Received monetary theory supports the existence of a strong relationship between monetary activity and stock prices. Following the work of Friedman and Schwartz [8], relating money supply to aggregate economic activity, some researchers have examined the more specific connection between changes in the rate of growth of money supply and associated movements in stock prices (see [6], [10], [11], [14], [17], [18], [19], [20], [22], and [28]). These studies use a variety of monetary aggregate measures to functionally relate the level of stock market indices to contemporaneous and lagged monetary growth rates. In general, the findings indicate a direct relationship between money supply and stock returns.

As an extension of previous works, we develop a theoretical framework for the relationship between monetary changes and market risk premia. The wealth effect and the return variability effect of money are shown to be the two important channels of the monetary impact on the market risk premium for three representative classes of utility functions. The theory also states that the market risk premium will be an increasing function of monetary changes given that the two component effects of money are positive.

Hedgers adjust their futures market positions to reflect new information. Therefore, the anticipation of new information creates future decision points and thus a multiperiod decision problem. Previous studies (see [2], [4], [5], [7], and [8]) which solved the problem of choosing optimal futures market hedges have not addressed this issue. Rather, these studies have derived optimal hedges in one-period frameworks. In general, this solution is incorrect if, during the time the hedge is in effect, new information is anticipated.

Schwartz [3] proposed a model to solve for the value of a warrant or an option when a closed-form solution of the valuation equation cannot be obtained. This model is based on a difference approximation of the valuation equation and uses standard numerical methods. We intend to show here that the same methods can be used to derive a difference approximation of the solution of the valuation equation which has a greater level of accuracy than Schwartz's approximation.

This paper presents a multiperiod model of a deposit-type mutual financial institution and analyzes the manager's capital accumulation and deposit pricing decisions under uncertainty. The model is meant to describe a mutual savings and loan association (SLA) or a credit union in which there are no stockholders and nominal ownership is widely diffused (see [12] and [14]). The resulting paucity of monitoring gives rise to an agency problem (see [13]) in which the manager maximizes his multiperiod expected discounted utility with minimal intervention from nominal owners.

This paper differentiates between country risk--the probability that a country will default on its obiigations--and two forms of international banking risk: (1) the extent to which a bank's foreign activities affect the cost of equity capital; and (2) the extent to which a bank's foreign activities affect the probability of bankruptcy. The paper focuses on the latter form of international banking risk.

Using Chebyshev's Inequality, it is pointed out that the risk of bankruptcy is influenced by the mean as well as the variance of the return distribution. Consequently, restrictions on the (international) composition of a bank's portfolio may increase rather than reduce the probability of bankruptcy.

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.

Bawa [3] has argued that mean-lower partial moment portfolio selection rules are more general than mean-variance rules in that they rely on fewer restrictive assumptions regarding investor utility functions and/or distributions of security returns. As with the mean-variance model, it is possible to formulate equilibrium security prices under the assumption that expected utility-maximizing investors utilize mean-lower partial moment portfolio selection rules. This paper has investigated the empirical relationship between the resultant mean-lower partial moment pricing model and the long established mean-variance pricing model.

A key assumption behind the traditional capital asset pricing model (CAPM) is the joint normality of security returns. Recently, however, this assumption has been relaxed in at least two directions. First, the emergence of continuous-time models has shifted emphasis from discrete-time random variables to continuous-time diffusion processes, with log-normality (as opposed to normality) for security prices in the stationary case. Second, the recognition that the CAPM is difficult to test empirically has led to the development of an asset pricing theory based on an arbitrage argument in large markets and free of any distributional assumption.

The relationship between heterogeneous expectations on the part of investors with respect to a security's future return and asset prices is an area of increasing interest in finance. Theoretical examples include Miller [14], Williams [23], and Jarrow [8]. Empirical examples include Bart and Masse [1] and Peterson and Peterson [18]. Miller, Bart and Masse, and Peterson and Peterson address issues related to whether an increase in divergence of opinion will lead to an increase in an asset's price. Unfortunately, little is known of how different types of changes in investors' probability distributions of returns influence asset returns. An even more basic problem is that it is not clear what is meant in terms of investor probability distributions when it is said that divergence of opinion increases or decreases. The answer to this problem has important implications for understanding equilibrium price.