[A simple introduction to contingent claim valuation of risky assets in a discrete time, stochastic interest-rate economy is provided. Taking the term structure of interest rates as exogenous, closed-form solutions are derived for European options written on (i) Treasury bills, (ii) interest-rate forward contracts, (iii) interest-rate futures contracts, (iv) Treasury bonds, (v) interest-rate caps, (vi) stock options, (vii) equity forward contracts, (viii) equity futures contracts, (ix) Eurodollar liabilities, and (x) foreign exchange contracts.]

There appears to be some confusion in the literature on asset-pricing models about the role of default-risk in short-selling and borrowing by consumers. For example, in the Sharpe-Lintner ([16] [9]) model it is usual to assume that all consumers are able to borrow or lend without restriction, at the riskless rate of interest. This assumption has been recognized to involve an inconsistency in the theory, because with personal borrowing there is always a positive probability of default with the S-L assumptions, so that the consumer's bond (as seen by any lender) is not a perfect substitute for the safe asset.

Journal Article Consumer Preferences, Linear Demand Functions and Aggregation in Competitive Asset Markets Get access Frank Milne Frank Milne Australian National University and University of Rochester Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 46, Issue 3, July 1979, Pages 407–417, https://doi.org/10.2307/2297010 Published: 01 July 1979 Article history Received: 01 March 1977 Accepted: 01 September 1978 Published: 01 July 1979

This paper attempts to clarify the apparent conflict between the recent contribution of Stiglitz and Smith (S-S) and the established Modigliani-Miller (M-M) leverage theorem. The two approaches differ in their treatment of asset creation. Whereas M-M restrict their discussion to a given set of competitive asset markets, S-S consider the addition of an extra asset to the original systems.

This paper presents a theory of equilibrium asset pricing that generalizes the recent work of G. Connor (1984). Th e model extends Connor's results to more general sets of asset return s and consumer preferences; introduces production; and provides a fra mework for analyzing exact and approximate equilibrium asset pricing. The other major contribution of the paper is the introduction of geo metric arguments that exploit the properties of induced preferences o ver assets. This method of analyzing asset pricing provides an intuit ively appealing way of analyzing equilibrium asset pricing theories.

[The Cox, Ross, and Rubinstein binomial model is generalized to the multinomial case. Limits are investigated and shown to yield the Black-Scholes formula in the case of continuous sample paths for a wide variety of complete market structures. In the discontinuous case a Merton-type formula is shown to result, provided jump probabilities are replaced by their corresponding Arrow-Debreu prices.]

The implications for portfolio behavior and asset prices of transaction costs are central to the analysis of numerous issues in economics. For example, questions involving the demand for the financial contracts issued by financial intermediaries are intimately tied to the existence of transaction costs. Thus the analysis of questions involving the nature of the demand for mutual fund shares, insurance contracts, mortgage loans, etc., and the form those contracts take require the explicit inclusion of transaction costs.

A simple introduction to contingent claim valuation of risky assets in a discrete time, stochastic interest-rate economy is provided. Taking the term structure of interest rates as exogenous, closed-form solutions are derived for European options written on (i) Treasury bills, (ii) interest-rate forward contracts, (iii) interest-rate futures contracts, (iv) Treasury bonds, (v) interest-rate caps, (vi) stock options, (vii) equity forward contracts, (viii) equity futures contracts, (ix) Eurodollar liabilities, and (x) foreign exchange contracts.

This paper studies the role of a large trader in a dynamic currency attack model based on Abreu and Brunnermeier (2003), who study stock market bubbles and crashes in a dynamic model with a continuum of rational small traders. We introduce a large trader into their model and apply it to currency attacks. In an attack against a fixed exchange rate regime with a gradually overvalued currency, traders lack common knowledge about the time when the overvaluation starts and need to coordinate to break a peg. Both the inability of traders to synchronize their attack and their incentive to time the collapse of the regime lead to the persistent overvaluation of the currency. We find that the presence of a large trader with perfect information induces small traders to attack sooner and leads to an accelerated collapse of the regime. But the presence of a large trader with noisy information may delay the collapse of the regime ex post. Moreover, a large trader with precise information tends to be at the rear of an attack. With noisy information, he could attack earlier or later than small traders. In both cases, the large trader affects market dynamics of the attack substantially.

Frank Milne, Hersh M. Shefrin; Clarifying Some Misconceptions About Stock Market Economies*, The Quarterly Journal of Economics, Volume 99, Issue 3, 1 Augu