In a four-factor asset-pricing model estimated on daily data, Fed intervention significantly affects betas of surprises in the market return, expected inflation rate, yield curve, and corporate-bond risk premium. Fed foreign-currency sales cause economically and statistically significant increases in the systematic risk premium in appreciation and thus in the dollar's expected appreciation rate, as theory predicts. Intervention’s effects on actual appreciation are less reliable; they depend on unpredictable risk-factor realizations. Even successful intervention to strengthen the dollar may be costly; by increasing the dollar’s systematic risk, intervention reduces the attractiveness of U.S. relative to foreign investments. Further, uncertainty about future Fed interventions may induce resource misallocation: ceteris paribus, investors find it harder to select appropriate risk-adjusted discount rates and to forecast the home-currency value of cash flows. (Forthcoming in the Journal of International Money and Finance.)

Evaluating the Nordea Experiment: Evidence from Market and Accounting Data

Lawrence G. Goldberg , Richard J. Sweeney and Clas G. Wihlborg ^c

This paper discusses results and difficulties of comparing banks' performance based on publicly available data for the case of Nordea, a pan-Nordic bank created through mergers of important national banks. The objective of the performance comparison is to determine whether Nordea's unique strategy of functional intergation across four countries can be advantageous. For stock-market data, however, Nordea does not have stable betas on risk factors, as illustrated by market betas, and thus the comparables method must be used with great care. The Nordea holding company performed about as well as the comparables, both in terms of stock-market and accounting data. Nordea banks in individual countries outperformed comparable holding companies; by arithmetic, Nordea non-bank operations are not as profitable as its bank operations. In event studies, the market views Nordea's acquisitions as adding value.(Forthcoming in the Journal of Banking and Finance.) 

Many stock exchanges have daily price limits for individual stocks.  The effects of these price limits are little understood, especially for price revelation and thus resource allocation.  This paper models and tests how price limits may induce an informed investor to shift part or all of her profit-motivated trades until the next day, thus retarding the spread of information.  The model implies these delays are particularly likely if the current price is near, but the equilibrium price is substantially beyond, today’s limit.  In a series of tests on daily open, close, high, low and limit prices from the Taiwan Stock Exchange, results are consistent with the model; empirical results support the view both that informed investors’ trades play a major role in price revelation and that price limits importantly delay price revelation.
 

Cross-section finance-study variables should be, but never are, tested for integration. This omission can have severe consequences. Two cases are analyzed. First, a stationary variable is regressed on an integrated variable. The integrated regressor may enter significantly, if it is related to a stationary regressor in the true relationship, but the estimated coefficient’s size and sign are wholly unreliable. Resolving this specification problem requires unit-root tests for all variables. If a regressor is integrated, a related stationary variable should be used instead. Differencing the integrated regressor sometimes is appropriate; frequently, however, a related categorical variable should be used. Second, both dependent and explanatory variables are integrated. OLS slope estimates and t-values have standard properties; the time-series “spurious regression” problem does not arise. Finding a relationship raises further questions, however. Cointegration tests are required: Cointegration requires investigating implied profit opportunities; lack of cointegration requires searching for an omitted integrated variable. 

                     Equivalent Valuations in Cash Flow and Accounting Models

Residual Income and Free Cash Flow models' equity valuations are equivalent if (a) the models’ discount rates jointly satisfy the Modigliani and Miller (1958) condition which relates discount rates for levered equity, unlevered equity, tax savings and debt, and (b) forecasts of the two models’ variables jointly satisfy the income statement and balance sheet identities. Past discussions fail by ignoring or misusing (a). Further, past discussions focus on use of pro formas; pro formas automatically impose (b), but often are heavily judgmental. Any forecast method that imposes (b) is acceptable, however, whether judgmental methods are used or not; an example is forecasts based on regressions constrained to satisfy the income statement and balance sheet identities.

Researchers typically base levered-discount rates on Modigliani and Miller (1958, 1963). This paper shows that MM’s key assumption, value additivity, implies both the familiar MM rates and a second set of discount rates, Single Period Value Additivity rates. MM rates are found by applying value additivity to the firm’s overall value. SPVA rates are found by applying value additivity to each period’s financial flows. Both sets of rates give correct results when applied to the entire dividend stream. For proper subsets of the stream, as required for many capital-budgeting and valuation issues, MM rates give incorrect results.

                                           Spurious Mutual-Fund Performance

The portfolio manager, without superior insight, changes the risky-portfolio weight in inverse proportion to the portfolio’s excess return, giving the weight a unit root. The manager is evaluated by a quadratic regression of the portfolio’s rate of return on the market. From simulations, the manager may appear to beat the market; in a base-case, the probability is approximately 0.50 that the squared-market coefficient is significantly positive at the 10% level in a one-tail test. With observable portfolio weights, conventional unit-root tests can detect the spurious results. With unobservable weights, cusum-squared tests and recursive parameter estimates may detect spurious results for the squared-market coefficient.

Building a European Union Constitution:

Richard J. Sweeney

1.  Introduction: Constitution-Making for the Great Federations

2. Allocating Power Between Federal and State Governments: Some Lessons from Writing the United States Constitution

 Appendix Chapters 2 and 6: Influences on the Founders and Framers

3.  German-French Dominance in the European Union Council 

                   Appendix to Chapter 3: Voting Power in the U.S. Senate and House 

4.  “Constitutional Settlements” and Legitimacy

5. Creeping Federalization: Increases in Federal Power in The United States and The European Union
 

6.  Constitutional Conflict and the American Revolution 

Appendix to Chapter 6: Timeline of Events in the American Revolution 

7.  Secession and Expulsion: Lessons for the EU from United States History,

1789 – 1861

 

8. "Conditional" Unionists

9.  Secession, the EU, and Lessons from the U.S. Civil War: Why Reconciliation Happened  

Appendix to Chapter 9: Evidence That Jefferson Davis Planned Guerilla War

Bibliography