The work of Black and Scholes [2] and Merton [4] suggests that analysis of hedged positions in a continuous time random walk model yields powerful insights into the valuation of financial securities. The present paper extends this methodology in a straightforward fashion to foreign exchange transactions. By adopting the device of hedging in a secondary market for forward currency contracts against a long position in spot currency, a simple statement of boundary conditions for the forward position can be detailed. This allows a direct solution of the continuous time valuation problem that yields the interest rate parity theory.

Using establishment-level data, we show that COVID-19 vaccinations boost business activity and firm performance in the United States. A 10-percent increase in vaccination rates results in a 4-percent to 6-percent increase in customer visits. We document the channels through which vaccinations increase store visits and the limits to the effect of vaccines on business activity. At the firm level, vaccinations increase sales and earnings, impact expansion decisions, and decrease probability of default, but the benefits vary across businesses. Vaccinations create private economic benefits to firms, shareholders, and employees, in addition to their intended public health benefits.

In the last decade the theories of Investor behavior and capital markets have broadened to recognize the importance of the portfolio decision of investors and the simultaneity of price determination of equity values. Tobin, Sharpe, Lintner, and Lerner and Carleton have all made contributions to the theory that equity markets are essentially a system in which many investors simultaneously seek to maximize their wealth by allocating their available liquidity among various equities.

If all urban renewal projects were perfectly divisible and completely independent of one another, and if the urban renewal authority had perfect foresight as well as unlimited funds, the investment decision would be ideally simplified. There would be no need to choose between competing projects, and the urban renewal authority could evaluate each project on its own merits, without reference to any other project. Its decisions would be merely decisions to accept or reject single projects, uncomplicated by portfolio considerations.

Presence of a variable market demand function for a given product has significant implications for factor input levels and for the resulting production costs to the firm. In a recent paper, McKean argues that in order to describe the costs of producing a product subject to fluctuating demand it is necessary to take into account the entire distribution of outputs as it relates to the static total cost function. While it is evident that influences on costs and factor inputs will differ in the case of a fluctuating demand schedule compared to the conventional stable demand conditions of classical micro theory, it is not clear that the use of a static cost function in conjunction with a probability distribution of outputs is the proper framework in which to examine the problem.

Municipal bond credit ratings are currently being created and distributed by two main rating agencies. Controversy has urrounded these ratings and their effects on interest costs to municipalities. This paper summarizes these controversies and presents a methodology which would enable a more objective appraisal of municipal credit quality.

This study tests whether a “portfolio effect” exists in a given branch bank; i.e., does the addition of branches reduce the variability of demand deposits for the bank? The approach taken is narrower than that in the usual portfolio selection model. The study measures risk by the intrayear coefficient of variation of average monthly demand deposits. The term “portfolio effect” was defined operationally as a reduction in the overall coefficient of variation of demand deposits through the addition of sets of branches. Relatively few portfolio effects were realized from the chronological addition of sets of branches. The absence of portfolio effects is largely attributable to (1) generally high positive correlations between deposits of the various sets of branches and the defined deposit base and (2) the small size of the sets of branches relative to the base deposits. Further, while the correlations were generally high and positive, they were also serially unstable which suggests they would be poor predictors of future correlations. Based on the experience of this bank, it does not appear that the reduction in demand deposit variability by adding branches is general or consistent enough to facilitate improved management of reserves or selection of branch locations. However, this conclusion does not necessarily imply that the bank should not have undertaken branch expansion. For example, this study does not include an analysis of branch profitability. While the results of this study based on a single branch bank cannot be generalized, they do suggest the need for a more comprehensive analysis of the impact of branching on the variability of demand deposits.

We examine the structural stability of Gaussian shadow rate term structure models in a sample of Treasury yields that includes the “effective lower bound” (ELB) period from 2008 to 2015. After highlighting the challenges of testing for structural breaks in a latent-factor model, we proceed to document various pieces of empirical evidence for a structural break. As one of several practical implications, the expected policy rate paths during ELB years are notably shallower in our model that accommodates a structural break compared with a model that imposes structurally stability.

This article constructs and examines enhanced global return factors. I focus on three different enhancement approaches. First, I incorporate information about the covariance structure in the cross-section of stock returns. Second, I employ volatility-reducing techniques in the time series. Third, I exploit diversification benefits. I form six categorical factors by aggregating information from 214 characteristics. Further, I diversify across factors. The enhancement mechanisms are largely successful and when jointly applied increase the optimal Sharpe ratio on average by a factor of 1.96 compared to the traditional factors. My results point to the importance of employing efficient factors in asset pricing studies.

By employing a dynamic model with two limit order books, we show that fragmentation is associated with reduced competition among liquidity suppliers and lower picking-off risk of limit orders. Due to these countervailing channels, the impact of fragmentation on liquidity and welfare differs with asset volatility: When volatility is high (low), liquidity and aggregate welfare in a fragmented market are higher (lower) than in a single market. However, fragmentation always shifts welfare away from agents with exogenous trading motives and toward intermediaries. We empirically corroborate our model’s predictions about liquidity. Our model reconciles the mixed results in the empirical literature.

Adverse market events can affect credit supply not only by hurting financial fundamentals but also by changing the risk-taking behaviors of individual decision-makers. We provide micro-level evidence of this individual decision-making channel in the U.S. mortgage market. We find that mortgage application rejection rates are more sensitive to foreclosure intensity when loan officers are more exposed to foreclosure news, despite the same housing market and bank fundamentals. Loans originated from the affected branches have lower ex post default rates, consistent with higher lending standards being applied. In the aggregate, this effect results in tighter credit supply during housing market downturns.

Short sale constrained stocks are overpriced on average. I show that firms exploit mispricing by selling shares when their stock is short sale constrained and repurchasing shares when their stock is easily shorted. Stocks underperform following seasoned equity offerings (SEOs) if and only if the stock is difficult to short. This suggests that some SEOs are motivated by mispricing, whereas others are not. Short selling costs make it difficult for investors to profit from the poor performance following SEOs. Short selling and SEOs are alternative ways to supply shares to investors, and firms become the low-cost share provider when short selling is costly.

In this study, we investigate whether and how trust between board members and the CEO (board–CEO trust) affects the performance of mergers and acquisitions. Contrary to conventional wisdom, we find that firms with higher levels of board–CEO trust exhibit poor M&A performance. High trust is associated with low acquisition announcement returns, long-term stock return performance, and post-deal operating performance. This negative effect of board–CEO trust is more pronounced among acquiring companies prone to agency problems. Our results suggest that, in the institutional setting of corporate boards, high trust can be too much of a good thing.

Using the 2016 U.S. presidential election result as a shock to the expectations about the future regulatory environment, I find that most regulated firms earned approximately 4% higher cumulative abnormal stock returns than least regulated firms during the first 10 trading days after the election. Exploring economic mechanisms, I find evidence consistent with the explanation that more regulations disproportionately harm high-growth firms and allow incumbent firms to extract rents through lower competition and political favoritism. Stock returns are also followed by a shift in firm fundamentals over 3 years after 2016, consistent with the economic mechanisms.

Considerable attention has been focused in the past two decades on the substitutability of the liabilities of private nonmonetary financial intermediaries for money, narrowly defined as the sum of currency and demand deposits adjusted. Discussion concerning this topic related to the United States, and most of the empirical work has been confined to that country. The essential folklore of that discussion crossed the border into Canada and is now even reflected in its textbooks on Canadian money and banking. However, very little empirical work has been done in Canada to examine this lore.

The substantial growth of the mutual fund industry during the last few years has attracted the attention of students of finance, economics, and public policy alike. Net assets managed by such funds have grown from approximately $450 million in 1940 to more than $38 billion by June of 1966. During 1965 the mutual fund industry funneled some $5. billion of new (primarily equity) funds into the capital markets; more than twice the $2. billion in new equity raised by all non-financial United States corporations during the year. Growth of the industry has not been uniform, however, but has been concentrated among a relatively small number of highly successful funds.

Applied economics consists of the application of the general principles of economics to a particular situation in order to provide an explanation of the behavior of economic agents in that situation. However, the degree of specificity of any explanation depends upon the particular uses to which the explanation is to be put. Thus, in applied economics one may wish to explain the behavior of the agents who operate a particular enterprise. Or, one may wish to provide a. broader frame of reference to explain the behavior of agents who operate a. type or class of enterprises. By utilizing the analysis of the general economic theory of the firm one may introduce the additional constraints under which, for example, a public utility operates, and thereby derive a. theory of public utilities. Or, in the same way, one may wish to construct a, theory of transport firms, or a theory of retail firms, or a theory of manufacturing firms.

There is a standard trade-off in compensation contracts between the provision of incentives and insurance. We hypothesize that this trade-off influences the precision with which firm performance is measured. We find that firm outcomes are measured less precisely when chance plays a large role in these outcomes. Further, this precision is determined through the choice of shares outstanding. This has several novel implications. Nominal stock prices can remain constant over time, and firms with unpredictable cash flows should have more shares and lower stock price levels, all else equal. We find evidence consistent with these implications.