I estimate the welfare benefits of eliminating idiosyncratic consumption shocks in the United States related (unrelated) to the business cycle as 36%–39% (lower than 1%) of household utility. Estimates of the former exceed earlier ones because I distinguish between idiosyncratic shocks related/unrelated to the business cycle, estimate the negative skewness of shocks, target moments of idiosyncratic shocks from household-level CEX data, and target market moments. Benefits of eliminating aggregate shocks are lower than 1% of utility. Policy should facilitate the insurance of idiosyncratic shocks related to the business cycle, such as job layoffs, with proof that individuals diligently seek suitable employment during periods of unemployment.

The widespread notion that dollar-cost averaging can help an investor minimize the risk of investing all of one's capital in the market at an inappropriate time is aptly stated by Malkiel [4, p. 242]:Periodic investments of equal dollar amounts in common stocks can substantially reduce (but not avoid) the risks of equity investment by insuring that the entire portfolio of stocks will not be purchased at temporarily inflated prices. The investor who makes equal dollar investments will buy fewer shares when prices are high and more shares when prices are low.

We develop a theory of warrants held by competitive warrantholders not constrained to exercise their warrants as one block; the theory also applies to convertible bonds held by competitive bondholders not constrained to convert their bonds as one block. We prove that the warrant (bond) price in each of the competitive equilibria is less than or equal to the price in an economy with the block constraint; and for at least one competitive equilibrium the warrant (bond) price equals the warrant (bond) price in the block-constrained economy. We illustrate the paths of competitive warrant exercise and bond conversion and conclude that under realistic assumptions they can be long.

The tax law confers upon the investor a timing option - to realize capital losses and defer capital gains. With the tax rate on long term gains and losses being about half the short term rate, the law provides a second timing option - to realize losses short term and gains long term, if at all. Our theory and simulation over the 1962–1977 period establish that taxable investors should realize long term gains in high variance stocks and repurchase stock in order to realize potential future losses short term. Tax trading does not explain the small-firm anomaly but predicts a seasonal pattern in trading volume which maps into a seasonal pattern in stock prices, the January anomaly, only if investors are irrational or ignorant of the price seasonality.

We embed the Sharpe-Lintner, two-parameter asset pricing theory in an intertemporal general equilibrium model. The investment opportunity set changes stochastically over time; in general the short-term and long-term interest rates and the distribution of the rate of return of the market portfolio are non-stationary. This non-stationarity, which is admissible in the Sharpe-Lintner model, has two implications: First, it may bias econometric methods which fail to explicitly take into account the non-stationarity. Second, the sequential application of the Sharpe-Lintner model in the discounting of stochastic cash flows becomes computationally complex and of little practical use.

[A model of the nominal term structure of interest rates is developed that has a positive and stationary process for the interest rate and delivers closed-form expressions for the prices of discount bonds and European options on bonds. Unlike the one-state-variable version of the Cox, Ingersoll, and Ross (1985) model, this model--even in its one-state-variable version--allows the term premium to change sign as a function of the state and the term of maturity, and also allows for shapes of the yield curve that are observed in the U.S. data but that are disallowed in the Cox, Ingersoll, and Ross model.]

A model of the nominal term structure of interest rates is developed that has a positive and stationary process for the interest rate and delivers closed-form expressions for the prices of discount bonds and European options on bonds. Unlike the one-state-variable version of the Cox, Ingersoll, and Ross (1985) model, this model—even in its one-state-variable version—allows the term premium to change sign as a function of the state and the term to maturity, and also allows for shapes of the yield curve that are observed in the U.S. data but that are disallowed in the Cox, Ingersoll, and Ross model

[This paper examines the effect of the capital gains tax on investors' optimal consumption and investment behavior and on equilibrium asset prices in an intertemporal economy. It explictly considers the fact that capital gains and losses on stock are taxed only when the investor sells the stock. Ownership of stock then confers upon the investor a timing option which enables him to realize capital losses immediately and defer capital gains. This option is a large fraction of the total benefit which accrues to the stockholder, and is the prime reason for the novel implications of capital gains taxation, discussed in this paper.]