This note corrects recent results concerning qualitative portfolio composition in Roll's ‘Critique of Asset Pricing Theory Tests’.

The pricing of new corporate bond issues is examined, with particular emphasis on the seasoning effect and the cost of underwriting. Considerable attention is paid to some special features of the corporate bond market, including the use of actual trader quotes so as to accurately measure holding period returns. Our results suggest that the cost of issuing corporate bonds is less than previously reported.

ABSTRACT The pricing of new corporate bond issues is examined, with particular emphasis on the seasoning effect and the cost of underwriting. Considerable attention is paid to some special features of the corporate bond market, including the use of actual trader quotes so as to accurately measure holding period returns. Our results suggest that the cost of issuing corporate bonds is less than previously reported.

We show how a given probability distribution can be approximated by an arbitrary distribution in terms of a series expansion involving second and higher moments. This theoretical development is specialized to the problem of option valuation where the underlying security distribution, if not lognormal, can be approximated by a lognormally distributed random variable. The resulting option price is expressed as the sum of a Black-Scholes price plus adjustment terms which depend on the second and higher moments of the underlying security stochastic process. This approach permits the impact on the option price of skewness and kurtosis of the underlying stock's distribution to be evaluated.

Barr Rosenberg, Andrew Rudd, Factor-Related and Specific Returns of Common Stocks: Serial Correlation and Market Inefficiency, The Journal of Finance, Vol. 37, No. 2, Papers and Proceedings of the Fortieth Annual Meeting of the American Finance Association, Washington, D.C., December 28-30, 1981 (May, 1982), pp. 543-554

Andrew Rudd, Barr Rosenberg, The "Market Model" In Investment Management, The Journal of Finance, Vol. 35, No. 2, Papers and Proceedings Thirty-Eighth Annual Meeting American Finance Association, Atlanta, Georgia, December 28-30, 1979 (May, 1980), pp. 597-607