This paper considers a version of the Dornbusch model of exchange rate dynamics which allows a nonlinear domestic demand for foreign assets function and imperfect substitutability between domestic and foreign interest bearing assets. Expectations of exchange rate changes are modelled as adaptive...

In this paper we propose a framework for studying possible causes of excess exchange rate volatility. The framework consists of a generalized Dornbusch model of exchange rate dynamics, involving imperfect substitutability between assets, lagged nonlinear protfolio adjustment and les than...

We reconsider the derivation of the traditional capital asset pricing model (CAPM) in the discrete time setting for a portfolio of one riskless asset and many risky assets. In contrast to the standard setting, it is assumed that agents are heterogeneous in their conditional means and covariances...

Margrabe provides a pricing formula for an exchange option where the distributions of both stock prices are log-normal with correlated components. Merton has provided a formula for the price of a European call option on a single stock where the stock price process contains a compound Poisson...