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The authors comment on the article "Duration Fallacy," by Miles Livingston and John Caks, which they suggest criticizes the method they developed in a previous paper to deal with duration problems. They state their use of the term "duration" was concerning the general problem concerning coupon bonds as the phrase "term to maturity" concerns only the date of final expected cash flows, rather than the standard usage as defined by Frederick Macaulay. They mention that term to maturity ignores all other cash flow timings. They state that Macaulay descriptive summary statistics are of little use in hypothesis testing.

The underlying premise of the Tucker paper is that institutional arrangements must be made, primarily in the form of regulatory changes, such that thrift institutions can be protected from the vagaries of fluctuating interest rates. This view ignores the more fundamental issue of whether it might be desirable to allow the housing sector to continue to play its role as handmaiden to monetary policy by contracting when monetary conditions are tight and expanding when conditions ease. On this issue Gibson (1) has presented rather convincing argument against buffering the housing sector at all. A stronger case should be made for the opposing view, which seems to limit its analysis to the microeconomics of thrift institutions rather than the macroeconomics of the effectiveness of monetary policy. However, the author avoids the issue and chooses to investigate ways in which the maturity differential can be reduced. [ABSTRACT FROM AUTHOR]

One has to be impressed with the potential importance of the data base which Professors Cohn, et al. have been able to assemble and begin to analyze. The first report of their ongoing study, which was presented a year ago at these meetings, tantalized our expectations for learning more about the investment behavior of individuals--for long a relatively forgotten segment of the securities markets. A subsequent paper presented additional information on portfolio objectives, investor attitudes, decision processes, and portfolio composition--as well as insights on how these aspects of individual investors are interrelated. The issue of the present paper is straightforward: as individuals acquire greater wealth beyond their consumption needs, what do they do with it? Absolute and relative risk aversion are formal measures of what they do, and thus are often discussed in theoretical papers. While some theorists have proceeded without specification of investor utility functions beyond the sign of their first and second derivatives, other theorists have postulated additional properties, such as absolute and relative risk aversion, and even the functional form in some instances. In addition to its theoretical implications, the findings of this study by Professors Cohn, et al. should be of general interest to anyone teaching investment courses at any level. [ABSTRACT FROM AUTHOR]

Aharom Ofer's interesting paper presents a method for identifying the growth expectations of investors and then examines the correlation of the constructed expectational variables with the future growth realizations of the firms and with the realized rates of returns on their stocks. I believe the paper contains some errors in specification and technique, and I have methodological difficulties concurring with the conclusions of the paper. Nevertheless, I want to state at the outset that Ofer has attacked an important and relatively neglected problem in finance, and his method of measuring illusive investor expectations is an imaginative one, which may well prove serviceable in the future. [ABSTRACT FROM AUTHOR]

The Klein-Jonhson paper inspires the sort of reaction that an environmentalist might experience in yet seeing another prototype of an emission-free automobile without any real assurance that such a thing might actually run on the highway any time soon. As an admirer of the idea of the Link project, my remarks are tinged with that kind of impatience because it seems to me that Link does not as yet give results that allow a tracing of the effects of changes in economic activity from country to country with sufficient authority so that policy advice could be based on the results. In this respect, I am wondering to what extent the current paper represents a further step in the evolution of the Link project towards a policy advice goal and, indeed, in how far it still is more an academic rather than a practical exercise. It may well be that a fair amount of the problems associated with the Link models lies in the fact that all the national models are essentially demand models. The absence of supply variables, thus, makes it very hard to evaluate, for example, the way in which inflationary pressures of the sort we had in 1973 are transmitted from one country to another. But even abstracting from this general problem, there are some more specific questions that seem puzzling about the results presented in this paper. [ABSTRACT FROM AUTHOR]

The interrelated model provides a useful framework for a time series econometric study of household behavior. This paper summarizes the discussion in a longer paper scheduled for publication. In addition, a suggested extension and some preliminary results are presented. The interrelated model is a generalization of the familiar partial adjustment model. That model suggests that net investment in any period closes some fixed proportion of the gap between desired and actual stock holdings. In the multi-asset generalization, net investment in each asset is determined by the disequilibrium in all other asset holdings, as well as its own disequilibrium. Therefore, the model explains the allocation of wealth among assets, and also the allocation of income to wealth holding as determined by the desired level of asset holding. The extension of the model discussed below restricts the model to the portfolio allocation problem for a given level of total wealth. [ABSTRACT FROM AUTHOR]

In this paper, conditions are discussed under which maximum wealth does not correspond to maximum welfare. As one might suspect, these conditions involve situations in which capital investment on the part of the individual firm influences not only the wealth of its stockholders but also the prices and/or characteristics of existing assets available to stockholders in the market. In these situations changes in nominal stockholder wealth due to corporate investment may not correspond in direction to the concomitant changes in the size of stockholders' "real" opportunity sets. The discussion of conditions under which changes in wealth do not measure changes in welfare naturally leads to consideration of (a) conditions under which the price maximization rule is equivalent to maximization of stockholder welfare, and (b) alternative investment criteria which avoid the problems associated with price maximization. With respect to the optimality of the price maximization rule it is argued that rather stringent conditions on capital market structure are required. This is particularly true of, though not limited to, the case of uncertainty. As for alternative investment criteria, a simple and "operational" welfare maximizing rule is given of which price maximization is a special case under appropriate conditions. The welfare rule, however, applies to all capital market structures. [ABSTRACT FROM AUTHOR]

The article presents commentary from Uri Ben-Zion about an article written by Robert W. Resek, "Multidimensional Risk and the Modigliani-Miller Hypothesis," which appeared in the March, 1970 issue of the "Journal of Finance." In that paper Resek claimed to present a proof that the Modigliani-Miller proposition concerning the indifference of a firm's cost of capital to its capital structure was mistaken. In the current paper Ben-Zion argues that Resek himself is mistaken, and that the Modigliani-Miller proposition still holds.

Part I of this paper discusses briefly the methods used in the calculation of the variance--co-variance matrix and correlation coefficients and the nature and sources of the data. In Part II we present an analysis of correlation among pairs of domestic and foreign assets over different lengths of holding periods. Part III contains an analysis of correlation among pairs of domestic and foreign identical industries. The paper closes with the presentation of the influence exchange rate variations have on the stability of earnings from foreign assets. [ABSTRACT FROM AUTHOR]

A conference paper is presented that looks at money demand and supply functions. Several theories about money supply are discussed including one in which it does not have any influence on national income or prices and another that allows for a link between national income, money, and prices. A particular aim of this paper is to generate a monetary theory that incorporates policy with consumer behavior and bank behavior.

A conference paper is presented that focuses on the pricing of new automobile financing. In his research the author uses the cost of the vehicle's credit as the finance rate and argues against the criticism that this is not a measure of pure interest and opts to use the U.S. Federal Reserve System's method for estimating the finance rate. During 1952-1962 sales finance companies competed more heavily with other financial institutions and the car manufacturers' own lenders.

This paper seeks to identify an optimum set of monetary-fiscal policies to aid in economic adjustments to general and complete disarmament on a specified model. A solution is located by econometric analysis of the effects of changes in taxes and of government expenditures on GNP, employment, and the federal budget. The implications, potentialities, and limitations of surplus budgets, reduction of federal debt, and monetary expansion for disarmament adjustment are also explored. The obstacles to the adoption of the proposed policy are appraised, and a strategy for overcoming them is suggested, which would, incidentally, help to overcome structural obstacles and also conserve for the civilian economy some of the dynamic economic contributions of national defense. While much excellent work has been done on defense economics, there has been relatively little specific and technical discussion of disarmament economics, particularly of the bearing of fiscal and monetary theory upon it.However, the Program of Research on Economic Adjustments to Disarmament (READ) has now in press a report of two years of research on the problem, which will deal at some length with monetary-fiscal adjustments. This paper will serve as a preliminary report on a part of our findings, although obviously the particular conclusions I draw reflect only my own opinions. [ABSTRACT FROM AUTHOR]

The article presents a list of books the publications received for review.

The article lists books received including "Business Reports: Investigation and Presentation," third edition, by C. R. Anderson, A. G. Saunders, and F. W. Weeks, "Economics: An Introduction to Analysis and Policy," second edition, by George L. Bach, and "Introduction to Mathematical Economics," by D. W. Bushaw and R. W. Clower.

A conference paper is presented that examines firm income taxation and asset expansion. The author explores some of the problems associated with the measurement of asset expansion during periods of changing price levels. The author investigates the impact that changes in corporate income tax rates have on asset expansion and offers some suggestions on how to stimulate investments by means of special tax measures.

A discussion of several conference papers that examined postwar monetary policy in the U.S. is presented. The author begins by discussing the paper that examined international trade. The author points to the growing trend of government intervention in trade and questions if the forces that promote equilibrium in a free exchange market can still function in a market guided by governments. The author also explores domestic bank lending policies and increases in short-term interest rates.

This article presents a discussion on several papers that examined postwar economics in the U.S. The author discusses the government bond holdings of life insurance companies and the common stock shares purchased by colleges and universities with money from endowments. The author also discusses a paper that examined some of the philosophical forces that have shaped investment activity in the U.S. The author explores how the purchasing power theory had been applied by investors in their financial decision making. The author also discusses trends in securities prices following the end of World War II.

The article presents a conference paper in response to another paper published in this same issue titled "Cost of the Marshall Plan to the United States," by Seymour E. Harris. The author notes that Harris may not have had the advantage of reading the 240 page report containing the U.S. President Harry Truman's proposals for European recovery. The author considers the role of financial measures in economic recovery, stabilization loans, and the validity of the cost estimates of the Plan.

Professor Renwick has presented an interesting and worthwhile overview of the portfolio problem. Observations on the divergence of thought and implementation with regard to the conceptualization and measurement of risk appear to be of particular value to theorist and practitioner alike. The paper is indeed meritorious in many additional respects, but there remain, at least in this observer's opinion, some rather serious deficiencies. It is to this latter set that the following comments are addressed. [ABSTRACT FROM AUTHOR]

The article discusses stock valuation and the role of dividends. Theoretical and empirical analysis in the paper focuses on several problems including the determination of the cost of equity capital, the minimization of the cost of capital, and the maximization of the value of stock. These problems are overlapping in that they directly and indirectly concern stock valuation. When speaking of stock valuation one must also discuss the role of dividends. Dividends can influence stock value through capital structure and income splitting.

The article presents a list of books received including "Government and Housing in Metropolitan Areas," by Edward Banfield and Morton Grodzins, "Principles of Economic Policy," by Kenneth E. Boulding, and "The Demand for Currency Relative to Total Money Supply," by Philip Cagan.

The article presents discussion regarding the 1982 paper "Do We Really Know Financial Markets are Efficient," by Lawrence H. Summers. The author states that Summers' largest contribution with his paper is the observation that the negative correlation between pricing error and variance of returns can be too small to detect using common techniques. The article states that Summers' paper does not suggest new statistical tests, but does call attention to the deficiencies of past tests. The article supplies a mathematical model of a comparison of values for a monthly versus daily returns which implies that the negative autocorrelation of returns approaches zero as the length of the return interval grows.

This paper studies a financial market populated by adaptive traders. Learning is modeled following Camerer and Ho (1999) . A call market and a Walrasian tatonnement are compared in an environment in which both institutions have the same Nash and competitive equilibrium outcomes. When traders learn via a belief-based model, equilibrium is discovered in both types of markets. In contrast, when traders learn via a reinforcement-based model, convergence to equilibrium is achieved in the Walrasian tatonnement but not in the call market. This paper suggests that market mechanisms can be designed to foster traders' learning of equilibrium strategies. [ABSTRACT FROM AUTHOR]

This article presents news and events regarding the American Finance Association (AFA). The AFA and Morgan Stanley are pleased to announce that Eugene F. Fama, the Robert R. McConnick Distinguished Service Professor at the University of Chicago, has been chosen as the first recipient of the Morgan Stanley-American Finance Association Award for Excellence in Finance. The AFA annual meeting will take place in New Orleans, Louisiana, in January 2008. There are also forms and information regarding membership and submission procedures.

Several announcements are presented, including an obituary for Shmuel Kandel, professor and dean at Tel Aviv University, a notice of the establishment of the Morgan Stanley-American Finance Association Award for Excellence in Finance and a notice that the 2008 annual meeting of the American Finance Association is to be held in New Orleans, Louisiana from January 4 through 6.

This paper shows that the existence of managerial ability, combined with the labor contract prevalent in the industry, implies that the closed-end fund discount should exhibit many of the primary features documented in the literature. We evaluate the model's ability to match the quantitative features of the data, and find that it does well, although there is some observed behavior that remains to be explained. [ABSTRACT FROM AUTHOR]

In theory, better access to bank credit can reduce or increase output volatility depending on whether firms are more financially constrained during contractions or expansions. This paper finds that the volatility of industrial output is lower in countries with more bank credit. Most of the reduction in volatility is idiosyncratic, which follows from the ability of banks to pool and diversify shocks. Systematic volatility is reduced less strongly. Volatility dampening is achieved via countercyclical borrowing: At the firm level, short-term borrowing is less (or more negatively) correlated with sales and inventories in countries with high levels of bank credit. [ABSTRACT FROM AUTHOR]

This paper analyzes the trading behavior of stock market investors. Purchases and sales are highly correlated when we divide investors geographically. Investors who live near a firm's headquarters react in a similar manner to releases of public information. We are able to make this identification by exploiting a unique feature of individual brokerage accounts in the People's Republic of China. The data allow us to pinpoint an investor's location at the time he or she places a trade. Our results are consistent with a simple, rational expectations model of heterogeneously informed investors. [ABSTRACT FROM AUTHOR]

This paper looks at internal capital markets in financial conglomerates by comparing the responses of small subsidiary and independent banks to monetary policy. I find that internal capital markets in financial conglomerates relax the credit constraints faced by smaller bank affiliates. Further analysis indicates that those markets lessen the impact of Fed policies on bank lending activity. The paper also examines the role of internal capital markets in influencing the investment allocation process of those conglomerates. My findings suggest that frictions between conglomerate headquarters and external capital markets are at the root of investment inefficiencies generated by internal capital markets. [ABSTRACT FROM AUTHOR]

This paper explores the empirical relevance of banking market structure on growth. There is substantial evidence of a positive relationship between the level of development of the banking sector of an economy and its long-run output growth. Little is known, however, about the role played by the market structure of the banking sector on the dynamics of capital accumulation. This paper provides evidence that bank concentration promotes the growth of those industrial sectors that are more in need of external finance by facilitating credit access to younger firms. However, we also find evidence of a general depressing effect on growth associated with a concentrated banking industry, which impacts all sectors and all firms indiscriminately. [ABSTRACT FROM AUTHOR]

This paper evaluates various explanations for the profitability of momentum strategies documented in Jegadeesh and Titman (1993). The evidence indicates that momentum profits have continued in the 1990s, suggesting that the original results were not a product of data snooping bias. The paper also examines the predictions of recent behavioral models that propose that momentum profits are due to delayed overreactions that are eventually reversed. Our evidence provides support for the behavioral models, but this support should be tempered with caution. [ABSTRACT FROM AUTHOR]

The article presents views of the author on the paper by scholars Robert Grauer and Nils Hakausson entitled "Gains from International Diversification: 1968-85 Returns on Portfolios of Stocks and Bonds." The author addresses the underlying model employed in the research and the risk of estimation. He agrees with the authors of the original article that the mean-variance framework is not suited to determine the optimal multiperiodic investment policy. Several aspects of portfolio rebalancing are also discussed.

The article presents discussion regarding the 19867 paper "Optimal Portfolio Choice Under Incomplete Information," by G. Gennotte. The article discusses research done on investment decisions in a Merton/Cox Ingersoll & Ross production economy. The article states that Gennotte's paper provides two interesting observations: that an increase in the uncertainty regarding instantaneous expected returns of a certain production process will reduce its weight in the portfolio, and that the decisions of investors with logarithmic preferences behave as if the conditional means are the true ones, given that their estimates of expected returns are independent of the estimation error.

The article presents a commentary on the paper "The Pricing of Oil & Gas: Some Further Results." The author notes that the greatest value of this research comes from investigating the time series properties of VALUE and HOTEL. He explains that measurement issues which persist through time will disappear with first differencing, and those which remain will be drowned out by a big movement in prices. The author observed an error in the cross-sections where the correlations between current costs and future costs increased. He believes that this correlation may not be present in oil royalty trusts, because of the manner in which reserves are chosen to be put in trusts.

This article presents a discussion of an article that presents an outline of the reasons for regulating financial institutions, the evolution of financial regulation and the financial system as a whole and the status of financial reform legislation. The author suggests that the paper could have gone into greater detail in examining the performance of bank holding company subsidiaries with unaffiliated firms to make inferences about relative riskiness and profitability. He also points out that they could have done more in discussing whether the future of bank holding companies lies in conglomeration or in specialization.

Myron J. Gordon's paper has an ambitious purpose. It attempts to explain the effects of inflation and real factors on the performance of the U.S. stock market, over the years 1960 to 1980. In doing this, it addresses the empirical finding of the absence of a positive short-run correlation between inflation and a share's holding period rate of return in the U.S. There is no widely accepted explanation for the negative correlation observed between stock market values and inflation (anticipated and unanticipated). However, plausible explanations, some of them competing and some complementary, have been offered. Gordon's paper attempts to evaluate several of the more important of these. That he does not successfully resolve the controversies raised does not mean that he has not furthered the debate. [ABSTRACT FROM AUTHOR]

The paper by professors John and Saunders addresses a fundamental dilemma inherent in the conventional system of public utility regulation. The primary objective of public utility regulation is to limit the revenue of the regulated firm to a sum that will cover prudent operating expenses and interest on debt plus a fair return to equity. The dilemma arises because pursuit of the objective of limiting the firm's profit to the amount that would be earned in competitive markets substantially lessens incentives to reduce cost that are present in competitive markets. Conventional regulation relies primarily on two techniques to address this dilemma. The first is the prudent investment doctrine which allows regulators to disallow unreasonable expenses incurred by managers of jurisdictional firms. This doctrine is only an ultimate deterrent for extreme cases. It creates the danger of regulatory "Monday morning quarterbacking." At best it is a negative force; it does not provide a positive incentive. The other conventional regulatory inducement to cost reduction is the filed-rate doctrine, or as it is more often called by economists, regulatory lag. Public utilities are permitted to charge only filed rates and these are only adjusted periodically and prospectively. Utility rates are fixed for some period of time and are not true cost-plus prices. During the period the fixed rates are in effect, any realized cost efficiencies benefit the firm. However, efficiencies are likely to be reflected in the rates set whenever new rates are filed and approved by regulators. Thus, we must seek new and positive regulatory incentives for efficiency. To this end the paper before us proposes more use of incentive contracting between utilities and their suppliers. [ABSTRACT FROM AUTHOR]

This paper examines the consequences of putting the word "international" in front of Ross's Arbitrage Pricing Theory, or, in shortened form, of putting an "I" in front of "APT". Professor Solnik has played an important role in putting that same letter in front of another important acronym in asset pricing theory. The outcome of that effort was, of course, the IAPM, and it appears that it is largely dissatisfaction with the testability of that theory which motivates the work presented here. Professor Solnik discusses his work primarily in terms of international pricing and his results are, of course, interesting for that application. He also notes other potential applications, e.g. asset pricing with relative price uncertainty. First we want to discuss the theoretical considerations involved in extending the APT to an international setting and then consider what is gained on the empirical front by making this extension. [ABSTRACT FROM AUTHOR]

The article presents commentary on a paper written by Oldrich A. Vasicek and H. Gifford Fong (V&F) entitled "Term Structure Modeling Using Exponential Splines," which appeared in the May, 1982 issue of the "Journal of Finance." The author believes V&F should have acknowledged potential problems inherent in their assumption that expected rates are equal to forward rates. He also discusses spline functions in general and raises questions about V&F's particular application. He hopes further research will yield more insight into the estimating equation for the term structure.

This article presents a discussion of a paper that examined the credit union industry. The author states that the industry experienced rapid growth in the 1960s and 1970s due to relaxed deposit rate ceilings and that consumers responded favorably to this atmosphere. The author examines a model that attempted to portray credit unions as a financial intermediary; however, the paper failed to recognize empirical research that would have influenced this decision based on evidence on bank and thrift institution retail competition.

The article comments on a paper published within the issue, "The Theory of the Trading Firm Revisited," by B. Dumas. The paper recommends that the future real market value of the trading firm be decomposed into components of inflation, a single real future spot exchange rate and an orthogonal real random variable designed to capture all other phenomena. The author criticizes Dumas for his decomposition on both a technical and economic level. He notes that both variables contain a common variable, and will thus be collinear. Similarly, their coefficients (termed inflation-risk exposure and exchange-risk exposure) will be inter-dependent. As a result of this realization, inflation-risk exposure may actually be exchange-risk exposure, and vice versa.

The article comments on a paper published within the issue, "Taxation and the Incidence of Homeownership Across Income Groups," by Robert H. Litzenberger and Howard B. Sosin. The author feels that this paper is a generally sound framework for the analysis of homeownership incentives, but criticizes the its simplifying assumptions and the lackluster attention given to the impact of inflation. The author discusses the implication that a change in the paper's capital gains tax assumption strengthens the conclusions that are not adequately supported by the presented analysis.

The article comments on a paper published within the issue. "Technology, Communication and the Performance of Financial Markets: 1840-1975," by Kenneth D. Garbade and William L. Silber, investigates the effects of innovations in information technology on security markets. The author discusses two points of criticism regarding the paper in question. He feels that the authors exaggerate the policy significance of their findings. He also believes they overstate their case regarding the importance of the consolidated ticker tape, noting that no impact on inter-market price differentials could be observed. The author feels that the automation of the trading processes is the next logical step for market integration, which is currently under active consideration by the U.S. Securities and Exchange Commission.

A paper that presents us with a paradox has a natural appeal. The paradox in Grossman's paper--that "when a market is a perfect aggregator of information it removes private incentives to collect information" is certainly not trivial from the viewpoint of anyone concerned with the functioning of securities markets. A broader viewpoint is also possible, moreoever, since I find Grossman's problem closely related to an older question in price theory: When every market participant is convinced that the efforts of arbitrageurs ensure that the same good never (for any instant) is offered at different prices at the same time, how can the arbitrage operation that ensures this condition survive? Most price theory texts do not address this problem directly, or at all, although I think they should, and Grossman deserves credit for ably illuminating its counterpart in the theory of efficient securities markets. [ABSTRACT FROM AUTHOR]