The arbitrage pricing theory and supershares

Article Abstract:

In a single-period model with options on the market portfolio, linear factor pricing holds if and only if the variance of the market conditional on the factors is zero. There is no need for factors other than nonlinear functions of the market. For accurate linear pricing of all payoff patterns the factors must be rotationally equivalent to Hakansson's "supershares." In a multiperiod model, a similar set of results holds, but with consumption replacing the market payoff. The methodology of the empirical Arbitrage Pricing Theory literature is not consistent with either the single-period model or the multiperiod model. (Reprinted by permission of the publisher.)

Models, Pricing, Arbitrage

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Informational efficiency and information subsets

Article Abstract:

The concept of information efficiency has been a rather unstudied topic, although it could have a profound effect on capital markets. Information efficiency involves the prices of securities on capital and equities markets that remain fairly constant and do not change as long as the related firm and investment information are perceived to be 'perfect'. A model is developed which suggests that a new definition of information efficiency is required. The new definition offered asserts that information efficiency exists when information and changes in information do not change the securities' prices or provoke radical swings in portfolios and investment values.

Analysis, Information management, Money market, Money markets

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The effects of different taxes on risky any risk-free investment and on the cost of capital

Article Abstract:

Tax rate changes have a profound effect on market values, securities trading and the economy as a whole. Particularly affected are the values of risky assets which appear to react positively to some tax rate changes and negatively to others. A model is developed that incorporates human wealth as a key variable influencing increases in securities' values. Therefore, lower tax rates on personal income have a definite effect on stock prices and other financial instruments. A corollary of the model indicates that tax rate reductions cannot increase savings.

Taxation, Capital investments

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