk in the Stock Market

This paper examines the pricing of exchange rate risk in the U.S. stock market, using two factor and multi-factor arbitrage pricing models. Evidence is presented that the relation between stock returns and the value of the dollar differs systematically across industries. The empirical results, however, do not suggest that exchange risk is priced in the stock market. The unconditional risk premium attached to foreign currency exposure appears to be small and never significant. As a result, active hedging policies by financial managers cannot affect the cost of capital, and other reasons must explain why firms decide to hedge.

Global Stock Markets in the Twentieth Century

Long-term estimates of expected return on equities are typically derived from U.S. data only. There are reasons to suspect that these estimates are subject to survivorship, as the United States is arguably the most successful capitalist system in the world. We collect a database of capital appreciation indexes for 39 markets going back to the 1920s. For 1921 to 1996, U.S. equities had the highest real return of all countries, at 4.3 percent, versus a median of 0.8 percent for other countries. The high equity premium obtained for U.S. equities appears to be the exception rather than the rule. Copyright The American Finance Association 1999.

A multicountry comparison of term-structure forecasts at long horizons

This paper extends previous work on the information in the term structure at longer maturities to other countries besides the United states, using a newly constructed data set for 1 to 5 year interest rates from Britain, West Germany and Switzerland. Even with wide differences in inflation processes across these countries, there is we find strong evidence that the term structure does have significant forecasting ability for future changes in inflation, particularly so at long maturities. On the other hand, the ability of the term structure to forecast future changes in 1-year interest rates is somewhat weaker; only at the very longest horizon (5 years) is there significant forecasting ability for interest rate changes.

Option listing and stock returns: An empirical analysis

Abstract This article examines the effect of option introductions on the underlying stocks. In addition to the price increase and volatility decrease that take place when new options are listed, we obtain and explain the following new empirical results: (i) an increase in the value of the market around the listing dates of new options, (ii) an increase in the value of an industry index which excludes the optioned stocks, (iii) the dissipation of the price and volatility effects in recent periods and (iv) the existence of an announcement effect in one subperiod of our sample and its dissipation in recent periods.

Mean reversion in real exchange rates: evidence and implications for forecasting

Abstract The stationarity of real exchange rates over the recent flexible exchange rate period is an issue that has long bedeviled researchers in international finance. Using a constrained multivariate framework, this paper provides the strongest evidence yet that real exchange rates were mean-reverting over the 1973-93 period. We also investigate shifts in long-run real exchange rates, which may be important for the purpose of forecasting. Out-of-sample forecasting shows that the random walk model is outperformed by a mean-stationary model, especially at long horizons. In addition, there are substantial forecasting benefits from using a multivariate approach.

Interest rates and risk premia in the stock market and in the foreign exchange market

Abstract This paper documents common empirical regularities in the foreign exchange market and in the US stock market. We find that increases in interest rates are associated with predictable increases in the volatility of returns in both markets, and that expected returns both in the stock market and in the foreign exchange market are negatively correlated with nominal interest rates. We show that not taking into account the time variation of second moments may seriously affect tests of asset pricing models. Using a numerical example based on the static capital asset pricing model, we are able to produce fluctuations in risk premia similar to those observed empirically. Finally we show that the overidentifying restrictions of the latent variable capital asset pricing model are not rejected when beats are assumed to be correlated with nominal interest rates.

The performance of emerging hedge funds and managers

This paper provides the first systematic analysis of performance patterns for emerging funds and managers in the hedge fund industry. Emerging funds and managers have particularly strong financial incentives to create investment performance and, because of their size, may be more nimble than established ones. Performance measurement, however, needs to control for the usual biases afflicting hedge fund databases. After adjusting for such biases and using a novel event time approach, we find strong evidence of outperformance during the first two to three years of existence. Each additional year of age decreases performance by 42 basis points, on average. Cross-sectionally, early performance by individual funds is quite persistent, with early strong performance lasting for up to five years.

Bayesian and CAPM estimators of the means: Implications for portfolio selection

Abstract This paper compares active investment policies under three alternative models for estimating expected stock returns: the historical sample mean, a shrinkage or Bayesian estimator and a CAPM-based estimator. The out-of-sample performance of actively managed U.S. industry portfolios is analyzed for these three estimators over the period 1931 to 1987. It is found that the classical method, based on historical means and covariances, leads to the worst forecasts and out-of-sample performance, and is generally outperformed by shrinkage estimators. An active portfolio with expected returns based on the CAPM produced the best results among all actively managed portfolios; this strategy, as we show, closely matches a simple buy-and-hold the market rule.