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This study revisits the long-horizon stock market predictability literature. Most of this research was published between 1988 and 2001. The earlier studies such as Fama and French [1988, 1989] and [...]

It is widely accepted that high-yield bonds are hybrid assets. That is, their returns are sensitive to high-grade bond returns and stock returns (Blume and Keim [1991]; Cornell and Green [...]

To purchase or authenticate to the full-text of this article, please visit this link: http://dx.doi.org/10.1111/j.1540-6288.2007.00183.x Byline: Dale L. Domian (1), David A. Louton (2), Marie D. Racine (3) Keywords: diversification; investment horizon; Safety First; shortfall risk; simulations Abstract: Abstract We examine returns and ending wealth in portfolios selected from 1,000 large U.S. stocks over a 20-year holding period. Shortfall risk, the possibility of ending wealth being below a target, is a useful metric for long horizon investors and is consistent with the Safety First criterion. Density functions obtained from simulations illustrate that shortfall risk reduction continues as portfolio size is increased, even above 100 stocks. A slightly lower risk can be achieved in small portfolios by diversifying across industries, but a greater reduction is obtained by simply increasing the number of stocks. Author Affiliation: (1)York University (2)Bryant University (3)University of Saskatchewan Article note: (*) Corresponding author: Department of Finance, Bryant University, 1150 Douglas Pike, Smithfield, RI 02917; Phone: (401) 232-6343; Fax: (401) 232-6319; E-mail: dlouton@bryant.edu

In the Winter 1999 issue of this journal, Reichenstein [1999] used 1994-1998 taxable bond fund returns to examine the efficiency of the U.S. taxable bond market. The efficient markets hypothesis [...]

The negative correlation between changes in expected inflation and subsequent stock returns has long puzzled researchers. Aside from contradicting most theoretical inflation-stock return models, the extent of the relationship between the two variables is often too great to be believed. A study is conducted that examines the asymmetrical relationship between interest rate variances and stock returns. A year of excess stock returns is found to follow interest rate declines, while interest rate hikes are found to have no significant impact on stock returns. The findings suggest that a statistically and economically significant relationship between interest rate decreases and increases in stock returns, even as much as one year later, can account almost completely for the negative correlation between interest rates/inflation and stock returns.

Two models of money market fund managers' decision making patterns in determining the maturity of the markets have been developed. The first model asserts that the markets are efficient but that transactions are costly while the second model asserts that fund managers make maturity decisions based on selected variables that indicate exploitable market opportunities. Tests on the validity of both models showed strong support for the first model but none for the second model. The results suggest that managers are unwilling to make aggressive maturity decisions despite their belief that money markets are inefficient. Managers' unwillingness to do so may be the result of stiff competition or poor probabilities for high yields.