Shmuel Kandel

Asset returns and intertemporal preferences

A representative-agent model with time-varying moments of consumption growth is used to analyze implications about means and volatilities of asset returns as well as the predictability of asset returns for various investment horizons. A comparative-statics analysis using non-expected-utility preferences indicates that, although risk aversion is important in determining the means of both equity returns and interest rates, implications about the volatility and the predictability of equity returns are affected primarily by intertemporal substitution. Lower elasticities of intertemporal substitution are associated with greater variance in the temporary component of equity prices.

On correlations and inferences about mean-variance efficiency

A framework is presented for investigating the mean-variance efficiency of an unobservable portfolio based on its correlation with a proxy portfolio. A sensitivity analysis derives the highest correlation between the proxy and a portfolio that reverses the inference of a test of SHarpe-Lintner tangency. For example, the maximum correlation between the value-weighted NYSE-AMEX portfolio and a portfolio inferred tangent ranges from 0.76 to 0.48. We also test whether the correlation between the proxy and the tangent portfolio exceeds a given level. This hypothesis is often rejected for the NYSE-AMEX proxy at a correlation of 0.7.

The likelihood ratio test statistic of mean-variance efficiency without a riskless asset

Abstract The question whether a given porfolio is mean-variance efficient is a basic problem of investment analysis. Mean-variance efficiency is also the basis of the Capital Asset Pricing Model. This paper presents the explicit form of the likelihood ratio test of the hypothesis that a given portfolio, or a particular market index, is ex-ante mean-variance efficient in the case where there is no riskless asset. Geometric relations are illustrated to provide intuition about the constrained maximum likelihood estimators and the test statistic, and two simple economic interpretations of the test are given.

The Price Pressure of Aggregate Mutual Fund Flows

Using a unique database of aggregate daily flows to equity mutual funds in Israel, we find strong support for the “temporary price pressure hypothesis” regarding mutual fund flows: Mutual fund flows create temporary price pressure that is subsequently corrected. We find that flows are positively autocorrelated, and are correlated with market returns ( R 2 of 20%). Our main finding is that approximately one-half of the price change is reversed within 10 trading days. This support for the “temporary price pressure hypothesis” complements microstructure research concerning price impact and price noise in stocks by indicating price noise at the aggregate market level.

Do investors prefer round stock prices? Evidence from Israeli IPO auctions

Abstract We find round number clustering in orders submitted by investors in Israeli IPO auctions. Explanations offered for price clustering, such as dealer collusion or implicit agreement to simplify negotiations, cannot explain price clustering in this market. Therefore, this is direct evidence that investors prefer round numbers.

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.

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.

Real and nominal effects of central bank monetary policy

Abstract We examine the impact of monetary policy using Israeli data on nominal and indexed bonds, which allow us to decompose nominal interest rates into inflation expectations and ex ante real interest rates. We find that a monetary policy shock, introduced by raising the overnight rate the Bank of Israel charges member banks, raises real interest rates but lowers inflation expectations. Long-term real interest rates are less impacted than short-term rates. Lastly, monetary shocks affect the exchange rate between the Israeli currency and the US dollar. Our estimates are robust to numerous modifications to the basic VAR model.

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.

Firms' fiscal years, size and industry

Abstract Most U.S. corporations choose their fiscal years to coincide with the calendar year. We document that the larger the firm, the more likely it is to begin its fiscal year in January. This finding holds across industries.