As a consequence of optimal investment choices, a firm’s assets and growth options change in predictable ways. Using a dynamic model, we show that this imparts predictability to changes in a firm’s systematic risk, and its expected return. Simulations show that the model simultaneously reproduces: ~i! the time-series relation between the book-to-market ratio and asset returns; ~ii! the cross-sectional relation between book-to-market, market value, and return; ~iii! contrarian effects at short horizons; ~iv! momentum effects at longer horizons; and ~v! the inverse relation between interest rates and the market risk premium. RECENT EMPIRICAL RESEARCH IN FINANCE has focused on regularities in the cross section of expected returns that appear anomalous relative to traditional models. Stock returns are related to book-to-market, and market value. 1 Past returns have also been shown to predict relative performance, through the documented success of contrarian and momentum strategies. 2 Existing explanations for these results are that they are due to behavioral biases or risk premia for omitted state variables. 3 These competing explanations are difficult to evaluate without models that explicitly tie the characteristics of interest to risks and risk premia. For example, with respect to book-to-market, Lakonishok et al. ~1994! argue: “The point here is simple: although the returns to the B0M strategy are impressive, B0M is not a ‘clean ’ variable uniquely associated with eco-

I review empirical research on the relation between capital markets and financial statements.The principal sources of demand for capital markets research in accounting are fundamental analysis and valuation, tests of market efficiency, and the role of accounting numbers in contracts and the political process.The capital markets research topics of current interest to researchers include tests of market efficiency with respect to accounting information, fundamental analysis, and value relevance of financial reporting.Evidence from research on these topics is likely to be helpful in capital market investment decisions, accounting standard setting, and corporate financial

Households in the west African semi-arid tropics, as in much of the developing world, face substantial risk-- an inevitable consequence of engaging in rainfed agriculture in a drought-prone environment. It has long been hypothesized that these households keep livestock as a buffer stock to insulate their consumption from fluctuations in income. This paper has the simple goal of testing that hypothesis. Our results indicate that livestock transactions play less of a consumption smoothing role than is often assumed. Livestock sales compensate for at most thirty percent, and probably closer to twenty percent of income shortfalls due to village-level shocks alone. We discuss possible explanations for these results and suggest directions for future work.

When the underlying price process is a one-dimensional diffusion, as well as in certain restricted stochastic volatility settings, a contingent claim's delta is always bounded by the infimum and supremum of its delta at maturity. Further, if the claim's payoff is convex (concave), then the claim's price is a convex (concave) function of the underlying asset's value. However when volatility is less specialized, or when the underlying price follows a discontinuous or non-Markovian process, then call prices can have properties very different from those of the Black-Scholes model: a call's price can be a decreasing, concave function of the underlying price over some range; increasing with the passage of time; and decreasing in the level of interest rates. Much of the financial options literature derives precise option prices, when the underlying asset price process is completely specified. Since it is empirically difficult to ascertain what the true underlying process is, another part of t...

Zipf’s law is a very tight constraint on the class of admissible models of local growth. It says that for most countries the size distribution of cities strikingly fits a power law: the number of cities with populations greater than S is proportional to 1/S. Suppose that, at least in the upper tail, all cities follow some proportional growth process (this appears to be verified empirically). This automatically leads their distribution to converge to Zipf’s law. I.

The fundamental goal of all good design and engineering is to create maximal value added for any given investment. There are many dimensions in which value can be assessed, from monetary profit to the solution of social problems. The benefits sought are often domain-specific, yet the logic is the same: design is an investment activity. Software economics is the field that seeks to enable significant improvements in software design and engineering through economic reasoning about product, process, program, and portfolio and policy issues. We summarize the state of the art and identify shortfalls in existing knowledge. Past work focuses largely on costs, not on benefits, thus not on value added; nor are current technical software design criteria linked clearly to value creation. We present a roadmap for research emphasizing the need for a strategic investment approach to software engineering. We discuss how software economics can lead to fundamental improvements in software design and engineering, in theory and practice. 1

The application of real options analysis to information technology investment evaluation problems recently has been proposed in the IS literature by Dos Santos (1991), Kambil et al. (1993), Kumar (1996), Chalasani et al. (1997), and Taudes (1998). The research reported on in this paper illustrates the value of applying real options analysis in the context of a case study involving the deployment of point-of-sale (POS) debit services by the Yankee 24 shared electronic banking network of New England. In the course of so doing, the paper also attempts to operationalize real options analysis concepts by examining claimed strengths of this analysis approach and balancing them against methodological difficulties that this approach is believed to involve. The research employs a version of the Black-Scholes option-pricing model that is adjusted for risk-averse investors, showing how it is possible to obtain reliable values for Yankee 24's "investment timing option", even in the absence of a market to price it. To gather evidence for the existence of the timing option, basic scenario assumptions and the parameters of the adjusted Black-Scholes model, a structured interview format was developed. The results obtained using real options analysis enabled the network's senior management to identify conditions for which entry into the POS debit market would be profitable. These results also indicated that, in the absence of formal evaluation of the timing option, traditional approaches for evaluating information technology investments would have produced the wrong recommendations.

Using equipment-level data from aerospace plants that closed during the 1990s, this paper studies the process of moving installed physical capital to a new use. The analysis yields three results that suggest significant sectoral specificity of physical capital and costs of re-deploying the capital. First, other aerospace companies are over-represented among buyers of the used capital relative to their representation in the market for new investment goods. Second, even after taking into account age-related depreciation, capital sells for a substantial discount relative to replacement cost. The more specialized the type of capital, the greater is the discount. Yet, capital that sells to other aerospace firms fetches a higher price than capital sold to industry outsiders. Finally, the process of winding down operations and selling the equipment takes several years. _____________________ We are greatly indebted to the managers, auctioneers, and machine tool salesman who provided us with ...

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I propose several mean-reversion jump-di#usion models to describe spot prices of energy commodities that maybevery costly to store. I incorporate multiple jumps, regime-switching and stochastic volatilityinto these models in order to capture the salient features of energy commodity prices due to physical characteristics of energy commodities. Prices of various energy commodity derivatives are derived under each model using the Fourier transform methods. In the context of deregulated electric power industry, I construct a real options approachtovalue physical assets such as generation and transmission facilities. The implications of modeling assumptions to the valuation of real assets are also examined.