The law of one price (LOP) is tested for narrowly defined commodities traded in futures markets in different countries during the period 1973–80. Although the LOP holds as an average tendency for most of the commodities, there are instances of large riskless arbitrage returns (before transactions costs). Deviations from the LOP tend to be commodity specific rather than due to a common external factor and they tend to be smaller the longer the maturity of the futures contract.

The law of one price (LOP) is tested for narrowly defined commodities traded in futures markets in different countries during the period 1973–80. Although the LOP holds as an average tendency for most of the commodities, there are instances of large riskless arbitrage returns (before transactions costs). Deviations from the LOP tend to be commodity specific rather than due to a common external factor and they tend to be smaller the longer the maturity of the futures contract.

The behavior of competing dealers in securities markets is analyzed. Securities are characterized by stochastic returns and stochastic transactions. Reservation bid and ask prices of dealers are derived under alternative assumptions about the degree to which transactions are correlated across stocks at a given time and over time in a given stock. The conditions for interdealer trading are specified, and the equilibrium distribution of dealer inventories and the equilibrium market spread are derived. Implications for the structure of securities markets are examined.

The behavior of competing dealers in securities markets is analyzed. Securities are characterized by stochastic returns and stochastic transactions. Reservation bid and ask prices of dealers are derived under alternative assumptions about the degree to which transactions are correlated across stocks at a given time and over time in a given stock. The conditions for interdealer trading are specified, and the equilibrium distribution of dealer inventories and the equilibrium market spread are derived. Implications for the structure of securities markets are examined.

Recent empirical work by Banz (1981) and Reinganum (1981) documents abnormally large risk-adjusted returns for small firms listed on the NYSE and the AMEX. The strength and persistence with which the returns appear lead both authors to conclude the single-period, two-parameter capital asset pricing model is misspecified. This study (1) confirms that total market value of common stock equity varies inversely with risk-adjusted returns, (2) demonstrates that price per share does also, and (3) finds that transaction costs at least partially account for the abnormality.