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The relationship between return and the market value of common stocks (1981)

by R-W Banz
Venue:Journal of Financial Economics
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The cross-section of expected stock returns

by Eugene F. Fama, Kenneth R. French - Journal of Finance , 1992
"... Your use of the JSTOR archive indicates your acceptance of JSTOR ' s Terms and Conditions of Use, available at ..."
Abstract - Cited by 2049 (25 self) - Add to MetaCart
Your use of the JSTOR archive indicates your acceptance of JSTOR ' s Terms and Conditions of Use, available at

Bid, ask and transaction prices in a specialist market with heterogeneously informed traders

by Lawrence R. Glosten, Paul R. Milgrom - Journal of Financial Economics , 1985
"... The presence of traders with superior information leads to a positive bid-ask spread even when the specialist is risk-neutral and makes zero expected profits. The resulting transaction prices convey information, and the expectation of the average spread squared times volume is bounded by a number th ..."
Abstract - Cited by 1273 (5 self) - Add to MetaCart
The presence of traders with superior information leads to a positive bid-ask spread even when the specialist is risk-neutral and makes zero expected profits. The resulting transaction prices convey information, and the expectation of the average spread squared times volume is bounded by a number that is independent of insider activity. The serial correlation of transaction price dif-ferences is a function of the proportion of the spread due to adverse selection. A bid-ask spread implies a divergence between observed returns and realizable returns. Observed returns are approximately realizable returns plus what the uninformed anticipate losing to the insiders. 1.

Illiquidity and stock returns: cross-section and time-series effects,

by Yakov Amihud - Journal of Financial Markets , 2002
"... Abstract This paper shows that over time, expected market illiquidity positively affects ex ante stock excess return, suggesting that expected stock excess return partly represents an illiquidity premium. This complements the cross-sectional positive return-illiquidity relationship. Also, stock ret ..."
Abstract - Cited by 864 (9 self) - Add to MetaCart
Abstract This paper shows that over time, expected market illiquidity positively affects ex ante stock excess return, suggesting that expected stock excess return partly represents an illiquidity premium. This complements the cross-sectional positive return-illiquidity relationship. Also, stock returns are negatively related over time to contemporaneous unexpected illiquidity. The illiquidity measure here is the average across stocks of the daily ratio of absolute stock return to dollar volume, which is easily obtained from daily stock data for long time series in most stock markets. Illiquidity affects more strongly small firm stocks, thus explaining time series variations in their premiums over time. r
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...the stock, is also related to liquidity since a larger stock issue has smaller price impact for a given order flow and a smaller bid–ask spread. Stock expected returns are negatively related to size (=-=Banz, 1981-=-; Reinganum, 1981; Fama and French, 1992), which is consistent with it being a proxy for liquidity (Amihud and Mendelson, 1986). 7 The negative return-size relationship may also result from the size v...

Market Efficiency, Long-Term Returns, and Behavioral Finance

by Eugene F. Fama , 1998
"... Market efficiency survives the challenge from the literature on long-term return anomalies. Consistent with the market efficiency hypothesis that the anomalies are chance results, apparent overreaction to information is about as common as underreaction, and post-event continuation of pre-event abnor ..."
Abstract - Cited by 787 (6 self) - Add to MetaCart
Market efficiency survives the challenge from the literature on long-term return anomalies. Consistent with the market efficiency hypothesis that the anomalies are chance results, apparent overreaction to information is about as common as underreaction, and post-event continuation of pre-event abnormal returns is about as frequent as post-event reversal. Most important, consistent with the market efficiency prediction that apparent anomalies can be due to methodology, most long-term return anomalies tend to disappear with reasonable changes in technique.

A Simple Model of Capital Market Equilibrium with Incomplete Information

by Robert C. Merton - JOURNAL OF FINANCE , 1987
"... The sphere of modern financial economics encompases finance, micro investment theory and much of the economics of uncertainty. As is evident from its influence on other branches of economics including public finance, industrial organization and monetary theory, the boundaries of this sphere are both ..."
Abstract - Cited by 756 (2 self) - Add to MetaCart
The sphere of modern financial economics encompases finance, micro investment theory and much of the economics of uncertainty. As is evident from its influence on other branches of economics including public finance, industrial organization and monetary theory, the boundaries of this sphere are both permeable and flexible. The complex interactions of time and uncertainty guarantee intellectual challenge and intrinsic excitement to the study of financial economics. Indeed, the mathematics of the subject contain some of the most interesting applications of probability and optimization theory. But for all its mathematical refinement, the research has nevertheless had a direct and significant influence on practice. It was not always thus. Thirty years ago, finance theory was little more than a collection of anecdotes, rules of thumb, and manipulations of accounting data with an almost exclusive focus on corporate financial management. There is no need in this meeting of the guild to recount the subsequent evolution from this conceptual potpourri to a rigorous economic

Outside directors and CEO turnover

by Michael !i. Weisbach, Jim Dana, Franklin M. Fisher, Paul Healy, Cliff Holdemess, Bob Kaplan, Mervyn King, Kevin J. Murphy, Rick Ruback, Ross Watts, Kr. Y Weisbach, Especially Ben Hermahn - Journal of Financial Economics , 1988
"... ‘this paper examines the relation between the monitoring of CEOs by inside aud outside directors and CEO resignations. CEO resignations are predicted using stock returns and earnings changes as measures of prior performance. There is a stronger association between prior performance and the prhabilit ..."
Abstract - Cited by 491 (10 self) - Add to MetaCart
‘this paper examines the relation between the monitoring of CEOs by inside aud outside directors and CEO resignations. CEO resignations are predicted using stock returns and earnings changes as measures of prior performance. There is a stronger association between prior performance and the prhability of a resignation for companies with outsider-dominated boards than for companies with insider-dominated boards. This result dces not appear to be a function of ownership effects, size effects, or industry effects. Unexpected stock returns on days when resignations are announced are consistent with the view that directors increase firm value by removing bad management. Boards of directors are widely believed to play an important role in corporate governance, particularly in monitoring top manage4znt. Directors are supposed to supervise the actions of management, provide advice, and veto poor decisions. The board is the shareholders ’ first line of defense against incompetent management; in extreme cases, it wilt replace an errant chief executive officer (CEO). Discussing boards ’ effectiveness in this role, Jensen (1986) claims that ‘the internal control mechanism of corporations, which

Home Bias at Home: Local Equity Preference in Domestic Portfolios

by Joshua D. Coval, Tobias J. Moskowitz
"... ..."
Abstract - Cited by 488 (7 self) - Add to MetaCart
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Investor psychology and asset pricing

by David Hirshleifer , 2001
"... The basic paradigm of asset pricing is in vibrant flux. The purely rational approach is being subsumed by a broader approach based upon the psychology of investors. In this approach, security expected returns are determined by both risk and misvaluation. This survey sketches a framework for understa ..."
Abstract - Cited by 420 (27 self) - Add to MetaCart
The basic paradigm of asset pricing is in vibrant flux. The purely rational approach is being subsumed by a broader approach based upon the psychology of investors. In this approach, security expected returns are determined by both risk and misvaluation. This survey sketches a framework for understanding decision biases, evaluates the a priori arguments and the capital market evidence bearing on the importance of investor psychology for security prices, and reviews recent models.

Efficient Capital Market: II” ,

by Eugene F Fama , Fischer Black , David Booth , Michael Bradley , Michael Brennan , Stephen Buser , John Campbell , Nai-Fu Chen , John Cochrane , George Constantinides , Wayne Ferson , Kenneth French , Campbell Harvey , Richard Ippolito , Michael Jensen , Gautam Kaul , Josef Lakonishok , Bill Mcdonald , Robert Merton , Mark Mitchell , Sam Peltzman , Marc Reinganum , Jay Ritter , Harry Roberts , Richard Roll , G William Schwert , H Nejat Seyhun , Jay Shanken , Robert Shiller , Andrei Shleifer , Rex Sinquefield , Rene Stulz , Richard Thaler , Robert Vishny , Jerold Warner - Journal of Finance, No , 1991
"... SEQUELS ARE RARELY AS good as the originals, so I approach this review of the market efflciency literature with trepidation. The task is thornier than it was 20 years ago, when work on efficiency was rather new. The literature is now so large that a full review is impossible, and is not attempted h ..."
Abstract - Cited by 337 (0 self) - Add to MetaCart
SEQUELS ARE RARELY AS good as the originals, so I approach this review of the market efflciency literature with trepidation. The task is thornier than it was 20 years ago, when work on efficiency was rather new. The literature is now so large that a full review is impossible, and is not attempted here. Instead, I discuss the work that I find most interesting, and I offer my views on what we have learned from the research on market efficiency. I. The Theme I take the market efficiency hypothesis to be the simple statement that security prices fully reflect all available information. A precondition for this strong version of the hypothesis is that information and trading costs, the costs of getting prices to reflect information, are always 0 (Grossman and Stiglitz (1980)). A weaker and economically more sensible version of the efficiency hypothesis says that prices reflect information to the point where the marginal benefits of acting on information (the profits to be made) do not exceed the marginal costs (Jensen (1978)). Since there are surely positive information and trading costs, the extreme version of the market efficiency hypothesis is surely false. Its advantage, however, is that it is a clean benchmark that allows me to sidestep the messy problem of deciding what are reasonable information and trading costs. I can focus instead on the more interesting task of laying out the evidence on the adjustment of prices to various kinds of information. Each reader is then free to judge the scenarios where market efficiency is a good approximation (that is, deviations from the extreme version of the efficiency hypothesis are within information and trading costs) and those where some other model is a better simplifying view of the world. Ambiguity about information and trading costs is not, however, the main obstacle to inferences about market efficiency. The joint-hypothesis problem is more serious. Thus, market efficiency per se is not testable. It must be

A Test of the Efficiency of a Given Portfolio

by R. Gibbons, Tephena Ross, Jay Shanken - In Econometrica , 1989
"... A test for the ex ante efficiency of a given portfolio of assets is analyzed. The relevant statistic has a tractable small sample distribution. Its power function is derived and used to study the sensitivity of the test to the portfolio choice and to the number of assets used to determine the ex pos ..."
Abstract - Cited by 331 (14 self) - Add to MetaCart
A test for the ex ante efficiency of a given portfolio of assets is analyzed. The relevant statistic has a tractable small sample distribution. Its power function is derived and used to study the sensitivity of the test to the portfolio choice and to the number of assets used to determine the ex post mean-variance efficient frontier. Several intuitive interpretations of the test are provided, including a simple mean-stan-dard deviation geometric explanation. A univariate test, equivalent to our multivariate-based method, is derived, and it suggests some useful diagnostic tools which may explain why the null hypothesis is rejected. Empirical examples suggest that the multivariate approach can lead to more appropriate conclusions than those based on traditional inference which relies on a set of dependent univariate statistics.
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