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This paper discusses the pricing of assets in an intertemporal rational-expectations model when real production and inflation evolve according to first-order autocorrelated processes. The focus is on the structure of the various intertemporal discount rates (yields) exhibited by this economy. Yield curves are identified for consumption claims, indexed bonds, and nominally riskless bonds and can be extended to any claim that can be approximated by a (finite) linear combination of such securities. The model demonstrates that, if the average term structure for nominally riskless securities is upward sloping, then the yield curve for consumption (market) claims is downward sloping, suggesting that conventional methods for computing long-term discount rates err by not accounting for maturity factors. The paper also explores the relationship between the intertemporal equilibrium and its embedded single-period equilibria. The single-period risk measures in this economy are derived and shown to be (generally) functions of maturity. A model of nominal bond betas is constructed along these lines. It is shown that bond betas that are increasing functions of maturity do not necessarily imply an upward-sloping term structure. [ABSTRACT FROM AUTHOR]

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This paper presents a simple model of net foreign investment. It is shown that an increase in the expected return of investments in the foreign technology decreases net foreign investment in the domestic country, whereas an increase in the variance of the return of investments in the foreign technology increases net foreign investment in the domestic country. An increase in foreign wealth accompanied by an equivalent decrease in domestic wealth is shown to increase net foreign investment in the domestic country. Finally, it is shown that an increase in the risk tolerance coefficient of the domestic investor has, to a first approximation, no effect on net foreign investment in the domestic country. A closed-form solution is given for the case in which all investors have a logarithmic utility function and is used to derive the dynamics of net foreign investment. One direction in which the present model could be extended consists in taking into account the fact that it is harder for domestic investors to enforce property rights abroad than at home. If property rights cannot be enforced abroad by domestic investors and at home by foreign investors, net foreign investment is always equal to zero, even though gross foreign investment differs from zero. Whereas the differential cost of enforcing property rights at home and abroad for domestic investors creates incentives for foreign investors to take actions which reduce the value of the net investment abroad by domestic investors, domestic investors can impose substantial penalties on foreign investors if they engage in confiscatory actions. The suggested extension of the analysis involves the development of a concept of equilibrium that accounts for the dependence of the actions of domestic investors on what they believe foreign investors will do. [ABSTRACT FROM AUTHOR]

This paper constructs a general equilibrium model with endogenous stochastic production and establishes that the equilibrium interest rate can he constant in a closed production economy when the preferences are represented by constant absolute risk aversion utility functions. The results in this paper and their limitations are compared and contrasted with related contributions in the financial economics literature. [ABSTRACT FROM AUTHOR]

The article defines differences between Tobin's "q" and the valuation ratio, which is called "v" in the Neo-Passinetti Theorem concerning distribution and mentions methods used in financial research. Tobin's q is usually related to investment at the aggregate level and is a ratio for asset valuation which considers market price and replacement cost. The v shows a relationship between the capital employed or book value of assets and the market value of shares. The Malkiel-von Furstenberg-Watson paper clarifies the meaning of coefficients in regression analysis, while the Ciccolo-Fromm paper explains how q indicates relative potential profitability in an industrial environment. The Durbin-Watson statistic is mentioned, as well as the fund flows between surplus and deficit sectors.

My comments are directed to the paper by Professors Cohn and Lessard, which examines the potential implications for the use of several non-standard forms for residential mortgage instruments in an inflationary economic environment. Overall, the paper represents a modest contribution to the existing literature, containing three especially noteworthy features. First, the paper presents a relatively concise statement about the scope of research activities of the recent MIT-Sloan School Mortgage Market Study. Second, the paper has a relatively careful statement about the design of several "new" alternative non-standard mortgage instruments. Third, the paper discusses in some detail the micro-effects on the borrower in terms of the implied real and nominal payment streams for each of the proposed non-standard mortgages under different long run economic scenarios. [ABSTRACT FROM AUTHOR]

The article discusses the various endeavors of the National Bureau of Economic Research (NBER). Founded in 1920, NBER sponsors and distributes research aimed at furthering economic knowledge. The Bureau maintains several ongoing programs including those specializing in Asset Pricing, Children's Health & Well-Being, and Corporate Finance, among several others. Researchers can explore topics of common interest under the aegis of an NBER Project. Projects ongoing in 1999 focused on such areas as international capital flows, school choice, and Social Security reform. NBER also publishes working papers, periodicals, and books.

The three papers presented at this session have provided a fine balance of theoretical analysis and statistical investigation. The paper by Black and Scholes is a particularly commendable contribution, thoroughly professional in execution and a very constructive piece of work in its broader implications. The authors has previously derived an equation for the valuation of options from the condition that opportunities for profitable arbitrage will be eliminated in efficient capital markets. In the present paper they carefully analyze a sizeable body of data to examine the efficiency of the operation of the option market as it is now structured. They validate their formula for the pricing of options by showing that in the absence of transactions costs, buying "undervalued" contracts and selling "overvalued" contracts at model prices computed with foreknowledge of the actual variances of the returns on the underlying stock over the holding period would produce quite insignificant average gains or losses. But when ex ante variances are estimated from previous stock price histories, buying "undervalued" contracts and selling "over-valued" contracts at model prices would have produced significantly negative excess portfolio returns, while substantial positive excess portfolio returns would have been made by buying overvalued and selling undervalued options at market prices. These results indicated that the true value of options is somewhere midway between market prices and "model" prices based on historical data. [ABSTRACT FROM AUTHOR]

The article presents a list of books related to finance, including "Instalment Credit Computations for Yields, Charges, Rebates and Earnings," by Nathan A. Batchker, "Simulation of Information and Decision Systems in the Firm," by Charles P. Bonini, and "Paciolo on Accounting," by Ralph F. Brown and Kenneth S. Johnston.

In two papers and in a recent book I have presented theory and evidence which lead to the conclusion that a corporation's share price (or its cost of capital) is not independent of the dividend rate. As you may know, MM (Modigliani and Miller) have the opposite view, and they argued their position at some length in a recent paper.3 Moreover, the tone of their paper made it clear that they saw no reasonable basis on which their conclusion could be questioned. Since they were so sure of their conclusion, it would seem advisable for me to review carefully my thinking on the subject, and this meeting appears to be a good time and place to do so. [ABSTRACT FROM AUTHOR]

The article presents a discussion of Charls Walker's and Ira Scott's research paper on the role of governments in bank earnings. Walker discusses discount policy in the 1950s. The author of this article states that the research presents only the advantages of discounting and few of the disadvantages. Also discussed is the third paper entitled "Elements of Timing and Response in the Balance Sheet of Banking." The author states that he has had difficulty commenting on these papers because of the obvious subject matter diversity.

The article addresses the democratization of money. The author equates the economic importance of the use of checks or deposit currency with the ability to physically distribute goods through railways. The author considers government intervention into the regulation of deposit currency, as it is beginning to replace the use of currency and coins, which are provided to the public free of charge. The author argues against the criticism that this is a socialization of the banking system by stating that this subsidy would take the place of the costs of generating paper currency and coins, and would strengthen the banking system by the increase in individual bank business.

This article presents a discussion of an article that examined private deposit insurance as well as boarder issues that have implications for finance theory. The author notes that the paper addresses the questions of whether the appropriate incentives for risk-taking are being offered to insured institutions and whether the current system extends the government's guarantee to an inappropriate extent. The author asserts that risk-related deposit insurance premiums are not the answer to this problem. He discusses some of the problems with the deposit insurance system such as their determination of when insolvency occurs.

The article presents commentary about a paper written by E. Han Kim entitled "Miller's Equilibrium, Shareholder Leverage Clienteles, and Optimal Capital Structure," which was published in the May, 1982 edition of the "Journal of Finance." The author regards Kim's paper as a survey of research on optimal capital structure inspired by Merton Miller's article "Debt and Taxes." He discusses the portion of Kim's paper that contrasted complete and incomplete capital market environments, and notes the importance of tax arbitrage restrictions in understanding them.

This article presents a discussion of a paper that examined the state of the credit union industry. The author commends the survey that the paper provided; however, he feels the conclusion raised important issues that should have been dealt with. Some of these issues include the sharp slowdown in credit union growth as a result of various developments in financial markets and the implementation of regulatory changes that will ensure the industry never achieves the growth it has experienced. The author also states that the paper should have thoroughly discussed the impact of the Depository Institutions Deregulation and Monetary Control Act of 1980.

This article presents a discussion of a paper that examined uncertainty in monetary aggregates. The author discusses some the areas where he saw problems in the paper's argument such as the lack of analysis of the information gap between the author's preliminary and final figures. The author suggests that an effective analysis of this data could provide researchers with better information on the significance of the lack of information about developments in monetary aggregates. The author also addresses how the paper examines seasonal adjustment and notes that the paper fails to present a specified policy on this issue.

This article presents a discussion of a paper that examined the behavior of companies when dealing with foreign exchange. The author states that the paper follows a risky asset management hypothesis and examines several ways that foreign currency assets and liabilities can change. The author discusses several of the paper's strengths and also comments on various areas where it could be improved. The author discusses the conclusions reached in the paper and states that the strength of these points should be examined.

Both papers in this session try to discriminate between various theories of the determination of exchange rates. The null hypothesis of the Brittain paper is that monetary factors are not relevant in the determination of exchange rates. After examining some of the implications of current monetary models he rejects the null hypothesis. The Sargen paper sets out to explain the empirical observation that in the floating exchange rate period some rates were highly volatile while others seemed to be quite stable. He examines the implications of two alternative theories. He finds that the Purchasing Power Parity (PPP) theory as extended by Girton & Roper is not quite adequate in explaining exchange rate fluctuations, but that it explains reserve changes quite well. The Aliber-Dornbusch-McKinnon approach, which is the alternative theory, implies that structural parameters of the economy will influence exchange rate volatility. He then proceeds to estimate these parameters and finds that they are not sufficiently different across countries to account for the differences in exchange rate volatility. [ABSTRACT FROM AUTHOR]

The Duesenberry-Bosworth (DB) paper (and the impressive amount of work which ties behind it) are a welcome addition to the literature on models of the financial sector. In the first instance, there has been considerable interest in recent years in moving away from models with a heavy dosage of term structure and risk structure equations towards a model in which interest rates are explicitly determined by portfolio behavior of demanders and suppliers of various financial assets. Needless to say, the DB effort takes a giant step in this direction. To me at least, the other main attraction of the DB effort is that it attempts to exploit the flow of funds data, whose promise has long been touted but is as yet unrealized. The present paper reports a number of policy simulations with their complete macroeconometric model. The general structure of the model is given in the paper before us but most of the details are omitted. The model, however, is described more extensively in research which has recently been reported elsewhere. Since it is difficult to evaluate the simulations reported without some reference to the underlying model, I will be pardoned if I say a few words on this score. [ABSTRACT FROM AUTHOR]

This paper analyzes how blockholders can exert governance even if they cannot intervene in a firm's operations. Blockholders have strong incentives to monitor the firm's fundamental value because they can sell their stakes upon negative information. By trading on private information (following the “Wall Street Rule”), they cause prices to reflect fundamental value rather than current earnings. This in turn encourages managers to invest for long-run growth rather than short-term profits. Contrary to the view that the U.S.'s liquid markets and transient shareholders exacerbate myopia, I show that they can encourage investment by impounding its effects into prices. [ABSTRACT FROM AUTHOR]

The article presents a report from the editor of "The Journal of Finance." During 2008 authors from over 90 institutions contributed to the 80 articles published in the Journal. In terms of both visibility and impact the Journal continues to rank very highly among economics and finance publications. The Journal accepted 5.1% of manuscripts received for publication. For 2008 the backlog of accepted but as-yet-unpublished manuscripts is slightly longer than one year. The Journal as added an Internet Appendix for accepted papers for the inclusion of material that is not published in the print edition.

This article announces the 2009 Annual Meeting for the "Journal of Finance," which will be held in San Francisco, California, from January 3, 2009 to January 5, 2009, the results of the 2008 election, which includes Jeremy Stein, Darrell Duffie, and John Cochrane, and that the AFA and the Department of Finance at Ohio State University have entered into a joint venture to maintain and enhance the finance faculty directory held on the OSU Web site.

This article offers announcements for April 2007 concerning the American Finance Association, publishers of the periodical "The Journal of Finance." Topics of discussion include the results of the organization's 2006 elections, in which Jeremy Stein was voted president-elect and Darrell Duffie was voted vice president, and information regarding the 2008 annual meeting, to be held in New Orleans, Louisiana in January. The article also offers computer network resource information for further announcements, and offers information on the organization's worldwide directory of finance faculty.

This section contains announcements related to the American Finance Association. Included are the results of the 2006 election, information pertaining to the worldwide directory of finance faculty, and information concerning the 2008 annual meeting of the association. The American Finance Association has entered into an agreement with Ohio State University's Department of Finance to maintain a directory of finance faculty that is available on the Web Site of the university. Dates for the 2008 annual meeting, held in New Orleans, Louisiana, are January 4-6.

The article presents commentary from Zhenyu Wang about a paper written by Lubos Pastor and Robert F. Stambaugh (P&S) entitled "The Equity Premium and Structural Breaks," which appeared in the August, 2001 edition of the "Journal of Finance." In that paper P&S combined statistical procedures with economic ideas to estimate the equity premium for stocks in the U.S. The author of the current paper applauds their approach and finds their results sensible. However, he also believes they should incorporate a valuation model based on fundamental economic variables.

The article presents a report from the editor of the "Journal of Finance" for the year 1997. During the summer of 1997 Blackwell Publishers began publishing the "Journal" under terms of a five-year agreement. It is hoped that by the year 2000, current and all back issues of the"Journal" will be available online. During 1997 898 papers were submitted, of which 8.85% were accepted for publication. The backlog of accepted but unpublished papers continues to decline, and the turnaround time for papers submitted continues to hold steady.

This paper shows that the empirical tests of the Arbitrage Pricing Theory (APT) model are very sensitive to the anomalies observed in January in the stock returns data. There is a strong seasonal pattern in the estimates of the risk premia from the APT model. The most important implication of the findings in this paper is that the APT model can explain the risk-return relation mostly for January. Once the January returns are excluded from the data, there is no significant relation between the expected stock returns and the risk measures predicted by the APT model. [ABSTRACT FROM AUTHOR]

In this paper, we examine leasing as a tax-arbitrage instrument. Analysis of a sample of UK leases presented in this paper suggests that lessors earn large positive NPVs. Our theoretical model seeks to explain these positive NPVs in terms of a market price for a scarce resource that we identify as scarce taxable earnings. Using these prices, the model permits a lessor to determine whether the profitability of a proposed set of lease contracts can be improved by writing a different set of contracts that makes better use of the lessor's taxable earnings. There may be two reasons why an initial portfolio of contracts may be suboptimal. Either there may be clienteles or the leasing market may be inefficient. Subsequently, we discuss reasons why the leasing market may be characterized by clienteles, and, using two different samples of leases, we test whether the leasing market is segmented and efficient. [ABSTRACT FROM AUTHOR]

The paper tests the null hypothesis of ex ante purchasing power parity. The empirical evidence obtained is inconsistent with the null for major industrialized countries over the current floating exchange rate regime. Expected nominal exchange rate changes appear to deviate systematically from expected inflation rate differentials over the same holding period even though real exchange rate changes appear to be serially uncorrelated. This supports the presence of time-varying risk premia in foreign exchange markets and real determinants of exchange rate movements as suggested by equilibrium theories of international asset markets. [ABSTRACT FROM AUTHOR]

This paper analyzes the major factors which determine the effects of taxation on the value of risky assets and on the cost of capital, and shows how the magnitudes and even the signs of these effects depend on the values assumed for a few key parameters in the model. Using plausible values for these parameters, it is shown that the results obtained are frequently counter-intuitive. [ABSTRACT FROM AUTHOR]

This paper develops a model of bond prices and yield spreads that incorporates the effect of both taxes and differences in default probabilities. The tax loss consequences of default are recognized. Traditionally, tax-free (municipal) bond yields have been viewed as linearly related to taxable yields with a slope coefficient equal to one minus the tax rate and the intercept representing differences in default risk. While our model supports the linearity assumption, it implies that the slope and intercept are both functions of both the break-even tax rate and the default probability(ies). Clientele effects among both municipal and taxable bonds are demonstrated. Finally, the implied marginal tax rates and the implied default probabilities are estimated for different categories of municipal bonds. [ABSTRACT FROM AUTHOR]

This paper tests the tax explanation of the January effect by examining small firm stock returns before the War Revenue Act of 1917. No evidence of a turn-of-the-year effect is found. This paper also extends previous authors' work on the subject to 1918-29. A January effect is found during that period. [ABSTRACT FROM AUTHOR]

The main contribution of my original paper is in pointing out that short-term profit elimination around the ex-dividend day can make the inference of stockholders' marginal tax rates from the behavior of stock prices in that period impossible. This is so because, in the absence of transaction costs and assuming risk neutrality,1 the equilibrium condition for no profit opportunities implies an expected ex-dividend day price drop which, irrespective of stockholders' marginal tax rates, must be equal to the dividend per share. Elton, Gruber, and Rentzler (hereafter EGR) argue that the relevant transaction costs of a short-term trader include the costs associated with the bid and ask spread, clearance, and transfer taxes (for the period of the study). These costs are larger than the minimum transaction costs reported in Table III (p. 1067) of my paper. Consequently, EGR argue that short-term trading around the ex-dividend day is unprofitable and long-term tax rates are determining the price behavior in this period. I agree with EGR that the effective transaction costs of a short-term trader can be larger than the minimum costs reported in my paper. However, below I argue and present evidence that these costs are not large enough to prevent short-term trading at all dividend yield levels. Therefore, as I argued in my original paper, long-term taxes cannot be inferred from the exdividend day behavior of stock prices. [ABSTRACT FROM AUTHOR]

The paper by Dhrymes, Friend, and Gultekin (DFG) in this issue criticizes empirical work on the Arbitrage Pricing Theory (APT) conducted by ourselves, (RR), and by a number of others. We are honored that such eminent professors as DFG have taken an interest in our work. Unfortunately, the DFG paper contains analysis which might foster misconceptions in the casual reader. Our purpose here is to present a brief, nontechnical comment. We are confident that those who are inclined to study the DFG paper in detail will be able to discern its merit for themselves. [ABSTRACT FROM AUTHOR]

In this paper, we analyze the behavior of equilibrium real interest rates in an identical consumer economy in which the preferences are represented by time additive logarithmic utility functions and production technologies are Cobb-Douglas with stochastic constant returns to scale. The following main results are established. (i) When there is no relative price uncertainty, it is shown that the equilibrium interest rate exhibits a mean reverting tendency. A nontrivial steady state distribution is found to exist for the equilibrium interest rate. The properties of the equilibrium interest rate are also derived and discussed. (ii) In a multigood economy, even with additive preferences across goods, the equilibrium interest rates depend explicitly on relative prices. The substitution possibilities in production technologies induce this result. This is in contrast to the findings of Richard and Sundaresan [11] who show that the analytical general equilibrium term structure of interest rates formula of Cox, Ingersoll, and Ross [5] is unaffected by the introduction of relative price uncertainty when the technologies are linear and hence involve no substitution. Furthermore, we relate our results to those of Cox, Ingersoll, and Ross [5], Breeden [3], and Richard and Sundaresan [11] with special emphasis on stochastic production and relative price uncertainty. [ABSTRACT FROM AUTHOR]

Several recent writings have raised questions concerning the effectiveness of commonly used analytical measures and techniques which have their basis in Modern Portfolio Theory. Questions have been raised about the use of beta in the interpretation of risk adjusted equity performance and about the usefulness of the capital asset pricing model (CAPM) as a tool for measuring and interpreting investment performance. This paper restricts itself to questions concerning beta and CAPM as they relate to performance measurement. In the process of this examination it discusses some basic principles of performance measurement as they relate to judgments of investment management skill and ability. It has been shown that simple applications of beta used in adjusting equity performance for risk can possibly produce misleading or incorrect interpretations of risk adjusted performance. Errors have been shown to be related to the market index used as a basis for the determination of beta. These findings are independent of the validity of CAPM, but the line of reasoning which leads to these conclusions is not totally antithetical to the derivation of CAPM. This paper has three major sections: 1. The capital asset pricing model is assumed to be valid, and a broader index of capital assets is constructed. This index is “better” in the sense that it includes many more assets than the S&P 500 and hence is more complete. 2. The better index is then used to “game” performance measurement using current investment technology and the Standard & Poor's 500. 3. Some conclusions are drawn as to the effectiveness of gaming and the ways in which performance measurement numbers should be interpreted in general. General issues are discussed in the text. A parallel, more detailed and more technical argument is presented in the appendix. [ABSTRACT FROM AUTHOR]

The article presents commentary about a paper written by Kose John and Avner Kalay (J&K) entitled "Costly Contracting and Optimal Payout Constraints," which appeared in the May, 1982 edition of the "Journal of Finance." The author finds J&K's work insightful, carefully presented, and mathematically rigorous, but also excessively technical and difficult to digest. He summarizes J&K's key findings and notes a few reservations he has, including J&K's assumption that there is a positive tax advantage to debt.

Bond prices reflect investors' expectations of the after-tax stream of cash flows generated by the bond and of the path of interest rates, as embodied in the term structure. In the absence of taxes on capital gains income, the stream of cash flows generated by a default-free bond is deterministic. The valuation problem in this case consists of computing the expected present value of a stream of known cash flows, but with stochastically varying interest rates as a part of a stochastically varying investment opportunity set. Cox, Ingersoll and Ross addressed this problem in a general equilibrium context and presented a comprehensive theory of bond pricing and the term structure of interest rates. With personal taxes on accrued capital gains, a similar model applies. (See Skelton and Torous.) With capital gains taxes only on realized capital gains and losses, the after-tax stream of cash flows generated by a bond is stochastic and depends on the fluctuations of interest rates. A sophisticated bondholder should follow the optimal trading policy with the objective of minimizing the discounted value of his stream of tax payments, and consequently maximizing the value of his stream of after-tax cash flows. The corresponding problem for a portfolio of stocks and the equilibrium implications of personal tax on the pricing of stocks were discussed in Constantinides and Scholes and Constantinides. The present paper unifies these two strands of research. We examine the optimal bond trading policies in the presence of personal taxes. We also explore the tax implications for the pricing of bonds. In particular we examine the bias in estimating tax brackets and yield curves, when the possibility that investors follow a sophisticated trading policy which differs for a buy-and-hold policy is ignored. [ABSTRACT FROM AUTHOR]

The article presents information on the fortieth annual meeting of the American Finance Association, to be held at Washington, D.C, on December 28-30, 1981.

These are two excellent papers that view the Modigliani-Miller (MM) theorem from different perspectives. The Leland and Pyle (LP) paper considers what occurs when the financial claims of an entrepreneur convey information to the market about the type of project that is being financed. The Grossman and Stiglitz (GS) paper considers the financial decision when the market possesses full information about the returns of firms but where the market incompletely covers or markets claims in all contingencies. These are different approaches towards the same goal of developing a theory of corporate finance. The role of the MM theorem in these studies is analogous to that of Arrow's impossibility theorem in the theory of social choice. In both cases, to obtain an acceptable theory one must weaken the underlying assumptions. [ABSTRACT FROM AUTHOR]

This paper presents a formula for evaluating financial lease contracts. We use it to solve the firm's lease vs. borrow problem, and to examine the economic rationale for leasing. The formula is derived from the objective of maximizing the equilibrium market value of the firm, with careful consideration of interactions between the decision to lease and the use of other financing instruments by the lessee and the lessor. The analysis applies the "adjusted present value" methodology developed by one of us in another paper [10]. [ABSTRACT FROM AUTHOR]

Professor Katz has opened a neglected area of study in the pricing processes of the securities markets with what is, on the whole, a very estimable first effort. The rash of bond reclassifications in recent years found us with little or no knowledge of their effects, particularly with respect to yields. In this regard Katz's paper is a needed and welcome one. It may also be that, as his paper says, investigation will reveal something of bond market efficiency, though this is much more problematic and conjectural than the more narrowly framed problem of repercussions on yield of rating change. [ABSTRACT FROM AUTHOR]

Recent discussions of the Eurodollar market have revealed considerable controversy among economists over its structure and impact. In the hope of clarifying the functioning of the market, this paper presents two models in which Eurobanks are viewed as a special type of intermediary in the financial sector of the United States. These overseas banks issue Eurodollar deposits, time deposits denominated in dollars, and acquire U.S. and foreign securities and non-deposit branch claims on U.S. commercial banks. Changes in asset yields, including the Eurodollar deposit rate, alter the size and composition of the balance sheets of Eurobanks, U.S. commercial banks, and the public. These models will be used to determine (1) how the behavior of transactors in the Eurodollar market affects the impact on U.S. interest rates of monetary disturbances in the United States; (2) how the size of the market is affected by these disturbances; (3) whether switches into Eurodollar deposits by the public are likely to lead to an induced expansion of the market; (4) whether raising Regulation Q ceilings is expansionary or contractionary; and (5) the importance of Regulation Q ceilings to the size of the market. The Gramley-Chase-Smith financial sector model is reviewed and modified in Section I and extended in Section II to include Eurodollar transactions. Section III presents an alternative model of the Eurodollar market, in which Regulation Q ceilings are imposed on U.S. time deposit rates. Section IV is a summary of the results. The major limitation of this paper is its omission of induced changes in foreign interest rates, the inclusion of which would require the addition of a foreign financial sector to the models, and in spot and forward exchange rates, which are taken to be pegged by the exchange authorities. [ABSTRACT FROM AUTHOR]

The authors respond to comments by Professor Eugene Carter concerning their paper "A Simultaneous Equation Approach to Financial Planning." They state that while matrix inversions are utilized in solving linear simultaneous equations, their own model utilizes nonlinearities that prevent the use of a straight-forward matrix inversion technique. They suggest their own model does a more effective job of portraying financial decision making than other models. They comment on the accuracy of projections for Sears-Roebuck and mention a discussion about if the U.S. Securities and Exchange Commission should permit or require projections in equity prospecti, considering the method for making financial projections is well-developed.

To take a representative sample of Keran's approach to empirical research, consider his equation (7), reproduced as equation II-1 in Table 1 of the H & K paper. This equation purports to show that the "major factors determining stock prices are ... expected corporate earnings and current interest rates" (Keran, p. 31). What it actually shows is an index of stock prices regressed on the current and one lagged value of a long-term interest rate, and on the current and 19 lagged values of corporate profits, with the coefficients constrained to lie along a sixth-order polynomial of the Almon variety. Despite the continual use of the term, "expected corporate earnings," when referring to these lagged values, no attempt is ever made to disentangle the presumed forecasting weights from the presumed explanatory coefficients, nor to validate the expectation by direct predictive tests, nor to compare its predictive performance with other possible proxies. [ABSTRACT FROM AUTHOR]

The article comments on the papers "The Changing Role of U.S. Banks in International Financing," by George H. Chittenden, "The International Money Market: Structure, Scope and Instruments," by Fred H. Klopstock, and "The Integration of European Capital Markets," by Oscar L. Altman, all published within the issue. The author looks at changes occurring in European capital markets, international money markets, and commercial bank lending. The movement toward better organized markets for long-term capital in Western Europe is discussed.

The article presents a list of books received, including "Economics and the Modern World," by Lawrence Abbott, "A Study of Company-sponsored Foundations," by Frank M. Andrews, and "An Introduction to Analysis and Policy," by George Leland Bach.

The article discusses the important contribution that non-financial institutions make to money markets. The article focuses on the short-term investment practices of non-financial corporations, and outlines any changes in these practices since 1939. The article explains that, because of the significant increase in money-market investment, these investments can have a real impact on the growth of various sectors. The article addresses the determinants of types of securities held by non-financial corporations and trends in corporate short-term investment practices. The author notes that corporate portfolio managers have significant cash for investment, and market growth is evident by the number of companies selling commercial paper directly and sales changes in commercial paper houses.