An analysis of the dual problem described by Ronn (1987) reveals that it provides a powerful and easily interpretable test for the hypothesis of a single class of marginal investors, including models of equilibrium based on a “representative tax bracket.” When Ronn's empirical tests are interpreted via the dual, they lend additional support to his conclusions in providing a strong rejection of the representative tax bracket hypothesis. A valid dual LP used to test the hypothesis can be obtained with fewer assumptions than Ronn's primal; in addition, a minor error in Ronn's presentation of the dual is corrected.

The primary objective of this paper is to derive a multi-factor equilibrium model using a mean-variance approach. The results of this derivation provide greater insight into the nature of the resulting factors than does APT. There are several important implications for empirical tests of any a priori defined multi-factor model.

Edward C. Blomeyer, An Analytic Approximation for the American Put Price for Options on Stocks with Dividends, The Journal of Financial and Quantitative Analysis, Vol. 21, No. 2 (Jun., 1986), pp. 229-233

The advance of the theory of contingent claim pricing has made it possible to model and analyze very complex financial claims. When the value of the firm can be represented as a contingent claim, then the firm's optimal financial policy can be determined with only a slight modification in standard solution techniques for contingent claims. In this paper, stochastic control theory is used to determine a dynamic investment policy for the valuemaximizing firm. The value of future, stochastic economic rents (i.e., the net present value of the firm), and the firm's optimal investment policy must reflect a rational reaction on behalf of its competitors. A computationally efficient methodology is presented for solving the simultaneous investment-valuation problem for an n-firm game.

Changes in the Japanese financial system over the coming decade will play a significant role in the functioning of U.S. financial markets and, indeed, of the entire U.S. economy. From World War II through at least the mid–1970s, the United States was a major exporter of investment capital in the form of foreign direct and portfolio investment. More recently, low U.S. savings rates, recurring federal budget deficits, reduced sovereign lending by U.S. banks, and, possibly, high real returns on domestic investment have combined to make the United States a major importer of capital. At the same time, large trade surpluses and very high savings rates in Japan have more than offset increases in government borrowing to make Japan the world's principal capital exporter, a position it is likely to hold for some time. These are fundamental changes.

This paper demonstrates the strong linkages that exist between currency risk, represented by inflation risk and exchange rate changes, and relative price risk. These linkages affect the optional quantities of forward exchange contracts, nominal debt, and fixed price sales (purchase) contracts to use in hedging against these risks. It is shown that the existence of as many hedging mechanisms as there are forms of price risk allows for the precise targeting of specific price risks with specific hedging instruments. Moreover, even though each hedging mechanism specializes in protecting against a particular form of price risk, the optimal quantitiy of each influences and is influenced by the optimal quantities of the others.

This paper differentiates between country risk--the probability that a country will default on its obiigations--and two forms of international banking risk: (1) the extent to which a bank's foreign activities affect the cost of equity capital; and (2) the extent to which a bank's foreign activities affect the probability of bankruptcy. The paper focuses on the latter form of international banking risk.Using Chebyshev's Inequality, it is pointed out that the risk of bankruptcy is influenced by the mean as well as the variance of the return distribution. Consequently, restrictions on the (international) composition of a bank's portfolio may increase rather than reduce the probability of bankruptcy.

The well known Sharpe-Lintner-Mossin capital asset pricing model (CAPM) assumes the existence of stability in the price level so that the market price of risk (MPR) measured in nominal terms is the same for all risky assets in an equilibrium market. Friend, Landskroner and Losq [5, hereafter F-L-L] have recently shown that CAPM measured in nominal terms understates the MPR if an uncertain inflation is expected and if a covariance between the rate of return on the market and the rate of inflation is positive (p. 1287).

Since the early work of Durand (1941), there has been considerable interest in using quantitative models of consumer credit behavior for credit-granting decisions. Most models are based on the concept of “scoring” by use of weights usually determined as statistically significant coefficients of some linear statistical model, frequently the linear discriminant model. It is the purpose of this note, however, to propose maximum likelihood estimation of the logit model as an alternative, and to compare the two models in a “scoring experiment.”

The unique characteristic of a foreign asset is that the real purchasing power of the cash flows from the asset depends on the exchange rate prevailing on the conversion date. A naive view is that this dependence exposes foreign assets to exchange risk proportional to the volatility of the exchange rate and, other things equal, makes foreign assets much riskier than domestic ones. Anothe extreme is that for nonmonetary foreign assets, purchasing power parity (PPP) causes exchange rates to move inversely todifferential inflation rates, thereby eliminating exchange risk. Aliber and others maintain that a similar argument applies to foreign monetary assets. The international Fisher effect (IFE) causes the exante equilibrium return on all default-free monetary assets, measured in the domestic currency, to be the same regardless of the currency denomination of the instrument. The fact is, however, that PPP and IFE cannot be expected to hold instantaneously throughout time, but only on average over time. Consequently, although foreign assets may promise the same expected return as domestic assets, they will have a higher variance of return as seen by domestic investors. To justify the holding of foreign assets by a domestic investor, one must introduce portfolio considerations, the possibility of consumption expenditures denominated in the foreign currency, heterogeneous expectations, or market imperfections.