Using the currency swap as the forward-exchange risk hedge, the covered interest parity condition in the long-date capital markets is evaluated. Of interest is the extent to which deviations from parity can be attributed to transactions costs. The empirical conclusions presented in the paper suggest that, although (on average) transactions costs account for deviations from parity, net deviations (in excess of transactions costs) are neither rare nor short-lived. Yet an analysis of the variance structure of covered interest parity reveals that these profit opportunities diminish over time and eventually disappear. Copyright 1996 by MIT Press.

Abstract-The mechanisms governing the relationship of money, prices and interest rates to the business cycle are the most studied and most disputed topics in macroeconomics. In this paper, we first document key empirical aspects of this relationship. We then ask how well three benchmark rational expectations macroeconomic models-a real business cycle model, a sticky price model and a liquidity effect model-account for these central facts. While the models have diverse successses and failures, none can account for the fact that real and nominal interest rates are "inverted leading indicators " of real economic activity. That is, none of the models captures the post-war U.S. business cycle fact that a high real or nominal interest rate in the current quarter predicts a low level of real economic activity two to four quarters in the future. Robert G. King and Mark W. Watson* In exploring the predictions of these models, we take the stock of money to be one of several exogenous variables in the system. All of our models are capable of generating a forecasting role for money relative to real economic activity, similar to that found in the U.S. data. In the real business model, monetary changes can forecast real activity because productivity is related to many underlying sources of shocks and because these real shocks also affect the money stock. In the models with "sticky prices " and "liquidity effects" I.

[This study investigates the association between going concern opinions and the market's reaction to bankruptcy filings. The results of prior studies indicate that going concern opinions are useful in predicting bankruptcy and provide some explanatory power in predicting bankruptcy resolution. As such, going concern opinions may reduce the surprise associated with bankruptcy. Our results are consistent with this assertion. Firms receiving going concern opinions experience less negative excess returns in the period surrounding bankruptcy filings than those receiving unqualified opinions. These results hold after controlling for the probability of bankruptcy, the market's reaction to news announcements occurring prior to bankruptcy, and changes in stock price prior to the issuance of the auditor's report. Overall, our results are consistent with going concern opinions having information value.]

The use of predetermined variables to represent public information and time-variation has produced new insights about asset pricing models but the literature on mutual fund performance has not exploited these insights. This paper advocates conditional performance evaluation in which the relevant expectations are conditioned on public information variables. The authors modify several classical performance measures to this end and find that the predetermined variables are both statistically and economically significant. Conditioning on public information controls for biases in traditional market timing models and makes the average performance of the mutual funds in the authors' sample look better.

Willingness to pay (WTP), most economists believe, is an appropriate benefits metric for government expenditure and regulatory policies that reduce risks to human life. It depends, however, on the distribution of risk and wealth. Currently, society's expenditures overemphasize concentrated risks, say after-the-fact treatment as opposed to prevention. A "dead-anyway" effect complements excess attention to intense interests in explaining this. Our normative criterion for spending on risk reduction is what a rational, albeit uninsured, individual confronting lotteries on future risks to life and wealth would choose for himself. This requires correcting WTP to eliminate the dead-anyway effect but continues to reflect that wealth enhances the utility of living.

[Prior research indicates that auditors encounter difficulty in applying experienced error frequencies to judgments of the probability that an audit objective is violated given a particular transaction cycle. This difficulty may occur because of a mismatch between the organization of this particular judgment task and the organization of auditors' knowledge. We test the effectiveness of two decision aids at counteracting this difficulty: (1) a checklist aid which facilitates knowledge retrieval and (2) a decomposition-and-mechanical-aggregation aid which facilitates both knowledge retrieval and aggregation. The checklist aid slightly improved the degree to which auditors' judgments reflected experienced frequencies and the mechanical-aggregation aid greatly improved auditors' judgments, completely counteracting the effect of the task organization-knowledge organization mismatch.]