[Any admissible portfolio performance measure should satisfy four minimal conditions: it assigns zero performance to each reference portfolio and it is linear, continuous, and nontrivial. Such an admissible measure exists if and only if the securities market obeys the law of one price. A positive admissible measure exists if and only if there is no arbitrage. This article characterizes the (infinite) set of admissible performance measures. It is shown that performance evaluation is generally quite arbitrary. A mutual fund data set is also used to demonstrate how the measurement method developed here can be applied.]

[This article offers a tractable monetary asset pricing model. In monetary economies, the price level, inflation, asset prices, and the real and nominal interest rates have to be determined simultaneously and in relation to each other. This link allows us to relate in closed form each of the dependent entities to the underlying real and monetary variables. Among other features of such economies, inflation can be partially nonmonetary and the real and nominal term structures can depend on fundamentally different risk factors. In one extreme, the process followed by the real term structure is independent of that followed by its nominal counterpart.]

[We develop a measurement theory of market integration, based on two notions of "integrated markets." First, two markets cannot be perfectly integrated in any sense if one can construct two portfolios, one from each market, that have identical payoffs but different prices. In that case, the law of one price is violated across the markets. Second, they cannot be integrated in a stronger sense if there are cross-market arbitrage opportunities. Two measures of market integration are developed, respectively reflecting these notions. The smaller the measures, the more closely integrated (in the respective senses) the markets. Among other things, they are interpreted as measuring pricing discrepancy between markets.]

This article empirically analyzes some properties shared by all one-dimensional diffusion option models. Using S&P 500 options, we find that sampled intraday (or interday) call (put) prices often go down (up) even as the underlying price goes up, and call and put prices often increase, or decrease, together. Our results are valid after controlling for time decay and market microstructure effects. Therefore one-dimensional diffusion option models cannot be completely consistent with observed option price dynamics; options are not redundant securities, nor ideal hedging instruments-puts and the underlying asset prices may go down together.

In existing theory, wealth is no more valuable than its implied consumption rewards. In reality investors acquire wealth not just for its implied consumption, but for the resulting social status. Max M. Weber refers to this desire for wealth as the spirit of capitalism. We examine, both analytically and empirically, implications of Weber's hypothesis for consumption, savings, and stock prices. When investors care about relative social status, propensity to consume and risk-taking behavior will depend on social standards, and stock prices will be volatile. The spirit of capitalism seems to be a driving force behind stock-market volatility and economic growth.

This article studies the equilibrium valuation of foreign exchange contingent claims. Within a continuous-time Lucas (1982) two-country model, exchange rates, interest rates, and, in particular, factor risk prices are all endogenously and jointly determined. This guarantees the internal consistency of these price processes with a general equilibrium. In the same model, closed-form valuation formulas are presented for currency options and currency futures options. Common to these formulas is that stochastic volatility and stochastic interest rates are admitted. Hedge ratios and other comparative statics are also provided analytically. It is shown that most existing currency option models are included as special cases.

Substantial progress has been made in developing more realistic option pricing models. Empirically, however, it is not known whether and by how much each generalization improves option pricing and hedging. The authors fill this gap by first deriving an option model that allows volatility, interest rates, and jumps to be stochastic. Using S&P 500 options, they examine several alternative models from three perspectives: (1) internal consistency of implied parameters/volatility with relevant time-series data, (2) out-of-sample pricing, and (3) hedging. Overall, incorporating stochastic volatility and jumps is important for pricing and internal consistency. But for hedging, modeling stochastic volatility alone yields the best performance.

Any admissible portfolio performance measure should satisfy four minimal conditions: it assigns zero performance to each reference portfolio and it is linear, continuous, and nontrivial. Such an admissible measure exists if and only if the securities market obeys the law of one price. A positive admissible measure exists if and only if there is no arbitrage. This article characterizes the (infinite) set of admissible performance measures. It is shown that performance evaluation is generally quite arbitrary. A mutual fund data set is also used to demonstrate how the measurement method developed here can be applied.

We develop a measurement theory of market integration, based on two notions of “integrated markets”. First, two markets cannot be perfectly integrated in any sense if one can construct two portfolios, one from each market, that have identical payoffs but different prices. In that case, the law of one price is violated across the markets. Second, they cannot be integrated in a stronger sense if there are cross-market arbitrage opportunities. Two measures of market integration are developed, respectively reflecting these notions. The smaller the measures, the more closely integrated (in the respective senses) the markets. Among other things, they are interpreted as measuring pricing discrepancy between markets.