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Abstract:
This paper provides some empirical evidence on a relatively new and increasingly prevalent form of equity restructuring called tracking stock. Also known as "targeted" or "lettered" stock in the financial press, this equity structure has been adopted with increasing frequency, with seven tracking stocks being proposed in the first half of 1999 and several more rumored to be imminent. We find, for a sample of 27 firms, a mean abnormal return of over 3% in the two-day period surrounding the announced proposal to issue a tracking stock. Individually, 24 of the 27 firms in the sample earned positive abnormal returns, while none earned significantly negative abnormal returns. These estimates are comparable to previous estimates of abnormal returns associated with announcements of carve-outs and spin- offs. The empirical finding that announcements of all three forms of equity restructurings earn positive abnormal returns is consistent with the hypothesis that investors expect gains from more focused and transparent business units.

Abstract:
We investigate the empirical relation between corporate governance and stock market liquidity. We find that firms with better corporate governance have narrower spreads, higher market quality index, smaller price impact of trades, and lower probability of information-based trading. In addition, we show that changes in our liquidity measures are significantly related to changes in the governance index over time. These results suggest that firms may alleviate information-based trading and improve stock market liquidity by adopting corporate governance standards that mitigate informational asymmetries. Our results are remarkably robust to alternative model specifications, across exchanges, and different measures of liquidity.

Corporate governance, Spreads, Price impact, Information-based trading, Liquidity

Abstract:
The theories of investment under uncertainty and real options predict that uncertainty about, for example, oil prices will tend to depress current investment. We reinvestigate the relationship between the price of oil and investment, focusing on the role of uncertainty about oil prices. We utilize an internally consistent simultaneous equations empirical model that accommodates an independent role for the effects of oil price volatility. We find that volatility in oil prices has had a negative and statistically significant effect on several measures of investment, durables consumption and aggregate output. We also find that accounting for the effects of oil price volatility tends to exacerbate the negative dynamic response of economic activity to a negative oil price shock, while dampening the response to a positive oil price shock.

Oil, volatility, uncertainty, Multivariate GARCH VAR

Abstract:
A firm's announcement that it intends to restructure based on tracking stock is usually associated with a positive and significant stock price reaction, at least in the short-run. Typically, this reaction has been attributed to expected reductions in a diversification discount, via reduced agency costs and/or reduced informational asymmetries. The existing literature has investigated this latter hypothesis - the impact of tracking stocks on informational asymmetries - by focusing on the behavior of equity analysts: the number following the specified firms and the accuracy of their forecasts. The results thus far have been inconclusive. In contrast, we focus on the behavior of market makers. In particular, we analyze the liquidity provided by market makers, as measured by the bid-ask spread, before and after a firm issues a tracking stock. Our results provide additional support to the growing evidence that restructurings based on tracking stocks are not effective at reducing informational asymmetries. Rather, firms that issue tracking stocks tend to exhibit less liquidity and greater adverse selection than a matched sample of control firms.

Tracking stock, bid-ask spreads, restructuring

Abstract:
The implementation of monetary policy through financial markets is widely believed to be an important factor affecting the return on financial assets, particularly the return on short-term government debt. This paper assesses the effects of shocks to monetary policy on Treasury bill returns by fitting a factor-ARCH model with a candidate factor based on innovations in the federal funds rate. We find that positive policy shocks significantly reduce Treasury bill returns and significantly increase the volatility of Treasury bill returns, but that the volatility of policy shocks does not explain the time-varying risk premia in Treasury bill returns.

Abstract:
F tests which test jointly for a unit root and a zero intercept, and so compete against Dickey-Fuller t tests, are shown not to enhance power because they are invariant to the intercept value in the absence of a unit root. Monte Carlo results in the literature that indicate otherwise are shown to have resulted from the use of special starting values. Testing procedures that employ these F tests to enhance power should be revised by omitting them.

Unit root tests, Dickey-Fuller tests, Power

Abstract:
This paper examines the effects of inflation uncertainty on real economic activity by utilizing a flexible, dynamic, multivariate framework that accommodates possible interaction between the conditional means and variances. The empirical model is based on a familiar identified vector autoregressive framework, modified to accommodate multivariate generalized autoregressive conditional heteroskedasticity. Our empirical model is preferred to the baseline VAR by likelihood based information criteria, and it retains the important dynamics of the underlying VAR. We find that an average shock to inflation uncertainty has tended to reduce output growth over three months by about 22 basis points.

Please see the definitive published version in JMCB (2004).

Inflation, inflation uncertainty, multivariate GARCH, VAR

Abstract:
Analytical results are presented that drastically simplify joint estimation of the APT by Non-linear SUR and maximum likelihood when the factors are measured. Four alternative analytical expressions for calculating standard errors are also presented.

Please see published version in Economics Letters for full text and equations.

Non-linear seemingly unrelated regressions, arbitrage pricing theory

Abstract:
We reexamine the volatility of agricultural commodity futures for evidence of fractional integration, providing new empirical results and extending the extant literature in important dimensions. First, we utilize two relatively new estimators based on wavelets, which are generally superior to, for example, the popular GPH estimator and exact MLE estimators on the basis of mean squared error. Second, we provide simulations to contrast our point estimates with those obtained by a fractionally integrated GARCH model. Third, we conduct a wavelet coefficient decomposition of futures volatility. We find that futures volatilities display the self similarity property consistent with long memory, and we confirm that futures volatilities exhibit persistent long memory with finite unconditional variance.

Please see paper published in J of Futures Markets for all figures and equations.

futures volatility, fractional integration, long-term memory

Abstract:
We reexamine commodity futures returns for evidence of fractional integration utilizing two estimators based on wavelets. We summarize basic wavelet methods for signal processing and decompose commodity futures returns by wavelet scale. We find the evidence for long memory is not conclusive based on visual inspection of the wavelet decomposition, but formal statistical tests suggest evidence of long memory, in the form of antipersistence, in about half of agricultural commodity futures. We find little evidence of long memory in metal futures. Our results are useful in interpreting previous disparate findings based on frequency domain estimators.

Abstract:
We reexamine commodity futures returns for evidence of fractional integration utilizing two estimators based on wavelets. We summarize basic wavelet methods for signal processing and decompose commodity futures returns by wavelet scale. We find the evidence for long memory is not conclusive based on visual inspection of the wavelet decomposition, but formal statistical tests suggest evidence of long memory, in the form of anti-persistence, in about half of agricultural commodity futures. We find little evidence of long memory in metal futures. Our results are useful in interpreting previous disparate findings based on frequency domain estimators.

futures returns, fractional integration, long memory, wavelets

Abstract:
This paper investigates the extent to which observable macroeconomic factors can explain the time-varying risk premia in the short-end of the term structure. The empirical model we employ is motivated by a dynamic asset pricing model with time-invariant reward-to-risk measures and time-varying risk premia. Our results indicate that two factors, based innovations in the federal funds rate and shifts in the yield curve, explain up to 65% of the temporal variation in Treasury bill returns. We also find that shifts in the yield curve factor may explain some time-variation in risk premia at the very short end of the term structure, and that the federal funds rate factor may be weakly linked to the time-varying risk premia over the post-1966 sample, when the federal funds market first began to function as a major source of bank liquidity. This latter result, however, is somewhat sensitive to the sample period.

Term structure, time-varying risk premia, macroeconomic factors

Abstract:
We use a very general bivariate GARCH-M model and quarterly data for five Asian countries to test for the impact of real and nominal macroeconomic uncertainty on inflation and output growth. We conclude the following. First, in the majority of countries uncertainty regarding the output growth rate is related negatively to the average growth rate. Secondly, contrary to expectations, inflation uncertainty in most cases does not harm the output growth performance of an economy. Thirdly, inflation and output uncertainty have a mixed effect on inflation. Consistent results are found using the VAR-GARCH-M approach to investigate the dynamic relationship between inflation and output growth using impulse response functions. This evidence implies that macroeconomic uncertainty may even improve macroeconomic performance, i.e. raise output growth and reduce inflation. Our empirical results highlight important differences with those for industrialized countries.

Abstract:
This paper extends the work in Serletis (1992) by re-examining the empirical evidence for random walk type behavior in energy futures prices. It tests for fractional integrating dynamics in energy futures markets utilizing more recent data (from January 3, 1994 to June 30, 2005) and a new semiparametric wavelet-based estimator, which is superior to the more prevalent GPH estimator (on the basis of Monte-Carlo evidence). We ýnd new evidence that energy prices display long memory and that the particular form of long memory is anti-persistence, characterized by the variance of each series being dominated by high frequency (low wavelet scale) components.

Energy, Weak-form market efficiency, Long memory, Fractional integration

Abstract:
This paper derives an analytical expression for an impulse-response function for a vector autoregression with multivariate GARCH errors, where the vector of conditional means is a function of the conditional variances. We also provide the appropriate interpretation of an impulse-response function for such models and suggest interesting empirical issues that can be addressed within this framework.

Multivariate GARCH, VAR, Impulse-response

Abstract:
This paper reexamines foreign currency markets for evidence of fractional integration, and extends the extant literature in several important dimensions. First, we utilize a new semiparametric wavelet-based estimator, which is far superior to the more prevalent GPH estimator on the basis of mean squared error. Second, we utilize a broader and longer sample, which better facilitates the detection of long memory dynamics. Our analysis yields interesting empirical results that contrast with other recent studies. In particular, we find new evidence that a large proportion (14 out of 19) of exchange rate series display evidence of long memory, with little variation over alternative sample periods and alternative frequencies.

Exchange rates, Weak-form market efficiency, Long memory, Fractional integration, Wavelets