Security behavior in bull and bear markets has received some attention in recent years. Fabozzi and Francis [5] first documented evidence that security betas are not influenced by the alternating forces of bull and bear markets. Their subsequent study of mutual fund betas also indicated that mutual funds generally respond indifferently to bull and bear market conditions. Using the concept of bull and bear market variations, Kim and Zumwa1t [9] developed and tested the risk premiums associated with the upside and the downside portions of returns variation. They concluded that investors expect to receive a risk premium for downside risk and pay a premium for upside variation of returns. From their results, Kim and Zumwalt [9] suggested that the down-market beta measuring downside risk (downside variation of returns) may be a more appropriate measure of portfolio risk than the single beta in the market model.

Over the past years the beta coefficient has been widely used as a measure of systematic risk in investment and portfolio analysis. The validity of using the beta coefficient as the proper measure of systematic risk is dependent upon the assumption that the beta coefficient is stationary over time. Unfortunately, this assumption has been challenged by a number of empirical studies which have found the beta coefficient to be unstable over time. Examples of such empirical investigations are those documented by Blume [4], Levy [12], Levitz [11], Baesel [2], Altman, Jacquillat, and Levasseur [1], and Roenfelt, Griepentrong, and Pflaum [16]. Most recently, Fabozzi and Francis [9] reported that some security beta coefficients tend to be random over time. Their findings also support the regression tendency of the beta coefficients towards the mean over time, as found by Blume [4]. Thus, because the beta coefficient is changing over time, the use of the ordinary least-squares (OLS) method in investment and portfolio analysis will yield an inefficient estimate of systematic risk. Furthermore, the OLS estimates of security and portfolio residual risks will be influenced by the variability of beta coefficient. Therefore, the purpose of this paper is to investigate the relationship between the variability of the beta coefficient and portfolio residual risk, and hence to provide a real picture of the process of portfolio diversification under the condition of beta nonstationarity. It is shown that the use of the OLS method to estimate security and portfolio residual risks will produce an incorrect conclusion that larger residual risks tend to be associated with higher variability in the beta coefficient.

The problems associated with the investment horizon and systematic risk estimation have been investigated in some detail. Jensen [7] has shown that investment horizon has some impact on the estimated systematic risk; Cheng and Deets [1] have raised some questions about Jensen's instantaneous systematic risk estimation method; Lee [9] has derived the relationship between the estimated instantaneous systematic risk and the estimated finite systematic risk; Levhari and Levy [11] have shown that there exist some relationships between the magnitude of estimated systematic risk and the length of investment horizon; based upon Zellner and Montimarquette's [19] time aggregation technique, Lee and Morimune [10] have shown that the investment horizon problem can be treated either as a time aggregation problem or as a specification problem. However, systematic risk estimates in terms of additive and multiplicative rates of return have not been investigated in detail. The purpose of this paper is to employ the time aggregation technique proposed by Zellner and Montimarquette [19] to investigate the impact of time aggregation on systematic risk associated with the market model. It is shown that autocorrelation and variation in market rates of return are two important factors in determining the magnitude of the estimated systematic risk associated with additive as well as multiplicative models.

The problem of the portfolio demand for money was first rigorously studied by Tobin [22]. It has been analyzed since then, by Hicks [8] and Arrow [1], among many others. Many interesting results and implications regarding liquidity preference and risk-taking are derived in these studies. However, the effect of purchasing power risk on liquidity preference has been overlooked in these studies.

We have formulated the mean-variance models of portfolio selection with stochastic cash demand. The results of the general model have indicated that the characteristic of the investor's stochastic cash demand, the liquidity risks of assets (measured by the covariance between an asset's return and the cash demand), and the structure of transfer costs also play important roles in the determination of the investor's optimal portfolio. We have also shown that the model of portfolio selection with stochastic cash demand can be greatly simplified if the assumption of symmetric transfer costs is invoked. Furthermore, it has been shown that the simplified model can be reformulated and solved by the LP techniques. Thus, LP formulation of portfolio selection with stochastic cash demand should have practical usefulness.Finally, along the line of works by Chen, Jen and Zionts [3, 4], Pogue [14, 15] and Stone and Reback [20], one can extend the analysis in this paper to the problem of dynamic portfolio management with stochastic cash demand and transfer costs.

Broadly speaking there are two models to the problem of asset valuation under uncertainty and aversion to risk. Under one, the certaintyequivalent method, each future return is converted to its certainty equivalent and discounted at the pure rate of interest. Under the other, the risk-adjusted discount rate method, each future return is discounted at an appropriate discount rate. The interrelation and validity of these models of asset valuation have come under discussion in two important works on stock valuation.

A standard real business-cycle model with external habit and capital adjustment costs matches a long list of asset price and business-cycle moments: equity, firm value, and risk-free rate volatility; the equity premium; excess return predictability; consumption growth predictability; basic moments of consumption, output, and investment; among others. The model also generates endogenous consumption volatility risk. Precautionary savings motives make consumption sensitive to shocks in bad times, leading to countercyclical volatility, even with homoscedastic technology shocks. Habit acts as countercyclical leverage, which amplifies this channel. Habit also implies high risk aversion, which amplifies the stock price response.

This paper examines the degree to which managerial discretion over accruals relating to loan losses in the Canadian banking industry during 1977–87 may have been utilized to manage regulatory capital, taxable income, and reported earnings. These years reflect a unique period in which accounting and regulatory practices differed significantly from the post‐1987 period. These prior practices created different types of incentives and highlighted different policy issues such as the role of tax benefits in loan loss accrual decisions. We model a three‐equation, simultaneous system around three annual discretionary choices: the amount of loan loss experience accrued (based on specific provisions), the size of reserve transfers to the Appropriation for Contingencies (based on general provisions), and the extent of external regulatory capital raised. Results indicate strong support for the capital maintenance predictions and weaker, but significant, support for the tax management predictions. Results do not support the predictions of the earnings management hypothesis. Résumé. Les auteurs examinent la mesure dans laquelle la discrétion dont jouissait la direction dans la présentation des montants cumulatifs des pertes sur prêts, dans le secteur bancaire canadien entre 1977 et 1987, pourrait avoir été mise à profit dans la gestion du capital réglementaire, du revenu imposable et des bénéfices publiés. Cette décennie est unique puisqu'elle se caractérise par le fait que les méthodes comptables et réglementaires présentaient des différences significatives par rapport à celles de la période postérieure à 1987. Les méthodes initiales ont donné naissance à différents types d'incitatifs et mis en relief des questions différentes relatives aux politiques, telles que le rôle des avantages fiscaux dans les décisions touchant les pertes sur prêts cumulatives. Les auteurs créent un modèle à partir d'un système de trois équations concomitantes, autour de trois choix annuels discrétionnaires: le montant cumulatif des pertes sur prêts qui sont subies (basé sur des dispositions précises), l'importance des transferts de réserves aux provisions pour éventualités (basée sur des dispositions générales), et l'importance du capital réglementaire externe recueilli. Les résultats confirment éloquemment les prédictions relatives au maintien du capital et de façon plus tempérée, mais néanmoins significative, les prédictions relatives à la gestion fiscale. Ils ne confirment cependant pas les prédictions relatives à la gestion des bénéfices.

We find that firms that provide limited liability and indemnification for their directors enjoy higher credit ratings and lower yield spreads. We argue that such provisions insulate corporate directors from the discipline from potential litigation, and allow them to pursue their own interests by adopting low-risk, self-serving operating strategies, which coincidentally redound to the benefit of corporate bondholders. Our evidence further suggests that the reduction in the cost of debt may offset the costs of directorial shirking and suboptimal corporate policies occasioned by this insulation, which may explain why stockholders have little incentive to rescind these legal protections.

I. Customary dynamic analysis, 489. — II. Alternative dynamic system, 492.— III. Concluding remarks, 493.