The sphere of modern financial economics encompases finance, micro investment theory and much of the economics of uncertainty.As is evident from its influence on other branches of economics including public finance, industrial organization and monetary theory, the boundaries of this sphere are both permeable and flexible.The complex interactions of time and uncertainty guarantee intellectual challenge and intrinsic excitement to the study of financial economics.Indeed, the mathematics of the subject contain some of the most interesting applications of probability and optimization theory.But for all its mathematical refinement, the research has nevertheless had a direct and significant influence on practice.It was not always thus.Thirty years ago, finance theory was little more than a collection of anecdotes, rules of thumb, and manipulations of accounting data with an almost exclusive focus on corporate financial management.There is no need in this meeting of the guild to recount the subsequent evolution from this conceptual potpourri to a rigorous economic theory subjected to systematic empirical examination.1 Nor is there a need III -2on this occasion to document the wide-ranging impact of the research on 2 finance practice.I simply note that the conjoining of intrinsic intellectual interest with extrinsic application is a prevailing theme of research in financial economics.The later stages of this successful evolution has however been marked by a substantial accumulation of empirical anomalies; discoveries of theoretical inconsistencies; and a well-founded concern about the statistical power of many of the test methodologies.3Finance, thus finds itself today in the seemingly-paradoxical position of having more questions and empirical puzzles than at the start of its modern development.To be sure, some of the empirical anomalies will eventually be shown to be mere statistical artifacts.However, just as surely, others will not be so easily dismissed.I see this new-found ignorance in finance as mostly of the useful type that reflects our "...express recognition of what is not yet known, but needs to be known in order to lay the foundation for still more knowledge." 5Anomalous empirical evidence has indeed stimulated wide-ranging research efforts to make explicit the theoretical and empirical limitations of the basic finance model with its frictionless markets, complete information, and rational, optimizing economic behavior.Although much has been done, this research line is far from closure.Some hold that the paradigm of rational and optimal behavior must be largely discarded if knowledge in finance is to significantly advance.Others believe that most of the important empirical anomalies surrounding the current theory can be resolved within that traditional paradigm.Whichever view emerges as the dominant theme in finance, our understanding of the subject promises to be greatly enriched by these research programs.

The sphere of modern financial economics encompases finance, micro investment theory and much of the economics of uncertainty. As is evident from its influence on other branches of economics including public finance, industrial organization and monetary theory, the boundaries of this sphere are both permeable and flexible. The complex interactions of time and uncertainty guarantee intellectual challenge and intrinsic excitement to the study of financial economics. Indeed, the mathematics of the subject contain some of the most interesting applications of probability and optimization theory. But for all its mathematical refinement, the research has nevertheless had a direct and significant influence on practice. It was not always thus. Thirty years ago, finance theory was little more than a collection of anecdotes, rules of thumb, and manipulations of accounting data with an almost exclusive focus on corporate financial management. There is no need in this meeting of the guild to recount the subsequent evolution from this conceptual potpourri to a rigorous economic

Introducing more speculators into the market for a given commodity leads to improved risk sharing but can also change the informational content of prices. This inflicts an externality on those traders already in the market, whose ability to make inferences based on current prices will be aff ected. In some cases, the externality is negative: the entry of new s peculators lowers the informativeness of the price to existing trader s. The net result can be one of price destabilization and welfare red uction. This is true even when all agents are rational, risk-averse c ompetitors who make the best possible use of their available informat ion. Copyright 1987 by University of Chicago Press.

One of the current questions in the literature on the demand for money is whether the adjustment of actual to desired money holdings is in nominal or real terms.This paper describes a simple procedure than can be used to test the nominal against the real hypothesis.The test is carried out for 27 countries.The paper also tests the structural stability of the demand for money equations and the correctness of the dynamic specification.The results are strongly in favor of the nominal adjustment hypothesis.The estimated equations are quite good in terms of the number of coefficient estimates that are of the right sign and that are significant.The equations also stand up well when tested against a more general dynamic specification.There is, however, some evidence of structural instability before and after 1973, although the instability is generally moderate.The instability does not affect the conclusion that the nominal adjustment hypothesis dominates the real adjustment hypothesis.

This paper studies pure exchange economies with infinite dimensional commodity spacces in the setting of Riesz dual systems. An Edgeworth equilibrium is an allocation that belongs to the core of every replication of the ec onomy. Under some mild conditions, it is shown that (1) Edgeworth equ ilibria exist, (2) an allocation is an Edgeworth equilibrium if and o nly if it is an approximate quasiequilibrium, and (3) if preferences are uniformly proper, then every Edgeworth equilibrium is a quasiequi librium. The obtained results specialize to most exchange economies t hat have appeared in the literature of general equilib rium theory. Copyright 1987 by The Econometric Society.

A risk neutral principal wishes to exact a payment from a risk neutral agent whose wealth he does not know, but may verify through a costly auditing procedure. We characterize efficient schemes for the principal when he is allowed to choose schedules for preaudit and postaudit payments and audit probabilities, subject to the constraint that only monetary incentives can be used and that the principal may never make a net payment to the agent. The main results are that efficient schemes involve preaudit payments which are increasing in the agent's wealth, audit probabilities are decreasing in the agent's wealth and also satisfy certain constraints as equalities. In general, such schemes involve stochastic auditing and rebates after an audit.