Stock market returns are significantly correlated with inflation and money growth. The impact of real macroeconomic variables on aggregate equity returns has been difficult to establish, perhaps because their effects are neither linear nor time invariant. We estimate a GARCH model of daily equity returns, where realized returns and their conditional volatility depend on 17 macro series' announcements. We find six candidates for priced factors: three nominal (CPI, PPI, and a Monetary Aggregate) and three real (Balance of Trade, Employment Report, and Housing Starts). Popular measures of overall economic activity, such as Industrial Production or GNP are not represented.

amines the behavior of a price-discriminating monopolist under un-certainty. The firm seeks to maximize its market value in (Sharpe-Lintner) asset market equilibrium by selecting appropriate output prices and capacity level. Meyer's analysis describes a firm that either sells one (or more) products in several distinct markets, or produces nontransferable products (e.g., electric power, telephone services) at different points in time. Without loss of generality this comment employs the former interpretation. Meyer derives two important conclusions with respect to a firm's optimal pricing policy. 1. The price charged each market segment under uncertainty differs from the certainty equivalent) price in a way that reflects the segment's riskiness. 2. Optimal prices for a set of market segments reflect demand covariances among the market segments. Unfortunately, a basic algebraic oversight leads Meyer to misinterpret market "risk. " Subject to this misunderstanding, the first conclusion above remains correct in spirit, but the second is entirely misleading. This comment correctly defines the market "risk " pertinent to a value-maximizing firm's pricing decision. THE MODEL Meyer's framework is briefly restated here. The firm manufac-tures one (or more) product(s) and sells it (them) in several markets simultaneously. 2 Each market has a demand schedule, Di = D i (Pi,ui) i = 1, , n, where ui is a stochastic element. Expected demand at any price is given by Di * (Pi) = E[Di(Phui)], 1. That is, all variables set to their expected values. 2. One of Meyer's constraint variables must be reinterpreted to apply to the case of intertemporal demand segments. This is not directly relevant to the issue discussed here.

The authors examine debenture yields over the period 1983-91 to evaluate the market's sensitivity to bank-specific risks and conclude that investors have rationally reflected changes in the government's policy toward absorbing private losses in the event of a bank failure. Although this evidence does not establish that market discipline can effectively control banking firms, it soundly rejects the hypothesis that investors cannot rationally differentiate among the risks undertaken by the major U.S. banking firms.

Corporations - Finance; Bank investments; Financial leverage