Knowledge that Transforms

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J. Clay Singleton, Joseph R. Lauer, The Implications of Recursiveness in Capital Markets--Theory and Empirical Tests, The Journal of Financial and Quantitative Analysis, Vol. 14, No. 1 (Mar., 1979), pp. 59-76

There appears to be some confusion in the literature on asset-pricing models about the role of default-risk in short-selling and borrowing by consumers. For example, in the Sharpe-Lintner ([16] [9]) model it is usual to assume that all consumers are able to borrow or lend without restriction, at the riskless rate of interest. This assumption has been recognized to involve an inconsistency in the theory, because with personal borrowing there is always a positive probability of default with the S-L assumptions, so that the consumer's bond (as seen by any lender) is not a perfect substitute for the safe asset.

Lawrence B. Smith, Comment: Brueggeman-Peiser and Noland Papers, The Journal of Financial and Quantitative Analysis, Vol. 14, No. 4, Proceedings of 14th Annual Conference of the Western Finance Association, June 21-23, 1979 (Nov., 1979), pp. 801-803

Since the formulation of the portfolio selection problem by Markowitz [12] as a parametric quadratic programming problem, considerable effort has been devoted to obtaining operational portfolio management models. Research has involved: (1) characterizing the return generating process in terms of index models; (2) specifying special-purpose algorithms such as the critical-line method of Markowitz [13] or the solution procedure of Jucker and de Faro [11]; (3) using linear programming formulations to approximate solutions to the nonlinear programming problems such as Sharpe [20, 22] and Stone [25]; and (4) converting portfolio selection models into portfolio management models designed to revise an existing protfolio subject to transaction costs using heuristics such as Smith [24] or revision formulations such as Pogue [16, 17] and Stone and Reback [27].

In the September 1975 issue of this Journal Ben Branch works out in detail an “optimal” strategy for an investor seeking to purchase or sell a security. The suggested strategy involves placing limit orders at specified prices and then waiting for the order to be filled. Hypothetical calculations indicate the magnitude of savings possible through use of the strategy. Ben Branch apparently accepts the standard random walk model and develops his theory around it. If one believes that the value of a stock is a constant and that prices fluctuate randomly, the treatment seems correct.

Alan Kraus, Comment: Cohen, Maier, Schwartz and Whitcomb Paper, The Journal of Financial and Quantitative Analysis, Vol. 14, No. 4, Proceedings of 14th Annual Conference of the Western Finance Association, June 21-23, 1979 (Nov., 1979), pp. 867-868

Richard P. Castanias II, Comment: Bhattacharya Paper, The Journal of Financial and Quantitative Analysis, Vol. 14, No. 4, Proceedings of 14th Annual Conference of the Western Finance Association, June 21-23, 1979 (Nov., 1979), pp. 705-710

During the explosive growth in options markets, from 18.1 million contracts traded in 1975 to 57.2 million in 1978, institutional participation has lagged. While precise measures are not available, informed estimates suggest that only 12 to 15 percent represents true institutional activity in spite of the fact that one by one, tax, regulatory, and conceptual barriers have been reduced or eliminated. In addition to such retarding factors as lethargy, prejudice, and unfamiliarity, there are still some fundamental characteristics of options which make questionable the prudence of their use by fiduciaries or asset managers in a fiduciary position.