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Journal Article
Municipal bonds and the distribution of income
Journal Article
Do municipal bond yields forecast tax policy?
During the recent flat tax debate, interest rates on long-term municipal bonds rose relative to the rate on U.S. Treasury bonds. This was widely attributed to expectations of a reduction in future tax rates. While an axiom of finance states that current asset prices reflect expectations about future events, there is no consensus on how sensitive municipal bond yields are to expectations about future tax rates. This study assesses that question by examining the relationship between the implicit tax rate and actual future tax rates.> Efficient markets theory predicts that the implicit tax ...
Journal Article
Anomalies in option pricing: the Black-Scholes model revisited
In 1973, Myron Scholes and the late Fischer Black published their seminal paper on option pricing. The Black-Scholes model revolutionized financial economics in several ways: It contributed to our understanding of a wide range of contracts with option-like features, and it allowed us to revise our understanding of traditional financial instruments. This article addresses the question of how well the Black-Scholes model of option pricing works. The goal is to acquaint a general audience with the key characteristics of a model that is still widely used, and to indicate the opportunities for ...
Journal Article
Stocks, bonds, options, futures, and portfolio insurance: a rose by any other name
Trading volume and open interest in options and futures contracts on stock indices, equities, and interest rate instruments traded on world exchanges have experienced remarkable growth. However, this growth has been accompanied by controversy about the proper role of financial derivatives and the potential for abuse. Prominent attention has been given to losses by major corporations, broker-related short-term mutual funds, and municipal agencies.> The public debate about "derivatives" has promoted the impression that the heart of the problem has been a proliferation of brand new ways of ...
Journal Article
Mutual fund myths
Journal Article
Primer on U.S. stock price indices
The measurement of the "average" price of common stocks is a matter of widespread interest. Investors want to know how "the market" is doing, and to be able to compare their returns with a meaningful benchmark. Money managers often have their compensation tied to performance, typically measured by comparing their results to a benchmark portfolio, so they and their clients are interested in the benchmark portfolio's returns. And policymakers want to judge the potential for sudden adjustments in stock prices when differences from "fundamental value emerge. ; This article discusses some ...
Journal Article
Security loans at banks and nonbanks: Regulation U
Over the years, the Board of Governors of the Federal Reserve System has established margin regulations to limit purpose loans by banks and nonbanks to broker-dealers or other borrowers. In this study, the author reviews those regulations affecting security lending by banks and nonbanks. He examines data on security loans during the 1920s and 1930s, as well as in recent years, noting that security lending by banks and borrowing by broker-dealers often diverge-the popular notion that the two are tightly linked is not correct-and that during the 1920s the volume of loans by banks to brokers may ...
Working Paper
Debt capacity, tax exemption, and the municipal cost of capital: a reassessment of the new view
The Traditional View of municipal investment holds that the federal tax-exemption of interest payments by state and local (municipal) governments provides a capital cost subsidy to municipal investment. Recently a New View has emerged which argues that tax-exemption plays a minor role, if any, in shaping municipal investment decisions. In its simplest version (with municipal debt issued at a constant interest rate), the New View argues that tax-exemption plays a role only for municipalities in which the representative individual has an income tax rate lower than the implicit tax rate on ...
Journal Article
Are stock returns different over weekends? a jump diffusion analysis of the \"weekend effect\"
The distribution of returns on common stocks is, arguably, one of the most widely studied financial market characteristics. The performance of stock prices during breaks in trading has received considerable attention in recent years, especially since the advent of "circuit breakers" designed to create stability when markets are chaotic. This study examines the distribution of daily returns on five popular stock price indices, with a special emphasis on the difference between returns over weekends and returns over adjacent intraweek trading days. The author revisits the "weekend effect" in ...
Journal Article
The municipal bond market, part II: problems and policies
Why does Congress allow municipal interest payments to be exempted from federal income taxes in the face of a very large chronic deficit in the federal budget, even though no constitutional provision requires that this tax policy continue? The rhetoric of tax exemption is philosophical, appealing to notions of appropriate intergovernmental relations and, in particular, to the doctrine of reciprocal immunity: no level of government should use its taxing authority to impose harm on another level. ; But the true force behind tax exemption is that it provides states and local governments with a ...