Why is the mere announcement of an open-market share repurchase program, which involves no commitment to purchase shares, regarded as good news by the market? We develop a theoretical model to resolve this puzzle. The model predicts that firms with large underpricing can attract attention from speculators by announcing repurchases, and the subsequent trades from these speculators lead to value corrections. Firms with small underpricing, however, cannot attract attention by announcing repurchases, and these firms have to use costly share repurchases as a value-correcting signal. We then provide empirical evidence corroborating the predictions of the theoretical model.
Humanitarian Aid Organization Wins $500,000 Top Honor – Hong Kong Community Involvement program.
Erin E. Syron Ferris. How do dividend taxes affect stock volatility? In this paper, I use a decrease in dividend taxes as a natural experiment to identify their impact on firm’s price volatility. If a risk-averse executive faces price risk through his incentive contract, changes in stock volatility due to dividend taxes may increase agency costs and therefore decrease overall welfare. Stock volatility decreased after the tax cut for firms where an executive has large holdings of shares and options relative to firms where an executive has small holdings of shares and options. Therefore, with a risk-averse executive and risk-neutral shareholders, dividend taxes may exacerbate agency costs. The increase in agency costs will decrease shareholder welfare, which can be partially offset by the use of options in the employment contract.
Revisiting the Risk-Neutral Approach to Optimal Policyholder Behavior: A Study of Withdrawal Guarantees in Variable Annuities
Policyholder exercise behavior presents an important risk factor for pricing Variable Annuities. However, approaches presented in the literature—building on value-maximizing strategies akin to pricing American options—do not square with observed price and exercise patterns for popular withdrawal guarantees. We show that including taxes into the valuation closes this gap between theory and practice. In particular, we develop a subjective risk-neutral valuation methodology that takes into consideration differences in the tax structure between investment opportunities. We demonstrate that accounting for tax advantages significantly affects the value of the guarantees and produces results that are in line with empirical patterns.
2015-035: Are Survey Expectations Theory-Consistent? The Role of Central Bank Communication and News
Lena Dräger, Michael J. Lamla, and Damjan Pfajfar. In this paper we analyze whether central bank communication can facilitate the understanding of key economic concepts. Using survey data for consumers and professionals, we calculate how many of them have expectations consistent with the Fisher Equation, the Taylor rule and the Phillips curve and test, by accounting for three different communication channels, whether central banks can influence those. A substantial share of participants has expectations consistent with the Fisher equation, followed by the Taylor rule and the Phillips curve. We show that having theory-consistent expectations is beneficial, as it improves the forecast accuracy. Furthermore, consistency is time varying. Exploring this time variation, we provide evidence that central bank communication as well as news on monetary policy can facilitate the understanding of those concepts and thereby improve the efficacy of monetary policy
Li Lin, Dimitrios P. Tsomocos, and Alexandros P. Vardoulakis. We examine the role that credit risk in the central bank’s monetary operations plays in the determination of the equilibrium price level and allocations. Our model features trade in fiat money, real assets and a monetary authority which injects money into the economy through short-term and long-term loans to agents. Short-term loans are riskless, but long-term loans are collateralized by a portfolio of real assets and are subject to credit risk. The private monetary wealth of individuals is zero, i.e., there is no outside money. When there is no default in equilibrium, there is indeterminacy. Positive default in every state of the world on some long-term loan endogenously creates positive liquid wealth that supports positive interest rates and resolves the aforementioned indeterminacy. Hence, a non-Ricardian policy across loan markets can determine the equilibrium allocations while it allow
s the central bank to earn profits from seigniorage in order to compensate for any losses.
Ample empirical and experimental evidence documents that individuals place greater weight on information gained through personal experience—a phenomenon that Tversky and Kahneman call availability bias. I embed this bias in an overlapping generations equilibrium model in which the period that investors first enter the market establishes the starting point of their experience history. The difference in the individuals’ experience leads to heterogeneity among agents and perceived noise trading. The model captures several empirical findings. It explains why returns on high-volume trading days tend to revert. Furthermore, it provides explanations for a high trading volume, a connection between trading volume and volatility, excess volatility, and overreaction and reversal patterns. Consistent with empirical evidence, young investors buy high and sell low, trade frequently, and obtain lower returns. For intraday trading, it predicts a high trading volume around the opening hours, especially for cross-listed stocks.
The recent empirical evidence of a downward-sloping term structure of equity risk is viewed as a challenge to many leading asset pricing models. This article analytically characterizes conditions under which a continuous-time long-run risk model can accommodate the stylized facts about dividend and equity risk, when dividends are a stationary stochastic fraction of aggregate consumption. Such a cointegrating relation not only makes dividends riskier in the short run than at medium horizons but also preserves the role of long-run risk: consequently, the model captures both the traditional puzzles, like the high equity premium, as well as the new evidence about the term structure of equity risk.
The World Islamic Funds Conference was held in Bahrain on May 18-19, 2015.
Africa can become a continent of the future, prosperous and children need no longer take the risk of crossing the Mediterranean to be the sole bread-winner for many families in the continent. This phenomenon is all the more distressing that one third perished at sea, and another one third are treated inhumanely in camps and the final third of the survivors are undocumented citizens and therefore faces an uncertain future!