The empirical distributions of price changes for speculative assets (e.g., common stocks, bonds, etc.) measured over calendar time yield a higher frequency of observations near the mean and at the tails than would be expected for a normal distribution. The sample kurtosis is almost always greater than 3—the value expected for a normal distribution—and the distributions are commonly characterized as fat-tailed and peaked (i.e., leptokurtic).

I was interested to read Meyer and Kim [5], where I learned a little about sugar futures, but regret to say that I found the attempted Box-Jenkins analysis singularly lacking in expertise. It is my intention, here, to discuss a few of its most obvious shortcomings. My list will not be exhaustive, but will include just five points.

That restrictions on real-estate-mortgage lending by banks chartered under the National Banking Act of 1864 seriously restricted availability of long-term financing before 1913, has long been accepted. Professors Keehn and Smiley explain some ways in which resourceful national banks could circumvent this restriction. They find that lending within the letter but outside the spirit of the Act of 1864 was greater than published figures on direct lending indicate.

Some basic ideas of a model of the international term structure of interest rates are outlined. Based on Roll's (1970) theory of equilibrium interest rates in an efficient bond market of a closed economy, we show that the term structure of interest rates in countries whose residents engage in international financial transactions is a function of domestic and foreign traders' expectations of future domestic and foreign spot interest rates, or their degree of risk aversion, and of differences in time preferences.

Since the seminal article by Black and Scholes on the pricing of corporate liabilities, the importance in finance of contingent claims has become widely recognized. The key to the valuation of such claims has been found to lie in the solution to certain partial differential equations, the best known of which is that derived by Black and Scholes in their original article from the assumption that the value of the asset underlying the contingent claim follows a geometric Brownian motion.

The paper derives a general form of the term structure of interest rates. The following assumptions are made: (A1) The instantaneous (spot) interest rate follows a diffusion process; (A2) the price of a discount bond depends only on the spot rate over its term; and (A3) the market is efficient. Under these assumptions, it is shown by means of an arbitrage argument that the expected rate of return on any bond in excess of the spot rate is proportional to its standard deviation.

The financial dilemmas faced by large municipalities, due in general to decreasing tax bases, increasing public services, inflationary pressure and in some cases fiscal irresponsibility, have brought increased attention to the subject of municipal bond ratings. In order to gain insight into those factors which are most significant in explaining the ratings, a set of financial ratios is investigated. Such ratios are frequently used to describe characteristics of the risk of municipal obligations. This paper attempts to determine if these ratios can be effectively used to predict ratings.

During 1976 and 1977, a national sample of nearly 300 FDIC-insured financial institutions had their applications for home mortgage and home improvement loans monitored. The purpose of the study was to establish whether, and in what form, discrimination existed in the granting of housing-related loans.

The paper presents evidence suggesting that banks with very low and very high capital positions respond to interest rate changes differently from other banks. The concept of a capital constraint is introduced to explain this phenomenon. The hypothesis is that banks with a binding capital constraint should exhibit different asset management decisions from those banks which are unconstrained. The regression results indicate that low-capital banks for the years 1973-74 and 1974-75 did not respond to earnings in an economic fashion.

Recent theoretical articles on leasing are summarized as a basis for the distillation of a conceptually correct framework for analyzing leasing versus purchase decisions. In order to make a theoretically valid comparison, the analysis must be kept within the framework of comparable and consistent risk class assumptions. When this is done, competition in the leasing market produces indifference in the leasing versus purchase analysis.

A general proof using matrices is given proving the equivalence of the Chow test (analysis of covariance) and an appropriate adaptation of the dummy variable technique. Implications of hypothesis testing in the linear regression framework are reviewed for each method. The dummy variable approach is found to have the following advantages: (a) it is more convenient in testing hypotheses regarding the equality of subvectors of the parameter vectors from separate regressions, in particular not requiring the running of new regressions as the Chow test approach sometimes does; and (b) a more general form of hypothesis can be tested, namely that corresponding regression parameters differ by a constant other than zero.

This paper examines the profitability and risk of a naive strategy of forward exchange speculation during pegged and flexible exchange rate systems. It suggests a new method of calculating these speculative returns and shows that the average return was much less than previously supposed and that the distribution of returns differed between systems and countries.

The focus of this study is the role of default risk in capital market theory. The impact of default risk on the value of securities has been a major concern of investors and academics alike. Several authors have examined the relationship between bond ratings, the probability of default, and security value [5, 12]. In this context, the ability to avoid or reduce expected bankruptcy costs and thereby increase value has been suggested as a reason for mergers and consolidations [16, 18]. In other studies, models have been developed for predicting ratings [17, 20, 21, 28], for predicting bankruptcy using accounting and other financial variables [1, 6, 7], and for approximating default premiums in the credit markets [22]. Finally a question which has received considerable attention is the effect of bankruptcy on a company's cost of capital. When bankruptcy is possible and there exists a positive bankruptcy transaction cost, it has been argued that there is an optimal capital structure [24, 26].

This papaer assesses some of the costs and benefits of aloowing banks to pay interest on demand deposits. With the help of a simple short-run model of the financial sector, it is shown that, barring a possible but unlikely perverse reaction, the deposit rate will tend to move in the same direction as other rates. This will moderate changes in the money supply accompanying a given change in interest rates; conversely, a given change in the excess demand for money will cause larger fluctuations in the level of interest rates. This can either be good or bad; if the excess demand for money corresponds to an excess demand for real output, the wider fluctuations in the interest rate will be more effective in eliminating it.

The main focus of this study concerns the pricing of default-free bonds in a risky economy inhabited by risk-averse consumers. The methodology of the paper draws upon recent work in the fields of intertemporal asset pricing and valuation by arbitrage principles. We develop a general equilibrium model for the expected rates of return on “created financial assets” (such as bonds) dependent upon the risk attitudes of investors and the uncertain real investment opportunities available.