[This article generalizes the Cox, Ross, and Rubinstein (1979) binomial option-pricing model, and establishes a convergence from discrete-time multivariate multinomial models to continuous-time multidimensional diffusion models for contingent claims prices. The key to the approach is to approximate the N-dimensional diffusion price process by a sequence of N-variate, (N + 1)-nomial processes. It is shown that contingent claims prices and dynamic replicating portfolio strategies derived from the discrete time models converge to their corresponding continuous-time limits.]

[This article develops a multiperiod rational expectations model of stock trading in which investors have differential information concerning the underlying value of the stock. Investors trade competitively in the stock market based on their private information and the information revealed by the market-clearing prices, as well as other public news. We examine how trading volume is related to the information flow in the market and how investors' trading reveals their private information.]

[In this article we derive necessary and sufficient conditions that must be satisfied by equilibrium asset price processes in a pure exchange economy. We examine a world in which asset prices follow a diffusion process, asset markets are dynamically complete, all investors maximize their (state-independent) expected utility of consumption at some future date, and investors have nonrandom exogenous income. We show that it is necessary and sufficient that the coefficients of an equilibrium diffusion price process satisfy a partial differential equation and a boundary condition. We also examine how the dynamics of asset prices are related to the shape of the representative investor's utility function through the boundary condition. For example, in a constant-volatility economy, the expected instantaneous return of the market portfolio is mean reverting if and only if the relative risk aversion of the representative investor is decreasing in terminal wealth.]

This article generalizes the Cox, Ross, and Rubinstein (1979) binomial option-pricing model, and establishes a convergence from discrete-time multivariate multinomial models to continuous-time multidimensional diffusion models for contingent claims prices. The key to the approach is to approximate the N-dimensional diffusion price process by a sequence of N-variate, (N+1)-nomial processes. It is shown that contingent claims prices and dynamic replicating portfolio strategies derived from the discrete time models converge to their corresponding continuous-time limits.

A fundamental equilibrium condition underlying most utility-based asset pricing models is the equilibration of intertemporal marginal rates of substitution (IMRS). Previous empirical research, however, has found that the comovements of consumption and asset return data fail to satisfy the restrictions imposed by this equilibrium condition. In this paper, we examine whether market frictions can explain previous findings. Our results suggest that a combination of short-sale, borrowing, solvency, and trading cost frictions can drive a large enough wedge between IMRS so that the apparent violations may not be inconsistent with market equilibrium.

A fundamental equilibrium condition underlying most utility-based asset pricing models is the equilibration of intertemporal marginal rates of substitution (IMRS). Previous empirical research, however, has found that the comovements of consumption and asset return data fail to satisfy the restrictions imposed by this equilibrium condition. In this paper, we examine whether market frictions can explain previous findings. Our results suggest that a combination of short-sale, borrowing, solvency, and trading cost frictions can drive a large enough wedge between IMRS so that the apparent violations may not be inconsistent with market equilibrium.

This article develops a multiperiod rational expectations model of stock trading in which investors have differential information concerning the underlying value of the stock. Investors trade competitively in the stock market based on their private information and the information revealed by the market-clearing prices, as well as other public news. We examine how trading volume is related to the information flow in the market and how investors' trading reveals their private information.

In this article we derive necessary and sufficient conditions that must be satisfied by equilibrium asset price processes in a pure exchange economy. We examine a world in which asset prices follow a diffusion process, asset markets are dynamically complete, all investors maximize their (state-independent) expected utility of consumption at some future date, and investors have nonrandom exogenous income. We show that it is necessary and sufficient that the coefficients of an equilibrium diffusion price process satisfy a partial differential equation and a boundary condition. We also examine how the dynamics of asset prices are related to the shape of the representative investor’s utility function through the boundary condition. For example, in a constant-volatility economy, the expected instantaneous return of the market portfolio is mean reverting if and only if the relative risk aversion of the representative investor is decreasing in terminal wealth.

In this study of private placement of public equity (PEP) in China, we examine post-placement stock performance and the possible bases for regulatory approval for PEP applications. We find that firms receiving approvals for PEP issues are financially stronger than those rejected by regulatory authorities and experience significant positive long-term abnormal returns following the placements. These long-term abnormal returns are higher when controlling shareholders participate in the placements and when the capital raised is allocated to asset restructuring or M&As. The evidence supports the view that the government offers a “helping hand” by screening PEP applications and approving those with promising investments and capable investors. Investor overoptimism about investment opportunities at firms that issue equity privately is constrained because PEP participants can effectively monitor and discipline management and help improve investment efficiency over time.