A simplified version of the Neyman (1937) “Smooth” goodness-of-fit test is extended to account for the presence of estimated model parameters, thereby removing overfitting bias. Using a Lagrange Multiplier approach rather than the Likelihood Ratio statistic proposed by Neyman greatly...

We study a consumption-based asset pricing model with incomplete information and [alpha]-stable shocks. Incomplete information leads to a non-Gaussian filtering problem. Bayesian updating generates fluctuating confidence in the agents' estimate of the persistent component of the dividends'...

The apparent banking market failure modeled by Diamond and Dybvig [1983] rests on their inconsistently applying their “sequential servicing constraint” to private banks but not to their government deposit insurance agency. Without this inconsistency, banks can provide optimal risk-sharing...

The well-known option pricing formula of Black and Scholes depends upon the assumption that price fluctuations are log-normal. However, this formula greatly underestimates the value of options with a low probability of being exercised if, as appears to be more nearly the case in most markets,...

The term structure of interest rates is carefully analyzed over the period 1947-77 in order to construct a monthly series on cumulative unanticipated changes in long-term interest rates. This series is a sort of synthetic interest rate, changes in which over several months or years represent...

Traditionally, banks and financial intermediaries borrow short and lend long. This causes a risk of negative net worth (and failure, under simplifying assumptions), because the present discounted value of the assets is more volatile than that of the liabilities. This paper utilizes a new option...

Individuals plan consumption and production for different points in the future, using interest rates of various maturities as a guide. How-ever, individuals do not always pre-contract all planned future borrowing and lending, and the intermediaries they work through often do not match the...

The Austrian theory of the "marginal use" is restated and extended. It is found that the Austrian concept of marginal utility (as derived from the marginal use) is not dependent on cardinal utility, and indeed is consistent with "intrinsically ordinal" utility. In this system, diminishing...