There is strong theoretical support for the notion that prices in a perfect capital market will vary randomly ([22], [16]). However, the existence of some nonrandomness in stock prices is well documented, see ([10], [11], [13], [14], [20]). Of special importance for this study is the research by Young [24] who finds predominantly negative autocorrelation for a sample of securities using a monthly differencing interval. Autocorrelation coefficients are often used as a measure of nonrandom price behavior; negative autocorrelation is an indication of price reversals.

The concept of immunization is currently one of the most widely discussed innovations in bond portfolio management. The interest in immunization, which allows one to nearly guarantee a minimum return performance over a specified investment horizon, is due in large measure to the desire on the part of bond managers to reduce the risk which has accompanied the recent swings in interest rates.

This study deals with the problem of debt — composition of the firm — specifically, the optimal mix of short- and long-term debt, or the optimal maturity composition of the total debt. It can be viewed as a subproblem of the more familiar determination of the optimal mix between total debt and owner's equity (Modigliani and Miller [15 and 16], Durand [3], Schwartz [18], Solomon [20], etc.).

The purpose of this paper is to describe a computerized classroom teaching tool for use in money and banking courses. A basic macroeconomic model and simulation program are introduced, along with classroom presentations and sample output. In addition, the technical details of the simulation, including operating costs, are explained.

Harry C. Friedman in his paper, “Real Estate Investment and Portfolio Theory,” has put his mind to an increasingly important area of financial concern, the relationship of real estate as a security in developing portfolio theory. Between now and the year 2000, it has been estimated that $1,500 billion will be spent on building and remodeling nonfarm housing. There will be an estimated $1,000 billion spent on commercial, industrial, and utility construction. In addition, $1,000 billion will probably be spent on public utilities and service institutions, plus $30 billion annually on community facilities. It is anticipated that each year in coming generations we will add to our existing inventory the equivalent of fifteen cities of 200,000 persons each. Predictions are that there will be a need for an additional 2 million dwelling units per year during the 1970's and that this need will climb steadily thereafter.

This article develops a criterion for comparing warrant financing with further common stock financing from the viewpoint of a firm's current stockholders. This criterion is then related to a complementary one presented by Bierman [1] and a condition is imposed on Bierman's cost of warrant financing for warrant financing to be preferred to further stock financing. Finally the article considers the limitations of these criteria and qualitatively discusses risk considerations that influence the attractiveness of warrant financing.

The investment managers of financial institutions face a multiplicity of factors that influence the performance of fixed coupon securities in their investment portfolios. These factors can be classified under three headings:

1) Condition of the economy–changes in interest rate levels and spreads;

2) Nature of the financial institution–institution's tax rate, economic factors such as deposit variability and loan demand for banks, and premium inflow and benefit payments for insurance companies;

3) Characteristics of individual securities–(a) their attractiveness in terms of risk level and marketability; and (b) their contractual factors (coupon level and maturity) and tax status.

I study venture capital firms’ (VCs) use of public market information and how attention to this information relates to private market investment outcomes. I link web traffic to public filings hosted on EDGAR to individual VCs. VCs analyze public information about industry peers before most deals. An increase in industry filing views relates positively to the probability of an exit through acquisition, suggesting that public information helps identify paths to acquisition. The effect is stronger when the VC has less access to private information, especially for low-reputation VCs. Policymakers should consider spillover effects on private markets when setting public disclosure requirements.

Modern contingent pricing theory (CPT) dates its genesis from the pioneering work of Arrow [1] and Debreu [9] in the context of complete markets. Beja [2, 3] demonstrated the application of contingent pricing concepts to incomplete markets. The approach has been applied to the valuation of options (Cox and Ross [7]; Rubinstein [30]) and a variety of other financial instruments (e.g., Ross [28])- Tne fundamental insight of CPT is that in arbitrage-free markets complex securities may always be viewed as additive combinations of simple “state-claims” having positive value which, in effect, pay off one unit if and only if a given state is attained at a given date. Concurrently, the continuoustime viewpoint pioneered by Black and Scholes [4] and Merton [22] has grown in significance. The basic simplification of the continuous-time approach is that relevant valuation quantities may all be expressed in terms of the first two moments, i.e., mean and variance, of the state variable distributions employed. When CPT adopts a continuous-time format, it has been shown (Garman [13]) that a basic differential equation holds for all securities; that differential equation involves, of course, the state-claim values, the distributional parameters of state variable evolution, and the prices and dividends of securities. Alternatively, somewhat stronger assumptions which lead to the existence of a rational consensus investor allow thedifferential equation to be expressed in terms of marginal utilities (Cox, Ingersoll, and Ross [8]). This paper applies the techniques of continuous-time CPT to the foreign exchange market. Since we wish to substantively treat inflationary and productive sources of risk in two countries, four state variables are necessarily involved. In a sense, therefore, this is an ambitious attempt since the mostcomplex continuous-time models to date (e.g.. Brennan and Schwartz [5]), have substantively treated only two state variables. Such complexity is simplified through the use of some compact notation, but not by the use of ad hoc modeling. Indeed, it should be emphasized that the present treatment is a full-equilibrium approach, and that while the compact quality of the notation might be made to incorporate a significant amount of possible additional structure, nothing here is inconsistent with a complete equilibrium.

This paper develops the parametric restrictions imposed on diffusion state processes by the requirement of arbitrage-free asset pricing. Using the equivalent martingale measure as a starting point, the diffusion property is exploited to specify the shadow pricing function, which takes conditional state variable probabilities under the reference measure into arbitrage-free contingent claim prices. The main results of the paper provide differential equations associated with the shadow price function that are used to identify restrictions on the parameters of assumed diffusion processes. The paper concludes with an application to the CIR model where the state variable, the instantaneous interest rate, is assumed to follow a square root process. Calculations are also provided for the parametric restrictions imposed on the Brownian bridge and OU state variable processes.

In their present paper. Professors Cheng and Deets (hereafter C-D) attempt to derive a measure of instantaneous systematic risk for securities and portfolios which is consistent with the Sharpe-Lintner-Mossin capital asset pricing model when the true market horizon is infinitesimally short. In so doing, they assert that Jensen's resolution of the horizon problem for such a market horizon is incorrect. In the comments which follow, I shall attempt first to indicate explicitly the causes for the differences in the Jensen and C–D results, and second, to evaluate their relative merits.

We empirically study the strategic behavior of levered firms in competitive and noncompetitive environments. We find that regulation induces firms to increase leverage, and this reduces their ability to compete when deregulation occurs. Large and small levered firms adopt different strategies upon deregulation. Whereas more levered small firms charge higher prices to increase margins at the expense of market shares, highly levered large firms prey on their rivals by increasing output and reducing prices to increase their market shares. The difference in their behavior is due to differences in their probability of bankruptcy and their financing constraints.

We examine liquidity-related characteristics of U.S. firms with cross-listed shares in 20 foreign markets in the 1950–2013 period. We find that firms after foreign-market listing exhibit lower liquidity sensitivity and lower liquidity beta and suffer less from transitory price shocks. These results are stronger when firms are listed on multiple exchanges and in larger and more liquid markets. The liquidity enhancement is associated with firms’ increased foreign ownership postlisting and is effective for firms with high levels of volatility, foreign income, and foreign trading and a high probability of informed trading. Our findings provide support for global markets providing liquidity and reducing liquidity risk to U.S. firms.

I document a new stylized fact: The higher the degree of institutional ownership (IO) in a portfolio, the more time-varying expected returns rather than changes in expected cash flows drive changes in its valuation. Empirical evidence suggests that institutions’ time-varying sensitivity to the risk of holding stocks translates into time-varying expected returns on high-IO stocks. In my model, imperfect risk sharing between different types of investors generates cross-sectional differences in return predictability based on ownership, even among a priori identical stocks. My findings suggest an economic rationale for weak return predictability of small stocks and predictability reversals of stocks and real estate investment trusts.

Time series techniques based on autocovariance and spectral analysis methods have often been used for statistical analyses of commodity and stock prices, with the usual conclusion that the prices, zt, are best described by a random walk:

where the errors, ut (alternatively called shocks or residuals), have zero expectation and form a sequence of independent random variables [5 and 8 ].

In a recent paper published in this journal [1], Bierman and Hass (BH) developed a model in which the risk differential that an investor would require to compensate him for the risk of default is stated as a function of the following variables: the probability of default on annual interest payments, (1-P1); the probability of default on the principal payment at the end of the maturity of the bond, (1-P2); the default-free rate, i, and the maturity, N.

Professor Melicher has conducted an interesting study of the effects of financial factors on beta coefficients and their variations. He reduced the perennial multicollinearity problem by using a factor analysis to screen the financial variables used in the statistical analysis. This study is another in the growing body of literature concerned with beta coefficients as measures of risk. My comments on this paper will consider separately (1) the research design (i.e., what the study directly covered), and (2) the inferences drawn by the author versus what the beta coefficients and their variation really do measure.

In recent years, large commercial banks in the United States have turned to so-called “liability management” as a way to acquire additional funds. The use of Certificates of Deposit (CD's), Eurodollar balances, debentures, and recently the issuing of commercial paper through their holding companies represent an extension of the more traditional secondary reserve asset management approach to bank liquidity and reserve adjustment.

This paper presents a descriptive theory of risk that may be applied to capital budgeting decisions. The proposed theory is actually much more general than a theory of financial risk and is consistent with reported laboratory experiments. The essential feature of this theory is the role that risk descriptively plays as a constraint in the decision-making process. Specifically, risk is modeled as a chance constraint such that projects are rejected if the probability of “failure” is larger than some prescribed level. This has the effect of making all investment decisions chance-constrained programming problems, although some classes of problems have trivial solution procedures. In this context, risk serves to “strike out” or eliminate alternatives from consideration.

It has been suggested that information has the three following uses:

1. Information can be employed to earn trading profits.

2. Information can improve the operating decisions of a firm or group of firms and thereby increase the stock price.

3. Information can reduce the risk of a firm or group of firms and thereby increase the stock price.