In this paper prices of corporate bonds are decomposed into elements associated with (1) the pure price of time, (2) the default risk of the agency rating class to which the bond is assigned, and (3) the unique risk and ancillary features of the bond itself.

This paper is a theoretical investigation of equilibrium forward and futures prices. We construct a rational expectations model in continuous time of a multigood, identical consumer economy with constant stochastic returns to scale production. Using this model we find three main results. First, we find formulas for equilibrium forward, futures, discount bond, commodity bond and commodity option prices. Second, we show that a futures price is actually a forward price for the delivery of a random number of units of a good; the random number is the return earned from continuous reinvestment in instantaneously riskless bonds until maturity of the futures contract. Third, we find and interpret conditions under which normal backwardation or contango is found in forward or futures prices; these conditions reflect the usefulness of forward and futures contracts as consumption hedges.

This paper presents a model of general equilibrium stability in which agents understand that they are not at equilibrium. Rather, agents expect prices to change and contemplate the possibility that they may not be able to complete their own transactions. They optimize their actions taking account of such price changes and transaction constraints. It is shown that a necessary condition for instability is the continuing perception of new, previously unforeseen opportunities (real or imagined). Without this, old opportunities will be arbitraged away and the system will converge to equilibrium. The equilibrium approached will depend on the history of the system and may not be Walrasian if transaction constraints are present.

between schooling and wages: Schooling raises wages. The standard empirical questions of when are wages raised and by how much have gone unaddressed. The purpose of this paper is to demonstrate that the conventional efficiency units model of human capital accumulation provides answers to these questions. The model deals with investment both in school and on the job. The existence of post-schooling investment implies a path of wages that rises over time. Proposition 1 is that the marginal impact of schooling on the log of wages at each point in time is a constant equal to the interest rate if and only if the human capital production function is locally unit elastic in accumulated stocks of capital. A constant marginal effect on log wages is what is usually assumed in empirical work. Further, extrapolating from a model with no post-schooling investment, the constant effect is expected to equal the interest rate. Proposition 1 indicates that this assumption severely restricts the underlying structure. Propositions 2 and 3 deal with intertemporal variation in the marginal effect of schooling on wages. For example, if the output elasticity of accumulated stocks in the human capital production function falls short of one, the marginal impact of schooling on log wages is shown to decline over time. Further, under a reasonable additional assumption, the marginal impact of schooling on the level of wages rises over time. The propositions arise from the fact that wealth maximization involves maximization of an appropriately discounted flow of rents. Wages at a point in time provide information on the current flow of rents. The relationship between wealth maximization and the implied optimal pattern of flow rents yields the results. The model is laid out in Section 2. Section 3 deals with optimal schooling choice. Propositions 1-3 are presented in Section 4. In Section 5 the results are employed to discuss several stylized facts in the empirical literature on the wage-schooling relation. Proofs of the propositions are straightforward and are therefore presented in an appendix.

D ESPITE acute interest in Monetary Approach to Balance of Payments (MBOP) over past several years, both as an explanation of worldwide inflationary epidemic of late 1960s and early '70s (Johnson, 1972b) and as a simple and manageable theoretical basis for policy recommendations by groups like IMF (Rhomberg and Heller, 1977), no general consensus has been reached as to validity of monetary model. One reason for this is that task of interpreting results of plethora of empirical tests of monetary approach' has been complicated by controversy over accuracy of exogeneity assumptions underlying MBOP that are implicit in those studies. These include exogeneity with respect to reserve flows of determinants of demand for nominal money balances-the domestic price level, interest rate and level of real income-as well as domestic credit component of a country's money supply. Exogeneity makes task of interpretation difficult, for if MBOP assumptions regarding exogeneity are incorrect, then, to borrow Geweke's (1978, p. 163) words (and to add studies in MBOP literature to which they would apply), the otherwise identifying restrictions imposed on structural equations may not be sufficient to identify those equations (Argy and Kouri, 1974; Genberg, 1976), estimation procedures will be inconsistent (e.g., Bean, 1976; Zecher, 1976), and model cannot adequately portray dynamics of system it seeks to describe. This last problem transcends any issue of estimation (although it is not unrelated) for it implies that theoretical specification of MBOP is incorrect to begin with, thus invalidating putative reduced forms of MBOP that have come to represent approach and form basis for policy recommendations alluded to earlier. Historically, exogeneity was simply assumed as something not amenable to testing. Recently, however, Geweke (1978) has demonstrated that specification of exogeneity is a hypothesis with testable implications. The purpose of this paper is to test formally exogeneity hypothesis underlying empirical tests of MBOP specifically, and theoretical specification of model in general, using Geweke's methods. It is found that hypothesis that variables mentioned above are in fact exogenous can be rejected for each and every country in sample. This finding casts some doubt on theoretical validity of MBOP and even more doubt on accuracy of much of empirical evidence garnered in its support. The plan of paper is as follows. In section II a MBOP model is briefly presented and its exogeneity restrictions are highlighted. In section III formal test of exogeneity is discussed, and then in section IV results of tests using data from Australia, France, Germany, Norway and Sweden are presented. Section V contains some conclusions.

faces, however elastic it may be. But it is necessary to look beyond the elasticity of the curve to determine whether or not this is the case. Or consider two demand estimation situations, identical in terms of the supply elasticities involved. Differences in the variability of supply could make for large differences in the quality and appropriateness of OLS estimates. Yet a researcher relying on elasticity would be totally unaware of the differences in OLS bias in the two situations. Finally, concern about elasticities turns attention from the central question in choosing an estimator in the face of possible OLS bias: the relative shifting in the equations involved. That this is an important factor is well known, having been pointed out by Working as long ago as 1927, and by many others since. However, this essential factor is often overlooked in empirical situations.

Observation error, Observation Bias, Accounting research

Behavioral Decision theory, Judgement, Choice, Normative theories

Journal Article Transaction Costs, Uncertainty and Generally Inactive Futures Markets Get access H. M. Shefrin H. M. Shefrin University of Santa Clara Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 48, Issue 1, January 1981, Pages 131–137, https://doi.org/10.2307/2297125 Published: 01 January 1981 Article history Received: 01 October 1978 Accepted: 01 April 1980 Published: 01 January 1981

In this paper I develop an N-person stochastic game in which each player views himself as facing a Markov decision process. Specifically, every player is assumed to choose his strategy as a policy which is optimal with respect to the process in question. It is clear that such a strategy need not be a best reply to the strategy choices of the other players, so a Nash equilibrium might not be appropriate for this game. Consider the following alternative equilibrium concept. Every player compares the subjective transition probabilities from his Markov decision process with the objective frequencies which he encounters during the course of the game. If no player receives disconfirming evidence about the subjective probabilities he is using, then the game is said to be in informational equilibrium. In this case the subjective probabilities are termed self-generating. Clearly, an informational equilibrium falls into the class of fulfilled expectations or rational equilibria. The main result of the paper is that an informational equilibrium exists for the game under consideration. The motivation for studying this particular class of games derives from the microeconomic treatment of household and firm intertemporal decisions under uncertainty. In economic theory it is common to treat these decision problems within a dynamic programming Markov decision process framework.' Here Markov transistion probabilities are used to describe the random prices faced by households and the random demand functions faced by firms. A question which would seem to be of considerable interest involves the problem of how one might model a complete economy in which each agent treats his own decision problem as a Markov decision process. Choosing an appropriate equilibrium concept would naturally be of paramount importance. This is the essential issue with which the present paper is concerned. It is important though to emphasize that the underlying approach does not really depend upon the specification of any particular economy. Therefore the general framework is described in terms of an