Prime rate changes: is there an advantage in being first?

Article Abstract:

The effects of changes in prime loan rates on the stock prices of both initiating banks and non-initiating banks are examined and compared. Theory suggests a variety of cost and revenues effects on initiators of changes in such a 'sticky' price as the prime rate. The information and direction effects of such announcements are measured for 186 prime rate changes occuring between 1974-1988. The results suggest that prime rate increases result in negative abnormal returns to initiating banks, while decreases have no or a weak positive effect on returns to the initiator relative to other banks. These findings suggest that prime rate change announcements also affect the profit expectations of investors in non-initiating banks.

DEPOSITORY INSTITUTIONS, Banking industry, Securities, Prime rate

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The Variance Gamma (V.G.) model for share market returns

Article Abstract:

The Variance Gamma (VG) model can be used to represent security price uncertainty. The long-tailed, continuous-time stochastic model provides a good empirical fit. The VG process can be approximated by a compound Poisson process having jump arrival rates approaching infinity and jump magnitudes concentrated near the origin. The model can be applied to option pricing.

Models, Evaluation, Options (Finance), Stochastic processes, Uncertainty

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SICs as delineators of economic markets

Article Abstract:

The ability of the Standard Industrial Classification (SIC) to accurately group companies into homogeneous economic markets is reviewed. Results indicate that the SIC does not accurately identify companies with similar sales changes, stock price changes, and profit rates.

Analysis, Business enterprises, Marketing research, Market research, Industry classification, Standard Industrial Classification

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