This paper presents a generalized version of the lattice approach to pricing options. It shows how the control variate technique can produce significant improvements in the efficiency of the approach. The control variate technique is illustrated using American puts on dividend and nondividend paying stocks.

Speculative bubbles have been offered to explain the excess volatility results by Shiller (1981) and LeRoy and Porter (1981). Recent work by Flood, Hodrick, and Kaplan has shown that rational speculative bubbles cannot be the explanation for the excess volatility results. This paper provides an analytical framework for examining the hypothesis that the simple present value model used for the excess volatility studies is a misspecification of the true model. The method is applied to data from a market index and four large corporations. The results are consistent with the hypothesis that the simple present value model is not the correct specification for stock market pricing.

This study provides evidence on joint characteristics of hourly common stock trading volume and returns on the New York Stock Exchange. Average volume traded shows significant differences across trading hours of the day and across days of the week. Average returns differ across hours of the day, and, to some extent, across days of the week. There is a strong contemporaneous relation between trading volume and returns and also a relation between trading volume and returns lagged up to four hours. Furthermore, the trading volume-returns relation is steeper for positive returns than for nonpositive returns.

Mechanical trading rules seem to have more potential than previous tests found. Fama and Blume (1966), looking at the Dow 30 of the late 1950s, found no profits for the best (½-percent) rule after adjusting for transactions costs. Fifteen of these stocks looked profitable in their sample, however; for the same rule, the surviving fourteen show statistically significant profits for 1970–1982 for transactions costs obtainable by floor traders. The test used here assumes constant risk premia, or more generally, that risk premia are on average approximately the same on days “in” as for the total period.

This paper examines the valuation impacts of specially designated dividends (SDDs) by analyzing the behavior of stock and bond prices on dates surrounding their announcements. The evidence presented here suggests that SDDs are considered positive signals by the market, with (most of) the gains associated with their announcements accruing to stockholders. In addition, we present some evidence that the gain to stockholders is negatively related to the frequency of SDD announcements.

This research provides improved techniques for analyzing the after-tax risk exposure of taxable institutions holding amortizing instruments such as commercial, real estate, and consumer loans. We derive after-tax duration for amortizing instruments and analyze it for sensitivity to tax rates, coupon, and maturity. Taxable investors who hedge and ignore the effects of taxes on amortizing instruments will underestimate differences in durations on bonds versus amortizing instruments of equal maturities; bond durations increase much faster as tax rates increase. One unexpected result shows that, unlike bond duration, amortizing instrument duration often increases with coupon rate, and sometimes is independent of coupon rate.

General equilibrium in the classical two-period mean-variance capital asset pricing model is not unique. Corresponding to one single set of expectations, utility functions, and an initial wealth distribution, there may be several equilibria, and an asset may have different prices, expected rates of return, and betas in different equilibria. However, any equilibrium portfolio is sustained by a unique price system, and if investors have decreasing risk aversion, then any equilibrium allocation of the risky assets is sustained by a unique price system.

A number of futures contracts conveys to the short position various delivery options regarding the quality and exact timing of delivery. Moreover, the compensation to the long position is not solely determined by the market value of the delivered asset at the time of delivery. Sometimes, the long position can hedge this delivery risk by holding an appropriate portfolio of the underlying asset. It often has been stated that whenever the long position can form a dynamic hedge against the delivery risk, the delivery option has a zero value. This paper demonstrates the implication of such erroneous intuition to the pricing of options. It is shown that the root of the issue is the property of diffusion processes whereas, within a given time interval, a random variable either will never cross a given boundary or else, cross it an infinite number of times.

Livingston contends that short futures/long cash traders can eliminate the potential costs of the quality option through use of a dynamic trading strategy. It is proposed here that if this is possible then futures prices will never reach a stable equilibrium. Alternatively, if Livingston's argument is flawed, then no risk-free arbitrage opportunities are likely to be available to either short cash/long futures or long cash/short futures traders. Under such conditions, futures prices will reach an equilibrium when the expected return and risk of each type position are equally attractive.