capital flow controls international asset pricing and investors welfare a multi country framework this paper investigates the impact of capital flow restrictions on the pricing of securities on the optimal portfolio composition for investors of different nationalities and on their welfare under capital flow controls the equilibrium price of a security is determined jointly by its international and national risk premiums and investors acquire nationality specific portfolios along with a market wide proxy for the world market portfolio removal of investment barriers generally leads to an increase in the aggregate market value of the affected securities and all investors favor a move toward market integration introduction of different types of index funds in the world market generally increases world market integration and investor welfare in recent years the international capital markets have undergone numerous important changes that have increased the international linkage of national markets these changes include the creation of national index funds e g mexico korea taiwan india france and scandinavia and selective liberalization e g brazil india korea sweden and japan despite their potential impact on the national economies and global finance it is not clear what consequences these integrating changes entail for example is welfare increased by allowing cross border investment that is restricted to purchasing the entire national portfolio of which the national index fund is a class unfortunately with the exception of subrahmanyam 1975a who studies the pricing and welfare effects of fully integrating heretofore completely segmented markets other international asset pricing models that incorporate capital flow restrictions for instance black 1974 stulz 1981b lessard et al 1983 errunza and losq 1985 cooper and kaplanis 1986 and eun and janakiramanan 1986 analyze the pricing but not the welfare effects of investment barriers to analyze systematically the welfare implications of various structural changes in the current market environment this paper follows the lead of subrahmanyam and recasts the analysis in two important respects

multi objective stochastic programming for portfolio selection abstract generally in the portfolio selection problem the decision maker dm considers simultaneously conflicting objectives such as rate of return liquidity and risk multi objective programming techniques such as goal programming gp and compromise programming cp are used to choose the portfolio best satisfying the dm s aspirations and preferences in this article we assume that the parameters associated with the objectives are random and normally distributed we propose a chance constrained compromise programming model cccp as a deterministic transformation to multi objective stochastic programming portfolio model cccp is based on cp and chance constrained programming ccp models the proposed program is illustrated by means of a portfolio selection problem from the tunisian stock exchange market

international portfolio choice and political instability risk a multi objective approach abstract the benefits derived from international portfolio diversification into foreign nations including the less developed countries are well documented yet this practice is discouraged due to market imperfections such as political instability in practice nations may be differentiated further by many aspects such as border controls or political and social trends which constrain private transactions and financial decisions this paper attempts to examine 1 whether the home asset bias in a portfolio holding is associated with higher political instability risk and 2 to what extent international diversification among stocks in the presence of such risk outperforms domestic stock portfolios using alternative instability risk proxies in the context of a discrete time version of mean variance framework we corroborate the impact of this type of risk on international portfolio investment decisions

portfolio choices in the presence of other risks the effects of multivariate risk are examined in a model of portfolio choice the conditions under which portfolio choices are separable from consumption decisions are derived unless the appropriate restrictions hold on investors preferences or on the probability distribution of risks the optimal portfolio is affected by other risks this requires generalizing the usual measures of risk aversion with one risky asset matrix measures of risk aversion are used to generalize the results of arrow 1965 and pratt 1964 concerning the effects of risk aversion and wealth on the optimal portfolio with two risky assets the choices made by two investors coincide if and only if their generalized risk aversion measures are identical ross s notion of stronger risk aversion is then used to characterize the effect of risk aversion on the level of investment in the riskier asset

trying to explain home bias in equities and consumption investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest a phenomenon called equity home bias in the absence of this bias investors would optimally diversify domestic output risk using foreign equities therefore consumption growth rates would tend to co move across countries even when output growth rates do not empirically however consumption growth rates tend to have a lower correlation across countries than do output growth rates a phenomenon i call consumption home bias in this paper i discuss these two biases and their potential relationship as suggested by the literature

risk taking global diversification and growth this paper develops a continuous time stochastic model in which international risk sharing can yield substantial welfare gains through its effect on expected consumption growth the mechanism linking global diversification to growth is an attendant world portfolio shift from safe low yield capital to riskier high yield capital the presence of these two types of capital captures the idea that growth depends on the availability of an ever increasing array of specialized hence inherently risky production inputs calibration exercises using consumption and stock market data imply that most countries reap large steady state welfare gains from global financial integration copyright 1994 by american economic association

a minimax portfolio selection strategy with equilibrium a new minimax model on optimal portfolio selection with uncertainty of both randomness and estimation in inputs is established and the corresponding optimal portfolio is derived analytically based on this result a sufficient condition for the existence and uniqueness of a nonnegative equilibrium price system under which the total demand and supply of each asset are equal is provided and an explicit formula for such a price system is obtained furthermore some properties of the equilibrium are discussed

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

political risk and the benefits of international portfolio diversification this paper examines the benefits of portfolio investment in the stock markets of politically risky countries by evaluating the effects of political risk constraints on the performance of a portfolio of international stocks we use monthly data on political risk ratings and stock returns for a sample of thirty six countries from april 1982 to december 1991 ex post and ex ante portfolio selection strategies are developed to assess the gains from international diversification efficient sets are derived using a quadratic programming technique we use four ex ante portfolio strategies whose optimal portfolio weights are those of the equally weighted portfolio the minimum variance portfolio the certainty equivalence tangency portfolio and the bayes stein portfolio the empirical findings based on the performance tests of jobson and korkie 1981 suggest that diversification among politically risky countries improves the risk return characteristics of optimal portfolios however the most striking benefit of the inclusion of politically risk countries in an international portfolio is the reduction in overall portfolio risk

international portfolio nondiversification and exchange rate variability abstract incomplete international portfolio diversification is implied by an equilibrium models of exchange rates with nontraded goods the model can also explain the greater correlation between consumption and income within a country than between consumption across countries nontraded goods make more stringent the elasticity conditions required to explain exchange rate variability resulting from current productivity disturbances though not from disturbances to fiscal policies or the prospective return to investment the model is also consistent with international real interest rate differentials changes over time in the current account and relative wealth across nations and observed time series properties of exchange rates

why do stocks and consumption imply such different gains from international risk sharing abstract estimates of the gains to international risk sharing based upon stock returns tend to find dramatically higher gains than do estimates from consumption based models in this paper i examine the reasons for these differences using a common theoretical framework for both approaches i find that the differences are largely due to the much higher variability of stock returns and its implied intertemporal substitution in marginal utility also contrary to conventional wisdom the differences in gains from the two approaches do not arise from treating stock returns as exogenous rather than endogenous

commodity trade and international risk sharing how much do financial markets matter abstract this paper evaluates the social gains from international risk sharing in some simple general equilibrium models with output uncertainty a simulation model calibrated to selected moments of u s and japanese data estimates the incremental loss from a ban on international portfolio diversification to be on the order of 0 20 percent of output per year even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology the paper argues that the small magnitude of potential trade gains may help explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility

a general proposition on the design of a neutral business tax abstract a simple and general means of levying a business tax that is neutral in the sense that it does not affect the firm s decisions at the margin is discussed in particular we analyze the effect of a business tax of our design on the investment decision of the firm the well known imputed income and immediate write off methods of levying a neutral business tax are found to be special cases of our general tax design the implication of our results is that a neutral pure profits tax can be levied without the informational difficulties of the imputed income method or the cash flow disadvantages of the immediate write off method

home bias in equity portfolios inflation hedging and international capital market equilibrium we test whether the home bias in equity portfolios is caused by investors trying to hedge inflation risk the empirical evidence is consistent with this motive only if investors have very high levels of risk tolerance and equity returns are negatively correlated with domestic inflation we then develop a model of international portfolio choice and equity market equilibrium that integrates inflation risk and deadweight costs using this model we estimate the levels of costs required to generate the observed home bias in portfolios consistent with different levels of risk aversion for a level of risk aversion consistent with standard estimates of the domestic equity market risk premium these costs are about a few percent per annum greater than observable costs such as withholding taxes thus the home bias cannot be explained by either inflation hedging or direct observable costs of international investment unless investors have very low levels of risk aversion article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

up close and personal investor sophistication and the disposition effect this paper analyzes the trading records of a major discount brokerage house to investigate the disposition effect the tendency to sell stocks that have appreciated in price winners sooner than stocks that trade below the purchase price losers in contrast to previous research that has demonstrated the disposition effect by aggregating across investors our main objective is to identify differences in the disposition bias across individuals and explain this in terms of underlying investor characteristics building on the findings in experimental economics and social psychology we hypothesize that differences in investor literacy about financial markets and trading frequency are responsible in part for the variation in individual disposition effect using demographic and socioeconomic variables as proxies for investor literacy we find empirical evidence that wealthier individuals and individuals employed in professional occupations exhibit a lower disposition effect consistent with experimental economics trading frequency also tends to reduce the disposition effect we provide guidelines for investment advisors regulators and investment communities to utilize our findings and help investors make better decisions

budget deficits corporate income taxes and the current account this paper studies the effects of budget deficits financed by taxing corporate incomes as households are finitely lived transfers and taxes on personal incomes are discounted at a higher rate than the interest on government debt as corporations are infinitely lived taxes on corporations are discounted at the same rate as the interest on government debt thus unanticipated deficits financed by taxing corporate incomes are neutral anticipated deficits financed by taxing corporations cause a current account surplus as transfers are then discounted at a higher rate than the taxes shifting taxes from households to corporations causes a current account surplus copyright 1995 by ohio state university press

optimal portfolio choice under loss aversion this paper analyzes the optimal investment strategy for loss averse investors assuming a complete market and general ito processes for the asset prices the loss averse investor follows a partial portfolio insurance strategy when the investor s planning horizon is short less than 5 years he or she considerably reduces the initial portfolio weight of stocks compared to an investor with smooth power utility the empirical section of the paper estimates the level of loss aversion implied by historical u s stock market data using a representative agent model we find that loss aversion and risk aversion cannot be disentangled empirically

on the effects of barriers to international investment a simple model is presented in which it is costly for domestic investors to hold foreign assets the implications of the model for the composition of optimal portfolios at home and abroad are derived it is shown that all foreign assets with a beta larger than some beta plot on either one of two security market lines some foreign assets with a beta smaller than are not held by domestic investors even if their expected return is increased slightly while it is obviously not true that asset markets are completely segmented between countries there is evidence of barriers to international investment although reality seems to lie in that grey area between complete segmentation and no segmentation at all most international asset pricing models are concerned with the extreme case of no barriers to international investment no effort seems to have been made to study the effect on portfolio choice of such barriers which make it costly to hold foreign securities as opposed to domestic securities but which do not in general render international diversification so onerous that investors avoid foreign securities completely casual empiricism suggests that models without barriers to international investment should be suspect those models cannot explain why it appears that in every country investors on average hold more domestic securities than would be required if they held the world market portfolio 2 this paper constructs a model of international asset pricing in which there is a cost associated with holding either long or short risky foreign securities for the sake of simplicity in most of the paper we assume that while domestic investors face barriers to international investment foreign investors face no such barriers it turns out that nothing significant is lost with such an assumption the main conclusions of this paper for the case in which foreign investors face no barriers to international investment are 1 in the presence of barriers to international investment some risky foreign

portfolio selection under strict uncertainty a multi criteria methodology and its application to the frankfurt and vienna stock exchanges abstract in modern portfolio theory it is common practice to first compute the risk reward efficient frontier and then to support an individual investor in selecting a portfolio that meets his her preferences for profitability and risk potential flaws include a the assumption that past data provide sufficient evidence for predicting the future performances of the securities under consideration and b the necessity to mathematically determine or approximate the investor s utility function in this paper we propose a methodology whose initial phase filters portfolios that are inefficient from a historical perspective while this is consistent with traditional approaches the second phase differs from the standard approach as it uses a decision table constructed by considering multiple scenarios assuming strict uncertainty the table cells measure consequences by a multi criteria linear performance index of simulated future returns which avoids difficulties with performance ratios the real world applicability is illustrated through two studies based on data from the stock exchanges in frankfurt and vienna

the eurobond market and corporate financial policy abstract on average significant positive abnormal returns are associated with eurobond issues during the period 1975 1985 the cross sectional and time series distributions of the abnormal returns are consistent with the hypothesis that impediments to the adjustment of asset supplies to new demand conditions are large enough to create profitable financing opportunities for firms our analysis demonstrates how profitable financing opportunities can persist on the eurobond market and when they are most likely to arise

portfolio preferences of foreign institutional investors the authors examine the relationship between foreign investment and the attributes of emerging market countries and firms in which investment is made their findings indicate that countries with higher levels of economic development and floating exchange rate regimes tend to have greater ability to obtain foreign capital after controlling for the country s level of economic development they find that firms in countries with stronger shareholder rights and legal framework attract more foreign capital the authors also find that foreign institutions allocate more of their assets to firms with better corporate governance after controlling for other country and firm attributes the main firm level measures of corporate governance are derived from accounting quality variables their results imply that steps can be taken both at the country and the firm level to create an environment conducive to foreign portfolio investment the analysis is based on a unique dataset consisting of equity positions of u s mutual funds in emerging markets

does industrial structure explain the benefits of international diversification abstract we examine the influence of industrial structure on the cross sectional volatility and correlation structure of country index returns for 12 european countries between 1978 and 1992 we find that industrial structure explains very little of the cross sectional difference in country return volatility and that the low correlation between country indices is almost completely due to country specific sources of return variation diversification across countries within an industry is a much more effective tool for risk reduction than industry diversification within a country

scenario based portfolio selection of investment projects with incomplete probability and utility information abstract in the selection of investment projects it is important to account for exogenous uncertainties such as macroeconomic developments which may impact the performance of projects these uncertainties can be addressed by examining how the projects perform across several scenarios but it may be difficult to assign well founded probabilities to such scenarios or to characterize the decision makers risk preferences through a uniquely defined utility function motivated by these considerations we develop a portfolio selection framework which i uses set inclusion to capture incomplete information about scenario probabilities and utility functions ii identifies all the non dominated project portfolios in view of this information and iii offers decision support for rejection and selection of projects the proposed framework enables interactive decision support processes where the implications of additional probability and utility information or further risk constraints are shown in terms of corresponding decision recommendations

nontraded goods nontraded factors and international non diversification abstract can the presence of nontraded consumption goods or nontraded factors of production explain the high degree of home bias displayed by investor portfolios we find that the answer is no so long as individuals have access to free international trade in financial assets in particular it is never optimal to exhibit home bias with respect to domestic traded good equities by contrast holdings of nontraded good equities in an optimal portfolio will depend sensitively on the elasticity of substitution between traded and nontraded goods

the capital asset pricing model theory and empiricism in a recent breakthrough article richard roll i977 has shown that the value of the huge amount of empirical research which has attempted to verify the sharpe lintner capital asset pricing model capm is open to question briefly roll claims that if all the empirical investigators were to take a meanvariance efficient portfolio as the market portfolio they would get in the sample a perfect linear relationship between average security returns and betas in what is commonly known as the second pass cross section regression this perfect linear relationship is tautological it neither proves nor disproves the capm theory it is a technical result obtainable by straightforward algebra without making any assumption regarding the investors preference it is interesting to mention that in another paper published in 1977 stephen ross makes the same argument with regards to the capm and the efficiency of the market portfolio in his words the efficiency of the market portfolio and the capm are equivalent see ross i 977 p 178 the purpose of this paper is to show that empirical evidence and the investigation of investor behaviour lends support to a rejection of the capm theory in its presentform a revised formulation of the capm developed by levy i 978 provides a more suitable theoretical model in the reformulated capm the systematic risk beta plays in most cases only a negligible role in measuring the security s risk in section i we sketch a different prooof of what we consider to be roll s basic claim this proof contributes no additional theoretical results beyond what is given by roll i977 appendix corollary 6 but it is simple very short and uses no matrix algebra in section ii we derive a number of sample efficient sets and demonstrate that all efficient portfolios include short positions such results can be interpreted in one of the following alternative ways a sample variations cause this result but the capm holds and no such results would be obtained if we employed ex ante rather than ex post parameters b the empirical results are not entirely attributed to sample variations and they indeed contradict the capm in its present form since the motives for taking a short position can be explained by strong positive correlations between rates of return of various stocks e g general motors and ford we believe that this co movement of prices prevails ex post as well as

behavioral portfolio theory we develop a positive behavioral portfolio theory bpt and explore its implications for portfolio construction and security design the optimal portfolios of bpt investors resemble combinations of bonds and lottery tickets consistent with friedman and savage s 1948 observation we compare the bpt efficient frontier with the mean variance efficient frontier and show that in general the two frontiers do not coincide optimal bpt portfolios are also different from optimal capm portfolios in particular the capm twofund separation does not hold in bpt we present bpt in a single mental account version bpt sa and a multiple mental account version bpt ma bpt sa investors integrate their portfolios into a single mental account while bpt ma investors segregate their port folios into several mental accounts bpt ma portfolios resemble layered pyramids where layers are associated with aspirations we explore a two layer portfolio where the low aspiration layer is designed to avoid poverty while the high aspiration layer is designed for a shot at riches

welfare gains from international risksharing abstract this paper uses consumption data to compute yet unexploited welfare gains that can be achieved through risksharing among twenty oecd countries there is both aggregate national consumption risk and nondiversifiable individual specific risk countries engage in an optimal risksharing arrangement to pool risk associated with the aggregate consumption endowment streams welfare gains are associated with reduced consumption variability and with the international pricing of the consumption streams of individual countries the paper considers the standard vnm time additive preferences as well as nonexpected utility and habit formation preferences large unexploited gains are found under all sets of preferences leading to an international risksharing puzzle

portfolio analysis an analytic derivation of the efficient portfolio frontier abstract in this paper the efficient portfolio frontier is derived explicitly for cases in which short sales are not allowed when all securities are risky it is shown that the efficient portfolio frontier consist of a series of monotonously increasing arcs of convex parabolas in the return variance plane if the efficient portfolio frontier of risky securities are known the efficient frontier can easily be revealed when there is a riskless security an upper limit on borrowing is also introduced

time consistent taxation in a dynastic family model with human and physical capital and a balanced government budget this paper analyzes optimal time consistent taxation in a dynastic family model with human and physical capital and with a balanced government budget when tax revenue is used for publicly provided consumption or lump sum transfers leisure would be higher than its social optimum pareto optimal taxation requires taxing capital income more heavily than labour income and subsidizing investment at the same rate of the tax also it requires either subsidizing labour at the same rate as a consumption tax or subsidizing consumption at the same rate as a labour income tax and hence it is not a practical guide to policy further a consumption tax or equivalently a uniform income tax with investment subsidies at the same rate can be improved on by taxing capital income more heavily than labour income ce memoire analyse la fiscalite optimale et consistante dans le temps dans un modele de famille dynastique avec capital humain et physique et un budget gouvernemental equilibre quand le revenu fiscal est utilise pour financer la consommation publique ou pour des transferts forfaitaires le niveau de loisir sera plus eleve que l optimum social la fiscalite optimale paretienne exige qu on taxe le revenu du capital plus fortement que celui du travail et qu on subventionne l investissement au meme taux que la taxe elle exige aussi soit qu on subventionne le travail au meme taux que la taxe a la comsommation soit qu on subventionne la consommation au meme taux que l impot sur le revenu du travail et donc ce n est pas un guide pratique pour la politique de plus un regime de taxe sur la consommation ou de maniere equivalente d impot uniforme sur le revenu avec subvention a l investissement au meme taux peut etre ameliore en taxant le revenu du capital plus fortement que celui du travail

the role and design of the corporate income tax proposals for tax reform have focused on the role of the corporate tax as either i a tax on pure profits or ii a withholding tax against certain forms of income capital gain income or income accruing to nonresidents little attention has been paid to reconciling these two functions we discuss how both functions can be combined so that the corporate tax can collect revenue from economic rents and withhold income at the same time we explicitly consider both nonfinancial firms and financial intermediaries

what can explain the apparent lack of international consumption risk sharing recent research in international business cycles finds that international consumption comovements do not match the risk sharing predictions of standard complete markets models in this paper i ask whether two different types of explanations can help explain this result 1 nonseparabilities between tradables and nontradable leisure or goods and 2 the effects of capital market restrictions on consumption risk sharing i find that risk sharing cannot be resolved by either explanation alone however when i allow for both nonseparabilities and certain market restrictions risk sharing among unrestricted countries cannot be rejected this evidence suggests that a combination of these two effects may be necessary to explain consumption risk sharing across countries

evaluating risky consumption paths the role of intertemporal substitutability abstract in dynamic stochastic welfare comparisons a failure clearly to distinguish between risk aversion and intertemporal substitutability can result in misleading assessments of the impact of risk aversion on the welfare costs of consumption risk changes the problem arises in any setting in which uncertainty is propagated over time notably but not exclusively in economies with stochastic consumption trends regardless of the preference setup adopted an increase in risk aversion amplifies the per period costs of risks the weights consumers use to cumulate the per period costs of risks with persistent effects should however depend on intertemporal substitutability as well as on risk aversion under time separable expected utility preferences an increase in the period utility function s curvature therefore alters the welfare effect of risk for reasons that are in part unrelated to risk aversion to illustrate these points i reconsider lucas s estimate of the cost of consumption instability for the postwar united states

investor protection and corporate governance recent research has documented large differences among countries in ownership concentration in publicly traded firms in the breadth and depth of capital markets in dividend policies and in the access of firms to external finance a common element to the explanations of these differences is how well investors both shareholders and creditors are protected by law from expropriation by the managers and controlling shareholders of firms we describe the differences in laws and the effectiveness of their enforcement across countries discuss the possible origins of these differences summarize their consequences and assess potential strategies of corporate governance reform we argue that the legal approach is a more fruitful way to understand corporate governance and its reform than the conventional distinction between bank centered and market centered financial systems

asset pricing puzzles and incomplete markets the representative agent theory of asset pricing is modified to incorporate heterogeneous agents and incomplete markets the model features two types of agents who differ up to a nontradable idiosyncratic component in their endowment processes numerical solutions indicate that individuals are able to diversify a substantial portion of their idiosyncratic income risk through riskless borrowing and lending alone restrictions on the variability of intertemporal marginal rates of substitution hansen and jagannathan 1991 are used to argue that incomplete markets as modeled here cannot account for the properties of asset returns that are anomalous from the perspective of representative agent theory a large literature in financial economics has investigated the extent to which variants of the lucas 1978 general equilibrium theory of asset pricing can account for the joint behavior of aggregate u s consumption and asset returns by and large this literature has concluded that a theory based upon frictionless arrow debreu markets and or a representative agent makes strongly counterfactual predictions regarding even the simple unconditional properties of this relationship mehra and prescott 1985 for instance show that the theory drastically underpredicts the average excess rate of return on u s stocks the so called equity premium puzzle weil 1989 points out as did mehra and prescott that the magnitude of the average risk free rate is far below that predicted by the theory this has been dubbed the risk free rate puzzle numerous authors including grossman melino and shiller 1987 and backus gregory and zin 1989 show that the theory cannot account for term premia inherent in the yield curve hodrick 1987 surveys a large literature which documents the theory s shortcomings in accounting for excess expected returns in foreign exchange markets the notion that the representative agent model cannot account for excess returns across a wide array of asset markets can be made more precise by using tools developed by hansen and jagannathan 1991 and shiller 1982

an investigation of cost differences between public sales and private placements of debt abstract we examine the cost differences between public sales and private placements of debt for a sample of public utility issues the lowest cost method depends on a firm s transaction costs which comprise flotation costs agency costs and the costs of searching the market our findings suggest that firms minimize the cost of issuing securities by selecting the market providing the lowest transaction costs

international investment restrictions and closed end country fund prices some closed end country funds trade at large premiums relative to their net asset values this paper examines whether international investment restrictions raise country fund price net asset value ratios by segmenting international capital markets we test whether a relation exists between announcements of changes in investment restrictions and changes in these ratios using weekly data from may 1981 to january 1989 the results provide evidence that some foreign markets are at least partially segmented from the u s capital market

the instability of governments and the instability of controls on funds transfers by multinational enterprises implications for political risk analysis this article represents a departure from previous empirical political risk studies it explicitly focuses on the association between specific governmental policy changes and other forms and political instability a cross national study of 115 countries finds positive but weak relationships between policy instability and other indicators of political instability the findings indicate the need to reconsider common assumptions about political risks

exchange rate volatility and deviations from unbiasedness in a cash in advance model abstract this paper examines time series properties of exchange rate changes the forward premium and the forward bias in the context of a variant of svensson s cash in advance model the model is solved and simulated using realistic forcing processes whose law of motion is estimated from u s japan data and then approximated by a markov chain although method of moments estimation shows that the over identifying restrictions implied by the model are not rejected it fails dramatically in producing a sufficiently variable risk premium on forward market speculation this result is robust to various pertubations to the model s parameters forcing processes and preference structure the model also fails to match exchange rate and forward premium volatility simultaneously

portfolio selection in stochastic markets with hara utility functions in this paper we consider the optimal portfolio selection problem where the investor maximizes the expected utility of the terminal wealth the utility function belongs to the hara family which includes exponential logarithmic and power utility functions the main feature of the model is that returns of the risky assets and the utility function all depend on an external process that represents the stochastic market the states of the market describe the prevailing economic financial social political and other conditions that affect the deterministic and probabilistic parameters of the model we suppose that the random changes in the market states are depicted by a markov chain dynamic programming is used to obtain an explicit characterization of the optimal policy in particular it is shown that optimal portfolios satisfy the separation property and the composition of the risky portfolio does not depend on the wealth of the investor we also provide an explicit construction of the optimal wealth process and use it to determine various quantities of interest the return risk frontiers of the terminal wealth are shown to have linear forms special cases are discussed together with numerical illustrations

does the liquidity of a debt issue increase with its size evidence from the corporate bond and medium term note markets to investigate the liquidity of large issues this study tests for yield differences between corporate bonds and medium term notes mtns in the sample mtns have an average issue size of 4 million compared with 265 million for bonds among mtns that have the same issuance date the same maturity date and the same corporate issuer we find no relation between size and yields moreover bonds and mtns have statistically equivalent yields thus rather than suggesting that large issues have greater liquidity these findings indicate that large and small securities issued by the same borrower are close substitutes the objective of this study is to test for a relation between the size of corporate debt offerings and their yields if investors value large offerings for their greater liquidity then large issues will have lower yields than small issues alternatively if investors view securities of the same borrower as close substitutes there may be no relation between issue size and yields to investigate whether issue size is a significant determinant of liquidity we test for yield differences between medium term notes mtns and bonds of the same corporate issuers in most respects mtns are similar to corporate bonds however mtns have an average issue size of around 5 million in contrast most offerings in the bond market raise at least 100 million thus if liquidity increases with issue size bonds will have lower yields than mtns and large mtns will have lower yields than small mtns the data we use consist of 4 182 mtns and 68 bonds offered by four large borrowers between october 1987 and december 1992 the issues in the sample range in size from 102 000 to 1 2 billion a disperse distribution that allows us to make reliable inferences about the relation between issue size and yields to test for a size effect within the mtn market we create subsamples of mtns that have the same issuance date the same maturity date and the same corporate issuer mtns in these subsamples are identical except for their yields and size on average yields on large mtns in the subsamples are 0 35 basis point higher than yields on small mtns a finding that is inconsistent with the liquidity hypothesis we also test for a yield difference between bonds

investor yield and gross underwriting spread comparisons among u s dollar domestic yankee eurodollar and global bonds abstract the characteristics and features of domestic foreign eurobonds and global bonds differ from one another as do their regulation we develop regression models to compare investor yield differences that should logically exist at issuance for these bond market segments for u s dollar denominated bonds our empirical results show that ceteris paribus both privately placed and rule 144a eurodollar issues yield more than publicly placed bonds yankee bonds yield insignificantly more than domestic bonds and the bearer feature common to eurodollar bonds is not prized enough by institutional investors for them to accept a lower yield relative to domestic or yankee bonds we do not find a statistically significant difference between the investor yield spread on u s dollar global bonds and u s domestic bonds or yankee bonds or eurodollar bonds we also study underwriting costs of publicly traded bonds and find ceteris paribus that eurodollar bonds are far more costly for the firm to issue than domestic bonds yankee bonds or global bonds domestic and yankee bonds are more expensive than global bonds and there is no significant cost difference between domestic and yankee bonds

investment in developed and less developed countries a number of studies have compared the investment risk of various industries and of various individual corporations in developed countries dcs the purpose of this paper is to compare investment risk in dcs with less developed countries ldcs the variance of returns to investment in common stocks provides a natural measure of investment risk and will be used in this study studies in ldcs include work of levy and sarnat 12 13 errunza 3 4 and lessard 11 levy and sarnat and errunza found low economy wide investment risk on an average for ldcs relative to dcs with stock indices being used as surrogates for economy wide risk these results are not unambiguous however because there are probable difficulties due to infrequent trading and averaging in the broad market indices used in the above studies hence we use a sample of the largest corporations that suffer little if at all from thin trading and or averaging

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite

on the neutrality of flow of funds corporate taxation real income earning business activities of firms rather than the financial ones furthermore it has virtually ignored the implications of the financial structure of the firm for the neutrality of flow of funds taxation of both real and financial activities of the firm in a model of the firm in which the financial structure has been explicitly included we shall be particularly concerned with the sorts of flow of funds tax systems suggested by the meade report the so called r and r f bases we will show that whether the investment decision is distorted under such corporate tax bases depends on how the financial structure of the firm is determined the r base is neutral under some financial constraints while the r f base is neutral under others 3 we also extend the analysis to incorporate personal taxes impinging on capital income and the effects of inflation finally we introduce financial assets held by the firm we show that the r base can be generalized to what we call the r a base this base will be neutral under the same borrowing constraints for which the r base is neutral in general the r f base as defined in the meade report will not capture all the profits arising from financial intermediation and may

gains from international diversification 1968 85 returns on portfolios of stocks and bonds this paper applies the multi period investment model to a universe of international securities on the basis of the simple probability assessment approach our principal findings are 1 the gains from including non u s asset categories in the universe were remarkably large in some cases statistically significant especially for the highly risk averse strategies 2 the gains from removing the no leverage constraint were more substantial than they were in the absence of non u s securities and 3 there is strong evidence of market segmentation in that the optimal levels of investment in u s securities were mostly zero in the presence of the non u s asset categories