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In the presence of imperfect, or perturbed benchmarks, pricing based on relative valuation or arbitrage can be affected adversely. This study highlights persistent pricing irregularities in the Kansas City Value Line (KCVL) stock index futures market. This contract is especially interesting because the underlying benchmark underwent a midstream change in definition from a complex equally weighted geometric index to an equally weighted arithmetic index. Empirical analysis reveals that during a four-year period the market displayed herd-like behavior and priced the KCVL (Geometric) contract using the simple but wrong cost-of-carry benchmark model. A dramatic change occurs around the publication of the Eytan-Harpaz (1986) model when the market turns efficient from the perspective of this new model. The market appears to have succumbed initially to a bad information cascade primarily because arbitrage was difficult to understand and carry out under complex benchmarking. The evidence provides empirical extension to the observational social learning paradigms of Simon (1955), Banerjee (1992), and Bikhchandani, Hirshleifer, and Welch (1992) that lead to behavioral herding and information cascades., THE HIGH DEGREE to which modern markets are interconnected through arbitrage motivated trading warrants that we pay close attention to the robustness of pricing benchmarks. The quality of the linkage [...]

New tests, based on smooth transition autoregressive models, for mean reversion in time series of real exchange rates are proposed. One test forces mean reversion to be symmetric about the integrated process central case, while the other permits asymmetry. The tests are applied to monthly series of seventeen real exchange rates against the U.S. dollar and fourteen against the deutsche mark. They reveal stronger evidence against the unit root null hypothesis than does the usual Dickey-Fuller test., THE THEORETICAL IDEA of purchasing power parity, grounded in the 'law of one price,' is discussed by Rogoff (1996). This law states that, for any good i, [P.sub.i] = [EP.sup.*.sub.i], [...]