Since the classical work of Samuelson (1965) and Leroy (1973), the random walk and martingale models of stock prices have formed the cornerstone of modern finance. Hence it is not surprising that an extensive empirical literature has considered deviations from these benchmark models. Several authors, including Lo & MacKinlay (1988), Fama & french (1988), Poterba & Summers (1988), Richardson & Stock (1989) and Boudokh & Richardson (1994) study long-run serial correlations in stock returns. Although this literature finds indications of a slowly mean reverting component in stock prices, deviations from normally distributed returns, time-varying volatility and small sample sizes have plagued existing tests and made it difficult to conclusively reject the random walk model.
This paper proposes a new approach to modelling time series dependence in stock prices that allow bull and bear hazard rates, i.e. the probability that a bull or bear market terminates next period, to depend on the age of the market. Inspection of these hazard rates yields new insights into long-run dependencies and deviations from parametric models of asset prices proposed in the literature, including the simple random walk model with a constant drift and models that allow for volatility persistence. By explicitly focusing on duration dependence in stock prices, the proposed tests are very different from the tests based on autocorrelations previously adopted in the literature. Our approach does not require that stock prices follow a low-order Markov process although this is a special case of our model when termination probabilities are memoryless.
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From 1980 to 2004, the number of personal bankruptcy filings in the United States increased more than five-fold, from 288,000 to 1.5 million per year. By 2004, more Americans were filing for bankruptcy each year than were graduating from college, getting divorced, or being diagnosed with cancer. A number of rich and famous people also filed for bankruptcy, which generated enormous publicity, raised public awareness of bankruptcy as a way to avoid repaying one’s debts, and suggested that bankruptcy was no longer subject to social disapproval. Famous bankrupts include former Governor of Texas John Connally, corporate raider Paul Bilzerian, actor Burt Reynolds, actresses Debbie Reynolds and Kim Basinger, rapper MC Hammer, singer Merle Haggard, U.S. baseball commissioner Bowie Kuhn, and boxer Mike Tyson (according to
Lenders responded with a major lobbying campaign for bankruptcy reform that lasted nearly a decade and cost more than $100 million. Their efforts were unsuccessful during the 1990s, but in 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) became law. It made bankruptcy law much less debtor-friendly. Personal bankruptcy filings surged to two million in 2005 as debtors rushed to file under the old law and then fell sharply to 600,000 in 2006.
