In this paper, we attempt to blend economic theory with an understanding of the historical context and regulation of Japanese financial markets, particularly during the 1950s and 1960s. The historical and regulatory context is critical since it represents the framework within which the economic forces operated. That is, we are interested in examining how a particular structure, characterized by controlled interest rates, segmentation of markets and functions, and limited entry, gave rise in understandable ways to distinctive corporate financial practices.

On average, nonconvertible preferred stocks have significantly positive abnormal returns and trading volume on the ex-day. For the less liquid stocks, however, the abnormal returns are significantly positive, and abnormal trading volume is insignificantly different from zero. This evidence suggests that long-term individual investors set the ex-day prices of less liquid stocks. For the more liquid stocks, the ex-day abnormal returns are closer to zero, and there is significantly positive abnormal trading volume on the ex-day and the day before the ex-day. These results suggest that short-term investors set the ex-day prices of more liquid stocks through dividend capture strategies. Despite this evidence, some inconsistent empirical findings make the overall evidence on dividend capture somewhat mixed.

This paper demonstrates that Black-Scholes option pricing model hedge positions that are risk free when rebalanced continuously will frequently exhibit substantial systematic risk when rebalanced at finite intervals. This systematic risk may have biased important empirical tests of the option pricing model. Moreover, this systematic risk means that the Black-Scholes option pricing model is inherently inconsistent with the discrete time version of the Capital Asset Pricing Model (CAPM).

The Sharpe-Lintner Capital Asset Pricing Model (CAPM) has always contained an implicit question: what if all investors are single-period wealth maximizers but the length of the single period varies across investors? Gressis, Philappatos, and Hayya (GPH) [7] have pointed out that as the assumption of investment horizon length is changed, the Capital Market Line (CML) intersects the Efficient Frontier (EF) at different points causing different investors to hold different efficient portfolios. GPH assert that these different portfolio holdings will result in an inefficient market portfolio—and dire consequences for the capital market model.

Black and Scholes [1] derived the pricing equation for a European put when the stock price follows geometric Brownian motion. For this same case, Merton [5] derived the pricing equation for an American put with infinite time to maturity. Brennan and Schwartz [2], Rubinstein and Cox [7], and Parkinson [6] have developed numerical solutions for the price of an American put. Numerical solutions are expensive and do not provide much intuition. Naturally, an analytic solution would be much preferred; unfortunately, pricing the American put requires solving a formidable and presumably intractable boundary value problem.

The original Black-Scholes (BS) [2] European call option pricing model does not take account of divided payments on the underlying stock and does not allow for the possibility of early exercise that may be optimal when the stock pays dividends. Black [1] has suggested that the original BS model can be modified to take account of dividends and Sharpe [14] predicts that this modified or pseudo-American BS approach, “while not exact, is probably sufficient for many listed options.”

One of the interesting anomalies of asset trading in secondary markets is that it is not usually possible to observe actual market clearing prices. Rather, we can only observe transactions as bid and ask price? and infer that the market equilibrium price lies between them. Professor Smidt analyzes continuous transactions data for individual NYSE listed securities during 1977. From it he deduces (1) the behavior of transaction prices, (2) the average size of bid-ask spreads, and (3) the movement of market prices. Given that neither the bid-ask spread nor the actual equilibrium price is observable from the available data, this is an ambitious undertaking. The problem is further complicated by the fact that the transactions data contain three distinct types of trading activity: matching trades at the opening or reopening of the auction market, auction trades (the bulk of activity by number of transactions), and block trades (the second largest activity by dollar volume).

Thomas E. Copeland, A Probability Model of Asset Trading, The Journal of Financial and Quantitative Analysis, Vol. 12, No. 4, Proceedings of the 1977 Western Finance Association Meeting (Nov., 1977), pp. 563-578

An important maintained hypothesis in financial economics states that the average interest rate on a firm's debt is positively related to its leverage. This hypothesis has a long history going back at least to the work of Kalecki [4] where it was used to derive a determinate size for the competitive firm when the production function is homogeneous of degree one. The upward sloping interest rate-leverage relationship has also played an important role in the theory of finance. In this connection, it is somewhat interesting to find both Modigliani-Miller [5] and their many critics in complete agreement on the nature of this relationship. In particular, their statement on this subject conveys the impression that this relationship is governed by an unalterable law when they write: “Economic theory and market experience both suggest that the yields demanded by lenders tend to increase with the debt-equity ratio of the borrowing firm” [5, p. 273].

In [1, p. 999] I wrongly stated that “the solution locus generated by the chance-constrained problem is efficient (for the class of utility function implied by the expected wealth-probability of ruin criterion) if the assets follow a multinomial distribution with means above the survival level.” In support of this statement footnote 6 of [1] attempted to establish the quasiconcavity of the expected utility functionin the (μ, σ) plane, where F is the normal distribution, z = (s-μ)/σ