Appendix A: Derivation of Dividend Discount Model

D1 D2 D3
A.1 Summation of Infinite Geometric Series P0 ¼ þ þ þ  (A.6)
1 þ k ð1 þ kÞ2 ð1 þ kÞ3
Summation of geometric series can be defined as:
Where P0 ¼ present value of stock price per share
Dt ¼ dividend per share in period t (t ¼ 1, 2,. . .,n)
S ¼ A þ AR þ AR2 þ    þ ARn1 (A.1)
If dividends grow at a constant rate, say g, then,
D2 ¼ D1(1 + g), D3 ¼ D2(1 + g) ¼ D1(1 + g)2, and so on.
Multiplying both sides of Equation A.1 by R, we obtain
Then, Equation A.6 can be rewritten as:

RS ¼ AR þ AR2 þ    þ ARn1 þ ARn (A.2)

D1 D1 ð1 þ gÞ D1 ð1 þ gÞ2
P0 ¼ þ þ þ    or,
Subtracting Equation A.1 by Equation A.2, we obtain 1þk ð1 þ k Þ2 ð1 þ kÞ3
D1 D1 ð1 þ gÞ D1
P0 ¼ þ  þ
S  RS ¼ A  AR n 1 þ k ð1 þ k Þ ð1 þ k Þ ð1 þ k Þ
ð1 þ gÞ2
It can be shown  þ  (A.7)
ð1 þ kÞ2
Að 1  Rn Þ
S¼ (A.3) Comparing Equation A.7 with Equation A.4, i.e.,
1R
P0 ¼ S1 ; 1þk
D1
¼ A, and 1þg
1þk ¼ R as in the Equation A.4.

1þk <1 or if k > g, we can use Equation A.5

1þg
If R is smaller than 1, and n approaches to 1, then Rn Therefore, if
approaches to 0 i.e., to find out P0
i.e.,
S1 ¼ A þ AR þ AR2 þ    þ ARn1 þ   
þ AR1 ; (A.4) D 1 =ð 1 þ k Þ
P0 ¼
1  ½ð1 þ gÞ=ð1 þ kÞ
then, D 1 =ð 1 þ k Þ
¼
½1 þ k  ð1 þ gÞ=ð1 þ kÞ
S1 ¼
A D1 =ð1 þ kÞ
1R
(A.5) ¼
ð k  gÞ =ð 1 þ k Þ
D1 D0 ð1 þ gÞ
¼ ¼
kg kg

A.2 Dividend Discount Model

Dividend Discount Model can be defined as:

C.-F. Lee and A.C. Lee (eds.), Encyclopedia of Finance, DOI 10.1007/978-1-4614-5360-4, 911
# Springer Science+Business Media New York 2013
 Appendix B: Derivation of DOL, DFL and DCL

B.1 DOL B.2 DFL

Let P ¼ price per unit 9

V ¼ variable cost per unit Let i ¼ interest rate on >
= iD ¼ interest payment
F ¼ total fixed cost outstanding debt
>
on dept
;
Q ¼ quantity of goods sold D ¼ outstanding debt
The definition of DOL can be defined as: N ¼ the total number of shares outstanding
DOL (Degree of operating leverage)
t ¼ corporate tax rate
EAIT ¼ ½QðP  V Þ  F  iDð1  tÞ

The definition of DFL can be defined as:

C.-F. Lee and A.C. Lee (eds.), Encyclopedia of Finance, DOI 10.1007/978-1-4614-5360-4, 913
# Springer Science+Business Media New York 2013
914 Appendix B

B.3 DCL (Degree of Combined Leverage)

 Appendix C: Derivation of Crossover Rate

Suppose there are two projects under consideration. Cash Table A.1 NPV of Project A and B under different discount rates
flows of project A, B and B – A are as follows: Discount rate (%) NPV (Project A) NPV (Project B)
0 1500.00 3500.00
Period 0 1 2 3
5 794.68 1725.46
Project A 10,500 10,000 1,000 1,000
10 168.67 251.31
Project B 10,500 1,000 1,000 12,000
15 390.69 984.10
Cash flows of B – A 0 9,000 0 11,000
20 893.52 2027.78

 
Based upon the information the table above we can cal- 1; 000 10; 000
0 ¼ ½10; 500  ð10; 500Þ þ 
culate the NPV of Project A and Project B under different 1 þ R c 1 þ Rc
discount rates. The results are presented in Table A.1. " # " #
1; 000 1; 000 12; 000 1; 000
NPV(B) is higher with low discount rates and NPV(A) þ  þ 
is higher with high discount rates. This is because the cash ð1 þ Rc Þ2 ð1 þ Rc Þ2 ð 1 þ Rc Þ 3 ð 1 þ Rc Þ 3
flows of project A occur early and those of project B occur (A.10)
later. If we assume a high discount rate, we would favor
project A; if a low discount rate is expected, project B will be Solving Equation A.10 by trial and error method for Rc, Rc
chosen. In order to make the right choice, we can calculate equals 10.55%.
the crossover rate. If the discount rate is higher than the Using the procedure of calculating internal rate of return
crossover rate, we should choose project A; if otherwise, (IRR) as discussed in Equations A.8, A.9, and A.10, we
we should go for project B. The crossover rate, Rc, is the calculate the IRR for both Project A and Project B. The
rate such that NPV(A) equals to NPV(B). IRR for Project A and B are 11.45% and 10.95% respec-
Suppose the crossover rate is Rc, then tively. From this information, we have concluded that Project
A will perform better than Project B without consideration
NPVðAÞ ¼  10; 500 þ 10; 000=ð1 þ Rc Þ þ 1; 000= for change of discount rate. Therefore, the IRR decision rule
ð1 þ Rc Þ2 þ 1; 000=ð1 þ Rc Þ3 (A.8) cannot be used for capital budgeting decisions when there
exists an increasing or decreasing net cash inflow. This is so
NPVðBÞ ¼  10; 500 þ 1; 000=ð1 þ Rc Þ þ 1; 000= called “The Timing Problem” for using the IRR method for
capital budgeting decisions.
ð1 þ Rc Þ2 þ 12; 000=ð1 þ Rc Þ3
NPVðAÞ ¼ NPVðBÞ (A.9)

Therefore,

Rearranging the above equation (moving all terms on the

LHS to the RHS), we obtain Equation A.10

C.-F. Lee and A.C. Lee (eds.), Encyclopedia of Finance, DOI 10.1007/978-1-4614-5360-4, 915
# Springer Science+Business Media New York 2013
 Appendix D: Capital Budgeting Decisions
with Different Lives

D.1 Mutually Exclusive Investment Projects Subtracting Equation A.12 from Equation A.11 gives:
with Different Lives  
NPV ðN; tÞ  ðHÞNPV ðN; tÞ ¼ NPVðNÞ 1  Htþ1
The traditional NPV technique may not be the appropriate  
NPVðNÞ 1  Htþ1
criterion to select a project from mutually exclusive invest- NPV ðN; tÞ ¼
1H
ment projects, if these projects have different lives. The
underlying reason is that, compared with a long-life project,
Taking the limit as the number of replications, t,
a short-life project can be replicated more quickly in the long
approaches infinity gives:
run. In order to compare projects with different lives, we
compute the NPV of an infinite replication of the investment
lim NPV ðN; tÞ ¼ NPV ðN; 1Þ
project. For example, let Projects A and B be two mutually x!1
2 3
exclusive investment projects with the following cash flows.
1
¼ NPV 4 h i5
Year Project A Project B 1  1=ð1 þ K ÞN
0 100 100 " #
1 70 50 ð1 þ K ÞN
¼ NPVðNÞ (A.13)
2 70 50 ð1 þ K ÞN  1
3 50
Equation A.13 is the NPV of an N-year project replicated
By assuming a discount rate of 12%, the traditional NPV
at constant scale an infinite number of times. We can use it to
of Project A is 18.30 and the NPV of Project B is 20.09. This
compare projects with different lives because when their
shows that Project B is a better choice than Project A.
cash-flow streams are replicated forever, it is as if they had
However, the NPV with infinite replications for Project A
the same (infinite) life.
and B should be adjusted into a comparable basis.
Based upon Equation A.13, we can calculate the NPV of
In order to compare Projects A and B, we compute the
Projects A and B as follows:
NPV of an infinite stream of constant scale replications. Let
NPV (N, 1) be the NPV of an N-year project with NPV (N),
replicated forever. This is exactly the same as an annuity For Project A For Project B
paid at the beginning of the first period and at the end of NPV ð2; 1Þ NPV ð3; 1Þ
every N years from that time on. The NPV of the annuity is: " # " #
ð1 þ 0:12Þ2 ð1 þ 0:12Þ3
¼ NPVð2Þ ¼ NPVð3Þ
NPV ðN; 1Þ ¼ NPVðNÞ þ
NPVðNÞ
þ
NPVðNÞ
þ 
ð1 þ 0:12Þ2  1 ð1 þ 0:12Þ3  1
ð1 þ K Þ N
ð1 þ K Þ 2N    
1:2544 1:4049
¼ ð18:30Þ ¼ 20:09
In order to obtain a closed-form formula, let 0:2544 0:4049
(1/[(1 + K)N]) ¼ H. Then we have: ¼ 90:23 ¼ 69:71
 
NPV ðN; tÞ ¼ NPVðNÞ 1 þ H þ H 2 þ    þ H t (A.11)
Consequently, we would choose to accept Project A over
Multiplying both sides by H, this becomes Project B, because, when the cash flows are adjusted for
different lives, A provides the greater cash flow.
 Alternatively, Equation A.13 can be rewritten as an equiv-
H½NPV ðN; tÞ ¼ NPVðNÞ H þ H 2
 alent annual NPV version as:
þ    þ H t þ H tþ1 (A.12)

C.-F. Lee and A.C. Lee (eds.), Encyclopedia of Finance, DOI 10.1007/978-1-4614-5360-4, 917
# Springer Science+Business Media New York 2013
918 Appendix D

NPVðNÞ Assume company A buys a machine that costs $1,000 and

K  NPV ðN; 1Þ ¼ (A.14) the maintenance expense of $250 is to be paid at the end of
Annuity factor
each of the 4 years. To evaluate this investment, we can
where the annuity factor is calculate the present value of the machine. Assuming the
discount rate as 10%, we have
.
1  1 ð1 þ K ÞN
250 250 250 250
K NPVðAÞ ¼ 1000 þ þ þ þ
1:1 ð1:1Þ2 ð1:1Þ3 ð1:1Þ4
The decision rule from Equation A.14 is equivalent to the ¼ 1792:47
decision rule of Equation A.13. (A.18)
The different project lives can affect the beta coefficient
estimate, as shown by Meyers and Turnbull (1977). For Equation A.18 shows that payments of (1,000, 250, 250,
empirical guidance for evaluating capital-investment 250, 250) are equivalent to a payment of 1792.47 at time 0.
alternatives with unequal lives, the readers are advised to Using Equation A.16, we can equate the payment at time 0 of
refer Emery (1982). 1792.47 with a 4 year annuity.

1792:47 ¼ C  A40:1 ¼ C  3:1699

D.2 Equivalent Annual Cost C ¼ 565:47

Equation A.14 can be written as: In this example, following Equation A.13, we can find

NPVðNÞ ¼ K  NPV ðN; 1Þ  Annuity Factor (A.15) NPV ðN; 1Þ ¼ 1749:47  ð1 þ 0:1Þ4 =½ð1 þ 0:1Þ4  1
¼ 5654:71
Corporate Finance by Ross, Westerfield, and Jaffe (2005,
7th edn, p. 193) has discussed about Equivalent Annual Then following the Equation A.17, we obtain
Cost. The Equivalent Annual Cost (C) can be calculated as
follows: C ¼ K  NPV ðN; 1Þ ¼ 0:1  5654:71 ¼ 565:47

NPVðNÞ ¼ C  Annuity Factor (A.16) Therefore, the equivalent annual cost C is identical to the
equivalent annual NPV as defined in Equation A.14.
From Equations A.15 and A.16, we obtain

C ¼ K  NPV ðN; 1Þ (A.17)

 Appendix E: Derivation of Minimum-Variance
Portfolio

If there is a two security portfolio, its variance can be defined as: s2p ¼ w2D s2D þ w2E s2E þ 2wD wE Covðr D ; r E Þ

  ¼ w2D s2D þ ð1  wD Þ2 s2E þ 2wD ð1  wD Þ Covðr D ; r E Þ

s2p ¼ w2D s2D þ w2E s2E þ 2wD wE Cov r D; r E (A.19) ¼ w2D s2D þ s2E  2wD s2E þ w2D s2E þ 2wD Covðr D ; r E Þ
 2w2D Covðr D ; r E Þ
where rD and rE are the rate of return for security D and
security E respectively; wD and wE are weight associated
with security D and E respectively; s2D and s2E are variance of Now, the first order conditions of Equation A.21 can be
security D and E respectively; and Cov(rD, rE) is the covari- written as
ance between rD and rE.
The problem is choosing optimal wD to minimize the 2wD s2D  2s2E þ 2wD s2E þ 2 Covðr D ; r E Þ  4wD
portfolio variance, s2p Covðr D ; r E Þ ¼ 0

Min s2P (A.20) Rearranging the above equation,

wD

We can solve the minimization problem by wD s2D þ wD s2E  2wD Covðr D ; r E Þ ¼ s2E  Covðr D ; r E Þ
 2 
differentiating the s2p with respect to wD and setting the sD þ s2E  2Covðr D ; r E Þ wD ¼ s2E  Covðr D ; r E Þ
derivative equal to 0 i.e., we want to solve
Finally, we have
@s2p
¼0 (A.21)
@wD s2E  Covðr D ; r E Þ
wD ¼
s2D þ s2E  2Covðr D ; r E Þ
Since, wD + wE ¼ 1 or, wE ¼ 1  wD therefore, the var-
iance, s2P , can be rewritten as

C.-F. Lee and A.C. Lee (eds.), Encyclopedia of Finance, DOI 10.1007/978-1-4614-5360-4, 919
# Springer Science+Business Media New York 2013
 Appendix F: Derivation of an Optimal Weight
Portfolio Using the Sharpe Performance Measure

Solution for the weights of the optimal risky portfolio can be Equation A.22 becomes
found by solving the following maximization problem:
@Sp @ ½f ðwD Þ=gðwD Þ
  ¼
E rp  rf @wD @wD
w D Sp ¼
Max
sp f 0 ðwD ÞgðwD Þ  f ðwD Þg0 ðwD Þ
¼ ¼0 (A.28)
½gðwD Þ2
where E(rp) ¼ expected rates of return for portfolio P
@f ðwD Þ
rf ¼ risk free rates of return where f 0 ðwD Þ ¼ ¼ Eðr D Þ  Eðr E Þ (A.29)
@wD
Sp ¼ sharpe performance measure, and
sp as defined in Equation A.19 of Appendix 5 @gðwD Þ
g0 ðwD Þ ¼
We can solve the maximization problem by @wD
differentiating the Sp with respect to wD, and setting the 1 h 2 2
derivative equal to 0 i.e., we want to solve ¼  wD sD þ ð1  wD Þ2 s2E þ 2wD ð1  wD Þ
2
Covðr D ; r E Þ1=21
@Sp 
¼0 (A.22)  2wD s2D þ 2wD s2E  2s2E þ 2Covðr D ; r E Þ
@wD
 4wD CovðrD ; r E Þ

In the case of two securities, we know that ¼ wD s2D þ wD s2E  s2E þ Covðr D ,rE Þ
2wD Covðr D ; r E Þ
  h
E r p ¼ wD Eðr D Þ þ wE Eðr E Þ (A.23)  w2D s2D þ ð1  wD Þ2 s2E þ 2wD ð1  wD Þ
 1=2 Covðr D ; r E Þ1=2
sp ¼ w2D s2D þ w2E s2E þ 2wD wE Covðr D ; r E Þ (A.24)
(A.30)
wD þ wE ¼ 1 (A.25)
From Equation A.28,
From above Equations A.23, A.24, and A.25, we can f 0 ðwD ÞgðwD Þ  f ðwD Þg0 ðwD Þ ¼ 0; or
rewrite E(rp)  rf and sp as: f 0 ðwD ÞgðwD Þ ¼ f ðwD Þg0 ðwD Þ (A.31)
 
E r p  r f ¼ wD Eðr D Þ þ wE Eðr E Þ  r f Now, plugging f(wD), g(wD), f0 (wD), and g0 (wD) [Equa-
¼ wD Eðr D Þ þ ð1  wD Þ Eðr E Þ  r f tions A.26, A.27, A.29, and A.30] into Equation A.31, we have
 f ðw D Þ (A.26)
½Eðr D Þ  Eðr E Þ
h i1=2
 1=2  w2D s2D þ ð1  wD Þ2 s2E þ 2W D ð1  wD ÞCovðrD ; r E Þ
sp ¼ w2D s2D þ w2E s2E þ 2wD wE Covðr D ; r E Þ  
h ¼ wD Eðr D Þ þ ð1  wD ÞEðr E Þ  r f
¼ w2D s2D þ ð1  wD Þ2 s2E þ 2wD ð1  wD Þ 
 wD s2D þ wD s2E  s2E þ Covðr D ; r E Þ
Covðr D ; r E Þ1=2 2wD Covðr D ; r E Þ
h
 gðwD Þ (A.27)  w2D s2D þ ð1  wD Þ2 s2E þ 2wD ð1  wD Þ

Covðr D ; rE Þ1=2
ðA31Þ
C.-F. Lee and A.C. Lee (eds.), Encyclopedia of Finance, DOI 10.1007/978-1-4614-5360-4, 921
# Springer Science+Business Media New York 2013
922 Appendix F

Multiplying by ½w2D s2D þ ð1  wD Þ2 s2E þ 2wD ð1  wD Þ Subtracting

 
1=2
Covðr D ; r E Þ on both sides of Equation A.32, we have ½Eðr D Þ  Eðr E Þ s2D þ s2E  2Cov ðr D ; r E Þ w2D and ½Eðr D Þ
 
Eðr E Þ Covðr D ; r E Þ  s2E wD from both hand sides of Equa-
½Eðr D Þ  Eðr E Þ tion A.33, we have
h i
 w2D s2D þ ð1  wD Þ2 s2E þ 2wD ð1  wD ÞCovðr D ; r E Þ  
½Eðr D Þ  Eðr E Þ  Covðr D ; r E Þ  s2E wD
 
¼ wD Eðr D Þ þ ð1  wD ÞEðr E Þ  r f þ ½Eðr D Þ  Eðr E Þ  s2E
     
 wD s2D þ wD s2E  s2E þ Covðr D ,r E Þ  2wD Covðr D ; r E Þ ¼ Eðr E Þ  r f  s2D þ s2E  2 Covðr D ; r E Þ wD
   
(A.33) þ Eðr E Þ  r f  Covðr D ; r E Þ  s2E (A.34)

Rearrange all terms on both hand sides of Equation A.33, i.e., Moving all the terms with wD on one side and leaving the
Left hand side of Equation A.33 rest terms on the other side from Equation A.34, we have

½ Eð r D Þ  Eð r E Þ   
h i ½Eðr D Þ  Eðr E Þ  s2E  Eðr E Þ  r f
 
 w2D s2D þ ð1  wD Þ2 s2E þ 2wD ð1  wD ÞCovðr D ; r E Þ  Covðr D ; r E Þ  s2E
   
¼ ½Eðr D Þ  Eðr E Þ ¼ Eðr E Þ  r f  s2D þ s2E  2Covðr D ; r E Þ wD
  
 w2D s2D þ s2E  2wD s2E þ w2D s2E þ 2wD Covðr D ; r E Þ  ½Eðr D Þ  Eðr E Þ  Covðr D ; r E Þ  s2E wD (A.35)

2w2D Covðr D ; r E Þ
   Rearrange Equation A.35 in order to solve for wD, i.e.,
¼ ½Eðr D Þ  Eðr E Þ  w2D s2D þ s2E  2Covðr D ; r E Þ
   
þ2wD Covðr D ; r E Þ  s2E þ s2E Eðr D Þ  Eðr E Þ þ Eðr E Þ  r f  s2E
    
¼ ½Eðr D Þ  Eðr E Þ  w2D s2D þ s2E  2Covðr D ; r E Þ  Eðr E Þ  r f Covðr D ; r E Þ
      
þ ½Eðr D Þ  Eðr E Þ  2wD Covðr D ; r E Þ  s2E þ ½Eðr D Þ ¼ Eðr E Þ  r f s2D þ Eðr E Þ  r f s2E
  
Eðr E Þ  s2E ¼ ½Eðr D Þ  Eðr E Þ  s2D þ s2E  Eðr E Þ  r f ½2Covðr D ; r E Þ  ½Eðr D Þ
2Covðr D ; r E Þw2D þ 2½Eðr D Þ  Eðr E Þ Eðr E ÞCovðr D ; r E Þ þ ½Eðr D Þ  Eðr E Þs2E wD
     
 Covðr D ; r E Þ  s2E wD þ ½Eðr D Þ  Eðr E Þ  s2E ¼ Eðr D Þ  r f s2E þ Eðr E Þ  r f s2D  ½Eðr D Þ
 
r f þ Eðr E Þ  r f Covðr D ; r E Þ wD
Right hand side of Equation A.33
   Finally, we have the optimum weight of security D as
wD Eðr D Þ þ ð1  wD ÞEðr E Þ  r f  wD s2D þ wD s2E
    
s2E þ Covðr D ; r E Þ  2wD Covðr D ; r E Þ Eðr D Þ  r f s2E  Eðr E Þ  r f Covðr D ; r E Þ
   wD ¼    
¼ wD Eðr D Þ þ Eðr E Þ  wD Eðr E Þ  r f  wD s2D Eðr D Þ  r f s2E þ Eðr E Þ  r f s2D
  
þwD s2E  2wD Covðr D ; r E Þ  s2E þ Covðr D ; r E Þ  Eðr D Þ  r f þ Eðr E Þ  r f Covðr D ; r E Þ
    
¼ wD ½Eðr D Þ  Eðr E Þ þ Eðr E Þ  r f  wD s2D

þs2E  2Covðr D ; r E Þ þ Covðr D ; r E Þ  s2E
 
¼ wD ½Eðr D Þ  Eðr E Þ  wD s2D þ s2E  2Covðr D ; r E Þ
 
þ wD ½Eðr D Þ  Eðr E Þ  Covðr D ; r E Þ  s2E
   
þ Eðr E Þ  r f  wD s2D þ s2E  2Covðr D ; r E Þ
   
þ Eðr E Þ  r f  Covðr D ; r E Þ  s2E
 
¼ ½Eðr D Þ  Eðr E Þ  s2D þ s2E  2Covðr D ; r E Þ w2D
 
þ ½Eðr D Þ  Eðr E Þ  Covðr D ; r E Þ  s2E wD
   
þ Eðr E Þ  r f  s2D þ s2E  2Covðr D ; r E Þ wD
   
þ Eðr E Þ  r f  Covðr D ; r E Þ  s2E
 Appendix G: Applications of the Binomial
Distribution to Evaluate Call Options

In this appendix, we show how the binomial distribution is period left to maturity. This option’s value at expiration is
combined with some basic finance concepts to generate a determined by the price of its underlying stock and the
model for determining the price of stock options. exercise price X. The value is either

Cu ¼ Maxð0; uS  XÞ (A.36)
G.1 What is an Option?
or
In the most basic sense, an option is a contract conveying the
Cd ¼ Maxð0; dS  XÞ (A.37)
right to buy or sell a designated security at a stipulated price.
The contract normally expires at a predetermined date. The Why is the call worth Max (0, uS  X) if the stock price
most important aspect of an option contract is that the us uS? The option holder is not obliged to purchase the stock
purchaser is under no obligation to buy; it is, indeed, an at the exercise price of X, so she or he will exercise the
“option.” This attribute of an option contract distinguishes option only when it is beneficial to do so. This means the
it from other financial contracts. For instance, whereas the option can never have a negative value. When is it beneficial
holder of an option may let his or her claim expire unused if for the option holder to exercise the option? When the price
he or she so desires, other financial contracts (such as futures per share of the stock is greater than the price per share at
and forward contracts) obligate their parties to fulfill certain which he or she can purchase the stock by using the option,
conditions. which is the exercise price, X. Thus if the stock price uS
A call option gives its owner the right to buy the underly- exceeds the exercise price X, the investor can exercise the
ing security, a put option the right to sell. The price at which option and buy the stock. Then he or she can immediately
the stock can be bought (for a call option) or sold (for a put sell it for uS, making a profit of uS  X (ignoring commis-
option) is known as the exercise price. sion). Likewise, if the stock price declines to dS, the call is
worth Max (0, dS  X).
Also for the moment, we will assume that the risk-free
G.2 The Simple Binomial Option Pricing interest rate for both borrowing and lending is equal to r
Model percent over the one time period and that the exercise price
of the option is equal to X.
Before discussing the binomial option model, we must rec- To intuitively grasp the underlying concept of option
ognize its two major underlying assumptions. First, the pricing, we must set up a risk-free portfolio – a combination
binomial approach assumes that trading takes place in dis- of assets that produces the same return in every state of the
crete time, that is, on a period-by-period basis. Second, it is world over our chosen investment horizon. The investment
assumed that the stock price (the price of the underlying horizon is assumed to be one period (the duration of this
asset) can take on only two possible values each period; it period can be any length of time, such as an hour, a day, a
can go up or go down. week, etc.). To do this, we buy h share of the stock and sell
Say we have a stock whose current price per share S can the call option at its current price of C. Moreover, we choose
advance or decline during the next period by a factor of the value of h such that our portfolio will yield the same
either u (up) or d (down). This price either will increase by payoff whether the stock goes up or down.
the proportion u  1  0 or will decrease by the proportion
1  d, 0 < d < 1. Therefore, the value S in the next period hðuSÞ  Cu ¼ hðdSÞ  Cd (A.38)
will be either uS or dS. Next, suppose that a call option exists
on this stock with a current price per share of C and an By solving for h, we can obtain the number of shares of
exercise price per share of X and that the option has one stock we should buy for each call option we sell.

C.-F. Lee and A.C. Lee (eds.), Encyclopedia of Finance, DOI 10.1007/978-1-4614-5360-4, 923
# Springer Science+Business Media New York 2013
924 Appendix G

Cu  Cd Table A.2 Possible option value at maturity

h¼ (A.39)
ðu  d ÞS

Here h is called the hedge ratio. Because our portfolio yields

the same return under either of the two possible states for the
stock, it is without risk and therefore should yield the risk-free
rate of return, r percent, which is equal to the risk-free borrow-
ing and lending rate, the condition must be true; otherwise, it
would be possible to earn a risk-free profit without using any
money. Therefore, the ending portfolio value must be equal to
(1 + r) times the beginning portfolio value, hS  C.

ð1 þ r ÞðhS  CÞ ¼ hðuSÞ  Cu ¼ hðdSÞ  Cd (A.40)

Note that S and C represent the beginning values of the

stock price and the option price, respectively.
Setting R ¼ 1 + r, rearranging to solve for C, and using
the value of h from Equation A.39, we get
1:07  0:90 1:10  1:07
  p¼ ¼ 0:85 so 1  p ¼
Rd uR 1:10  0:90 1:10  0:90
C¼ Cu þ Cd R (A.41) ¼ 0:15
ud ud

where d < r < u. To simplify this equation, we set Solving the binomial valuation equation as indicated in
Equation A.43, we get

Rd uR
p¼ so 1  p ¼ (A.42) 0:85ð10Þ þ 0:15ð0Þ
ud ud C¼
1:07
Thus we get the option’s value with one period to ¼ $7:94
expiration
The correct value for this particular call option today,
pCu þ ð1  pÞCd under the specified conditions, is $7.94. If the call option
C¼ (A.43) does not sell for $7.94, it will be possible to earn arbitrage
R
profits. That is, it will be possible for the investor to earn a
This is the binomial call option valuation formula in its risk-free profit while using none of his or her own money.
most basic form. In other words, this is the binomial valua- Clearly, this type of opportunity cannot continue to exist
tion formula with one period to expiration of the option. indefinitely.
To illustrate the model’s qualities, let’s plug in the
following values, while assuming the option has one period
to expiration. Let
G.3 The Generalized Binomial Option Pricing
X ¼ $100 Model
S ¼ $100
U ¼ ð1:10Þ; so uS ¼ $110 Suppose we are interested in the case where there is more than
one period until the option expires. We can extend the one-
D ¼ ð0:90Þ; so dS ¼ $90
period binomial model to consideration of two or more periods.
R ¼ 1 þ r ¼ 1 þ 0:07 ¼ 1:07 Because we are assuming that the stock follows a bino-
mial process, from one period to the next it can only go up by
a factor of u or go down by a factor of d. After one period the
First we need to determine the two possible option values stock’s price is either uS or dS. Between the first and second
at maturity, as indicated in Table A.2. periods, the stock’s price can once again go up by u or down
Next we calculate the value of p as indicated in by d, so the possible prices for the stock two periods from
Equation A.42. now are uuS, udS, and ddS. This process is demonstrated in
Appendix G 925

Equation A.45 tells us that if the value of the option after

one period is Cu, the option will be worth either Cuu (if the
stock price goes up) or Cud (if stock price goes down) after
one more period (at its expiration date). Similarly, Equa-
tion A.46 shows that the value of the option is Cd after one
period, the option will be worth either Cdu or Cdd at the end
of the second period. Replacing Cu and Cd in Equation A.43
with their expressions in Equations A.45 and A.46, respec-
tively, we can simplify the resulting equation to yield the
two-period equivalent of the one-period binomial pricing
formula, which is

p2 Cuu þ 2pð1  pÞCud þ ð1  pÞ2 Cdd

C¼ (A.47)
R2

In Equation A.47, we used the fact that Cud ¼ Cdu

because the price will be the same in either case.
We know the values of the parameters S and X. If we
assume that R, u, and d will remain constant over time, the
possible maturity values for the option can be determined
exactly. Thus deriving the option’s fair value with two
periods to maturity is a relatively simple process of working
backwards from the possible maturity values.
Using this same procedure of going from a one-period
model to a two-period model, we can extend the binomial
approach to its more generalized form, with n periods
maturity

1 Xn
n!
Fig. A.1 Price path of underlying stock (Source: Rendelman and C¼ pk ð1  pÞnk
Bartter, 1979, 1906) R k¼0 k!ðn  kÞ!
n
 
Max 0; uk d nk S  X (A.48)
tree diagram (Figure A.1) given in Example A.1 later in this
appendix. To actually get this form of the binomial model, we could
Note that the option’s price at expiration, two periods extend the two-period model to three periods, then from
from now, is a function of the same relationship that deter- three periods to four periods, and so on. Equation A.48
mined its expiration price in the one-period model, more would be the result of these efforts. To show how Equa-
specifically, the call option’s maturity value is always tion A.48 can be used to assess a call option’s value, we
modify the example as follows: S ¼ $100, X ¼ $100,
CT ¼ ½0; ST  X (A.44) R ¼ 1.07, n ¼ 3, u ¼ 1.1 and d ¼ 0.90.
First we calculate the value of p from Equation A.42 as
where T designated the maturity date of the option. 0.85, so 1  p is 0.15. Next we calculate the four possible
To derive the option’s price with two periods to go ending values for the call option after three periods in terms
(T ¼ 2), it is helpful as an intermediate step to derive the of Max[0, ukdnkS  X].
value of Cu and Cd with one period to expiration when the h i
stock price is either uS or dS, respectively. C1 ¼ 0; ð1:1Þ3 ð0:90Þ0 ð100Þ  100 ¼ 33:10
h i
pCuu þ ð1  pÞCud C2 ¼ 0; ð1:1Þ2 ð0:90Þ ð100Þ  100 ¼ 8:90
Cu ¼ (A.45) h i
R
C3 ¼ 0; ð1:1Þ ð0:90Þ2 ð100Þ  100 ¼ 0
pCdu þ ð1  pÞCdd h i
Cd ¼ (A.46) C4 ¼ 0; ð1:1Þ0 ð0:90Þ3 ð100Þ  100 ¼ 0
R
926 Appendix G

Now we insert these numbers (C1, C2, C3, and C4) into the Equation A.45 in the text, we can write the binomial call
model and sum the terms. option model as

1 3! X
C¼ 3
ð0:85Þ0 ð0:15Þ3  0 C ¼ SB1 ðn; p0 ; mÞ  B2 ðn; p; mÞ (A.50)
ð1:07Þ 0!3! Rn
3!
þ ð0:85Þ1 ð0:15Þ2  0 where
1!2!
3!
þ ð0:85Þ2 ð0:15Þ2  8:90 X
n
B1 ðn; p0 ; mÞ ¼ Cnk p0 ð1  p0 Þ
2!1! k nk

3!
þ ð0:85Þ3 ð0:15Þ0  33:10 k¼m
3!0! Xn
 B2 ðn; p; mÞ ¼ Cnk pk ð1  pÞnk
1 321
¼ 0þ0þ ð0:7225Þð0:15Þð8:90Þ k¼m
1:225 211

321 and m is the minimum amount of time the stock has to go up
þ  ð0:61413Þð1Þð33:10Þ
3211 for the investor to finish in the money (that is, for the stock
1 price to become larger than the exercise price).
¼ ½ð0:32513  8:90Þ þ ð0:61413  33:10Þ
1:225 In this appendix, we showed that by employing the defi-
¼ $18:96 nition of a call option and by making some simplifying
assumptions, we could use the binomial distribution to find
As this example suggests, working out a multiple-period the value of a call option. In the next chapter, we will show
problem by hand with this formula can become laborious as how the binomial distribution is related to the normal distri-
the number of periods increases. Fortunately, programming bution and how this relationship can be used to derive one of
this model into a computer is not too difficult. the most famous valuation equations in finance, the Black-
Now let’s derive a binomial option pricing model in terms Scholes option pricing model.
of the cumulative binomial density function. As a first step,
we can rewrite Equation A.48 as Example A.1
" # A Decision Tree Approach to Analyzing Future Stock Price
X
n
n! uk dnk By making some simplifying assumptions about how a
C¼S pk ð1  pÞnk stock’s price can change from one period to the next, it is
k¼m
k!ðn  K Þ! Rn
" # possible to forecast the future price of the stock by means of
X X n
n! nk a decision tree. To illustrate this point, let’s consider the
 n p ð1  pÞ
k
(A.49)
R k¼m k!ðn  kÞ! following example.
Suppose the price of Company A’s stock is currently
This formula is identical to Equation A.48 except that we $100. Now let’s assume that from one period to the next,
have removed the Max operator. In order to remove the Max the stock can go up by 17.5% or go down by 15%. In
operator, we need to make ukdnkS  X positive, which we addition, let us assume that there is a 50% chance that the
can do by changing the counter in the summation from k ¼ 0 stock will go up and a 50% chance that the stock will go
to k ¼ m. What is m? It is the minimum number of upward down. It is also assumed that the price movement of a stock
stock movements necessary for the option to terminate “in (or of the stock market) today is completely independent of
the money” (that is, ukdnkS  X > 0). How can we inter- its movement in the past; in other words, the price will rise or
pret Equation A.49? Consider the second term in brackets; it fall today by a random amount. A sequence of these random
is just a cumulative binomial distribution with parameters of increases and decreases is known as a random walk.
n and p. Likewise, via a small algebraic manipulation we can Given this information, we can lay out the paths that the
show that the first term in the brackets is also a cumulative stock’s price may take. Figure A.1 shows the possible stock
binomial distribution. This can be done by defining P0  prices for company A for four periods.
(u/R)p and 1  P0  (d/R)(1  p). Thus Note that in period 1 there are two possible outcomes: the
stock can go up in value by 17.5% to $117.50 or down by
uk dnk 15% to $85.00. In period 2 there are four possible outcomes.
¼ p0 ð 1  p0 Þ
k nk
pk ð1  pÞnk If the stock went up in the first period, it can go up again to
Rn
$138.06 or down in the second period to $99.88. Likewise, if
Therefore the first term in brackets is also a cumulative the stock went down in the first period, it can go down again
binomial distribution with parameters of n and p0 . Using to $72.25 or up in the second period to $99.88. Using the
Appendix G 927

same argument, we can trace the path of the stock’s price for We can also find the standard deviation for the stock’s
all four periods. return.
If we are interested in forecasting the stock’s price at the
end of period 4, we can find the average price of the stock for " #1=2
ð190:61  105:09Þ2 þ    þ ð52:20  105:09Þ2
the 16 possible outcomes that can occur in period 4. sP ¼
16
P
16 ¼ $34:39
Pi
190:61 þ 137:89 þ    þ 52:20
P ¼ i¼1 ¼ ¼ $105:09 P and sP can be used to predict the future price of stock A.
16 16
 Appendix H: Derivation of Modigliani and Miller
(M&M) Proposition I and II with Taxes

H.1 M&M Proposition I with Taxes H.2 M&M Proposition II with Taxes

Assume that the firms are non-growth companies; the market Since market value of levered firm, VL , is equal to total
value of levered firm is equal to the market value of equity, E, plus total debt, D, and based on M&M proposition
unlevered firm plus the present value of the cost of perpetu- I with taxes, the market value of unlevered firm can be
ally total debt. derived as

X1
TDkd TDkd VL ¼ E þ D ¼ VU þ TD ¼> VU ¼ E þ ð1  TÞD (A.54)
VL ¼ VU þ t ¼ VU þ
t¼1 ð1 þ kd Þ
kd
The cash flow from each side of balance sheet must equal,
¼ VU þ TD (A.51) therefore

Where VL ¼ market value of levered firm, VU ¼ market Eke þ Dkd ¼ VU ku þ TDkd

value of unlevered firm, T ¼ marginal corporate tax rate, ¼ ðE þ ð1  TÞDÞku þ TDkd (A.55)
D ¼ total debt, kd ¼ the cost of debt, and TD ¼ tax shield
value. Where E ¼ total equity, D ¼ total debt, ke ¼ the cost of
Alternatively, the market value of levered firm, VL , can be equity, kd ¼ the cost of debt, ku ¼ the cost of unlevered
viewed as the total cash flow to all stakeholders equity, and T ¼ marginal corporate tax rate.
Divide both side by total equity, E, then we can get
ðEBIT  kd DÞ  ð1  TÞ þ kd D
¼ EBIT  ð1  TÞ þ Tkd D (A.52) D D D
ke þ kd ¼ 1 þ ð1  TÞ ku þ Tkd
E E E
The cash flow to all stakeholders is made up of cash flow
D D
to stockholders plus cash flow to bondholders. The present ¼ ku þ ð1  TÞ ku þ Tkd (A.56)
E E
value of first term is equal to the market value of unlevered
firm, VU , and the present value of second term is TD. There- D D D
fore, VL ¼ VU þ TD. ke ¼ ku þ ð1  TÞ ku þ Tkd  kd
E E E
Miller (1977) modified Eq. A.51 by introducing personal D D
as well as corporate taxes into the model, and obtaining ¼ ku þ ð1  TÞ ku  ð1  TÞ kd (A.57)
E E
   D
ð1  TÞð1  T PS Þ ¼ ku þ ðku  kd Þ ð1  TÞ
VL ¼ VU þ 1  D (A.53) E
ð1  T PD Þ
Figure A.2 represents the relationship between the cost of
Where VL , VU , T, and D have been defined in Eq. A.51; equity with and without taxes, and the cost of unlevered firm.
T PS and T PD are the personal tax rate on equity income and The weighted average cost of capital with taxes will
the personal tax from bond income, respectively. If T PS decrease when the ratio of debt to equity increases.
equals to T PD , then Eq. A.53 can be reduced to M&M
Proposition I with taxes.

C.-F. Lee and A.C. Lee (eds.), Encyclopedia of Finance, DOI 10.1007/978-1-4614-5360-4, 929
# Springer Science+Business Media New York 2013
930

Fig. A.2 The Relationship

Between the Cost of Capital
and Debt-to-Equity Ratio
 Appendix I: Derivation of Capital Market Line (CML)

Fig. A.3 The Capital Market

Line

By geometric theory, triangles RfPE and RfMpD in the where Rf ¼ the risk-free rate; RMp ¼ return on market port-
Fig. A.3 above are similar and are, therefore, directly folio Mp; Rp ¼ return on the portfolio consisting of
proportional, combinations of the risk-free asset and portfolio Mp; sp and
sMp ¼ standard deviations of the portfolio and the market;
DPRf E ffi DMp Rf D (A.58) and the operator E denotes expectations.

Therefore,

EðRp Þ  Rf sp
¼
EðRMp Þ  Rf sMp
  sp  
¼> EðRp Þ  Rf ¼ EðRMp Þ  Rf
sMp
  sP
¼> EðRP Þ ¼ Rf þ EðRMp Þ  Rf (A.59)
sMp

C.-F. Lee and A.C. Lee (eds.), Encyclopedia of Finance, DOI 10.1007/978-1-4614-5360-4, 931
# Springer Science+Business Media New York 2013
 Appendix J: Derivation of Capital Market Line (SML)

Fig. A.4 The Opportunity Set

Provided by Combinations of
Risky Asset (I) and Market
Portfolio (M)

Sharpe (1964) used a general risky asset that did not lie on When wi ¼ 0, the security is held in proportion to its total
the CML and dubbed it I in Fig. A.4. The combinations of market value and there is no excess demand for security I.
risk and return possible by combining security I with the This is the key insight to Sharpe’s paper, for when wi ¼ 0, it
market portfolio, M, are shown by figure above. The average is possible to equate the slope of the curve IMI’ with the
return and standard deviation for any I-M combination can capital market line and thus obtain an expression for the
be approached in the same way as for a two-asset case: return on any risky security I. At equilibrium when wi ¼ 0,
the slope along the IMI’ curve will equal
EðRP Þ ¼ wi EðRi Þ þ ð1  wi ÞEðRm Þ (A.60)
@EðRP Þ EðRi Þ  EðRm Þ
 1 @EðRP Þ @wi sim  s2m
sP ¼ w2i s2i þ ð1  wi Þs2m þ 2ð1  wi Þwi sim 2 (A.61) ¼ ¼ (A.64)
@ðsP Þ @ðsP Þ sm
where w1 represents excess demand for I or demand greater @wi
than its equilibrium weight in portfolio M, and sim is the
The slope of the capital market line at point M is
covariance of i and m.
The change in mean and standard deviation as the pro-
EðRm Þ  Rf
portion w1 changes are the partial derivatives (A.65)
sm
@EðRP Þ
¼ EðRi Þ  EðRm Þ (A.62) Let Eq. A.64 equal to Eq. A.65, then rearranging the
@wi
terms to solve for EðRi Þ gives the equation for the security
h i 1 market line or CAPM
@ðsP Þ 2
¼ 1=2 w2i s2i þ ð1  wi Þ2 s2m þ 2wi ð1  wi Þ
@wi   sim
  EðRi Þ ¼ Rf þ EðRm Þ  Rf 2 (A.66)
2wi s2i  2s2m þ 2wi s2m þ 2sim  4wi sim sm
(A.63)

C.-F. Lee and A.C. Lee (eds.), Encyclopedia of Finance, DOI 10.1007/978-1-4614-5360-4, 933
# Springer Science+Business Media New York 2013
934 Appendix J: Derivation of Capital Market Line (SML)

This represents the return on any risky asset I. At equilib-

rium, every risky asset will be priced so that it lies along the

security market line. It should be noted that the term sim s2m
represents the beta coefficient for the regression of Ri vs. Rm ,
so that Eq. A.66 can be rewritten as
 
EðRi Þ ¼ Rf þ EðRm Þ  Rf bi (A.67)
 Appendix K: Derivation of Black-Scholes Option
Pricing Model

Assume the stock prices follow a lognormal distribution and C ¼ exp½rT E½MaxðST  X; 0Þ
Z 1  
denote the current stock price by S and the stock price at the X
¼ exp½rT S y gðyÞdy
St X S
end of t-th period by St then ¼ expðKt Þ is a random S
Z 1 Z
X 1
St1
variable with a lognormal distribution, where Kt is the rate of ¼ S exp½rT ygðyÞdy  exp½rT S gðyÞdy
return in t-thperiod and follows normal distribution with the
X S X
S S
constant mean m and variance s2 , therefore, (A.71)
   
ST S1 S2 ST Let x ¼ lnðyÞ, then x follows normal distribution with
E ¼E ...  
S S S1 ST1 mean mT ¼ r  12 s2 T and variance s2 T, and
 
Ts2
¼ E expðK1 þ K2 þ ... þ KT Þ ¼ Tm þ (A.68) 1 f ðxÞ
2 dx ¼ dy; ¼ gðyÞ
y y
ð1 ð1
Under the assumption of a risk-neutral investor, the f ðxÞ
  gðyÞdy ¼   ðydxÞ
ST X X
ln S y
expected return E is assumed to be exp[rT] (where r is S
ð1
S
¼   f ðxÞdx
the riskless rate of interest). In other words, m ¼ r  s2 =2. ln
X
The call option price C can be determined by discounting ð1 S
the expected value of the terminal option price by the risk- ¼ lnðXSÞðr12s2 ÞT hðzÞdz (A.72)
pffiffiffi
less rate of interest (r): s T

C ¼ exp½rTE½MaxðST  X; 0Þ (A.69) Where g(y) is the probability density function of y, f(x) is
the probability density function of x, z is standard normal
where T is the time of expiration and X is the striking price, distribution, and h(z) is the probability density function of z.
r is the riskless interest rate, ST is the stock price at time T. The first term of call option can be derived as
Note that

ST X ST X
MaxðST  X; 0Þ ¼ S  for > (A.70)
S S S S

ST
Let y ¼ has a lognormal distribution with mean
S
1
mT ¼ r  s2 T and variance s2 T, then
2

C.-F. Lee and A.C. Lee (eds.), Encyclopedia of Finance, DOI 10.1007/978-1-4614-5360-4, 935
# Springer Science+Business Media New York 2013
936

ð1 Z 1
f ðxÞ where
erT ygðyÞdy ¼ X erT ex ðydxÞ  
X y lnðXSÞðrþ12s2 ÞT lnð S Þþðrþ1s2 ÞT
ln
d1 ¼  pffiffiffi ¼ X spffiffiTffi 2 ;
S
ð1 S s T
¼   erT ex f ðxÞdx  
lnðXÞðr1s2 ÞT lnð S Þþðr1s2 ÞT pffiffiffi
d2 ¼  S spffiffiTffi 2 ¼ X spffiffiTffi 2
X
ln S ¼ d1  s T
ðxðr12s2 ÞT Þ
2
ð1  rT þ x
1 2s2 T Based on put-call parity, it can be shown that the relationship
¼   pffiffiffiffiffiffiffiffiffiffiffiffiffi e dx
ln S
X 2ps T 2 between a call option (C) and a put option (P) can be defined
ð1 as
ðxðrþ12s2 ÞT Þ
2
1
¼   pffiffiffiffiffiffiffiffiffiffiffiffiffi e 2s2 T dx
C þ XerT ¼ P þ S
X 2ps2 T
ln S (A.75)
ð1
¼ lnðXSÞðrþ12s2 ÞT hðzÞdz
pffiffiffi Substituting Eqs. A.74 into A.75, we obtain the put option
s T
(A.73) formula as

Where z is standard normal distribution, and h(z) is the P ¼ XerT Nðd2 Þ  SNðd1 Þ (A.76)
probability density function of z. Therefore, the call option
pricing model can be rewritten as where S, C, r, T, d1 and d2 are identical to those defined in the
call option model.
ð1
C¼S lnðXSÞðrþ12s2 ÞT hðzÞdz
pffiffiffi
s T
ð1
rT
Xe lnðXSÞðr12s2 ÞT hðzÞdz
pffiffiffi
s T
¼ SNðd1 Þ  XerT Nðd2 Þ (A.74)
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 Subject Index

Active portfolio, 7, 182

2008 financial crisis, 610, 612–614 Activity charge, 7
Activity ratios, 7
Acts of bankruptcy, 7
A Actual maturity, 7
AAR. See Average accounting return (AAR) Additions to net working capital, 7
ABC bond corporation, 507, 509 Add-on interest, 7
ABMI. See The Asian bond market initiative (ABMI) Add-on rate, 7
Abnormal return, 3, 853 Adjustable mortgage instrument (AMI), 7–8
ABO. See Accumulated benefit obligation (ABO) Adjustable-rate mortgage (ARM), 8, 15
ABS. See Asset-backed debt securities (ABS) Adjusted beta, 8
Absolute cost advantage, 3 Adjusted forecast, 8
Absolute priority of claims, 3 Adjusted Jensen alpha, 353–355
Absolute priority rule (APR), 3 Adjusted present value (APV) model, 8, 825
Absolute purchasing power parity, 3–4, 159–160 Adjusted price value (APV) model, 8
ACC. See Average cost of capital (ACC) ADR. See American Depository Receipt (ADR)
Accelerated cost recovery system (ACRS), 4 Advance, 8, 12
Accelerated depreciation, 4 Advance commitment, 8
Account activity, 4 Adverse selection, 414, 780
Account analysis, 4 Affiliate, 8, 847
Account executive, 4 Affine jump-diffusion model, 529–530
Accounting analytic, 4 Affinity card, 8
Accounting-based beta forecasting, 4 After-acquired clause, 8
Accounting-based performance measures, 4, 171 Aftermarket, 8, 193
Accounting beta, 4 After-tax real return, 8
Accounting break-even, 4–5 After-tax salvage value, 8–9
Accounting earnings, 5 Agency bond, 9
Accounting income, 5 Agency costs, 9–10, 27, 63, 100, 191, 854
Accounting insolvency, 5 Agency costs, across national borders, 9–10
Accounting liquidity, 5, 57 Agency problem, 10, 125, 318, 414, 415, 588, 602
Accounting rate of return (ARR), 5 Agency securities, 10, 82, 162, 176
Accounting, relationship to finance, 4 Agency theory, 10, 412–414
Accounting scandals, 495–499 Agent-based models, 501–504
Account maintenance, 4 Agents, 10, 87, 148–149, 460–461, 501–504
Accounts payable (AP), 5 Aggregation, 10, 261, 374, 573–574, 676
Accounts receivable (AR), 5–6, 10, 290 Aging accounts receivable, 10
Accounts receivable financing, 5 Aging population, 10
Accounts receivable turnover, 5–7, 15–16 Aging schedule of accounts receivable, 10
Accreting swap, 6 All-in-cost, 10
Accrual, 6 Allocational efficiency, 10
Accrual bond, 6 Allowance for loan and lease losses, 10
Accrual swap, 6 Alpha, 10–11, 186
Accrued interest, 6 Alternative Minimum Tax (AMT), 11
Accumulated benefit obligation (ABO), 6 American Depository Receipt (ADR), 8, 11
Accumulation phase, 6, 196 American option, 11, 25, 77
ACH. See Automated Clearing House system (ACH) AMI. See Adjustable mortgage instrument (AMI)
Acid-test ratio, 6, 117, 156 Amortization, 11, 117–118, 143–144
ACP. See Average collection period (ACP) Amortization schedule for a fixed-rate mortgage, 11
Acquisition, 6, 46, 99, 187, 197, 411–419, 515–522 Amortize, 11
ACRS. See Accelerated cost recovery system (ACRS) Amortizing swap, 11, 102
Active bond portfolio management, 6 Amsterdam, 477
Active management, 7 AMT. See Alternative Minimum Tax (AMT)

C.-F. Lee and A.C. Lee (eds.), Encyclopedia of Finance, DOI 10.1007/978-1-4614-5360-4, 977
# Springer Science+Business Media New York 2013
978 Subject Index

Angels, 11, 81 ATO. See Asset turnover (ATO)

Announcement date, 11, 258 At the money, 17, 766
Announcement effect, 11 Auction, 17, 175, 477–482
Annual effective yield, 11, 26, 72 Auction market, 17, 78, 492
Annualized holding-period return, 12 Auction method, 17
Annual percentage rate (APR), 11–12, 26, 47, 72, 133, 179 Audit committee, 594, 595, 600
Annuity, 12–13, 60 Audit, or control, phase of capital budgeting process, 17
Annuity due, 12 Audits of project cash flow estimated, 17–18
Annuity factor, 12 Autocorrelation, 18, 129, 170, 447, 448
Annuity in advance, 12 Autocorrelation [serial correlation], 18
Annuity in arrears, 13 Automated clearinghouse, 18
Anonymous, 52, 77, 775 Automated Clearing House system (ACH), 18, 35
Anticipated income theory, 13 Automated loan machine, 18
Antitakeover, 600, 601, 856 Automated teller machines (ATM), 18
Antithetic variate method, 13 Autoregressive jump process model, 530–531
AP. See Accounts payable (AP) Availability float, 18
Applied research, 13, 164 Average accounting return (AAR), 18
Appraisal ratio, 13 Average annual yield, 18
Appraisal rights, 13 Average collection period (ACP), 7, 16, 18, 58
Appreciation, 13, 244, 560–561 Average cost of capital (ACC), 18–19
Appropriation phase of capital budgeting, 13 Average daily sales, 19
APR. See Annual percentage rate (APR) Average exposure, 19
APT. See Arbitrage pricing theory (APT) Average price call option, 19
APV model. See Adjusted present value (APV) model; Adjusted price Average price put option, 19
value (APV) model Average sales price, 438
AR. See Accounts receivable (AR) Average shortfall, 19
Arbitrage, 13–14, 102, 133, 156, 163, 182, 192, 405, 453–458, Average strike option, 19
625–628, 659–673 Average tax rate, 19, 121
Arbitrage condition, 14
Arbitrage pricing model, 268–269
Arbitrage pricing theory (APT), 14, 81, 135, 344–345 B
Arbitrageur, 14, 660–661, 666, 667 Back testing, 19, 374
ARCH/GARCH jump-diffusion model, 532–533 Back-to-back transaction, 19
Arithmetic average, 14–15, 196, 763, 764 Backwardation, 19
Arithmetic mean, 15 Backward equation, 19
ARM. See Adjustable-rate mortgage (ARM) Backwards induction, 19, 169
ARR. See Accounting rate of return (ARR) Bad debts, 19
Arrears, 13, 15, 114 Balanced-budget unit, 19
Artificial intelligence, 195 Balanced funds, 20
Asian basket currency (ABC) bonds, 507, 511 Balance inquiry, 19
Asian option, 15, 140 Balance-of-payments (BOP) accounts, 20
Asian tail, 15 Balance sheet, 19–20, 46, 614–616
Asked price, 15, 24 Balloon loan, 20
Ask price, 15, 134 Balloon payment, 20
Asset allocation decision, 15 Bank-discount interest, 20
Asset-backed debt securities (ABS), 15 Bank discount method, 20
Asset-backed security, 15 Bank discount yield, 20
Asset-based financing, 15 Bank drafts, 20
Asset-liability management, 15 Bankers’ acceptances, 21, 113
Asset management ratios, 15–16, 18, 87, 108, 157, 190 Bankers bank, 21
Asset market approach, 450 Bank holding company, 20, 135
Asset-or-nothing call, 16 Banking crisis, 208, 212, 217, 507, 509
Asset-or-nothing option, 16, 24 Banking instability, 207
Asset pricing, 263, 265, 267, 268, 275, 300, 301 Banking laws, 213
Asset pricing models, 228–230, 263–269, 745–753 Banking structure, 21
Assets, 15, 39, 404–405, 748–749, 848 Bank Insurance Fund (BIF), 24, 164
Asset sensitive, 16 Bank of Japan Financial Network System (BOJ-NET), 20–21
Assets requirements, 16 Bank regulations, 617
Asset swap, 16, 237–238, 240 Bank returns, 581
Asset turnover (ATO), 16 Bank runs, 206, 208
Assignment, 16 Bankrupt, 21
Assumable mortgage, 16 Bankruptcy, 7, 21, 191, 358–359, 416
Asymmetric butterfly spread, 16 Bankruptcy costs, 21, 191
Asymmetric information, 174, 262, 323, 326, 547, 550, 562 Bankruptcy Reform Act, 21, 39
As-you-like-it option, 17 Banks, 20–21, 38, 47, 51, 102, 120, 127, 130, 161, 165, 166, 207–208,
ATM. See Automated teller machines (ATM) 213–217, 508
Subject Index 979

Bank supervision, 617 Board of directors, 26

Barbell, 21 Board of Governors of the Federal Reserve System, 26
Bargain-purchase-price option, 22 Board size, 593, 857
Barrier option, 22, 111 Bogey, 26
Barriers, 22, 190 BOJ-NET. See Bank of Japan Financial Network System (BOJ-NET)
Base case, 22, 102, 811 Bond, 26
Basel III, 616–619 Bond anticipation notes, 26
Base rate, 22 Bond broker, 26
Basic balance, 22 Bond-equivalent basis, 26
Basic IRR rule, 22 Bond equivalent yield of the T-bill, 26
Basic research, 22 Bond fund, 26
Basic swap, 22 Bond option, 26
Basis, 22, 26, 34, 38 Bond price volatility, 307
Basis point, 22 Bond pricing, 310, 383, 651, 800, 897
Basis risk, 22 Bond ratings, 26–27, 157, 855
Basis swap, 22 Bond valuation, 27
Basket credit default swap, 22 Bond yield, 27, 46
Basket default swaps, 241–242 Book cash, 27, 88
Basket option, 22 Book-entry form, 28
Baumol’s economic order quantity model, 22–23, 38, 125 Book value, 27–28, 30, 34, 122, 123, 199, 759, 760
Bear CD, 23 Book value equity, 28
Bearer bond, 23, 159 Book value per share, 28
Bear spread, 23 Bootstrapping, 28
Behavioral biases, 803 BOP accounts. See Balance-of-payments (BOP) accounts
Benchmark, 23, 471 Borrow, 28
Benchmark analysis, 23, 157 Borrowed reserves, 28
Benchmark error, 23 Borrowing, 28
Benchmark model, 297 Borrowing constraints, 680–681
Benchmark portfolio, 26, 281, 299, 472–474, 641 Borrowing portfolio, 28
Benchmark rate, 23 Bounce a check, 28
Beneficiary, 23, 101 Boundary condition, 28
Benefit/cost ratio, 23 Bounded rationality, 501, 504, 812, 938, 970
Bermudan option, 23 Box spread, 28
Bernoulli jump process, 527 Branch banking, 28, 194
Best efforts offering, 23 Break-even analysis, 28, 93
Best-efforts underwriting, 23 Break-even point, 28, 61
Beta, 4, 8, 24, 45, 79, 91, 123, 186, 203, 266–267, 276–277 Break point, 28–29
Beta coefficient, 24 Brennan and Schwartz two factor model, 381
Beta pricing model, 264, 267–269 Bridge loan, 29
Bid, 24 Broker, 26, 29, 43, 64, 89, 91
Bid-ask spread, 24, 778, 780 Brokered deposit, 29
Bidder, 24 Brokered market, 29
Bid-offer spread, 24 Brownian motion, 29, 94
Bid price, 24 Bubble theory (of speculative markets), 29
BIF. See Bank Insurance Fund (BIF) Budget deficit, 29, 60
Bill of exchange, 24 Budget surplus, 29, 184
Bill of lading (B/L), 24, 112 Bulge bracket firms, 29
Binary option, 24, 63 Bull CD, 29
Binomial option-pricing model, 24–25 Bullet loan, 29
Binomial process, 25 Bullish, bearish, 29
Binomial tree, 25, 111 Bull spread, 29
Bivariate normal distribution, 25 Bundling, unbundling, 29
B/L. See Bill of lading (B/L) Burden, 29, 132
Black, 343 Business cycle, 29–30
Black-Scholes formula, 25–26, 137 Business failure, 30
Black-Scholes model, 101, 381–382, 648, 717, 767, 806 Business risk, 30, 832
Black-Scholes option pricing model, 25, 46, 193, 197, 766 Business strategy matrix, 30
Black’s model (formula), 25 Butterfly spread, 16, 30
Blank check, 26, 600 Buying the index, 30
Blanket lien, 26
Blanket mortgage, 26
Block house, 26 C
Block sale, 26 Cable transfers, 30–31
Block transactions, 26 CAL. See Capital allocation line (CAL)
Board broker, 26, 138 Calculus approach, 797–798
Board independence, 590–592 Calendar spread, 31
980 Subject Index

Calibration, 31, 811, 897 Cash conversion cycle, 36

Call, 31, 54, 60, 120, 153, 173, 201 Cash cow, 30, 36
Callable, 31, 49 Cash cycle, 36, 293, 294
Callable bonds, 31 Cash delivery, 36
Call auctions, 478–479, 493 Cash disbursement systems, 36–37
Call deferment periods, 31 Cash discounts, 37
Call loan, 31 Cash equivalents, 37
Call-loan money rate, 31 Cash flow after interest and taxes, 37
Call money rate, 31 Cash flow cycle, 293, 294
Call option, 19, 31, 425–428 Cash flow from operations, 37, 179
Call premium, 31 Cash flow mapping, 37
Call price of a bond, 31 Cash flow matching, 37
Call privilege, 31 Cash flows, 34, 37, 91, 136, 179–180, 287–295, 398, 414, 602–603,
Call protected, 31 694–695, 840–842
Call protection, 31 Cash flow statement, 835–849
Call provision, 31 Cash flow timeline, 37
Call risk, 31 Cashier’s check, 38
CAMELS, 32 Cash letter, 37
Cancelable swap, 32 Cash management, 288–289, 292–293
Cannibalization, 21, 74 Cash-market, 37
Cap, 32, 41 Cash offer, 38, 93, 418
Capital, 9, 13, 18–19, 32, 39, 51, 53, 132, 143, 148, 167, 197, Cash offering, 38
201, 287–295, 460, 828 Cash-or-nothing call, 38
Capital account, 32 Cashout, 38
Capital allocation decision, 32 Cash settlement, 38
Capital allocation line (CAL), 32 Cash-to-cash asset cycle, 38
Capital asset pricing model (CAPM), 14, 32, 107–108, 168, Cash-to-cash liability cycle, 38
265, 274–275, 343–344, 354–355, 405, 429 Cash-to-cash working capital cycle, 38
Capital budgeting, 32, 813–823 Cash transaction, 38, 191
Capital budgeting decisions, 5, 22, 37, 76, 157 CAT bond, 38
Capital flow, 20, 22, 248 CBO. See Colletaralized bond obligation (CBO)
Capital gains, 32, 66 CD basis, 38
Capital-labor ratio, 34 CDs. See Certificates of deposits (CDs)
Capital lease, 32 Central bank, 38, 184, 508
Capital market equilibrium, 565–568 Central limit theorem, 38
Capital market line (CML), 33 Certainty effect, 396, 407
Capital markets, 32–33 Certainty equivalent, 38, 424
Capital market securities, 33 Certificates of deposits (CDs), 38, 110, 131
Capital rationing, 33 Certification effect, 38–39
Capital structure, 33, 44, 142–144, 180 Certified check, 39
Capital structure ratios, 33–34, 157 Certified financial planner (CFP), 39
Capital surplus, 34 CEV model. See Constant elasticity variance (CEV) model
Caplets, 34 CFA. See Chartered financial analyst (CFA)
CAPM. See Capital asset pricing model (CAPM) CFO. See Chief financial officer (CFO)
Capped option, 34 CFP. See Certified financial planner (CFP)
Cap rate, 32 Change in net working capital, 39
Captive finance company, 34 Changes in fixed assets, 39
Car, 34 CHAPS. See Clearinghouse automated payment system (CHAPS)
Card bank, 34 Chapter, 39, 588
Cardinal utility, 34 Characteristic line, 39, 168
Carry, 34 Charge-off, 39
Carrying costs, 34 Charter, 40, 333–339
Carrying value, 34 Chartered financial analyst (CFA), 40
Carry market, 34 Chartists, 40
CARs. See Cumulative abnormal returns (CARs); Cumulative Cheapest to deliver, 40
average residuals (CARs) Check kiting, 40
Carve outs, 34, 198 Chief financial officer (CFO), 40
Cash-and-carry, 34, 38, 162 Chinese A shares, 321–323
Cash basis, 34 Chinese B shares, 321–323
Cash/bond selection, 38 Chinese wall, 40
Cash break-even, 28, 35 CHIPS. See Clearinghouse Interbank Payment System (CHIPS)
Cash budget, 34–35 Chooser option, 40
Cash budget process, 31–35 Classical theory of interest rates, 40
Cash classification ambiguities, 835 Classic hedge strategy, 40
Cash commodity, 35 Classifiers, 504
Cash concentration systems, 35–36 Class of options, 40
Subject Index 981

Clean price of bond, 40 Component VaR, 370, 373

Clearing, 40 Composite-based beta forecasting, 45
Clearinghouse, 40 Composition, 45, 595
Clearinghouse Association, 40 Compounding, 45, 47
Clearinghouse Automated Payment System (CHAPS), 40 Compounding frequency, 45
Clearinghouse funds, 40 Compounding swap, 45
Clearinghouse Interbank Payment System (CHIPS), 41 Compound interest, 45
Clearing margin, 40 Compound option, 45, 426–427
Clientele effect, 41 Compound Sum Method, 761–764
CLNs. See Credit-linked notes (CLNs) Compound value, 45
Closed-end (mutual) fund, 41 Computer simulation, 501, 502, 685
Clustering, 502, 582, 583 Concave function, 45
CML. See Capital market line (CML) Concentration banking, 45
CMO. See Collateralized mortgage obligation (CMO) Concentration risk, 45
CM swap. See Constant maturity swap (CM swap) Conditional alpha, 280, 281, 283
CMT swap. See Constant maturity treasury swap (CMT swap) Conditional beta, 276–277, 280
Coefficient of determination, 41 Conditional expectations, 273, 274
Coefficient of variation (CV), 41 Conditional jump dynamics, 531–532
Co-evolution, 501 Conditional performance, 279–284
Cointegration, 879 Conditional probability analysis (CPA), 362
Collar, 41, 157, 203 Conditional sales contract, 45–46
Collar width, 41 Conditional value at risk (C-VaR), 46
Collateral, 41 Confidence index, 46
Collateralized bonds, 41–42 Configural weights, 407
Collateralized debt obligation, 42 Confirmation, 46
Collateralized mortgage obligation (CMO), 42 Conflict between bondholders and stockholders, 46
Collateral trust bond, 41 Conflicts of interest, 462
Collected balances, 42 Conglomerate acquisition, 46
Collection float, 42, 88 Conglomerate combination, 46
Collection policy, 42 Consensus forecast, 46
Collective bargaining, 258, 557, 562 Conservatism, 546, 604
Collect-on-delivery option, 42 Conservator, 46
Colletaralized bond obligation (CBO), 509 Consol, 46
Combination, 42, 46, 78, 99, 197 Consolidated, 46
Combined leverage, 42 Consolidated balance sheet, 46
Commercial bank, 42 Consolidated markets, 539, 542
Commercial draft, 42 Consolidation, 46, 493
Commercial loan theory, 42 Constant dividend growth model, 9, 46, 96
Commercial mortgage, 42 Constant elasticity variance (CEV) model, 46
Commercial paper, 42–43 Constant growth model, 47
Commission broker, 43 Constant maturity swap (CM swap), 47
Commitment, 8, 43 Constant maturity treasury swap (CMT swap), 47
Commitment fee, 43 Constant Proportion Portfolio Insurance (CPPI), 729, 733, 735, 736
Committed line of credit, 43, 163 Constructive sale, 47
Commodity Futures Trading Commission, 43 Consumer bank, 47
Commodity-indexed bonds, 43 Consumer cash management service, 47
Commodity spread, 43 Consumer credit, 47
Commodity swap, 43 Consumer price index (CPI), 257, 390
Common-base-year financial statements, 43 Consumption, 47, 230–235, 265–266
Common-size financial statements, 43 Consumption asset, 47
Common stock, 43 Contemporaneous reserve accounting, 47
Common stock equivalents (CSEs), 44 Contingent claim, 47, 62
Community Reinvestment Act (CRA), 44, 216 Contingent immunization, 47, 308
Comparative static analysis for option pricing model, 44 Contingent liabilities, 47
Comparison, 44, 471–472, 740–743, 765–776, 897 Contingent pension liability, 47
Comparison universe, 44 Continuous compounding, 47
Compensating balances, 44 Continuous discounting, 47
Competitive Banking Equality Act, 44 Continuously compounded interest rate, 47
Competitive bidders, 38, 44 Continuous markets, 478, 480, 481, 493
Competitive bidding issue, 44 Continuous trading, 478, 480–482, 493
Competitive environment, 496 Contract amount, 47
Competitive offer, 44 Contract devices, 462–463
Complete portfolio, 44 Contracting costs, 47, 191
Complex adaptive system, 501 Contract interest rate, 47
Complex capital structure, 44 Contract month, 47
Component analysis, 44–45 Contract specification, 48
982 Subject Index

Contractual efficiency, 334–335 Crack spread, 54

Contractual institutions, 48 Creative financing, 54
Contribution margin, 48 Credit, 54
Controller, 48 Credit bureau, 54
Control variate method, 48 Credit Card, 54
Convenience yield, 48 Credit check, 54
Conventional, 48, 87, 471–472 Credit default swaps, 625
Conventional mortgage, 48 Credit department, 54
Convergence property, 48 Credit derivatives, 54, 237–242
Conversion, 48, 89, 258 Credit enhancement, 54, 509
Conversion factor, 48 Credit exposure, 54
Conversion fee, 48 Credit file, 54
Conversion premium, 48 Credit instrument, 54
Conversion price, 48 Credit limit, 54
Conversion ratio, 48 Credit-linked notes (CLNs), 54
Conversion value, 48, 797 CreditMetrics model, 56
Convertibility, 48 Creditor, 56, 359
Convertible bonds, 47, 48, 242, 795–800 Creditors’ committee, 56
Convertible debt, 48 Credit period, 54–55
Convertible risk, 48 Credit quality, 55
Convertible securities, 48 Credit rating, 55
Convex, 49 Credit ratings transition matrix, 55
Convexity, 49–50, 72, 306–307 Credit rationing, 549–556
Convexity adjustment, 384 Credit risk, 55, 645–657, 891–908
Copula function, 51 Credit scoring, 55
Core capital, 51 Credit scoring model, 55
Core deposits, 51 Credit sensitive notes (CSN), 55
Corporate arbitrage, 667–669 Credit spread, 55, 240–241
Corporate board structure, 587–605 Credit spread option, 55, 240–241
Corporate bonds, 51, 310–311, 509 Credit union, 55–56
Corporate charter, 334 Credit value at risk, 56
Corporate failure, 357–365, 590–591 Critical mass order flow, 477
Corporate governance, 498–499, 587–605 Critical value, 432–433
Corporate law, 333–337 Cross-border, 515–522
Corporate leverage, 51 Cross hedge, 56
Corporate loans, 315, 316 Cross holdings, 56
Corporate note, 51 Cross rate, 56
Corporations, 51–52, 459–463, 509–510, 659–673 Cross-sectional analysis, 56, 157
Correlation, 52 Cross-sectional tests, 745–753
Correlation coefficient, 52 Crown jewels, 56
Correspondent bank, 51 Crush spread, 56
Cost of capital, 18–19, 199, 219–225, 460, 828 CSEs. See Common stock equivalents (CSEs)
Cost of carry, 52, 429–430 CSN. See Credit sensitive notes (CSN)
Cost of common equity, 52 Cum dividend, 56
Cost of debt, 52 Cumulative abnormal returns (CARs), 56
Cost of equity capital, 53, 460 Cumulative average residuals (CARs), 56
Cotango, 53 Cumulative distribution function, 56
Counterparties, 53, 106 Cumulative dividend, 57
Country risk, 53 Cumulative normal distribution function, 57
Country selection, 53 Cumulative probability, 57
Coupon, 53 Cumulative prospect theory (CPT), 395–400
Coupon bond, 53, 113 Cumulative voting, 57
Coupon effect, 53 Currency, 57
Coupon interest rate (coupon rate), 53 Currency crisis, 450
Coupon pre-funded bond, 219–225 Currency futures, 57, 90
Coupon-reinvestment risk, 53 Currency risk, 57, 227–235
Covariance, 53, 170, 713–725 Currency selection, 57
Covenants, 53–54, 161 Currency swap, 57, 185
Coverage ratios, 54 Currency-translated index, 57
Covered call, 54 Current account, 57
Covered interest arbitrage, 54 Current account deficit, 468–470
Covered write, 54 Current asset, 57, 108
CPA. See Conditional probability analysis (CPA) Current exposure, 57
CPI. See Consumer price index (CPI) Current liabilities, 57
CPT. See Cumulative prospect theory (CPT) Current ratio, 58, 117
CRA. See Community Reinvestment Act (CRA) Current saving, 58
Subject Index 983

Current yield, 58 Deferred down rebate option, 60

Customer information file, 58 Deferred nominal life annuity, 60
Customer profitability analysis, 58 Deferred payment option, 60
CV. See Coefficient of variation (CV) Deferred rebate option, 60
C-VaR. See Conditional value at risk (C-VaR) Deferred-strike options, 60
Cyclical liquidity needs, 58 Deferred swap, 60
Deferred taxes, 60
Deferred up rebate option, 60
D Deficit, 29, 60
DA. See Discriminant analysis (DA) Deficit-budget unit, 60
Date of payment, 58 Defined benefit plans, 60
Date of record, 58, 98 Defined contribution plans, 60
Dates convention, 58 Degree of combined leverage (DCL), 61–62
Day count, 58 Degree of financial leverage (DFL), 61, 71
Daylight overdraft, 58 Degree of operating leverage (DOL), 61
Day order, 58 Delaware, 333–339
Days in receivables, 58 Delinquent account, 62
Days’ receivables, 58 Deliverable instrument, 62
Days sales outstanding, 58 Delivery, 36, 42, 62, 120, 186
Day trade, 58 Delivery date, 62
Day trading center, 347 Delivery point, 62
DCF. See Discount cash flow model (DCF) Delivery price, 62
DCL. See Degree of combined leverage (DCL) Delta, 62, 368–372
DD. See Default probability (DD) Delta-gamma approximation, 62
DDB depreciation. See Double-declining balance (DDB) depreciation Delta-hedging, 62
DDM. See Discounted dividend model (DDM) Delta neutral portfolio, 62
Dealer market, 58, 492 Delta-normal methodology, 368–372
Dealer paper, 58 Demand deposit, 62
Dealer reserve, 58 Demand loan, 62
Debenture, 58, 183 Demand shock, 62
Debit card, 58 Denomination, 62
Debt, 48, 52, 58, 119, 153, 165, 173, 183, 194, 581–585, 611, De novo branch, 58
613–614, 854–855 Deposit insurance, 207–212
Debt capacity, 58 Deposit multiplier, 62
Debt displacement, 59 Depositor discipline, 207, 209
Debt management policy, 59 Depository institutions (DIs), 47
Debtor-in-possession financing, 59 Depository Institutions Deregulation and
Debt ratio (DR), 59 Monetary Control Act (DIDMCA), 62
Debt securities, 59 Depository transfer check (DTC), 62, 73
Debt service, 59 Depreciation, 4, 62, 66, 182
Debt-to-assets ratio, 33, 59 Depreciation tax shield, 62
Debt-to-equity ratio, 33, 59 Deregulation, 62
Decimalization, 325–326 Derivative, 54, 62, 105, 199, 237–242
Decimal trading, 325–326 Derivative asset/contingent claim, 62
Decision support systems, 347 Derivative security, 62, 148
Decision-tree method, 813–823 Derman and Toy model, 384
Decision trees, 25, 59, 813–823 Detachable warrant, 63
Decision weights, 396–398, 407–408 Devaluation trap, 575–576
Declaration date, 59, 65 Development projects, 63
Dedicated capital, 59 DF. See Discount factor (DF)
Dedication strategy, 59 DFL. See Degree of financial leverage (DFL)
Deed of trust, 59 Diagonal spread, 63
Deep-discount bond, 59 DIDMCA. See Depository Institutions Deregulation and
De facto, 59 Monetary Control Act (DIDMCA)
Defalcation, 59 Differential equation, 63, 86, 180
Default, 22, 59, 60, 645–657 Diffusion process, 46, 63
Default correlation, 59 Digital option, 63
Default premium, 59 Dilution, 63, 70
Default probability (DD), 59, 60 Direct agency costs, 63
Default probability density, 60 Direct finance, 63
Default risk, 55, 59 Direct lease, 63
Default swap, 22, 60, 238–239, 241–242 Direct loan, 63
Defeasance, 60 Director liability, 337–338
Deferred annuities, 60 Direct paper, 63
Deferred availability credit items, 60 Direct placement, 63
Deferred call, 60 Direct quote, 63
984 Subject Index

Direct search market, 63 DTC. See Depository transfer check (DTC)

Dirty price, 63 Dual banking system, 68
DIs. See Depository institutions (DIs) Dual funds, 68
Disbursing float, 63, 88 Duffie-Singleton, 893–894
Disclosure, 85, 595, 602–605 Dumbbell strategy, 68
Discount bonds, 59, 63, 138, 154 Du Pont analysis, 68
Discount broker, 64 Du Pont system of financial control, 68
Discount cash flow model (DCF), 423, 813 Durable goods, 266
Discounted cash-flow valuation theory, 64 Duration, 49, 68–69, 72, 120, 126, 221–222, 305–313
Discounted dividend model (DDM), 64 Duration gap (DURGAP), 69, 311–312
Discount factor (DF), 64 Duration matching, 69
Discount function, 64 Duration measure, 69
Discounting, 47, 64 DURGAP. See Duration gap (DURGAP)
Discount instrument, 64 Dutch auction, 175
Discount method, 20, 64 Dyl model, 69
Discount or premium on a currency Dynamic financial ratio analysis, 69–70
Discount payback period rule, 64 Dynamic hedging, 69, 713–725
Discount rate for discount instrument, 64 Dynamic option replication, 70
Discount rates, 27, 64, 82
Discount window, 64
Discrete state space, 454 E
Discretionary account, 64 EAC method, 70
Discriminant analysis (DA), 360–362 EAFE index. See European, Australian, Far East (EAFE) index
Disintermediation, 64 EANPV. See Equivalent annual NPV (EANPV)
Distress, 85 EAR. See Effective annual rate (EAR)
Distressing exchange, 64 Early exercise, 70, 717
Distribution, 23, 56, 57, 91, 100, 119, 132, 145, 177, 179, 813–823, 878 Early withdrawal penalty, 70
DI system, 63 Earning assets, 70
Divergent mappings, 450, 451 Earning before interest and tax (EBIT), 70–71, 830, 831
Diversifiable risk, 64 Earnings before interest, taxes, depreciation, and amortization
Diversification, 64–65, 72, 125, 149, 400–402, 404, 415–416, 460, (EBITDA), 70
516–517 Earnings credit (earnings credit rate), 70
Diversified mutual funds, 565 Earnings dilution, 70
Divestitures, 65 Earnings per share (EPS), 70, 91, 857
Dividend, 56, 57, 65, 116, 177–178, 181, 857 Earnings retention ratio, 70
Dividend declaration date, 65 Earnings yield, 70
Dividend growth model, 65 EBIT. See Earning before interest and tax (EBIT)
Dividend irrelevance, 65 EBITDA. See Earnings before interest, taxes, depreciation, and
Dividend-like yield, 425, 427–429, 439–440 amortization (EBITDA)
Dividend payout ratio, 65 EBIT/EPS analysis, 70–71
Dividend policy, 65, 177–178 Econometric model, 71
Dividends per share (DPS), 65 Economic assumptions, 71
Dividend yield, 65, 186 Economic earnings, 71
Divisional performance evaluation, 789 Economic income, 71
DJIA. See Dow Jones Industrial Average Index (DJIA) Economics, relationship to finance, 71–72
DMAC system, 65 Economic value added (EVA), 71
DOL. See Degree of operating leverage (DOL) Economies of scale, 72, 125, 460
Dollar-weighted return, 66 Economies of scale and economies of scope, 72
Dominance principle, 66 ECU. See European Currency Unit (ECU)
Donchian (DONCH) system, 66 ECU swap, 72
DONCH system. See Donchian (DONCH) system Edge Act Corporation, 72
Double-declining balance (DDB) depreciation, 66 Edge Acts, 72
Double taxation, 66 Effective annual interest rate, 72
Doubling option, 66–67 Effective annual rate (EAR), 72
Dow Jones Industrial Average Index (DJIA), 67 Effective annual yield, 11, 72
Down-and-in option, 68 Effective convexity, 72
Down-and-out option, 68 Effective duration, 72
Downgrade trigger, 68 Effective exchange rates, 559–561
Dow theory, 67–68 Efficiency, 10, 72, 202, 267, 343–344, 412–413, 445–448
DPS. See Dividends per share (DPS) Efficiency ratio, 72
DR. See Debt ratio (DR) Efficient diversification, 72
Draft, 42, 68, 140, 171, 174, 189 Efficient frontier, 72
DRAM chipmaker, 437, 438, 440 Efficient market, 72–73, 170, 183, 199, 445–446
DRAM foundry, 422, 439–441 Efficient market hypothesis (EMH), 73
Drift, 68 Efficient portfolio, 73
Drift rate, 68 Efficient set, 73
Subject Index 985

Elasticity, 73, 137, 147 Exchange rate risk, 57, 78

Elasticity (of an option), 73 Exchange rates, 78, 90, 177, 449–452, 516, 557–563
Electronic trading, 73 Exchange ratio for business combination, 78
Electronic transfer, 73 Exchanges, 24, 78, 90, 92, 96, 125, 138, 177, 449–452, 516, 557–563
Embedding option, 73–74 Exchange specialist, 179, 330, 478, 488
EMEAP Central Banks. See Executive Meeting of East Asia and Exclusionary self-tender, 78
Pacific (EMEAP) Central Banks Ex-dividend date, 77–78
EMH. See Efficient market hypothesis (EMH) Ex-dividend or ex-rights, 78
Empirical research, 74, 212 Executive Meeting of East Asia and Pacific (EMEAP) Central
Employees Retirement Income Security Act (ERISA), 76 Banks, 508
Employee stock ownership plans (ESOPs), 74 Executive stock options, 79
EMU. See European Monetary Union (EMU); European monetary Executor, 79
unit (EMU) Exercise, 70, 79, 101, 439, 769–770
End-of-year convention, 74 Exercise price, 79, 101, 439, 769–770
Endowment funds, 74 Exercise style, 79
Enhancement, 54, 74, 509 Exercising the option, 79
Enterprise value, 74 Existing rules, 843, 846
EPS. See Earnings per share (EPS) Exogenous and endogenous prepayments, 645–657
Equal Credit Opportunity Act, 74 Exotic option, 79
Equilibrium model, 74, 380–381 Expectations hypothesis, 79
Equilibrium rate of interest, 74 Expected return, 79, 145
Equipment obligation bonds, 74 Expected return-beta relationship, 79
Equipment trust certificate, 74 Expected shortfall, 733
Equity, 28, 52, 53, 59, 74, 75, 99, 113, 150, 186–187, 401–402 Expected utility, 874–875, 880
Equity kicker, 74 Expected value of a variable, 79
Equity-linked forward, 75 Expected yield, 79
Equity method, 74 Expiration date, 80
Equity multiplier, 74 Expiration-date risk, 80
Equity premium puzzle, 675–688 Explicit finite difference method, 80
Equity premiums, 675–688 Exposure, 19, 54, 80, 110, 118, 121, 736
Equity prices, 583, 584, 796, 799, 891 Extendable notes, 80
Equity swap, 74 Extendable swap, 80
Equivalent annual NPV (EANPV), 75–76 Extension, 80, 851–868
Equivalent loan, 76 Extension risk, 80
Equivalent taxable yield, 76 External auditor, 600
ERISA. See Employees Retirement Income Security Act (ERISA) External control mechanism, 599–602
Erosion, 76 Extinguish, 80
Errors of estimation, 345, 772
Escrow account, 219–223, 225
ESOPs. See Employee stock ownership plans (ESOPs) F
Estimation risk, 76 Face value, 80, 135, 139, 185, 222, 225
Euro, 76 Facility, 18, 80
Eurobanks, 76 Facility fee, 80
Eurobonds, 76 Factor, 48, 80, 268, 301
Eurocurrency, 76 Factor analysis, 81, 149
Eurocurrency deposits, 76 Factoring, 5, 80
Eurocurrency loans, 76 Factor model, 81, 175, 268–269, 746
Eurocurrency market, 76 Factor portfolio, 81, 746
Eurodollar bonds, 77 Failure prediction, 357–365
Eurodollar CD, 77 Fair Credit Billing Act, 81
Eurodollar futures contract, 77 Fair Credit Reporting Act, 81
Eurodollar interest rate, 77 Fair game, 81
Eurodollars, 76 Fair game model, 81, 183
Euroequity, 77 Fair market value, 81
European, Australian, Far East (EAFE) index, 70, 77 Fair value, 81, 667
European Currency Unit (ECU), 72, 77 Fallen angels, 81
European Monetary Union (EMU), 74 Fannie Mae, 81, 89, 390
European Monetary Unit (EMU), 77 FASB. See Financial Accounting Standards Board (FASB)
European option, 77 FASB Statement, 6, 81, 179, 836–837
EVA. See Economic value added (EVA) FDIC. See Federal Deposit Insurance Corporation (FDIC)
Evaluation, 279–284, 351–355, 471–475, 634–641 Feasible set, 81, 137
Event studies, 77 Federal agencies, 9, 82
Excess reserves, 78 Federal agency securities, 82, 176
Excess return, 78 Federal Deposit Insurance Corporation (FDIC), 82, 93
Exchange offering, 78 Federal funds, 82
Exchange option, 78 Federal Home Loan Mortgage Corporation (FHLMC), 82, 391
986 Subject Index

Federal Housing Administration (FHA), 82, 390, 693 Fixed annuities, 87

Federal National Mortgage Association (FNMA), 81, 82, 89, Fixed asset, 5, 16, 87, 845
115, 126, 390 Fixed asset turnover ratio, 16, 87
Federal Open Market Committee (FOMC), 82 Fixed-charge coverage ratio, 87
Federal Reserve Bank, 64, 82 Fixed costs, 87, 198
Federal Reserve Board, 82, 107, 128 Fixed-dollar obligations, 87
Federal Reserve Statement, 82 Fixed income securities, 10, 305
Federal Reserve System, 82, 87 Fixed-income security, 87
Federal Savings and Loan Insurance Corporation (FSLIC), 82 Fixed rate, 87, 139
Fed Wire, 82 Flat benefit formula, 87
FHA. See Federal Housing Administration (FHA) Flat volatility, 88
FHLMC. See Federal Home Loan Mortgage Corporation (FHLMC) Flex option, 88
Fiber optics, 82 Flight to quality, 88
Fidelity bond, 82 Float, 42, 63, 88, 109, 120, 132, 150
Fiduciary, 82 Floater, 88
Field warehouse financing, 83 Floating lien, 88, 193
Field warehousing, 83, 153, 198 Floating rate, 88, 105, 196
FIFO. See First-in first-out (FIFO) Floating-rate bond, 88, 185
Filter rule, 83, 201 Floating-rate note (FRN), 88
Finance, 4, 34, 63, 83 Floor, 88, 492
Finance charge, 83 Floor broker, 89
Finance company, 34, 80, 83 Floor-Ceiling Agreement, 89
Financial Accounting Standards Board (FASB), 83, 179, 182 Floorlet, 89
Financial analyst, 14, 83, 84, 133 Floor plan loans, 89
Financial asset returns, 274, 279 Floor rate, 89
Financial assets, 84, 128 Floor trader, 89, 492
Financial break-even, 84 Flotation costs, 89, 191
Financial disclosure, 84, 604–605 Flower bond, 89
Financial distress, 85, 155 Flow of funds, 290–291
Financial distress costs, 85 Flow of funds accounts, 89
Financial engineering, 85 Flow of funds matrix, 89
Financial futures contract, 85 FNMA. See Federal National Mortgage Association (FNMA)
Financial holding companies, 214, 215 FOMC. See Federal Open Market Committee (FOMC)
Financial innovation, 85 Forced conversion, 89
Financial institution management, 50 Foreclosure, 89
Financial intermediaries, 85, 510 Foreign bonds, 89
Financial investment, 85 Foreign capital inflow, 466, 468–470
Financial lease, 32, 85 Foreign currency futures, 90
Financial leverage, 85, 113 Foreign currency option, 89
Financial management analysis, 85 Foreign exchange, 77, 90, 113, 177
Financial market, 33, 77, 85, 153, 167, 298, 501–504, 621, Foreign exchange brokers, 90
736–740, 777, 780 Foreign exchange market, 90, 177
Financial modeling, 377 Foreign exchange rates, 90
Financial modernization, 213 Foreign exchange reserves, 508
Financial planning, 10, 85, 142, 176 Foreign exchange risk, 90
Financial ratios, 4, 23, 157, 360–362 Foreign exchange swap, 90
Financial requirements, 86 Foreign tax credit, 90, 134
Financial risk, 61, 86 FOREX, 90
Financial services holding company, 86 Forward calendar, 90
Financial systems, 86, 169, 194 Forward contract, 62, 75, 90, 92, 134, 146, 177
Financial Z score, 55 Forward curve, 90, 91
Financing strategies, 825 Forward exchange rate, 90, 185
Finite difference method, 86 Forward interest rate, 90, 100
Firm, 3, 85–86 Forward market, 90, 97, 244
Firm commitment offerings, 86–87 Forward parity, 90
Firm commitment underwriting, 87 Forward premium, 90, 253
Firm-specific risk, 87, 121 Forward price, 34, 81, 90
First Asian bond fund (ABF-1), 508 Forward rate, 63, 90
First-in first-out (FIFO), 83 Forward rate agreement (FRA), 91
First mortgage bond, 87, 168 Forward risk-neutral world, 91
First-pass regression, 87 Forward start option, 91
Fiscal agent, 87 Forward strip, 91
Fiscal policy, 87 Forward swap, 91
Fisher effect, 87, 133 Forward trade, 91
Fisher equation, 245 Fourth market, 91
Fisherian relation, 87 FRA. See Forward rate agreement (FRA)
Subject Index 987

Fractional trading, 325 Going-private transactions, 95

Fragmented, 492, 539 Going public, 95
Fragmented markets, 539 Golden parachute, 96, 188, 601
Franchising, 91 Gold exchange standard, 96
Freddie Mac, 82, 391 Gold standard, 96
Free cash flow, 91, 184, 291, 414–415, 849 Goods market approach, 450
Frequency distribution, 91 Goodwill, 96, 153, 417, 520
Frictions, 453–458 Gordon model, 47, 96, 274
FRMs, 91 Government intervention in the foreign exchange market, 96
FRN. See Floating-rate note (FRN) Government National Mortgage Association (GNMA), 81, 94–95, 390
Full-service broker, 91 Government-sponsored agencies, 9, 96
Fully diluted earnings per share, 91 Grace period, 96
Fundamental analysis, 91, 141 Gradual information diffusion, 547
Fundamental betas, 91 Grandfather clause, 96
Fund performance, 297–303 Graphical approach, 796–797
Funds flows, 91 Great Recession, 607, 617
Futures contract, 92, 102 Greeks, 96, 729
Futures exchange, 92 Greenmail, 96–97, 600
Futures market, 92 Green shoe provisions, 97
Futures options, 92 Gross domestic product (GDP), 97
Futures overlay, 92 Growing perpetuity, 97
Futures price, 92, 134 Growth funds, 97, 130, 302
Future value (FV), 45, 91 Growth opportunity, 97
Growth rate, 560, 609, 640, 755–764
Guarantee, 40, 47, 88, 97, 118, 120, 149, 469
G Guaranteed insurance contract, 97
GAAP. See Generally Accepted Accounting Principles (GAAP) Guaranteed investment contract (GIC), 97
Gamma, 44, 92 Guardian, 97
Gamma-neutral portfolio, 92
GAP, 16, 92, 113, 203
GAP management, 92 H
Gap option, 92 Habit formation, 679–680
GARCH model, 92, 533, 878 Habit persistence, 266
Garnishment, 93 Haircut, 97
Garn-St Germain Depository Institutions Act, 93 Hazard model, 365
Gauss-Hermite Jump Process, 527–528 Hazard rate, 97, 577
Gauss quadrature method, 430, 441 HDD, 97
GDP. See Gross domestic product (GDP) HECM. See Home equity conversion mortgage (HECM)
General break-even analysis, 93 Hedge, 97, 100, 456, 496–497
General cash offer, 93 Hedge fund, 97, 621–632
General credit controls, 93 Hedge fund history, 97, 622
Generalized method of moments (GMM), 577–578 Hedge fund strategies, 621–632
Generalized wiener process, 93 Hedge fund trends, 621–632
Generally Accepted Accounting Principles (GAAP), 5, 92, 93 Hedger, 97, 118
General obligation bonds, 93 Hedge ratio, 871–889
General partnership, 93 Hedge ratio (for an option), 97
Genetic algorithms, 504 Hedge ratio (for futures), 97
Genetic programming, 504 Hedging, 8, 62, 98
Gentry-De La Garza model, 93 Hedging demands, 98
Geometric Brownian motion, 94, 531 Hedging interest rate risk, 8
Geometric mean/average, 93 Hedging risk, 235
Geske, R., 426, 652–654, 891 Heston model, 98
Gibson relation, 94 Heterogeneity, 450, 573
GIC. See Guaranteed investment contract (GIC) Heterogeneous agents, 503
Gilts, 94 Heterogeneous information, 450
Gini coefficient, 875, 882, 883 Highly leveraged transaction (HLT), 98
Ginnie Mae, 98, 691–704 High-yield bonds, 98, 111
Glass-Steagall, 94 Historical cost, 28, 98
Glass-Steagall Act, 94, 213 Historical simulation, 98, 372–373
Global bonds, 94 Historical volatility, 98
Global investments, 627 HLT. See Highly leveraged transaction (HLT)
Globalization, 18, 94, 417, 616 HMBS, 694, 697
Global minimum variance portfolio, 94, 267 Ho and Lee model, 381–384
GMM. See Generalized method of moments (GMM) Holder-of-record date, 98
GNMA. See Government National Mortgage Association (GNMA) Holding company, 98, 130, 135
Going private, 95, 867 Holding period, 12, 98
988 Subject Index

Holding-period rate of return, 98 Independent directors, 498, 592

Holding-period yield (HPY), 98 Independent projects, 102
Holiday calendar, 98 Index amortizing swap, 102
Home banking, 98 Index arbitrage, 102, 152
Home currency approach, 99 Indexed principal swap, 102
Home debit, 99 Index fund, 102
Home equity conversion mortgage (HECM), 692–704 Index futures, 56, 102, 181
Home equity loan, 99 Index model, 102
Homemade dividends, 99 Index of leading indicators, 102
Homemade leverage, 99, 127 Index option, 102, 181
Homogeneous expectations, 99 Index rate, 102
Horizon analysis, 99 Indifference curve, 38, 102, 341
Horizontal acquisition, 99, 197 Indirect finance, 102
Horizontal combination, 99 Indirect loan, 102
Horizontal spread, 99 Indirect quotes, 103
Hot money, 99 Individual momentum, 546
Housing Devaluation Effect, 579 Individual retirement account (IRA), 103, 165
Howard-D’ Antonio strategy, 99 Industrial development bonds, 103
HPY. See Holding-period yield (HPY) Industrial momentum, 546–547
H-REMIC, 691–704 Industrial revenue bond (IRB), 103
Hull and white model, 384–385 Inefficient market, 103
Hung convertibles, 99–100 Inflation, 8, 83, 103, 246, 257–262, 312
Hybrid market, 481 Inflation-caused depreciation effect, 103
Hybrid security, 100 Inflation-caused income effect, 103
Hypothecation, 100 Inflation-caused income tax effect, 103
Hypothesis testing, 100 Inflation-caused wealth effect, 103
Inflation differential risk, 103
Inflation-escalator clause, 103
I Inflation premium, 103
IBFs. See International banking facilities (IBFs) Inflation risk (or purchasing power risk), 103
ICAPM. See Intertemporal capital asset pricing model (ICAPM) Inflation risk premium, 259–260
Idiosyncratic risk, 100, 323 Information, 7, 13, 54, 81, 104, 261, 451
Illiquidity, 100 Information asymmetry, 103–104, 191, 459, 461
ILSA. See International Lending and Supervision Act (ILSA) Information-content effect, 104
IMF bailout, 581–585 Information revolution, 104
IMM. See International monetary market (IMM) Information technology, 481
Immediacy, 483, 484, 487 Informed trading costs, 331
Immunization, 37, 100, 305, 307–308, 312 Ingersoll and Ross model, 380
Immunize, 100, 307 In-house processing float, 104
Immunized, 100, 306 Initial margin, 104
Impairment of capital rule, 100 Initial outlay, 104
Implicit agency costs, 9, 100 Initial public offering (IPO), 104, 195, 781
Implicit contract, 100 Input list, 104
Implicit finite difference method, 100 Inside information, 104, 591
Implied distribution, 100 Insider trading, 104, 183
Implied forward rate, 100 Insolvency, 7, 104, 358, 365
Implied rate forecast, 100 Insolvent, 7, 104
Implied repo rate, 100 Installment credit, 105
Implied standard deviation (ISD), 765–776 Installment loan, 105
Implied tree, 100 Instantaneous forward rate, 105
Implied variance (implied volatility), 101 Institutional investors, 592, 602
Implied volatility, 101, 717 Institutional Swap Dealers Association (ISDA), 109
Incentive options, 803 Instruments, 19, 82, 105, 275, 612–613, 795
Incentives, 482, 496 Insurance, 10, 24, 87, 95, 97, 105, 114, 194, 196, 207–212, 239, 312
Inception profit, 101 Insurance companies, 114, 149, 602
Income-and-growth funds, 102 Insurance principle (the law of averages), 105
Income beneficiary, 101 Interbank loan, 105
Income bond, 101 Interest correlation, 377
Income effect, 101 Interest coverage ratio, 105
Income fund, 101 Interest on interest, 105
Income statement, 43, 81, 101–102, 155 Interest only (IO), 109
Incorporation, 131, 179, 338, 652 Interest rate cap, 32, 34, 105
Incremental after-tax operating cash flows, 102 Interest rate collar, 105
Incremental cash flows, 22, 102 Interest rate derivative, 105
Indentures, 31, 102, 193 Interest rate floor, 89, 105
Independent bank, 102 Interest rate insurance, 105
Subject Index 989

Interest rate option, 105 IPO. See Initial public offering (IPO)
Interest rate parity, 105, 246 IRA. See Individual retirement account (IRA)
Interest rate risk, 32, 106, 221, 369 IRB. See Industrial revenue bond (IRB)
Interest rates, 45, 72, 77, 106, 173, 377–380 IRR. See Internal rate of return (IRR)
Interest rate structure, 106 Irrelevance result, 109
Interest rate swap, 6, 11, 106, 135, 184 Irrevocable letter of credit, 109
Interest subsidy, 106 ISD. See Implied standard deviation (ISD)
Intermarket spread swap, 106 ISDA. See Institutional Swap Dealers Association (ISDA)
Intermarket trading system (ITS), 537, 540 IS-LM curves, 554
Intermediaries, 106, 510, 607 Iso-expected return line, 109
Internal audit, 106 Iso-variance ellipse, 109
Internal Control Mechanism, 587 Issuer exposure, 110
Internal financing, 106 Itô Process, 110
Internal growth rate, 107 ITS. See Intermarket trading system (ITS)
Internal rate of return (IRR), 22, 66, 107, 426
International, 89, 94, 107, 228, 231–235, 243–249, 581–585,
607–619 J
International asset pricing, 108, 227, 230, 233–235 January effect, 110
International banking, 607–619 Jarrow-Turnbull, 893, 897
International Banking Act, 107, 608 Jensen alpha, 351–354
International banking facilities (IBFs), 100, 107, 608 Jensen, M.C., 34, 110, 279, 297
International capital asset pricing model, 107 Jensen’s inequality, 110
International debt crisis, 581–585 Jensen’s measure, 110
International Fisher effect, 108 Johnson hedge model, 110
International Lending and Supervision Act (ILSA), 108, 582 Joint probabilities, 110
International momentum, 545 Joint venture, 110, 840
International monetary market (IMM), 108 Judgment, 110, 604
International Rating Agencies, 510 Judgmental credit analysis, 110
International system risk, 108 Jumbos, 110
Internet, 347–349 Jump-diffusion model, 525–534
Intertemporal asset pricing, 230 Jump diffusion process, 525, 528, 533
Intertemporal capital asset pricing model (ICAPM), 108, 344 Jump diffusion with conditional heteroscedasticity, 531–533
Intertemporal marginal rate of substitution, 676 Junior liens, 110
Intertemporal risk, 227–235 Junk bonds, 111, 183, 220
Intertemporal substitution, 228, 679
In the money, 108, 198, 422, 717
In-the-money-option, 108 K
Intra-day price volatility, 481 Kappa, 111, 197
Intrinsic value, 108 Keogh plan, 111
Intrinsic value of an option, 108 Key-person insurance, 111
Inventory, 7, 16, 108, 114, 136, 193, 291 Kite, 111
Inventory conversion period, 108 Knock-in option, 111, 195
Inventory loan, 82, 108 Knock-out option, 111, 195
Inventory turnover ratio, 16, 108 Kolmogorov backward equation, 111
Inverted market, 108 Kurtosis, 111, 128, 372
Inverted yield curve, 108
Investable balances, 70, 108
Investment asset, 109, 264, 393 L
Investment bankers, 109, 193, 854 Ladder option, 111
Investment banking, 109, 185 Ladder strategy, 111
Investment company, 109, 259 Lagged reserve accounting, 111
Investment Company Act, 565, 627 Lagging indicators, 30, 111
Investment grade bond, 109, 310 Lambda, 111, 197
Investment Institutions, 109 Latent variables, 276
Investment of different life, 109 Lattice, 111, 383, 430
Investment opportunity schedule (IOS), 109 Lattice method, 429, 431–432
Investment performance, 279, 634 Law of one price (LOP), 111, 244
Investment portfolio, 21, 109, 471 LBO. See Leveraged buyout (LBO)
Investment quality bonds, 109 LDC loans, 582
Investments, 109 Leading economic indicators, 111
Investment trigger price, 109 Leakage, 111
Investor arbitrage, 630–661, 668 LEAPS, 111
Invoice, 24, 109 Learning, 503
Invoicing float, 88, 108 Lease, 112, 165, 844
IO. See Interest only (IO) Lease rate, 112
IOS. See Investment opportunity schedule (IOS) Leasing companies, 112
990 Subject Index

Le Chatelier Principle, 565–568 Loan-to-value ratio, 118, 576

Ledger cash, 27, 112 Locals, 118
Legal insolvency, 105, 112 Location risk, 118
Legal lending limit, 43, 112 Lockbox system, 118
Legal reserves, 28, 112, 128 Lock-in options, 118
Lender liability, 112 Lock-up provisions, 118
Lending portfolio, 112 Lognormal distribution, 119
Leptokurtosis (fat tails), 112 Lognormal versus normal movements, 378–379
Lessee, 32, 112, 165 London Interbank Offered Rate (LIBOR), 47, 114, 119, 237
Lessor, 32, 63, 112, 136 Long, 119
Letter of comment, 112 Long forward, 119
Letter of credit, 54, 112, 113 Long hedge, 119
Level-coupon bond, 113 Long position, 54, 119
Leverage, 33, 70, 113, 155, 628 Long run, 119, 187, 381
Leveraged buyout (LBO), 95, 111, 113 Long straddle, 119
Leveraged equity, 113 Long-term debt, 119
Leveraged lease, 113 Long-term securities, 119, 122
Leverage ratio, 113, 829–830 Long vertical spread, 29, 119
LGD. See Loss given default (LGD) Lookback call, 119
Liabilities, 5, 28, 105, 113, 155, 311 Lookback option, 119
Liability management, 113 Lookback put, 119
Liability management theory, 113 LOP. See Law of one price (LOP)
Liability sensitive, 113 Loss given default (LGD), 119, 158
LIBID, 114 Loss reserve, 119
LIBOR. See London Interbank Offered Rate (LIBOR) Low discrepancy sequence, 119
LIBOR Curve, 114, 239 Lower-of-cost-or market value method, 119
LIBOR-in-arrears swap, 114 Low-grade bond, 119
Lien, D., 5, 114 LPC. See Loan pricing corporation (LPC)
Life insurance companies, 114, 312
LIFO, 114
Limited branching, 114 M
Limited liability, 114 M1, 119
Limited liability company (LLC), 114 M2, 120
Limited-liability instrument, 114 M3, 120
Limited partnership, 114, 140 Macaulay duration, 120, 221–222, 308–310
Limit move, 114 Macroeconomic stabilization, 557
Limit order, 114 Macro exchange rate models, 449
Limits to arbitrage, 659–661 Macroforecasting, 120
Linear optimization model, 115 Macrohedge, 120
Linear penalization, 705, 708–709 Macrohedging, 311
Linear programming approach to portfolio analysis, 115 Mail float, 88, 120
Line of credit, 43, 80, 114–115 Maintenance margin, 120
Lintner’s model, 115–116 Make a market, 120
Lintner’s observations, 115 Make-whole clause, 120
Liquidating dividend, 116 Making delivery, 120
Liquidation, 3, 116, 359 Managed float, 120
Liquidation value, 116, 522 Managed floating currencies standard, 120
Liquidity, 6, 20, 100, 116, 123, 156, 187, 292, 460, 483 Management risk, 120
Liquidity preference hypothesis, 116, 122 Managerial effort, 805–806
Liquidity preference theory, 117 Managerial entrenchment, 853
Liquidity preference theory of interest rates, 117 Manipulation, 846–847
Liquidity premium, 117, 260 MAPB system, 120
Liquidity ratio, 117, 484 Margin, 40, 69, 120, 196, 374
Liquidity risk, 117, 123, 483 Marginal cost of funds, 121
Liquid yield option note, 117 Marginal standard deviation, 121
LLC. See Limited liability company (LLC) Marginal statistic, 121
Load fund, 117 Marginal tax rate, 121
Loanable funds theory of interest rates, 118 Margin call, 121
Loan amortization, 11, 117 Margin requirement, 121
Loan commitment, 54, 118, 315, 583 Marked to market, 121, 496
Loan contract terms, 315–319 Marketability, 116, 123, 292
Loan exposure, 118 Marketability risk, 123
Loan option, 118 Marketable securities, 124, 290, 847
Loan participation, 118 Market anomalies, 121
Loan pricing corporation (LPC), 318 Market-based beta forecasts, 123
Loan syndication, 118 Market-book ratio, 123
Subject Index 991

Market broadening, 121 Minimum variance, 871, 877–880

Market capitalization, 121, 546 Minimum-variance frontier, 126
Market capitalization rate, 121 Minimum-variance portfolio, 126, 203, 267
Market clearing, 121, 478 MIRR. See Modified internal rate of return (MIRR)
Market conversion price, 121 Misclassification cost model, 364
Market corner, 121 Mission statement, 126
Market-driven instruments, 123 Mixed average, 126
Marketed claims, 124 Mixed jump process, 526–527
Market efficiency, 445–448 MMDAs. See Money market deposit accounts (MMDAs)
Market exposure, 121 Mode, 126
Market interest rate, bond, 121 Modern portfolio theory (MPT), 126, 341
Market maker, 123, 329, 330, 487–490 Modified accelerated cost recovery system [MACRS], 126
Market model, 24, 121, 445–446 Modified duration (MD), 126
Market order, 121, 480–481, 492 Modified exchange standard, 126
Market or systematic risk, firm-specific risk, 121 Modified internal rate of return (MIRR), 128
Market portfolio, 14, 121–122, 263, 371, 640, 679 Modigliani, 41, 109, 473–474, 641
Market price, 27, 41, 91, 121–123, 159, 220, 488, 736, 738, 786–787 Modigliani and Miller (M&M) Proposition I, 127
Market price of risk, 122, 276, 432 Modigliani and Miller (M&M) Proposition II, 127
Market quality, 536 Moments (of a statistical distribution), 128
Market reaction, 418, 603 Momentum strategy, 546
Market risk, 122, 186, 243–254 Monetarist view, 128
Market segmentation hypothesis, 122 Monetary Authority of Singapore (MAS), 557–558
Market segmentation theory, 122 Monetary base, 128, 553
Market stabilization, 122 Monetary neutrality, 555
Market structure, 484, 492 Monetary policy, 82, 93, 128
Market timer, 122 Money, 128, 174, 189, 288
Market timing, 122, 281–282, 638 Money creation, 128
Market-to-book (M/B) ratio, 124 Money market, 612–613
Market value, 13, 97, 122 Money market account, 128
Market value added (MVA), 122 Money market deposit accounts (MMDAs), 128
Market value ratios, 122 Money market mutual fund, 128
Market-value-weighed index, 123 Money market securities, 37, 128
Marking to market, 124 Money multiplier, 128
Markovitz stochastic dominance, 402–404 Money purchase plan, 128
Markov process, 124 Money spread, 128, 177
Markowitz model, 123, 566 Money supply, 129
Mark-to-market, 123 Money supply expectations effect, 129
Mark-to-market swap, 124 Money supply income effect, 129
Martingale, 124 Money supply liquidity effect, 129
MAS. See Monetary Authority of Singapore (MAS) Monitoring, 603–604
Master note, 124 Monotinicity, 129
Matching principle, 294 Monte Carlo method, 430–431
Maturity, 881–882 Monte-Carlo simulation, 129, 373
Maturity date, 124 Monte Carlo valuation (simulation), 129
Maturity gap, 124 Moody’s bond rating, 129
Maturity premium, 124 Moral hazard, 207, 413
Maximum likelihood method, 124 Moral suasion, 129
MBS. See Mortgage-backed security (MBS) Mortality tables, 129
MBS valuation, 569–579 Mortgage, 8, 15, 29, 48, 87, 109, 129, 571, 573–574, 577, 691–704
Mean reversion, 124–125, 380, 384 Mortgage-backed security (MBS), 109, 124, 129, 145, 387–393,
Mean-variance analysis, 125 569–579
Mean-variance criterion, 125 Mortgage banking, 129
Mean variance efficiency, 267–268, 343–344 Mortgage banks, 129
Measure, 6, 125 Mortgage bonds, 129
Measurement error, 125, 682 Mortgage securities, 129
Median, 125 Mortgage servicing, 129
Member banks, 125 Move persistence, 129
Membership or seat on an exchange, 125 Moving-average, 120, 129–130
Merchandise trade balance, 125 MPT. See Modern portfolio theory (MPT)
Merger, 6, 99, 125, 411–419 Multibank holding company, 130
Microeconomic risk, 125 Multifactor CAPM, 130
Microhedge, 125 Multi-index CAPM Model, 227
Microstructure approach, 449–452 Multinational, 90, 792
Migration, 125 Multinational bank, 130, 173
Migration analysis, 125 Multinational corporation, 130, 784
Miller-Orr model, 125 Multiple-beta models, 266–267, 276–277
992 Subject Index

Multiple rates of return, 130 Nonbank bank, 133

Multiples, 130 Nonbank subsidiary, 133
Multivariate normal integral, 430–433 Nonborrowed reserves, 133
Mundell-Fleming model, 555 Noncash item, 133
Municipal bonds, 93, 130, 162 Non-competitive bidders
Municipals, 130 Nondebt tax shields, 133–134
Mutual, 814 Nondeposit funds, 134
Mutual fund, 26, 41, 102, 117, 128, 130, 136, 301, 406–407, Nondiversifiable risk, 134
633–642 Noninstallment credit, 134
Mutual fund theorem, 130 Nonlinearity with interaction effect, 861–863
Mutually exclusive investment decisions, 130 Nonlinear models, 851–868
Mutually exclusive projects, 130 Nonmarketed claims, 134
Mutual savings bank, 130 Nonnotification financing, 134, 144
MVA. See Market value added (MVA) Nonperforming loan, 134, 512
Nonrated bond, 134
Nonrate gap, 134
N Nonrecombining tree, 134
NAIC, 130–131 Nonrecourse, 134
Naked options, 130 Nonresidential mortgages, 134
Naked option writing, 130 Nonstandard option, 134
Naked position, 130 Nonstationary model, 134
Naked writing, 130 Nonsystematic risk, 134, 269
Nasdaq, 131, 325, 329–331 Normal backwardation theory, 134
Nasdaq index, 131 Normal distribution, 25, 134, 150, 177, 368
Nash equilibrium, 561 Normal market, 134
National banks, 131, 214 Note, 134, 192, 540–542
National Credit Union Administration (NCUA), 131 Note issuance facility, 134
National Income Accounts, 131 Notional amount, 134
National Wages Council, 557 Notional principal, 134, 167
NCUA. See National Credit Union Administration (NCUA) Notional value, 135
Negative covenant, 131 NOW. See Negotiable order of withdrawal (NOW)
Negative pledge clause, 131 NOW account, 135
Neglected-firm effect, 131 NPV. See Net present value (NPV)
Negotiable certificates of deposit, 110, 131 NPVGO model, 135
Negotiable order of withdrawal (NOW), 131, 191 NSF, 135
Negotiated credit, 131 Numeraire, 135
Negotiated markets, 131 Numerical procedure, 135
Negotiated offer, 131 NYSE, 138, 325, 326, 539, 540
Negotiation, 131, 163, 188, 439
Net cash balance, 132
Net float, 88, 132 O
Net interest margin, 132, 216 OAS. See Option-adjusted spread (OAS)
Net investment, 132 Obligor, 59, 135
Net operating losses (NOL), 132 OBPI. See Option-Based Portfolio Insurance (OBPI)
Net overhead burden, 132 OCC. See Options Clearing Corporation (OCC)
Net payoff, 132 Odd lot, 135
Net present value (NPV), 75–76, 99, 107, 132, 135, 166, 174, Odd-lot theory, 135
180, 423, 520, 709, 816, 819 Off-balance sheet activities, 135
Net present value profile, 132 Off-balance sheet financing, 135
Net present value rule, 132 Off-balance-sheet risk, 135
Netting, 132 Offer price, 15, 135
Net working capital, 7, 36, 39, 57, 132, 288 Official reserve transactions, 135
Networks, 535–542 Off-market swap, 135
Net worth, 5, 133 Offset coefficient, 555
Neural networks, 504 OHR. See Optimal hedge ratio (OHR)
Newton–Raphson method, 133, 432 One bank holding company, 135
No arbitrage, 133, 263, 454, 455, 457 One-factor APT, 135
No-arbitrage assumption, 133 Online trading, 347–350
No-arbitrage interest rate model, 133 On-the-run issue, 135
Nodes, 535–542 Open account, 135
NOL. See Net operating losses (NOL) Open contracts, 135
No loan fund, 133 Open-end (mutual) fund, 136
Nominal cash flow, 133 Open interest, 136
Nominal interest rate, 87, 133, 251 Open limit order book auction, 479
Nominal risk-free interest rate, 133, 164 Open market, 136, 552
Nomination Committee, 587 Open market operation, 82, 136
Subject Index 993

Open market repurchase, 136 Partnership, 139–140

Open (good-till-canceled) order, 135 Par value, 139, 148
Open outcry, 136, 536 Par yield, 139
Operating activities, 136, 836–837, 847, 849 Passbook savings, 140
Operating cash flow, 136, 842–843 Passive investment strategy, 140
Operating cycle, 136 Passive management, 140
Operating income, 136 Passive portfolio, 140
Operating lease, 112, 136 Passive portfolio management, 140
Operating leverage, 136–137 Pass-through, 138, 140
Opportunity cost, 36, 137, 877 Pass-through security, 140
Opportunity set, 81, 137, 659–673 Past-due loan, 140
Optimal, 23, 109, 137, 187, 231–233, 300, 364, 800, Past losers, 545, 547
807, 818 Past winners, 545–547
Optimal cash balance, 137 Path dependency, 570
Optimal hedge ratio (OHR), 713–715 Path-dependent derivative, 140
Optimal risky portfolio, 137 Path-dependent option, 140
Option(s), 15, 17, 22, 24, 26, 40, 46, 88, 137 Payable through drafts, 140
Option-adjusted spread (OAS), 138 Payback method, 140
Option-Based Portfolio Insurance (OBPI), 728–730 Payback period rule, 64, 141
Option class, 137 Payer swaption, 141
Option contracts, 137 Paylater strategy, 141
Option elasticity, 137 Payment date, 141
Option overwriting, 137 Payment-in-kind (PIK), 141
Option premium, 137 Payments pattern approach, 141, 158
Option pricing approach, 796, 798–799 Payoff, 19, 60, 105, 141, 156
Option pricing equation, 137 Payoff diagram, 141
Option pricing model, 25, 46, 62, 197 Payout phase, 141
Option pricing theory, 570, 573 Payout ratio, 141, 161, 187
Options Clearing Corporation (OCC), 135 PBGC. See Pension Benefit Guarantee Corporation (PBGC)
Option series, 138 PBO. See Projected benefit obligation (PBO)
Option theoretic, 138 Peak, 141
Option writer, 138 Peak exposure, 141
Order book official, 138 Pecking order hypothesis, 141–142
Order driven facility, 477 P/E effect, 141
Order driven markets, 477 Peer group, 142
Order flow, 451 Peggers, 142
Order-processing, 488 Pension Benefit Guarantee Corporation (PBGC), 142
Order statistics, 138 Pension funds, 142, 283, 312, 345
Ordinal utility, 138 P/E ratio. See Price/earnings ratio (P/E ratio)
Organized exchanges, 138, 167 Percentage of sales method, 142–143
Original-issue-discount-bond, 138 Percentile level, 143
Origination fee, 138 Perfectly competitive financial markets, 143
Originator, 138 Perfect markets, 143
Out of the money, 138 Performance, 4, 279–284, 297–303, 351–355, 471–475,
Out-of-the-money option, 138, 186 602–605, 623–625, 633–642, 713–725, 852–853
Out performance option, 138 Performance appraisal, 633–642
Outsourcing, 139 Performance measures, 4, 282–283, 297–301, 351
Overconfidence, 547, 803–811 Performance shares, 143
Overdraft, 139 Permanent working capital, 143
Overhead, 4, 17, 139, 785 Perpetual option, 143
Overreaction, 546 Perpetual preferred stock, 143
Oversubscribed issue, 139 Perpetuity, 143
Oversubscription privilege, 139 Perquisites, 143
Over-the-counter market, 139, 167, 377 Personal banker, 143
Personal trust, 143
Phantom income, 259
P Pie model of capital structure, 143
PAC. See Political action committee (PAC) PIK. See Payment-in-kind (PIK)
Package, 139, 469, 582 Plain vanilla, 22, 143
Pac-man strategy, 139, 188 Planned amortization class, 139, 143
Parallel shift in the yield curve, 139 Planning phase of capital budgeting, 144
Par bond, 139 Pledged securities, 144
Par coupon, 139 Pledging, 144
Parent company, 86, 139 Plowback ratio, 144
Partial expectation, 139 Plug, 144
Participating swap, 139 PO, 145
994 Subject Index

Point, 144 Prime rate, 148

Point of sale, 145 Primitive security, derivative security, 148
Poison pill, 144–145, 601–602 Principal, 148
Poisson distribution, 145 Principal-agent problem, 148–149
Poisson process, 145, 525, 526, 529 Principal components analysis, 149
Political action committee (PAC), 146, 149 Principle of diversification, 149
Political risk, 145 Priority rules, 535–542
Pooling of interests, 145 Private information, 448
Popular methods, 783, 832 Private pass-throughs, 149
Portfolio analysis, 81, 115, 145 Private placement, 149
Portfolio cushion, 145 Private placement of equity, 150
Portfolio formulation strategies, 347 Private (or direct) sale, 149
Portfolio immunization, 145 Probability distribution, 150, 164, 177
Portfolio insurance, 146, 727–743 Probability of default, 150
Portfolio management, 6, 146, 182, 308 Probate, 150
Portfolio opportunity set, 146 Problem loans, 150
Portfolio optimization, 110, 684, 688 Processing float, 88, 150
Portfolio weights, 109, 282 Product differentiation, 152
Position limit, 146 Profit, 150
Positive covenant, 146 Profitability index, 150–151
Positive float, 146 Profitability ratios, 151–152
Post, 146 Profit diagram, 150
Post audit, 146 Profit margin, 150
Power option, 146 Pro forma financial statements, 150, 152
Preauthorized check system, 146 Program trading, 152
Predictability, 273, 275–276 Projected benefit obligation (PBO), 152
Preferences, 231, 399–400, 676–678 Project finance, 152
Preferencing, 326, 488 Promissory note, 152
Preferred habitat theory, 146 Property-casualty insurance companies, 152
Preferred stock, 49, 146 Proprietorship, 152–153
Premium bonds, 146 Prospect stochastic dominance, 402
Premium burnout effect, 570 Prospect theory, 395–397
Premium on a bond, 146 Prospectus, 153, 441
Premium on an option, 137 Protective covenant, 153
Prepaid forward contract, 146 Protective put, 153
Prepaid forward price, 146 Proxy, 153
Prepaid swap, 146 Proxy contest, 153
Prepayment, 146, 569–579 Prudent man rule, 153
Prepayment function and model, 146 PSA. See Public securities association (PSA)
Prepayment penalties, 147 Public confidence, 153
Prepayment speed, 147 Public debt, 153
Present value, 147 Public issue, 153
Present value factor, 147 Publicly traded option, 153
Price and time priority, 536–537 Public offering, private placement, 153
Price discovery, 261–262, 492 Public Sale, 153
Price/earnings ratio (P/E ratio), 122, 141, 147 Public securities association (PSA), 391
Price elasticity, 147 Public warehousing, 153
Price formation, 445 Pull-to-par, 153
Price improvement, 326 Purchase accounting, 153
Price of credit, 147 Purchased call, 153
Price participation, 147 Purchased put, 153
Price risk, 147 Purchase method, 153
Price scan auction, 478 Purchasing power parity, 3, 153–154,
Price stabilization, 488 227, 243
Price takers, 147 Purchasing-power risk, 154
Price-to-book-value ratio, 123, 147 Pure discount bond, 154
Price value of a basis point, 147 Pure play method, 154
Price-variable cost margin, 147 Pure yield pickup swap, 154
Price volatility, 147, 306 Put, 17, 40, 138, 154, 162, 201
Price-weighted index, 147 Putable bonds, 154
Pricing grid, 148 Put bond, 154
Primary capital, 148 Put-call-parity, 155
Primary dealers, 148 Put option, 154
Primary market, 148 Put provision, 154
Primary reserves, 148 Puttable Bond, 155
Primary securities, 148 Puttable Swap, 155
Subject Index 995

Q Recursive preference, 266

Q ratio or Tobin’s Q ratio, 155 Red herring, 153, 159
Quadratic programming, 401, 565 Redlining, 159
Quality financial statements, 155 Reduced form, 579, 717, 723–725, 891
Quality risk, 155 Reduced-form default model, 896
Quality spread, 155 Reference CPI, 258, 259
Quantile, 155 Reference price, 15, 22, 159
Quantity risk, 156 Reforms, 331, 498, 582, 585, 838
Quanto (Cross currency derivative), 156 Refunding, 159
Quasi-arbitrage, 156 Registered bond, 159
Quasi-random sequence, 156 Registered trader, 159
Quick assets, 156 Registration statement, 159, 176, 198
Quick (acid-test) ratio, 156 Regression equation, 24, 159
Quote driven markets, 482 Regular cash dividend, 159
Regulation, 60, 95, 159, 168–169, 209, 214–216, 462, 517–518,
595, 616–617, 619, 627, 631
R Regulation A, 159, 169, 175
Rainbow option, 156 Regulation Q ceilings, 159
Random equation, 156 Reincorporation, 333–339
Random walk, 156, 400–401 Reinvestment rate risk, 159
Random walk model, 446, 450 Reinvestment risk, 53, 159
Range-forward contract, 156 REIT. See Real estate investment trust (REITs)
Rank correlation, 350–352, Relative price risk, 159
Ranking, 352–355, 397, 418, 473, 496, 546, 634, 706, 888 Relative purchasing power parity, 159–160, 245
Rank order, 129, 157 Remainder man, 160
Rank transformation, 351–355 REMIC, 160
RANs. See Revenue-anticipation notes (RANs) Reorganization, 3, 39, 101, 105, 109, 116, 160, 336, 419
Rate anticipation swap, 157 Replacement-chain problem, 160
Rate cap, 32, 157 Replacement cost, 57, 121, 160, 518, 519
Rate collar, 157 Replacement value, 155, 160, 190
Rate-hedging methods, 157 Repo, 100, 160, 162, 189
Rate of interest, 90, 157, 377–385 Repo rate, 100, 160
Rate sensitive, 16, 92, 157, 197, 203, 313 Representative heuristic, 546
Rating, 26, 27, 29, 32, 52–55, 68, 119, 125, 129, 134, 148, 154, Representative offices, 160
157–159, 178, 179, 189, 191, 214, 216, 221, 315, 318, 357, Repricing, 14, 160, 196
496, 508–510, 512, 854 Repurchase agreements, 120, 160, 189, 197
Ratings transitions, 157 Repurchase of stock, 160
Ratio analysis, 55, 69–70, 117, 132, 157, 360–362 Required reserves, 160
Rational expectations, 246, 273, 276, 501, 684 Reserve cash, 44, 160, 191
Rational expectation theory of interest rates, 157 Reserve for bank debts, 160
Ratio spread, 157 Reserve requirement ratios, 161
Real assets, financial assets, 157 Reserve requirements, 78, 111, 160–161
Real call option, 423, 428, 433, 436, 440, 441 Reserves, 10, 82, 111, 112, 128, 148, 161, 195, 214, 292, 312, 418,
Real cash flow, 157 468, 469, 508, 511, 550–554
Real estate, 8, 42, 87, 126t, 157, 387, 388, 390, 393 Reserve target, 161
Real estate investment trust (REITs), 41, 157, 387–393 Reset Date, 161
Real interest rate, 157, 243, 245, 247–251, 260, 380 Residential mortgage credit, 161
Real interest-rate parity, 252 Residential mortgages, 161
Real Investment, 157 Residual analysis, 447, 861–865
Realized compound yield, 158 Residual claim, 86, 161
Real Option, 157, 374, 421–442, 609, 815 Residual dividend approach, 161
Real risk-free rate of interest, 158 Residuals, 161, 281, 388, 447, 578, 685, 861–863
Rebalancing, 158, 201, 309, 457, 471, 721–723 Residual theory, 161
Rebate, 60, 158, 173 Residual value, 161, 388
Rebate option, 60, 158 Resistance level, 161
Receivable balance pattern, 158 Resolution Trust Corporation (RTC), 161
Receivables, 5–7, 15–16, 34, 36, 58, 80, 93, 117, 136, 144, 158, Respondent bank, 161
190–191, 198, 201, 290, 293 Restrictive covenants, 53, 161, 220
Receivables turnover ratio, 158 Retained earnings, 20, 28, 33–34, 52, 65–66, 106–107, 143, 150,
Receivership, 238, 359 161, 193, 417, 759, 857
Receiver swaption, 158 Retention rate, 161
Recombining tree, 158 Retention ratio, 70, 161
Record date, 77, 98, 158 Retractable bonds, 154, 162
Recourse, 5, 15, 144, 152, 158 Return, 3–4, 7, 10–12, 14, 72, 73, 76, 79, 94, 96, 98, 102, 107, 109,
Recoveries, 158 113, 120, 125, 128, 132, 145, 175, 239–240, 263, 275, 298,
Recovery rate, 158–159, 239, 310 308, 337, 424, 472, 516, 526
Recovery value, 158 Return distribution, 685, 686, 727, 740, 743, 872, 883
996 Subject Index

Return items, 162 S

Return on assets (ROA), 162 Safe deposit box, 165
Return on equity (ROE), 162 Safe harbor lease, 165
Return on sales (ROS), or profit margin, 162 SAIF, 165
Revenue-anticipation notes (RANs), 162 Sale and lease-back agreement, 136, 165
Revenue bond, 93, 130, 162 Sales forecast, 165
Reverse cash-and-carry, 162 Sales terms and collections, 165
Reverse conversion, 162 Sales-type lease, 165
Reverse mortgage, 162, 691–704 Sallie Mae, 165–166
Reverse purchase agreement, 162 Sample-function analysis, 166
Reverse repo, 162 Sarbanes-Oxley Act, 588–591
Reverse repurchase agreement, 162 Savings, 166
Reverse split, 161 Savings and loan associations, 166
Reverse stock split, 162 Savings banks, 166
Reversible swap, 162 Scalper, 166
Reversing trade, 162 Scatter diagram of a regression, 166
Reversion level, 162 Scenario analysis, 166–167, 170, 174
Review, 387–393, 582–584, 639–641, 795–800, 851–868, 871–889 SDRs. See Special drawing rights (SDRs)
Revolving commitment (revolver), 162 Sealed bid auction, 478
Revolving credit agreement, 162–163 Seasonality, 167
Revolving loan, 163 Seasonal liquidity needs, 167
Reward-to-volatility ratio, 163, 172 Seasonal swap, 167
Rho, 163 Season dating, 167
Riding the yield curve, 163 Seasoned new issue, 167
Rights issue, 163 Seasoned offering, 167
Rights offering, 139, 163, 179, 184 Seat, 78, 125, 167
Risk, 14, 22, 31, 52, 55, 72, 188, 367–374, 399–400, 497–498, SEC. See Securities and Exchange Commission (SEC)
605, 685–686, 731 Secondary capital, 167
Risk-adjusted, 472–475 Secondary market, 95, 167
Risk and return, 347, 516 Secondary securities, 168
Risk arbitrage, 163 Second mortgage, 168
Risk averse, risk neutral, risk lover, 164 Second mortgage bond, 168
Risk aversion, 164, 399 Second-pass regression, 168
Risk bearing, 488, 634 SEC Order Handling Rules, 329, 330t
Risk class, 164 Sector influences, 168
Risk classification, 163–164, 164t Sector loadings, 168
Risk dynamics, 280 Securities (Security), 8, 10, 15, 22, 28, 33, 49, 87, 115, 123, 135, 140,
Risk-free asset, 28, 32, 112, 164, 185 141, 148, 160, 185, 202, 214, 215, 257–262, 281, 290, 292, 368,
Risk-free investment, 164 434, 439–441, 491–494, 570, 574–576, 626, 627, 762
Risk-free rate, 164, 173, 186, 382, 436–437 Securities and Exchange Commission (SEC), 167–169, 329, 330t
Riskless portfolio, 165 Securitization, 168, 393, 846–847
Risk lover, 164 Securitized Asian Corporate Bonds, 509
Risk management, 164, 367–374, 731 Security analysis, 168
Risk management tools, 164 Security characteristic line, 168
Risk neutral, 91, 164 Security dealers, 168
Risk-neutral measure, 164 Security interest, 168
Risk-neutral probability, 164 Security market line (SML), 168
Risk-neutral valuation, 164 Security market plane (SMP), 168
Risk premiums, 79, 106, 164 Security returns, 175, 264
Risk reporting, 367, 373–374 Security selection, 168
Risk-return trade-off, 33, 165 Security selection decision, 168
Risks management, 164, 367–374 Seesaw effect, 106, 169
Risky asset, 165 Selection phase, 13, 169
Risky corporate debt, 165 Selective credit controls, 169
ROA. See Return on assets (ROA) Self-attribution, 546
ROE. See Return on equity (ROE) Self-financing portfolio, 169
Roll back, 165 Self-liquidating loans, 169
Roth IRA, 165 Sell offs, 169, 198
Rounding, 326 Semidirect finance, 169
Round lot, 165 Semistrong-form efficient market, 170
R-squared (R), 156 Semivariance, 875, 881–882
RTC. See Resolution Trust Corporation (RTC) Seniority, 170
Rule, 3, 64, 83, 107, 116, 150, 165, 329–331, 404–407, 535–542, Sensitivity analysis, 170, 174, 435–436
697–699, 836–837 Separation property, 170
Rule of, 165 Serial bond issue, 170
Run on a bank, 165 Serial bonds, 170
Subject Index 997

Serial correlation, 18, 170 Sinking fund, 175

Serial correlation (tests), 446 Size effect, 175
Serial covariance, 170 Skewness, 175
Serialization, 170 Skip-day settlement, 175
Series of options, 170 Small company offering registration, 175
Service charges, 170 Small-firm effect, 175
Service Corporation, 170 Small issues exemption, 175–176
Service-oriented economy, 170 Small open economy, 549–555
Set of contracts perspective, 170 SML. See Security market line (SML)
Settlement, 170 SMP. See Security market plane (SMP)
Settlement date, 53, 92, 170 Social accounting, 176
Settlement price, 170–171 Social responsibility, 176
SFAS-95, 835–838, 843, 847, 848 Society for Worldwide Interbank Financial Telecommunications
Shanghai stock exchange (SHSE), 321 (SWIFT), 176
Share draft, 171 Soft dollars, 176
Share-equivalent, 172 Sole proprietorship, 176
Shareholder, 171 Solicitation method, 176
Shareholder wealth, 166, 171–172 Sources and uses for funds statements, 176
Share value, 483 South Korea, 582–584, 612, 614
Shark repellent, 172 Sovereign Risk, 176
Sharpe, 172, 351–355, 706, 740, 874, 880 S&P. See Standard and Poor’s (S&P)
Sharpe Index, 352–353 S&P 500, 165, 178
Sharpe ratio, 172, 259, 342, 472–473 Spark spread, 176
Sharpe’s measure, 172 SPE. See Special purpose entity (SPE)
Shelf life, 172 Special drawing rights (SDRs), 176
Shelf registration, 172–173 Specialist, 176
Shell branches, 173 Special purpose entity (SPE), 496, 497
Shenzhen stock exchange (SZSE), 321 Speculation, 176, 213
Short, 173, 455 Speculative-grade bond, 176
Short-against-the-box, 173 Speculative profits, 447
Shortage costs, 37, 173 Speculator, 176
Short call, 173 Spin-off, 176, 198
Short forward, 173 Spontaneous financing, 176
Short hedge, 173 Spot curve, 177
Short position or hedge, 173 Spot exchange rate, 177
Short put, 173 Spot-futures parity theorem, 177
Short rate, 173 Spot interest rate, 177
Short rebate, 173 Spot market transaction, 177
Short run, 173 Spot price, 177
Short-run operating activities, 173 Spot rate, 177
Short-sale, 173 Spot trade, 177
Short sales constraints, 456, 457 Spot volatilities, 177
Short squeeze, 173, 177 Spread, 177
Short-term debt, 173, 194 Spread (futures), 177
Short-term risk-free rate, 173 Spread (options), 177
Short-term securities, 173 Spreadsheet, 177
Short-term tax exempts, 173 Spread underwriting, 177
Shout option, 60, 173 Squeeze, 177
SHSE. See Shanghai stock exchange (SHSE) Stable Distribution, 177
Side effects, 174 Stable distribution, 177
Sight draft, 42, 174 Stable dividend policy, 177–178
Sigma, 173 Stack and roll, 178
Signaling, 174, 463 Stack hedge, 178
Signaling approach, 174 Staggered-maturity plan, 178
Simple interest, 174 Stakeholders, 178
Simple interest method, 174 Stand-alone percent standard deviation, 178
Simple linear regression, 174 Stand-alone principle, 102, 178
Simple prospect, 174 Standard and Poor’s (S&P), 149, 165, 619
Simulation, 174, 372–373, 566, 770–773, 806–807, 813–823 Standard and Poor’s Composite Index, 178
Simulation analysis, 174, 821–823 Standard deviation, 134, 145, 178–179
Simulation method, 813–823 Standardized normal distribution, 179
Simultaneity, 317 Standard & Poor’s bond rating, 178
Single-country funds, 174 Standby fee, 179
Single-factor model, 175 Standby underwriting, 179
Single index model, 175 Standstill agreements, 179
Single-price auction (Dutch auction), 175 State-charted banks, 179
998 Subject Index

Stated annual interest rate, 133, 179 Subchapter S corporation, 183

Stated interest rate, 179 Sub-linear pricing functional, 453
Statement of cash flows, 179–180 Submartingale, 183
State of the world, 179 Submartingale model, 183
Statewide branching, 180 Subordinated debenture, 183
Static hedge, 180 Subordinated debt, 183
Static NPV, 180 Subordination clause, 184
Static option replication, 180 Subscription price, 184
Static theory of capital structure, 180 Substitution swap, 184
Static tradeoff hypothesis, 21, 142, 180 Sum-of-the-year’s-digit depreciation, 184
Statistical distribution method, 813–823 Sunk cost, 184
Statutory accounting, 180 Super-majority amendment, 184
Step-up swap, 180 Super-martingales, 454, 456
Stochastic differential equation, 180 Supply shock, 184
Stochastic discount factor, 297–303 Supply-side economics, 184
Stochastic dominance, 406 Support level, 184
Stochastic methods, 814, 823 Support tranche, 184
Stochastic process, 181 Surplus-budget unit, 184
Stochastic process risk, 309–310 Surplus funds, 184
Stochastic variable, 181 Sustainable growth rate, 74, 144, 184
Stock, 181–182, 219, 325–326 Swap, 6, 11, 16, 19, 22, 32, 43, 45, 47, 53–55, 57, 60, 70, 72, 91,
Stock dividend, 181, 182 102, 106, 109, 110, 114, 124, 134–135, 139, 146, 154, 155,
Stock exchanges, 181 157, 158, 161, 167, 180, 184–185, 187, 188, 237–242, 239t
Stockholder, 182 Swap agreements, 184
Stockholders’ books, 182, 187 Swap contract, 146, 184–185
Stockholders’ equity, 182 Swap rate, 185
Stock index, 181 Swap spread, 185, 240–241
Stock-index arbitrage, 182 Swap tenor, 185
Stock index futures, 181 Swap term, 185
Stock index options, 181 Swaption, 141, 158, 185
Stock investment, 185 SWIFT. See Society for Worldwide Interbank Financial
Stock market index, 181 Telecommunications (SWIFT)
Stock options, 79, 181 Swing option, 185
Stock ownership, 74, 321 SWOT analysis, 185
Stock prices, 26, 138, 336, 341 Symbiotic, 185
Stock repurchase, 181–182, 336, 463 Syndicated loan, 185
Stocks, 182, 325–326, 537–538 Syndicates, 185, 316–317
Stock selection, 182 Syndicate size, 316, 317
Stock split, 162, 182 Synergy, 412, 519–520
Stop-loss order, 182 Synthetic option, 185–186
Stop payment, 182 Systematic influences, 186
Storage costs, 182 Systematic risk, 121, 122, 134, 186
Straddle, 182, 201 SZSE. See Shenzhen stock exchange (SZSE)
Straddle rules, 182
Straight bond, 182
Straight-line depreciation, 182 T
Straight voting, 182 TAC. See Targeted amortization class (TAC)
Strangle, 182 Tailing, 186
Strap, 182 Tail VaR1, 186
Strategic planning, 183 Takatoshi Ito, 511
Stratified sampling, 183 Take-and-pay option, 185, 186
Street name, 183 Takedown risk, 186
Stress testing, 183 Takeover, 186, 335–337, 411–412, 417–418
Striking price, 79, 183 Takeover defenses, 335–337, 339
Strip, 182, 183 Takeover financing, 417–418
Strip hedge, 183 Takeover regulations, 517
Stripped bond, 183 Taking delivery, 186
Stripped of coupons, 183 Tangible equity, 186
Stripped securities, 183 Target cash balance, 187
STRIPS, 183, 220 Targeted amortization class (TAC), 186
Strong-form efficient market, 183 Targeted repurchase, 187
Structural, 645–657 Target firm, 187
Structural credit risk models, 645–657 Target payout ratio, 187
Structural default model, 645–657, 795 Target zone exchange rate, 467, 468
Structured note, 183 Tariffs, 512, 515
Style, 79, 471–472 Taxable acquisition, 187
Subject Index 999

Taxable income, 187 Trade acceptance, 190

Tax anticipation notes, 187 Trade barrier, 190
Tax books, 182, 187 Trade credit (receivables), 190–191
Tax credit, 90, 187 Trading account, 191
Tax deferral option, 187 Trading costs, 191
Tax-deferred retirement plans, 187 Trading range, 191
Tax-equivalent yield, 187 Trading rules, 329–331, 447
Tax-exemption privilege, 187 Trading system, 325, 368, 485, 491, 493, 538
Tax-exempts, 187 Trading volume, 191, 547
Tax-exempt securities, 187 Tranche, 191, 203, 492
Tax-free acquisition, 187 Transaction, 17, 19, 38, 77, 98, 191, 291, 292, 457, 496–497
Tax planning, 39, 48 Transaction cash, 38, 191
Tax Reform Act of 1986, 187 Transaction costs, 191, 573–574, 681
Tax shields, 133, 825–833 Transaction costs of refinancing and default, 571, 579
Tax swap, 187 Transactions account, 62, 191
Tax-timing option, 187 Transactions motive, 191
Taylor formula, 767–770 Transaction tax, 777–781
Technical analysis, 83, 187 Transfer pricing, 191, 786–790
Technical insolvency, 187–188 Transfer pricing (Financial institution), 191
Technicians, 188 Transfer pricing (Manufacture firm), 191
Technology and operation risks, 188 Transfer tax, 165, 779
TED (Treasury Eurodollar) spread, 188 Transition matrix, 55, 191
Temporary working capital, 188 Transit item, 191
Tender offer, 188 Treasurer, 191
Tenor, 185, 188 Treasury bill futures, 192
Term bonds, 188 Treasury bills (T-bill), 26, 186, 192, 203, 251, 290
Terminal value, 128, 189 Treasury bond, 192
Term insurance policy, 188 Treasury bonds futures, 192
Term loan, 188 Treasury inflation-indexed securities, 192
Term premiums, 188 Treasury inflation protected securities (TIPS), 192
Term repo, 189 Treasury note. See Treasury bond
Term RPs, 189 Treasury note futures. See Treasury bonds futures
Terms of sale, 189 Treasury stock, 160, 192
Term structure of interest rates, 189 Treasury STRIPS, 220
Term structure volatility, 198 Tree, 192, 800, 813–823
Thansin Shinawatra, 508 Trend analysis, 192
The Actual Size Rule, 329 Treynor, 352–354, 472–475, 639–640, 707
The Asian bond market initiative (ABMI), 508–509 Treynor index, 351–355
The Cox, 380 Treynor’s measure, 192
Thermodynamics, 565, 567, 568 Triangular arbitrage, 192
The Sixteenths Minimum Increment Rule, 329, 330 Trinomial tree, 192
Theta, 189 Triple-witching hour, 192
Third-country bills, 189 Trough, 193
Third market, 189 Trust department, 193
Thrifts, 189 Trustee, 193
Tick, 189, 204 Trust receipt, 193
Time decay, 189 Truth-in-lending, 193
Time drafts, 21, 112, 189 Two-tier corporate structure, 589–590
Time series analysis of financial ratios, 189
Time-series tests, 746
Times interest earned, 33, 190 U
Time spread, 189 UBPR, 193
Time value (of an option), 189 Unbiased forward rate hypothesis, 251, 253
Time value of money, 189 Unbundling, 29, 193
Time-weighted return, 189 Uncommitted line of credit, 193
Timing adjustment, 190 Unconditional performance, 300
TINSTAAFL principle, 190 Uncovered-interest parity, 243
Tobin’s Q, 155, 190, 518, 519, 521, 856 Underlying asset, 193
Tobin tax, 778 Underlying variable, 193, 437–439
Tombstone, 190 Underpricing, 193
Total asset turnover ratio, 16, 190 Underreaction, 546
Total cash flow of the firm, 190 Undervaluation, 518–519
Total-debt-to-total-assets ratio, 190 Underwrite, 193
Total return swap, 190, 239–240 Underwriter, 193
Total risk, 190 Underwriting, underwriting syndicate, 193
T-period holding-period return, 186 Undivided profits, 193
1000 Subject Index

Unearned interest, 194 Volatile deposits, 197

Unemployment, 194 Volatile funds, 197
Unemployment rate, 194 Volatility, 197, 282, 306, 323, 368, 379, 435–436, 440, 713–725,
Unexpected losses, 194 729, 740–743, 778–780
Unfunded debt, 194 Volatility (options), 198
Unified modeling framework, 897 Volatility matrix, 197
Uniform Limited Offering Registration, 194 Volatility risk, 198
Unilateral transfers, 194 Volatility skew, 198
Unique risk, 134, 194 Volatility smile, 198
Unitary Corporate Structure, 590 Volatility swap, 198
Unit banking States, 194 Volatility term structure, 198
Unit benefit formula, 194 Volatility transmission, 713–725
Unit investment trust, 194 Volume, 198
Unit labor cost, 559, 560, 563 Voluntary restructuring, 198
Unit of production method, 194 VRMs, 198
Unit volume variability, 194
Universal financial institution, 194
Universal life insurance, 194 W
Universal life policy, 195 Wages, 557–563
Unseasoned new issue, 195 Waiting period, 198
Unsystematic risk, 195 Warehousing, 83, 153, 187
Up-and-in, 195 Warrant, 49, 198–199
Up-and-out, 195 Wash, 199
Up-and-out-option, 195 Weak-form efficient market, 199
Uptick, 195 Wealth effect, 418, 516
Usury ceilings, 195 Wealth effect (of saving and interest rates), 199
Utility function, 195 Weather derivatives, 199
Utility theory, 195, 408 Web-based brokers, 347
Utility value, 195 Weekend effect, 199
Weighted average cost of capital, 199, 828–829
Weighted average life for mortgage-backed securities, 200
V Weighted cost of funds, 200
VA. See Veterans Administration (VA) Weighted marginal cost of fund, 200
VA loan, 195 Weighted unbiased estimator, 200
Valuation, 440, 569–579, 825–832 Well-diversified portfolio, 81, 125, 140, 186,
Valuation models, 348–349, 381, 422 195, 200
Valuation reserve, 195 Whipsawing, 201
Valuation uncertainty, 571, 815 White knight, 200
Value additivity (VA) principle, 195 Whole-life insurance policy, 200
Value-at-risk, 56, 186, 195–196, 307, 368–372 Wiener process, 200
Value function, 399 Wild card play, 200
Value Line, 282, 565, 885 Wilshire equity index, 200–201
Value loss, 221–222 Window dressing, 201
Vanilla option, 196 Winner’s curse, 201
Variable annuities, 196 Wire transfers, 201
Variable cost, 194, 196 With constraints, 566
Variable life policy, 196 Without constraints, 566
Variable rate securities, 196 Working capital, 7, 85, 143, 180, 201, 287–295
Variable universal life, 196 Working group, 201
Variance, 196 Workout period, 201
Variance rate, 196 World investable wealth, 201
Variance ratio, 484 Writing a call, 201
Variance reduction procedures, 196 Writing an option, 201
Variation margin, 196 Written call, 201
Vasicek model, 381, 384 Written put, 201
Vector autoregression, 451 Written straddle, 201
Vega, 197
Vega-neutral portfolio, 197
Vehicle currency, 197 X
Venture capital, 197 X efficiency, 202
Vertical acquisition, 197
Vertical combination, 197
Vertical spread, 119, 197 Y
Vested benefits, 197 Yankee bonds, 202
Veterans Administration (VA), 195, 390 Year-end selling
Video conferences, 197 Yield, 202, 260, 306–310, 377–384
Subject Index 1001

Yield curve, 99, 100, 108, 120, 163, 189, 202, 309 Zero-cost collar, 203
Yield curve swap, 202 Zero coupon bonds, 203, 219–225
Yield-giveup swap, 202 Zero-coupon interest rate, 203
Yield-pickup swap, 202 Zero-coupon swap, 203
Yield rate, 202 Zero-coupon yield curve, 203
Yield to maturity, 202 Zero gap, 203
Zero-investment portfolio, 204
Zero-plus tick, 204
Z Zero rate, 204
Zero-balance accounts, 203 Z-score model, 203, 360
Zero-beta portfolio, 203, 343 Z-tranche, 203
 Author Index

A Ang, J.S., 417, 659, 765, 766

Abel, A.B., 266, 679 Angel, J., 536, 537, 542
Abraham, F., 562 Anson, M., 242
Abreu, D., 660, 667 Antikarov, V., 422
Abuaf, N., 247 Arbel, A., 131
Acharya, V., 657 Archer, S.H., 352
Acharya, V.V., 311 Arellano, M., 747
Adams, L., 786 Arrow, K., 399, 401
Adler, M., 230, 234, 235 Arrow, K.J., 399
Admati, A., 281 Arthur, W.B., 503
Aggarwal, N., 638 Arugaslan, O., 638
Aggarwal, R., 853, 858 Arzac, E.R., 318, 828–830
Agrawal, A., 418, 591, 602 Asness, C.S., 545
Ahlgren, R., 695 Asquith, P., 316, 418
Ahn, C.M., 525, 528 Audet, N., 504
Ahn, D.H., 297, 299–301 Au-Yeung, S., 714
Ahn, H-J., 325 Avera, W., 484
Ahn, S.C., 747, 750 Avery, R.B., 361
Aitken, M., 326 Ayache, E., 796
Aiyagari, S.R., 676 Azzi, C.F., 318
Akerlof, G., 461
Akgiray, V., 527
Alangar, S., 854, 858 B
Alba, P., 507 Baba, N., 678
Albo, W., 417 Bachelier, L., 530, 685
Albuquerque, R., 245 Bacidore, J., 325
Alderson, M.J., 832 Bae, S., 855
Alexander, L., 697 Bagehot, W., 488
Alexander, S.S., 447 Bagnani, E., 853, 855, 859, 866
Alexander, T.O., 636 Bahnson, P.R., 844
Ali, A., 836 Baillie, R.T., 250, 714, 872, 878, 880, 885
Aliber, R.Z., 562 Bakashi, G., 302
Allen, F., 318, 851, 855 Baker, K.H., 539
Allen, L., 242, 318, 851, 855, 858, 861, 863 Baker, M., 803
Almazan, A., 660 Balin, B.J., 616, 617
Alpert, M., 803 Ball, C.A., 326, 527, 529
Altinkilic, O., 854 Ball, R., 447
Altman, E.I., 55, 360–362, 364, 416 Baltagi, B., 779, 780
Alvarez, F., 676 Bandi, F.M., 529
Amemiya, T., 361–363 Banerji, S., 216
American Institute of Certified Public Accountants (AICPA), 844 Bansal, R., 277, 676
Amihud, Y., 483, 488, 778 Baratta, P., 396
Amin, K., 907 Barber, B.M., 804
Ammann, M., 638, 800 Barberis, N., 263, 274, 546, 660, 676, 803
Amram, M.H., 422, 423 Barclay, M.J., 331, 539, 542, 840, 844
Amsterdam, 477 Barnea, A., 318
Andersen, L., 498, 800 Barnett, M., 347, 348
Anderson, R., 858 Barney, L. Jr., 854, 858, 860
Anderson, R.I., 710 BarNiv, R., 364
Andersson, H., 429 Barro, R.J., 555, 563
Andres, P., 857, 858 Barth, J.R., 207, 212, 213, 217, 604
Andrews, M., 563 Barth, M.E., 604

C.-F. Lee and A.C. Lee (eds.), Encyclopedia of Finance, DOI 10.1007/978-1-4614-5360-4, 1003
# Springer Science+Business Media New York 2013
1004 Author Index

Bartlett, W.W., 391 Blinder, A., 550, 555

Bartter, B.J., 25 Blinder, A.S., 555
Barua, S.K., 634 Bloomberg, 614, 615, 617, 737
Bar-Yosef, S., 804 Bloomfield, R., 780
Bates, D.S., 526, 530 Blum, M., 358
Batten, D.F., 502 Blume, L., 547
Baum, C.F., 247, 250 Blume, M., 447, 811
Bauman, W.S., 635 Blume, M.E., 351, 811
Baumann, A.O., 804 Bodie, Z., 312
Baumol, W.J., 796–798 Bohn, J., 647
Bawa, V.S., 345 Bollerslev, T., 250
Baysinger, B., 334, 335 Bolton, P., 319
Bazerman, M.H., 804 Bonini, C.P., 814, 816
Beatty, A., 316 Boot, A., 510
Beaver, W., 360 Boot, A.W., 317, 318
Beaver, W.H., 836 Booth, G.G., 527
Bebchuk, L.A., 334, 337, 338, 601 Booth, L., 825
Beck, T., 318 Born, K.E., 634
Becker, C., 281, 283 Boudreaux, K.J., 756
Becker, G., 266, 348 Boudry, W., 297, 301, 302
Beckers, S., 765 Bowen, R., 836
Beckmann, D., 637 Boyle, G., 856, 858, 861
Beebower, G., 483 Boyle, P., 457
Beja, A., 264 Bradley, C.M., 208
Bekaert, G., 243, 250, 253, 254 Bradley, M., 388, 416, 418
Bélanger, A., 891, 892, 894 Branson, W.H., 250
Beltratti, A., 684 Braun, P., 266
Benartzi, S., 401, 404, 676 Brealey, R., 825, 828
Ben-David, I., 804 Brealey, R.A., 358, 365, 412, 413, 417, 706
Benefield, J.D., 705 Breeden, D., 265, 267, 528, 750
Benet, B.A., 872, 881, 886 Brennan, M.J., 264, 302, 309, 381, 385, 421, 483, 570, 572, 796, 799
Bennett, P., 539 Brenner, M., 765767, 775
Benninga, S., 259 Brent, R.P., 432
Bensaid, B., 454, 457 Brick, I.E., 755, 756, 758
Bera, A.K., 888 Brickley, J.A., 601
Berger, A.N., 316, 318 Brigham, E.F., 220, 415, 796, 797
Bergman, N.K., 804 Brimmer, A.F., 608
Berk, J., 268 Bris, A., 660
Bernanke, B., 550, 555 Britten-Jones, M., 344
Bernardo, A., 804 Briys, E., 799
Berner, R., 632 Brockman, P., 350
Bernstein, P., 393, 483 Broome, L.L., 216
Bertoni, A., 636 Brotherton-Ratcliffe, 156
Bertrand, P., 729, 733 Brous, P., 853, 858
Besanko, D., 319 Brown, D.T., 418
Bessembinder, H., 326, 331 Brown, F.E., 634
Best, M.J., 345 Brown, J.D., 804
Bester, H., 319, 320 Brown, K., 29
Bethel, J.E., 602 Brown, P., 326, 447
Betker, B.L., 832 Brown, S., 676, 680
Bhagat, S., 601 Brtmetti, G., 636
Bharath, S.T., 647 Brueggeman, W., 391
Bharati, J.S., 637 Bruner, R.F., 582
Bhargava, R., 635 Brunnermeier, M.K., 660, 667
Bhattacharya, P., 714 Bu, Q., 638
Bhattacharya, S., 265, 281 Bubnys, E.L., 885
Bhide, A.V., 425 Buckland, C., 326
Bierman, H., 220 Buffum, D., 800
Bierwag, G.O., 308–310, 312, 313 Bulow, J., 358, 365
Billingsley, R.S., 582, 583 Burgess, R.C., 351
Birnbaum, M.H., 398, 407 Burgstahler, M.D., 213
BIS, 59, 188, 500, 598, 600–602, 604–607 Burmeister, E., 268
Bitler, M.P., 806, 811 Burton, F.N., 608
Black, F., 343, 405, 453, 645, 705, 717, 740, 746, 750, Bushman, R.M., 604
765, 766, 891, 894 Bushyhead, J.B., 804
Blake, C.R., 633 Busse, J., 284
Author Index 1005

Butler, H.N., 334, 335 Chen, Q., 804

Byrd, J., 856, 858, 867 Chen, R.R., 654, 891
Byrne, G.D., 482 Chen, S-H., 503
Chen, S.N., 351, 352, 473, 804
Chen, S.S., 851, 871, 872, 874, 875, 884
C Chen, Y., 281, 283, 297–302
Cadle, J., 727, 742 Chen, Y-M., 323
Caglayan, M., 250 Chen, Z., 281, 283, 454, 455, 457
Calmfors, L., 562 Cheung, C.S., 872, 875, 884, 885
Camdessus, M., 585 Cheung, Y.W., 247, 250, 451
Camerer, C., 803 Chiang, T.C., 243, 247–248, 250, 254
Campbell, H.R., 804 Chidambaran, N.K., 654
Campbell, J., 349, 659–661, 780 Chiesa, G., 317
Campbell, J.Y., 227–229, 233, 245, 266, 268, 274–276, 344, 676 Chiu, C.L., 872, 876, 888
Cao, C.Q., 325 Chng, M., 714
Cao, H.H., 297, 299–301 Cho, C.D., 230
Caouette, J.B., 242 Cho, M., 853, 855, 858, 861, 865, 866, 868
Capozza, D., 388 Choe, H., 325
Caprio, G., 212, 217 Choi, Y.K., 637, 640
Carache, B., 312 Chopra, V.K., 345
Carayannopoulos, P., 800 Chordia, T., 323
Carey, M.S., 318, 319 Chou, W.L., 872, 879, 880
Carhart, M.M., 302, 635 Choudhry, M., 242
Carleton, W., 867 Chowdhury, A., 556
Carleton, W.T., 309 Chretien, S., 300
Carline, N., 593 Christensen-Szalanski, J.J., 804
Carling, R.G., 563 Christie, W.G., 331, 492
Carlson, M., 660 Christopher, J.W., 550
Carpenter, J.N., 282, 311, 656, 811 Christopherson, J.A., 280, 283, 303, 472
Carrera, J.M.,450 Chu, P.K., 706
Carter, R., 856, 858, 861 Chu, Q.C., 259–262
Cary, W., 334 Chua, C.T., 705
Cassar, G., 804 Chua, J.H., 417
CBS News, 631 Chui, A.C.W., 545, 547
Cebenoyan, A., 851, 855, 857, 858, 861, 863 Chung, D., 350
Cecchetti, S.G., 872, 875, 878, 880, 884, 885 Chung, K., 325, 326
Cesari, C., 642 Chung, R., 602
Cesari, R., 774 Chung, T., 789
Chacko, G., 533 Chuppe, T., 507
Chadha, S., 592 Chuwonganant, C., 326
Chakravarty, S., 325 Claessens, S., 509
Chamberlain, G., 269 Clark, P.K., 684
Chambers, D.R., 309, 310, 756, 800 Clarke, R., 415
Chan, K., 545 Cliff, M., 300
Chan, K.C., 277 Coates, J.C., 637
Chan, W.H., 531 Cochrane, J.H., 250, 266, 268, 275, 298, 300,
Chan, Y., 319 301, 676, 679, 747, 749
Chance, D., 765, 766 Coco, G., 318
Chance, D.M., 310 Coggin, T.D., 355
Chander, R., 637 Cohen, A., 334, 337, 338
Chander, S., 636 Cohen, A.H., 220
Chang, H.S., 857 Cohen, K.J., 482, 536
Chang, H.Y., 640 Coleman, A.D.F., 316
Chang, J.R., 227, 230, 235 Coleman, J.W., 676
Chang, M., 364 Coles, J., 853, 857, 858
Chang E.C., 283 Coles, J.L., 601
Chapman, D., 660 Collin-Dufresne, P., 646, 651–652
Chatterjee, S., 419 Collins, B., 705
Chatusripitak, N., 510, 511 Comer, G., 637
Chen, C.J.P., 604 Compbell, J.Y., 447
Chen, G-M., 323 Conn, R.L., 518
Chen, H.Y., 755, 760 Connell, F., 518
Chen, L., 804 Connor, G., 267,–269, 279, 297, 344
Chen, M., 725 Conrad, J., 275, 447, 547
Chen, N., 268 Conroy, R., 536
Chen, N-F., 268, 277, 279 Constantinides, G.M., 264, 266, 424, 425, 676, 679–681
1006 Author Index

Cook, D., 854, 855, 858 Deakin, E.B., 361

Cooper, A.C., 804 Deb, S., 698
Cooper, I., 828, 829 Deber, R.B., 804
Cooper, J., 348 DeBondt, W., 275
Cooper, K., 484 DeBondt, W.F.M., 660, 803
Cooper, R., 208 Debreu, G., 684, 705
Cooperman, E., 857, 858 Dechow, P.M., 660, 836
Copeland, T., 282, 488 Degryse, H., 319
Copeland, T.E., 412, 417, 422, 706 Dekker, T.J., 432, 433
Cordella, T., 537 DeLong, J.B., 660
Cornell, B., 255, 282, 297, 582 Demirguc-Kunt, A., 582, 583
Cornelli, F., 666 Demsetz, H., 487, 852
Cornett, M.M., 393 Denis, D., 856, 858
Corning, J., 260 Dennis, S.A., 316–318
Corporate Governance Code Monitoring Committee, 596 Deo, M., 638
Corrado, C.J., 765, 768–770, 774–776 Department of Housing and Urban Development
Cortez, B.S., 777 (HUD), 691–694, 699
Cosslett, S.R., 363, 364 Derman, E., 180, 831
Couch, R., 830 Desai, A., 416
Coughenour, J., 326 Detemple, J., 457
Counsell, G., 359 Detragiache, E., 209, 319
Covitz, D., 318, 832 Diamond, D.W., 208, 565, 602, 854
Cox, J., 445, 528, 895 Diamond, P., 804
Cox, J.C., 267, 318, 381, 424, 426, 442, 455, 528, 529, Dichev, I.D., 316
638, 646, 648, 796, 799, 800, 891, 894, 895 Dickey, D.A., 879
Coyne, C., 666 Disyatat, P., 616
Cragg, J.G., 267 Dittmar, R.F., 297
Cramer, J.S., 363, 527, 529 Dixit, A.K., 566
Cranley, R., 432 Djankov, S., 509
Cremonini, D., 742 Djarraya, M., 867
Crosbie, P., 647 Do, B.H., 729
Crum, R.L., 872, 875 Dodd, P., 334, 416, 418
Cumby, R., 251, 283 Doherty, J., 219
Cumby, R.E., 230, 251, 283, 473, 555 Dominguez, K.M.E., 452
Curcio, R., 326 Domowitz, I., 250, 542
Donaldson, G., 418
Donaldson, J.B., 676
D Donaldson, J.M., 811
D’Agostino, R.B., 888 Doncel, L.M., 705
Dahl, F.R., 608 Dothan, M., 825
Dahlquist, M., 281, 297, 299–301 Doukas, J., 518
Daines, R., 335, 601, 851, 858, 867 Doukas, J.A., 804
Daley, L.A., 836 Dow, J., 660
Dalla, I., 507 Dow Jones Credit Suisse Hedge Fund Indexes (USD), 624
D’Amico, S., 260 Dowell, R., 811
Damodaran, A., 829 Dowla, A., 556
Daniel, K., 297, 546, 547, 676 Doyle, J.T., 316
Daniel, K.D., 547, 804 Drezner, Z., 430, 431, 433, 441
Daniel, N., 858 Droms, W.G., 635
Danielson, M.G., 601 Drost, F.C., 532, 533
D’Anton, L.J., 872, 874884 Drtina, R., 786
D’Antonio, L., 99, 714, 872, 874, 884 Duan, C.-W., 421, 425, 441
Das, S.R., 527, 528 Duarte, J., 736
Datar, S., 791 Dudley, W.C., 260
Daves, P.R., 220 Duffie, D., 242, 264, 529, 530, 660, 676, 680, 892
Davidson, A.S., 571 Duffy, J., 502
Davis, G.F., 602 Dumas, B., 230, 234, 235
Davis, M., 796 Dunkelberg, W.C., 804
D’Avolio, G., 660 Dunn, K.B., 266, 571
De Bruyne, K., 562 Dunn, O.J., 361
De Jong, A., 872, 875, 884, 887 Dunn, P.C., 634
De Roon, F., 872, 875, 884, 887 Dutta, M., 609
De Santis, G., 230, 250, 345 Dybvig, P., 267, 454, 457
de Varenne, F., 799 Dybvig, P.H., 208, 267, 344
Author Index 1007

E Ferruz, L., 709

Easley, D., 262, 323, 483 Ferson, W.E., 230, 263, 265–268, 273, 275–277, 279–284,
Easterbrook, F., 334 297–299, 301–303, 747–749
Easterbrook, F.H., 334, 414 Fidler, S., 496
Easterwood, J., 855 Field, L., 335, 853, 858, 860
Eccles, R., 787, 789 Fieten, P., 829
Eckbo, E., 804 Figlewski, S., 872, 875, 878, 880, 884, 885
Economides, N., 482 Financial Accounting Standards Board (FASB), 83, 187, 836
Ederington, L.H., 714, 871, 872, 885, Finger, C.A., 835
Edlin, A., 789 Finnerty, J.E., 287
Edward, R.J., 629 Firth, M., 416
Edwards, E., 638 Fischel, D.R., 334
Edwards, W., 396 Fischer, E.O., 830, 832
Eichenbaum, M.S., 266 Fischer, S., 581, 582
Eisenbeis, R.A., 361 Fischhoff, B., 804
Eisenbeis, R.O., 364 Fishburn, P.C., 397, 875
Eisenberg, T., 593 Fisher, E.L., 247, 582
Eiteman, D.K., 611 Fisher, J., 391
Elango, R., 640 Fisher, L., 447
Elgers, P., 4 Fishman, M.J., 418
Eling, M., 636 Flannery, M., 318
Elsasser, R., 260 Flannery, M.J., 313, 651
Elton, E.J., 400, 633 Fleisher, B.M., 323
Emery, D.R., 828 Fleissig, A.R., 247
Emery, R.F., 507 Fleming, J.M., 555
Engel, C., 243 Fletcher, J., 297, 302
Engle, R., 715, 879 Fluck, Z., 666
Engle, R.F., 886 Foerster, S.R., 276, 747, 748
Eom, Y.H., 896, 907 Fong, H.G., 309, 310
Epperson, J.F., 391 Fooladi, I., 305, 309, 310, 312
Epstein, L.G., 228, 229, 232, 266, 676, 678, 811 Forbes, D., 297, 302
Erev, I., 397 Forsyth, P.A., 796
Ergener, D., 180 Fosberg, R.H., 603
Errunza, V., 228 Foster, D., 275
Esho, N., 316 Foster, G., 358
Estep, T., 735 Foucault, T., 537
Esty, B., 317 Francioni, R., 477, 482, 484, 491, 493, 494
Eun, C., 793 Francis, J.C., 352, 565
Eun, C.S., 634 Frank, J.D., 804
Europe Economics, 617, 619 Frankel, J., 450
Evans, J.L., 352 Frankel, J.A., 247, 250, 253
Evans, M., 451 Frankfurter, G.M., 345
Evans, M.D.D., 277 Frankle, A.W., 796, 798
Ezer, M.S., 260 Fratianni, M., 253
Ezzamel, M., 361 Frecka, T.J., 361
Ezzell, J.R., 826 French, K., 274, 275, 547, 705, 746
French, K.R., 268, 301, 302, 447, 451, 547, 705, 746, 763
Frenkel, J.A., 247
F Friedman, H., 804
Fabbozzi, F.J., 221 Friedman, M., 399, 402, 409
Fabozzi, F., 666, 706 Friend, I., 351, 634, 811
Faff, R., 705 Froot, K., 780
Faff, R.W., 729 Froot, K.A., 243, 250, 254
Falloon, W., 313 Frost, P.A., 565
Fama, E.F., 245, 251, 253, 254, 268–271, 280, 301, 302, Fudenberg, D., 416
344, 351, 395, 445, 447, 547, 582, 603, 634, 641, Fuller, W.A., 879
685, 705, 746, 752, 764, 852 Funk, S.G., 400
Fan, J.P.H., 509
Fan, K.K., 872, 879
Farber, A., 828 G
Farmer, J.D., 502 Gabaix, X., 676
Farnsworth, H., 272, 281, 283, 297, 299–302 Gabriel, J.R., 432
Farrell, C., 350 Gadarowski, C., 747, 750
Fernandes, C., 796 Gallinger, G.W., 288
Fernandez, P., 829 Gallo, J., 635
Ferrell, A., 334 Gannon, G.L., 713, 714, 717
1008 Author Index

Garcia, G., 208, 209 Gravelle, T., 504

Garella, P.G., 319 Green, C., 779
Garleanu, N., 660 Green, C.J., 323
Garman, M., 455 Greene, J., 528, 529
Garman, M.B., 729 Greene, W.H., 363
Garman, M.S., 765 Greenspan, A., 581
Garrison, R.H., 788 Gregory, A., 418
Gelbard, E.M., 442 Grieves, R., 259
Genz, A., 430 Griffin, D., 804
Geppert, J.M., 882, 887 Griffiths, W.E., 362
Gerard, B., 230, 250 Grinblatt, M., 267, 268, 282–283, 297, 298, 344, 473,
Gerber, H.U., 831 545, 546, 633, 634, 804, 830
Gertler, M., 676 Gromb, D., 660
Gertner, R., 418 Gropp, R., 207
Gervais, S., 804 Grossman, H.I., 555
Geske, R., 422, 426–428, 646, 649, 651, 652, 891–894, 896, 907 Grossman, S.J., 265, 450, 488, 504
Ghosh, A., 856, 858, 860, 872, 879, 886 Groth, J., 484
Gibbons, M.R., 268, 276, 344, 745, 746, 753 Gruber, M.J., 400, 565
Gibbs, P.A., 414, 415 Guedes, J., 318
Gibson, S., 325 Guiso, L., 319
Gillet, R., 828 Gullett, N.S., 635
Gilovich, T., 804 Gupta, A., 636
Gilson, S.C., 417, 418, 832 Gupta, M., 628
Gimein, M., 348 Gupta, M.C., 761
Ginnie Mae, 82, 94, 391, 691–704 Gupta, O.P., 636
Giovannini, A., 228, 248, 254
Glascock, J., 390
Glassman, D., 303 H
Glassman, J., 349 Habermeier, K., 780
Glen, J., 283 Hackbarth, D., 832
Glosten, L.R., 488, 828–830 Hadar, J., 396
Gode, D.K., 503 Hahn, F.H., 562
Godfrey M.D., 447 Hakanoglu, E., 729
Goedhart, M., 825 Hakansson, N.H., 507, 511
Goel, A.M., 804 Hakkio, C.S., 250
Goetzmann, W.N., 302, 633, 660 Haldeman, R.G., 364
Gogoi, P., 350 Hallerback, W.G.P.M., 765, 766
Gokey, T.C., 250 Halpern, P., 418, 866, 868
Goldfeld, S., 867 Hambrick, D., 804
Goldsmith, R., 4507 Hameed, A., 545
Goldstein, I., 804 Hamer, M.M., 362
Goldstein, M., 3216 Hamidi, B., 742
Goldstein, R., 646, 830–832 Hampton, J.J., 412
Goldstein, R.S., 646, 651, 656, 804 Han, S., 832
Gómez-Bezares, F., 705, 708, 709 Hand, J.R.M., 836
Gonedes, N., 78 Handa, P., 492
Gonzales, P., 660 Hannan, T.H., 318
Goodhart, C., 326 Hanoch, G., 396
Goodman, L.S., 220 Hansen, L.P., 253, 264, 265, 275, 276, 298–303, 577,
Gordon, D.B., 563 677, 680, 745, 747, 753
Gordon, J., 755, 756, 759 Hansen, R., 853
Gordon, M., 757 Hara, C., 457
Gordon, M.J., 400 Harhoff, D., 318
Gorman, W.M., 264 Harrington, J.E., 416
Gorton, G., 660 Harris, J., 492
Gottesman, A.A., 316 Harris, L., 326, 537
Goudie, A.W., 415 Harris, M., 660
Gourieroux, G., 525 Harris, R.S., 828
Goyal, A., 275 Harris, S., 326
Graham, J.R., 825 Harrison, M., 264, 298, 453
Grammatikos, T., 872, 879, 885 Hart, M.L., 415
Granger, C.W., 879 Hart, P.E., 415
Granger, C.W.J., 438 Hartigan, J., 868
Grant, D., 280 Harvey, C.R., 266, 268, 275, 276, 749
Grau, P., 705 Hasbrouck, J., 484
Grauer, R.R., 345 Haslem, J.A., 638
Author Index 1009

Hassett, K., 349 Howison, S., 502

Hatch, B., 539 Hsieh, D., 277
Hathorn, J., 364 Hsin, C.W., 714, 872, 874, 876, 884, 887, 888
Hau, H., 779 Hu, S., 779
Haugen, R., 318 Hu, X., 250
Hawkins, C.A., 796, 798 Huang, H.H., 800
Hayashi, F., 747 Huang, R., 331
Hayward, M., 804 Huang, R.D., 247
He, H., 661, Hubbard, G.R., 637
He, Y., 321–323, 325, 326, 329, 331 Hubbard, R., 853, 858, 861
Heal, G.M., 266 Huber, I., 685
Healey, P.B., 288 Huberman, G., 268
Heaton, J., 266, 676 Hudson, C.D., 858, 859, 866
Heaton, J.B., 804 Hudson, J., 358, 359
Hedge Fund Research, Inc. (HFRI), 624, 632 Hughes, W.T., 390
Heinkel, R., 832 Hui, B., 484
Heitfield, E., 318 Huizinga, H., 582, 583
Hek, P.A., 811 Hull, J.C., 424, 428, 892, 895
Helwedge, J., 907 Hung, J.C., 872, 876, 884, 888
Helwege, J., 316, 365 Hung, M-W., 227, 228, 230
Hendershott, T., 539 Hutton, A.P., 660
Henderson, J.M., 195 Hvidkjaer, S., 483
Henderson, R.A., 417 Hylleberg, S., 882
Hendriksson, R., 297
Henriksson, R.D., 281, 283
Henriksson, R.T., 448 I
Henry, T., 282 Iati, R., 631
Hermalin, B.E., 593, 603 Ibbotson, R.G., 439
Herman, E.S., 635 Imerman, M.B., 645
Hernandez, L., 507 IMF, 176, 207, 208, 469, 470, 581–585, 610, 611, 614
Herold, U., 731, 742 İmrohoroğlu, S., 682
Heron, R., 335–338 In, F., 705
Heron, R.A., 333 Ingersoll, J., 267, 796, 799
Herring, R.J., 510–512 Ingersoll, J.E. Jr., 274, 309, 380, 442, 895
Herskovitz, M.D., 571 Institute of International Finance, 619
Hertz, D.B., 814, 821 Irwin, F.W., 804
Hertzel, M., 853, 859 Isard, P., 450
Hester, D.D., 318 Ito, T., 509
Heubel, B., 484 Ivkovic, Z., 302
Hickman, K., 856, 858, 866 Izan, H.Y., 326
Hicks, J.R., 305, 306
Higgins, R.C., 759–761
Hill, R.C., 362 J
Hillier, F., 814, 815 Jablecki, J., 616
Himmelberg, C., 853, 858, 861 Jackson, D., 277, 281, 283, 297, 299–302
Hindy, A., 454, 457 Jacobs, K., 682
Hirshleifer, D., 418 Jacoby, G., 305, 310, 311
Hirshleifer, J., 787 Jaffe, J.F., 221, 918
Hlawka, E.M., 431 Jagannathan, R., 66, 267, 275, 277, 300–302, 677,
Ho, L.C., 706, 733, 742–743 745, 748–750, 753
Ho, M.S., 531 Jaggi, B., 587, 604
Ho, R.Y.K., 512 Jahera, J. Jr., 213
Ho, T., 484, 492, 531, 796, 800 James, C.M., 313
Ho, T.S.Y., 381, 895 Jamshidian, F., 892
Hodges, C.W., 705 Janicki, A., 685
Hodrick, R.J., 243, 247, 250, 253, 254, 275, 276, 300 Jarque, C.M., 888
Hogan, K., 228, 235 Jarrow, R.A., 457, 796, 891, 892, 903
Holderness, C., 852, 858 Jasiak, J., 525
Holmstrom, B., 789, 805, 806 Jayadeve, M., 635
Homan, M., 359 Jeffries, P., 502
Hommes, C.H., 502 Jegadeesh, N., 275, 545, 546
Hong, H., 546, 547 Jen, F.C., 351
Hopewell, M.H., 49, 306 Jennings, R., 325, 326, 539
Hopwood, W.S., 361 Jensen, M.C., 283, 302, 333, 413, 414, 416, 418, 448, 460,
Horngren, C., 791 472, 519, 521, 593, 708, 746, 752, 852
Howard, C.T., 714, 872, 874, 884 Jensen, M.R.H., 418
1010 Author Index

Jenter, D., 804 Kazemi, H., 283

Jermann, U., 676 Keasey, K., 361, 853, 858, 860, 866
Jiang, C., 250, 254 Keeley, R.H., 422, 427
Jiang, W., 284 Keenan, D.C., 388, 391, 570–572, 574
Jobson, J.D., 268 Keim, D.B., 230, 276
Joh, S., 853, 858, 866 Kelly, S., 439, 440
Johannes, M., 529 Keloharju, M., 804
Johansen, S., 879 Kelsch, M., 695
John, K., 316, 418 Kemna, A.G.Z., 427
Johnson, H.E., 646, 652 Kemsley, D., 825
Johnson, K.H., 352 Kendall, M.G., 447
Johnson, L.L., 871, 873, 884, 885 Kennedy, D., 867
Johnson, N.F., 502 Kennedy, P., 362
Johnston, E.T., 571 Keoun, B., 617
Johnston, J., 867 Keren, G.B., 804
Jones, C., 326 Keynes, J.M., 777, 778
Jones, C.M., 660, 729, 740, 779 Khan, M.S., 616, 617
Jones, E.P., 645, 651 Khang, C., 308
Jones, J., 317 Khang, K., 282–284, 297
Jones, L.V., 400 Kharbanda, O.P., 412, 413, 415
Jones, R., 740 Khatdhate, D., 507
Jordan, B., 844 Khurshid SMZ, R., 638
Jorian, P., 247, 250 Kiang, L.H., 511
Jorion, P., 247, 254, 345, 374, 532 Kidd, J.B., 804
Joshi, S., 502 Kiefer, N., 323
Jou, G.D., 765 Kieschnick, R., 854, 858, 866–868
Jouini, E., 454–456 Kiker, B.F., 811
Joy, M.O., 364 Kim, C., 851, 855
Ju, N., 651, 656, 830–832 Kim, D.H., 745, 752
Judge, G.G., 362 Kim, E.H., 602
Junkus, J.C., 877, 885 Kim, H., 415
Jurczenko, E., 733, 742 Kim, J.B., 602
Juselius, K., 879 Kim, M., 275
Kim, S., 855
Kim, T., 351
K Kind, A., 800
Kahneman, D., 395, 396, 399, 400, 403 Kini, O., 853, 858
Kajshmi, N., 638 Kirilenko, A., 780
Kale, J., 318 Kisgen, D., 275, 281, 297–299, 301–303
Kalimipalli, M., 800 Kish, R.J., 515, 516, 520, 705
Kallal, H., 454–456 Klass, M.J., 765
Kamath, V., 483 Klausner, M., 335, 601
Kamphuis, R.W. Jr., 781 Klein, D., 855
Kan, K., 779 Klein, R.W., 345
Kan, R., 302, 529, 748, 750 Klein, W., 804
Kanatas, G., 319 Klemkosky, R.C., 351
Kandel, E., 331 Klingebiel, D., 507
Kandel, S.A., 268 Knez, P.J., 281, 283, 297–299
Kane, E.J., 209 Knoeber, C.R., 602
Kani, I., 831 Kobayashi, T., 796
Kaplan, R., 786 Kocherlakota, N.R., 235, 675
Kaplan, S.N., 825 Koehler, G., 765, 766
Karadeloglou, P., 562 Koh, W.T.H., 705
Karels, G.V., 361 Kohlhagen, S.W., 729
Karim, K.E., 581, 582, 584 Kohn, M.G., 565
Karpoff, J.M., 335, 601 Kolb, R.W., 872, 875, 880, 884, 886
Kashyap, A., 555 Kole, S., 867
Kasznik, R., 604, 836 Koller, T., 825
Katz, M., 259 Kolodny, R., 634
Kau, J.B., 388, 391, 570, 571, 574 Kon, S., 752
Kaufman, G.G., 49, 306, 310, 312, 313 Kopprasch, R., 729
Kaufman, H., 331 Korajczyck, R., 268
Kaufold, H., 582 Korkie, R., 268
Kaul, G., 259, 275, 447, 547 Korobov, N.M., 431
Kavajecz, K., 326 Korting, T., 318
Kavee, R.C., 740 Koscielniak, Z., 694
Author Index 1011

Koskela, E., 318 Lee, C.-F., 264, 281, 323, 351, 352, 357, 387, 388, 411, 421,
Kosowksi, R., 303 473, 706, 714, 755, 795, 800, 816, 851, 853, 857, 867,
Kothari, S.P., 836 871, 881, 885
KrÄahmer, D., 804 Lee, C.M.C., 547
Kraus, A., 264 Lee, D., 857, 858
Krebs, T., 676 Lee, H.T., 872, 876, 879
Kreps, D., 228, 231, 264, 298, 453 Lee, J.C., 755
Krigman, L., 853, 858 Lee, K.W., 800
Kritzman, M., 368, 735 Lee, M.C., 872, 876, 885, 888
Kroll, Y., 400, 401 Lee, S.B., 367, 377
Kroner, K., 714 Lee, S.W., 316, 317
Kroner, K.F., 872, 880, 887 Lee, T.C., 362
Kroszner, R., 852, 858 Lee, W., 714
Krugman, P., 247 Leftwich, R., 334
Kruschwitz, L., 829 Lehmann, B.N., 268, 279, 299
Kshirsagar, A.M., 361 Lehn, K., 414
Kulatilaka, N.H., 422, 423 Leibowitz, M.L., 312
Kunda, Z., 804 Leigh, R., 413, 415
Kuntz, P., 829 Leland, H., 728, 729, 740–742, 852, 891, 894, 896
Kuo, H.C., 357, 361, 364, 411 Leland, H.E., 185, 646, 647, 654–656, 799
Kuo, J., 714, 872, 874, 876, 884, 887, 888 Lemmon, M., 853, 858
Kupiec, P., 778 Lence, S.H., 872, 873, 877, 883
Kurz, M., 684 Leshno, M., 404
Kwan, C.C.Y., 872, 875, 884, 885 Lesne, J.-P., 454, 457
Kwok, C., 322 Lettau, M., 275, 276, 300, 301, 680
Kwok, Y.K., 796 Leung, K.-W., 582
Kyle, A.S., 323, 659–661 Lev, B., 70, 360, 738
Levhari, D., 351
Levhari, P., 351
L Levine, R., 247, 507
Labys, W.C., 565 Levy, H., 351, 395, 398, 401–407, 409, 811
Lacey, N., 638 Levy, M., 398, 401–407, 409
Lai, K.S., 247, 250 Lewarne, S., 550
Lai, T.Y., 765–776 Lewellen, W.G., 283, 333–339, 448, 828
Laibson, D., 676 Li, D., 666, 781
Laitenberger, J., 829 Li, Q., 781
Lakonishok, J., 362, 867 Li, S., 666, 765, 766, 770
Lalancette, S., 283 Liao, S.L., 800
Lalitha, L., 857, 858 Lichtenstein, S., 804
Lambert, R.A., 601 Lie, E., 854, 858, 866
Lamont, O.A., 660 Liebeskind, J.P., 602
Lamper, D., 502 Lien, D., 872, 875, 876, 878, 879, 881, 882, 884, 886–888
Lamy, R.E., 582, 583 Liew, J.M., 545
Landier, A., 804 Lim, T., 547
Lando, D., 891 Lin, C., 856, 858
Landsman, W.R., 836 Lin, F., 725
Lang, L.H., 519 Lin, L., 357, 361, 363, 365, 411, 418
Lang, W., 326 Lin, W.T., 421, 425, 428, 441
Langer, E.J., 804 Lin, Y., 889
Langetieg, T.C., 418 Linn, S.C., 502
Laplante, M., 284 Lintner, J., 115, 116, 177, 230, 264, 265, 343, 351, 405,
Larcker, D.F., 601 448, 473, 634, 705, 750
Larson, H., 78 Liow, K.H., 705
Latane, H.A., 101, 765 Lippman, S.A., 483
Latta, C., 309 Lipson, M., 326, 409
Lau, K.W., 796 Lipton, A.F., 705
Lau, S., 352 Lipton, M., 593
Laughhunn, D.L., 872, 875 Lischka, F., 796
Lauterbach, B., 542 Litterman, B., 341
Laux, P., 326 Litzenberger, R.H., 354
Lawler, P., 562 Liu, J., 830
LeBaron, B., 502–504 Liu, S., 546
Ledoit, O., 748 Liu, Y.C., 833
Lee, A.C., 756 Livnat, J., 843
Lee, C., 207, 585, 714, 760 Lloyd, W., 869, 957
1012 Author Index

Lo, A.W., 268, 277, 355, 362, 447 Maremont, M., 842
Loderer, C., 855, 858 Mark, N.C., 254
Löffler, A., 833 Markham, J.W., 216
Long, J., 267, 301, 302 Markowitz, H.M., 341, 351, 398, 399, 406, 407,
Long, R.W., 756 409, 566, 705
Longo, J.M., 621–632 Marks, R., 804
Longstaff, F.A., 381, 646, 650–651, 656, 657, Marks, S., 361
799, 891, 894, 896 Mar-Molinero, C., 361
Loomis, C., 623 Marquardt, D., 867
Loria, S., 741 Marschak, J., 341
Lorsch, J.W., 606 Marshall, D., 676
Lothian, J.R., 243, 247, 250 Marston, R.C., 245, 247–249
Loviscek, A.L., 565, 568 Martin, D., 362
Low, V., 563 Martin, K., 851, 855, 856, 858–860
Lowenstein, R., 631 Mason, S.P., 423
Lu, C., 387 Massa, M., 638
Lu, Q., 800 Matheson, T., 777, 780
Lucas, D.J., 675–677 Mathiesen, H., 588
Lucas, R.E. Jr., 250, 265 Mauer, D., 854, 855, 858
Ludvigson, S., 275, 276, 300, 301 Maurer, R., 731, 742
Luehrman, T.A., 423, 424, 442, 825, 829 Mayers, D., 282
Luo, X., 872, 875, 876, 879, 881, 884, 886 Mays, M., 512
Lutje, T., 637 Mazumder, M.I., 705
Lutkepohl, H., 362 Mazuy, K.K., 281, 297, 634
Luttmer, E.G.F., 454–456, 676 McConnell, J.J., 415, 570, 571, 851–853, 858–860, 868
Lynch, A.W., 297, 301, 302, 666, 676 McCormick, T., 326
Lyness, J.N., 432 McDonald, B., 361, 425
Lyons, R.K., 449–451 McDonald, G., 855, 858
McDonald, R., 422, 425
McElroy, M.B., 268
M McEnally, R.W., 309
MacArthur, A.T., 250, 253 McFadden, D.L., 363
Macaulay, F.R., 221, 305, 306, 313, 683 McGee, V., 867
MacBeth, J.D., 168, 351, 752 McGrattan, E.R., 676, 681–683
Machina, M.J., 397 McIntosh, W.R., 407
MacKinlay, A.C., 268, 275, 447 McKenzie, M., 706
Madan, D.B., 891 McKinnon, R.I., 507
Madariaga, J.A., 708 McLean, B., 348
Maddala, G.S., 364 McLeay, S., 361
Madhavan, A., 539 McNamee, M., 350
Madura, J., 515, 582 McNichols, M.F., 604
Maggioni, P., 323, 779 McWilliams, V., 856
Maheu, J.M., 531 Meckling, W.H., 333, 413, 460, 852
Maier, S., 484, 492, 536 Meeks, G., 415
Maillet, B., 733, 742 Meese, R., 450
Mais, E., 851, 853, 858, 860 Megginson, W., 317
Majd, S., 426 Mehra, R., 675–684
Maksimovic, V., 318 Melino, A., 679
Malatesta, P.H., 414, 418 Melnik, A., 315–317
Malkiel, B.G., 267 Mendelson, H., 483, 484, 488, 542, 778
Mallaby, S., 622 Mendes-de-Oliveira, M., 811
Malliaris, A.G., 872, 881, 886, 887 Mensah, Y., 362
Malmendier, U., 803, 804, 806, 811 Merrick, J., 265
Malpass, D., 581 Merton, R.C., 108, 138, 227, 267, 274, 276, 281, 297,
Mamaysky, H., 283 310, 318, 344, 424, 428, 455, 525, 526, 528, 532,
Manaster, S., 765, 766 622, 645, 647, 648, 659, 660, 683, 750, 765, 767,
Mandelbaum, A., 660 796, 798, 799, 894
Mandelbrot, B., 685 Meschke, F., 853, 858
Mandelker, G.N., 418 Meulbroek, L., 660
Maness, T.S., 288 Meulenberg, M., 714
Mankiw, N.G., 676 Miao, J., 832
Manne, H.G., 414 Michaud, R.O., 345
Mansi, S., 852, 855, 858 Mikkelson, W., 853, 858, 866
Manski, C.F., 363 Miles, J.A., 826, 827
March, J.G., 806 Milgrom, P., 412, 414, 416, 488
Marcus, A.J., 358, 365, 412, 413, 417, 418 Miller, E.M., 705
Author Index 1013

Miller, M.H., 41, 65, 99, 109, 111, 127, 177, Nieuwland, F.G.M.C., 533
405, 454, 638 Nijman, T.E., 532, 533
Miller, P.B.W., 844 Nissim, D., 825
Miller, R.E., 635 Noe, T.H., 318
Miller, T.W., 765, 766, 768–771, 775, 776 North, D.J., 413, 415
Milonas, N., 854, 855, 858, 859, 866 Norton, E.A.., 472
Mintel International Group Ltd., 348 NRMLA-Consumer site administered by the National
Mirrlees, J.A., 565 Reverse Mortgage Lenders Association, 691
Mishkin, F.S., 246–249 Nurnberg, H., 846
Mitchell, M., 660, 666 Nyborg, K.G., 796, 799, 828, 829
Mitchell, M.L., 414
Mittnik, S., 685
Mizon, G.E., 882 O
Modest, D.M., 268, 279, 299, 676 O´Brien, T.J., 729, 740–741
Modigliani, F., 41, 65, 109, 111, 113, 127, 142, 177, Obstfeld, M., 555
405, 453, 473, 638, 825, 826, 829 O’Connor, P.F., 460, 461, 463
Modigliani, L., 473, 641, 706, 707 Odean, T., 400, 804
Moffett, M.H., 611 Ofek, E., 660
Mondino, G., 555 Office of Economic and Corporate Development
Montiel, P.J., 555 (OECD), 588
Mooradian, R.M., 418 Ogawa, O., 511
Moore, A., 447 Ogden, J.P., 459–461, 463
Moore, W.T., 815 Oh, G., 508, 511
Morck, R., 603, 851–853, 856, 858–860, 863, 865, 866 O’Hara, M., 262, 457
Morellec, E., 832 Ohlson, J.A., 362, 455
Morgan, J.P., 56, 312 Oksendal, B., 527
Morgenstern, O., 341 Okunev, J., 872, 875, 880, 884, 886
Morris, M.H., 361 Oldfield, G.S., 530
Moskowitz, T.J., 545, 546 Omberg, E., 527, 528
Mossin, J., 265, 351, 473 Ongena, S., 319
Muellbauer, J., 555 Opiela, N., 350
Mullaney, T., 350 Opler, T., 318, 855, 858, 866
Muller III, W.J., 391, 570–572, 574 Orpurt, S., 844
Mullineaux, D.J., 316, 317 Ortiz-Molina, H., 855, 858
Mundell, R.A., 555 Ortobelli, S., 685
Mungthin, N., 508 Osborne, M., 448, 530
Murinde, V., 323, 779 Osterwald-Lenum, M., 879
Murphy, A., 539 Oswald, A.J., 563
Murphy, K.M., 266 Otani, I., 558
Murugesan, B., 638 Otrok, Ch., 680
Musumeci, J.J., 582 Oyer, P., 804
Muthuswamy, J., 715 Ozenbas, D., 484
Myers, D., 283 Oztekin, O., 651
Myers, R.J., 714, 872, 878, 880, 885
Myers, S.C., 220, 318, 365, 412, 418, 423,
426, 461, 825, 829 P
Padmaraj, R., 855
Pagano, M., 493, 494
N Pages, H., 454, 457
Nagao, H., 511 Pain, D., 733, 735, 738, 740
Nakagawa, N., 796 Palazzolo, C., 259
Nandy, D., 316–318 Palepu, K.G., 361, 363–365
Narayanan, P., 242, 361, 364 Palia, D., 803
National Association of Securities Dealers Palmer, R., 502, 504
Automated Quotation (NASDAQ), 131, 149, 325, Palmon, O., 803
326, 329–331, 348, 350, 388, 477, 478, 481, 484, Pamepinto, S., 337
535–539, 542 Pan, J., 685
Nawalkha, S.K., 310 Panchapagesan, V., 536, 537
Neale, M.A., 804 Pantzalis, C., 851, 861, 863
Nelson, C.R., 275 Panyagometh, K., 316
Nelson, K.K., 604 Paolella, M., 685
Neuberger, A., 488, 492 Papazoglou, C., 562
Newey, W.K., 246, 747 Paperman, J., 323
Nguyen, T.H., 529 Paradis, G.E., 400
Nickell, S.J., 563 Park, D., 511
Niederhoffer, V., 448, 530 Park, J., 247, 623
1014 Author Index

Park, T.H., 714 Price Waterhouse, 114, 788, 789

Partch, M., 853, 858, 866 Prigent, J.L., 729, 733
Parulekar, R., 698, 704 Pringle, J.J., 828
Parunak, H., 502 Prisman, E., 308–310, 457
Pastena, V., 358, 416 Protopapadakis, A., 259
Pastor, L., 483 Pulvino, T., 666
Patel, J., 247 Punjabi, S., 422, 427
Patterson, M., 622 Puri, M., 804
Patterson, T.N.L., 432 Purschaker, N., 731, 742
Paye, B., 275 Pyle, D., 852
Payne, J.W., 872, 875
Payne, R., 451
Pearson, N.D., 353 Q
Pedersen, L.H., 660 Qi, H., 830
Peel, D.A., 362 Qian, M., 280
Peel, M.J., 362, 417 Quandt, R.E., 195, 867
Pennachi, G.G., 260 Quiggin, J., 395, 397, 407
Pennings, J., 714
Peristiani, S., 318
Permanent Subcommittee on Investigations of the R
Committee of Governmental Affairs, 496 Rabinovitch, R., 895, 908
Perold, A.R., 729, 740 Rachev, S., 685
Perraudin, W.R.M., 531 Radcliffe, R.C., 353
Perron, P., 879 Radelet, S., 582
Perry, G.L., 562 Rahman, S., 281
Pesaran, M.H., 275 Rai, V., 698, 704
Pesek, W. Jr., 511 Raiffa, H., 803
Peters, E.E., 355 Rajan, R.G., 318, 319
Peters, H., 281 Ramasamy, B., 636
Pethokoukis, J., 348 Ramaswami, K., 354
Pfeffer, D., 796, 800 Rand, J., 733, 735, 738, 740
Pfleiderer, P., 281, 282 Rangan, N., 855, 858
Pham, T.M., 741 Ranu, A., 639
Phillips, H.E., 345 Ranu, D., 639
Phillips, L., 804 Rao, D.C., 507
Phillips, P.C.B., 879 Rao, J., 694
Pickles, E., 429 Rao, R., 854, 858
Piesse, J., 357, 363–365, 411, 418 Rapoport, A., 400
Pindyck, R.S., 426, 432–433, 439 Ravikumar, B., 680
Pinkowitz, L., 855, 858, 866 Reardon, T., 348
Piotroski, J.D., 604 Rebeggiani, L., 637
Pittman, D.N., 257 Redington, F.M., 221, 305, 307, 313
Plaut, S., 315–317 Redmand, A.L., 635
Plott, C.R., 400 Reeb, D., 852, 858
Poensgen, O.H., 796–798 Rees, B., 405, 858, 859, 862
Pogue, J.A., 565 Register, C., 857, 858, 866
Pomeranets, A., 777, 779, 780 Reichelstein, S., 789
Pond, L., 526, 527 Reilly, F.K., 351, 472
Pontiff, J., 275 Reiner, E., 831
Porter, D., 542 Rendelman, R.J. Jr., 25
Portes, R., 555 Rennhack, R., 555
Porteus, E., 228, 231 Rescher, N., 503
Post, M., 318, 319 Resnick, B., 793
Postma, T.J.B.M., 593 Resnick, B.G., 634
Pound, J., 602 Rhee, S.G., 507, 511
Powers, W.C. Jr., 496 Richard, S.F., 264, 275, 298, 303, 381, 572
Pozzolo, A.F., 316 Richards, A.J., 545
Prakash, A.J., 361 Richardson, M.P., 660
Prasch, R.E., 811 Rietveld, P., 565
Pratt, J.W., 399, 401 Rietz, T.A., 676, 680
Preiss, M., 514 Riolo, R.L., 502
Prelec, D., 396 Roberts, G.S., 305, 309, 311, 312, 316
Prescott, E.C., 675–684 Roberts, H.V., 447
Prescott, E.S., 211 Roberts, J., 412, 414, 416
Press, S.J., 526 Robinson, D.T., 417
Preston, M.G., 396 Robinson, R.J., 417
Author Index 1015

Robotti, C., 750 Savarino, J.E., 565

Rockefeller, D., 581 Savit, R., 502
Roe, M.J., 565 Schachter, B., 326
Rogalski, R.J., 530 Schadt, R., 279–281, 283, 297, 298, 301, 302
Rogoff, K., 243, 251, 450 Schaefer, S., 657, 804
Roldos, J., 511 Schall, L.D., 275, 412, 415
Roll, R., 56, 243–247, 250, 258, 259, 262, 267, 274, 275, Scharfstein, D., 319
299, 344, 414, 418, 426, 451, 779, 804 Scheinkman, J., 454, 457
Roman, E., 729 Schill, M., 281, 283
Romano, R., 334, 335, 337, 338 Schmukler, A.L., 247
Romer, D., 450 Schneider, M., 245
Roncaglio, F., 829, 830 Schnitzlein, C., 806
Rorke, C.H., 400 Schoemaker, P.J.H., 803
Rose, A., 450 Scholes, M., 63, 275, 351, 405, 448, 453, 455, 645–647,
Rosenfeld, E.R., 645, 651 652, 740, 752, 767, 798, 894
Rosenstein, S., 603, 856, 858 Schönbucher, P.J., 799, 891
Ross, D.M., 608, 609 Schooley, D., 854, 858, 860
Ross, S.A., 14, 221, 230, 263, 264, 268, 269, 298, 344, 358, Schroder, M., 46
365, 380, 395, 405, 412, 413, 415, 417, 418, 426, 442, Schuler, K., 581
453–455, 457, 608, 609, 750, 753, 756, 760 Schultz, G.P., 562
Ross, T.W., 208 Schultz, P.H., 331, 409, 492
Rotenberg, W., 866–868 Schumpeter, J.A., 422, 425
Roth, G., 855, 858 Schwartz, E.S., 302, 309, 381, 421, 570, 571, 650, 651,
Roth, J., 804 656, 657, 685, 796, 799, 800
Rothschild, M., 269 Schwartz, R.A., 302, 309, 381, 421, 477, 482, 484, 487,
Roush, J., 260 488, 491–494, 571, 646, 650, 651, 656, 657, 685,
Rouwenhorst, K.G., 545 796, 799, 800, 891, 894, 896
Rozeff, M., 414, 854 Schwert, G.W., 275, 683, 765, 778
Ruback, R., 413, 414, 416, 418 Seagle, J.P., 345
Ruback, R.S., 519, 828 Securities and Exchange Commission (SEC), 4, 77, 95, 97,
Rubinstein, A., 806 114, 149, 150, 153, 159, 165, 167–169, 175, 214,
Rubinstein, M., 146, 185, 264, 266, 728, 329–331, 462, 484, 493, 494, 497, 535, 537–539,
740, 831 542, 592–595, 600, 627, 631, 839, 842
Rui, O.M., 323 Seguin, P., 492, 778, 780
Ruland, W., 358, 416, 856, 858, 860 Senbet, L., 230, 318
Rutledge, D.J.S., 885 Sender, H., 842
Rutledge, S., 632 Sephton, P.S., 872, 878, 887
Ryder, H.E. Jr., 266 Servaes, H., 851–853, 859, 868
Seth, A., 413
Setia-Atmaja, L., 854, 858
S Shaffer, D.R., 872, 875, 881, 888
Saar, G., 780 Shah, K., 853, 858, 866
Sachs, G., 38, 167, 348, 626, 631, 632, Shailer, G., 361
796, 800 Shalit, H., 872, 875, 880, 887
Sachs, J., 582 Shane, P.B., 417
Sack, B., 260 Shanken, J., 267, 268, 275, 344, 745, 746, 753
Sade, O., 803, 806 Shanmugaratnam, T., 563
Sadhak, H., 636 Shannon, D.S., 352
Saelens, F.H., 608 Shapiro, A., 582, 686, 755, 756, 762
Safronova N., 675–688 Shaprio, E., 756, 757, 762
Sahay, S.A., 783–793, 835–849 Sharma, M., 348
Sahu, D., 780 Sharpe, I.G., 316–319
Sainz, J., 705 Sharpe, S.A., 316
Samant, A., 638 Sharpe, W.F., 259, 265, 267, 274, 341,
Samorodnitsky, G., 685 342, 351, 705
Samuelson, P.A., 221, 305, 307, 404, 565 Shastri, K., 705
Samuelson, R.J., 414 Shaw, W., 867
Santibáñez, J., 708 Sheehan, D., 852, 858
Saporta, V., 779 Shefrin, H., 803
Sarin, A., 856–858 Shen, P., 260
Sarkissian, S., 264, 266, 268 Shen, Y., 388
Sasikumar, K., 636 Sheng, A., 507
Sassanpour, C., 558 Shiller, R., 265, 349, 447
Saunders, A., 50, 51, 242, 312, 318, 393, 615, Shimizu, J., 511
617, 872, 879 Shiu, E.S.W., 831
Savage, L.J., 399, 402, 409 Shivdasani, A., 297
1016 Author Index

Shleifer, A., 263, 274, 659–661, 666 Standard and Poor’s (S&P), 4, 26, 56, 78, 102, 123, 134,
Shores, M.R., 309, 310 149, 157, 165, 178, 181, 186, 192, 246, 259, 280,
Short, H., 858, 860, 866 349, 471, 539, 596, 619, 623–625, 635, 638, 685,
Shoven, J., 358, 365 713–719, 722, 723, 763, 855, 885–888
Shrestha, K., 851–868 Stanton, R., 571, 573, 574
Shreve, S., 891, 894 Stapledon, G.P., 602
Shrieves, R., 416 Starks, L., 282
Shultz, G., 581 Startz, R., 275
Shumway, T., 365, 647 Statman, M., 640, 804
Sick, G.S., 829 Steen, N.M., 430, 431
Sidana, G., 637 Stein, J.C., 546, 547, 555
Siegel, A.F., 271 Sterken, E., 593
Siegel, D., 422, 425 Stevens, D., 416
Siegel, M., 842 Stevens, R.L., 545
Silberberg, E., 565 Stiglitz, J.E., 416, 488, 778, 779
Sim, A.B., 741 Stock, J.H., 882
Simin, T., 268, 275 Stohs, M., 854, 855, 858
Simms, J.M., 582 Stoll, H., 331, 488, 492, 646
Simon, H., 806 Stonehill, A.I., 611
Simon, W., 581 Storesletten, K., 676
Sims, C.A., 438 Storey, D.J., 362
Sing, G.P., 638 Stover, R., 856, 858, 861
Singh, A., 411, 412 Strahan, P.E., 316
Singh, H., 714 Strand, N., 698
Singh, J., 636 Strauss, J., 247
Singh, R., 325 Strebulaev, I.A., 656
Singleton, K.J., 242, 265, 266, 529, 530, 577, Strömberg, P., 825
891, 892, 903 Stulz, R.M., 227, 230, 250, 852, 853
Sinkey, J.F. Jr., 582 Su, D., 322, 323, 856, 858
Sinquefield, R.A., 439 Subha, M.V., 637
Siow, A., 483 Subrahmanyam, A., 483, 765, 766
Sisodiya, A.S., 636 Subrahmanyam, M.G., 766, 767, 775
Skelton, J., 309 Subrahmanyam, V., 855
Skinner, F., 310 Sudhakar, A., 636
Skoulakis, G., 303, 748 Sullivan, M.J., 416, 418
Skully, M., 854, 858 Sultan, J., 714, 872, 880, 887
Slovic, P., 789 Summers, L.H., 581, 660, 778
Slovin, M., 851, 853, 858, 860 Summers, V.P., 778
Smirlock, M., 582 Sumon, C.M., 216
Smith, A.J., 604 Sun, Q., 322
Smith, C. Jr., 854, 858 Sundaresan, S.M., 266, 891
Smith, D.M., 638 Sunder, S., 360, 361, 503
Smith, G., 347, 348 Sundgren, S., 593
Smith, J.L., 429 Sunner, M.W., 259
Smith, R., 853, 858, 859 Surz, R., 483
Smith, T., 275 Sushka, M., 851, 853, 858, 860
Smith, V.L., 400 Svenson, O., 804
Sobaci, T., 209, 211 Svensson, L.E.O., 235
Soderlind, P., 281, 297, 299–301 Swalm, R.O., 399
Sofianos, G., 484 Swaminathan, B., 547
Solnik, B., 230, 235, 244, 246, 247, 250, 275 Swason, P.T., 635
Solomon, D., 842 Sweeney, R.J., 247, 250
Solomon, S., 409 Switzer, L., 714
Sonakul, M.R.C.M., 508 Szafarz, A., 828
Sondhi, H.J., 637
Song, M.H.., 419
Sopranzetti, B.J., 760, 761 T
Sorensen, S.E., 531, 796, 800 Taggart, R.A., 828
Soto, G.G., 310 Takahashi, A., 796
Spatt, C.S., 570 Tanewski, G., 854, 858
Spiegel, M., 283 Tang, R., 786, 789
Staël von Holstein, C.A.S., 804 Taniguchi, T., 508
Stafford, E., 660, 666 Taqqu, M., 685
Stallworthy, E.A., 412, 413, 415 Tate, G., 804, 806, 811
Stambaugh, R.F., 483 Tay, N.S.P., 502
Stambaugh, R.S., 275 Taylor, M.P., 243, 247, 250, 450
Author Index 1017

Taylor, S., 804 U.S. Securities and Exchange Commission

Taylor, W.R.L., 705 (SEC), 462, 538
Teh, K.P., 563 Utton, M.A., 415, 416
Tehranian, H., 414
Telmer, C.I., 676
Terry, R.L., 601 V
Tesfatsion, L., 502 Vafeas, N., 857
Thakor, A.V., 318, 319, 804 Vallelado, E., 857, 858
Thaler, R.H., 243, 254, 275, 401, 404, 405, 408, Van der Auwera, I., 562
660, 676, 803 Van Drunen, L.D., 571
Tham, J., 829 Van Ees, H., 593
Thanou, E., 637 Van Horne, J.C., 416
The Conference Board, 498 Van Ness, R., 325
Theisen, R.D., 634 Van-Ness, B., 325
Theobald, M., 742–743 Van-Ness, R., 325
Thesmar, D., 804 Varela, O.A., 705
Thomas, H., 851, 856, 858–860, 866 Vargas, M., 709
Thompson, G.G., 804 Varma, J.R., 634
Thompson, H.E., 528, 660 Vartiainen, H., 803
Thompson, S.R., 871, 878 Vasconcellos, G.M., 515–522
Thorley, S., 640 Vasicek, O., 8, 309, 310, 381, 529, 650, 895, 897
Thornton, E., 348 Vayanos, D., 660
Timmermann, A., 275 Vaysman, I., 787
Timmis, G.C., 570 Veld, C., 875, 884, 887
Tirole, J., 416, 789 Velez-Pareja, I., 829
Titman, S., 267, 268, 275, 282, 283, 297, 298, 344, 418, Venezia, I., 803
473, 545–547, 634 Verhofen, M., 638
To, M.C., 283 Verschoor, W.F.C., 533
Tobin, J., 351, 399, 778 Vesala, J., 207
Todd, S., 277, 281, 283, 297, 299–302 Vesval, A., 345
Toevs, A., 309 Vetsuypens, M.R., 417
Toft, K.B., 646, 654–657, 799, 891, 894, 896 Vetzal, K.R., 796
Tollefson, J.O., 364 Viallet, C.J., 230, 247
Tong, W., 322 Viceria, L.M., 533
Torous, W., 527, 529 Vickers, D., 634
Tourk, K., 507 Vila, J., 660
Tran, H.Q., 511 Viscusi, W.K., 398, 403, 408
Travlos, N.G., 418, 518 Vishny, R., 588, 659–661, 666
Treacy, W.F., 319 Vissing-Jorgensen, A., 676
Treynor, J.L., 11, 281, 297, 351, 472, 634, 639, 707 Viswanathan, S., 277, 416
Trigeorgis, L., 422–425, 427, 434, 441 Vlaar, P.J.G., 527, 533
Trinidad, J., 211, 250 Vogel, T., 777
Troubh, R.S., 496 Vogelstein, F., 348
Tse, Y.K., 715, 872, 875, 881, 887, 888 Volkman, D.A., 635
Tshoegl, A.E., 326, 529 von Neumann, J., 341
Tsiveriotis, K., 796 von Thadden, E.L., 317
Tsui, A., 715 Vorkink, K., 804
Tucker, A.L., 526, 527 Vorst, T., 457
Tuckman, B., 660
Turki, L., 422, 427
Turnbull, S., 796, 891, 892, 903, 918 W
Turner, C.M., 316 Wachter, J., 297, 301, 302
Tversky, A., 395–400, 403 Waegelein, J., 414
Wagenaar, W., 804
Wagner, W.H., 352
U Wagster, J.D., 250
Udell, G.F., 316, 318 Wahal, S., 639
Uhrig-Homburg, M., 891 Wakeman, L.M., 253
Umlauf, S.R., 777, 779, 780 Wakker, P.P., 397, 402, 403, 407
Unal, H., 582, 891 Waldmann, R.J., 660
United Nations Conference on Trade and Walker, D.A., 635
Development (UNCTAD), 522 Walker, I.E., 358, 416, 417
United States General Accounting Office Walking, R.A., 419
(U.S.GAO), 258–260 Walter, T., 326
Urrutia, J.L., 872, 881, 886, 887 Wang, A.Y., 639
1018 Author Index

Wang, J.Y., 800 Woo, C.Y., 804

Wang, K., 705 Wood, D., 361, 364
Wang, L., 361, 364 Wood, R., 325
Wang, S.Y., 816 Woods, D.D., 804
Wang, Z., 275, 277, 303, 748–750 Working, H., 885
Warther, V.A., 283 Wort, D.H., 743
Watson, M.W., 882 Wriston, W., 581
Watson, R., 362 Wruck, K., 851, 853, 858–860
Watts, R.L., 836 Wu, C., 323, 326, 331
Waud, R.N., 447 Wu, L.S., 637
Weaver, D.G., 535–537, 539, 756, 779, 780 Wu, S., 361, 364
Weber, E.U., 397 Wu, W., 830
Weber, J., 349 Wu, Y., 550, 555, 558, 559, 561–563
Wei, K.C.J., 546 Wurgler, J., 660
Wei, L., 539 Wyatt, J., 856, 858
Wei, M., 260 Wyatt, J.G., 603
Weil, P., 228, 677 Wyatt Company, 338
Weil, R.L., 306, 307 Wynarczyk, P., 362
Weinberger, A., 312
Weinstein, N., 804
Weisbach, M.S., 593, 603 X
Weiss, A., 555 Xhang, L., 638
Welch, I., 275, 804
Wells, M.T., 593
Werker, B.J.M., 533 Y
Wermers, R., 282 Yaari, M., 397
Weron, A., 685 Yaari, U., 666
Wessels, D., 825 Yadav P., 593
West, K.D., 246, 747 Yam, J., 507
Westerfield, R.W., 221, 365 Yan, J., 804
Weston, J.F., 331, 412, 415, 417 Yan, Y., 635
Whalen, G., 364 Yang, A.X., 679
Whaley, R., 717 Yang, C.-W., 351, 565, 568
Wheatley, S., 276 Yang, D.Y., 511
Whitcomb, D., 483, 484, 492 Yang, J., 504
Whitcomb, D.K., 318 Yaron, A., 676
White, A., 384, 895 Yeh, C., 714
White, H., 246, 789 Yeh, C.-H., 504
Whitelaw, R., 660 Yeh, S., 714
Whiteman, C.H., 680 Yeo, G., 495
Whittington, G., 361 Yermack, D., 593, 857, 858
Wiener, Z., 398, 406 Yerramilli, V., 325
Wilcox, D.W., 260 Yeung, M.C.H., 636
Wilcox, J.A., 213 Yip, P.C.Y., 872, 875, 884, 885
Wilde, C., 800 Yoder, J.A., 872, 879, 888
Wilde, L., 400 Yu, F., 891
Williams, J., 275 Yu, L.Q., 260–262
Williamson, O., 789 Yu, S.M., 705
Williamson, R., 855, 858, 866
Wilmarth, A.E. Jr., 216
Wilson, N., 417 Z
Wilson, R.B., 264 Zanetti, L., 829
Winkelmann, K., 345 Zang, R., 844
Winokur, H.R. Jr., 496 Zaremba, S.K., 431
Wohar, M.E., 635 Zarruk, E.R., 582
Woidtke, T., 858, 867 Zavgren, C.V., 361
Wolf, M., 748 Zechner, J., 830, 832
Wolff, C.C.P., 533 Zender, J.F., 806
Womack, K., 853, 858 Zeng, M., 220
Wonder, N., 829 Zhang, H., 283
Wong, C.S.M., 512 Zhang, X., 300
Wong, C.Y.P., 451 Zhang, Z., 581–583
Wong, D., 891, 894 Zhao, Y., 731
Wong, M., 867 Zheng, L., 282, 283
Wonnacott, R.J., 821 Zhou, C., 891, 896
Wonnacott, T.H., 821 Zhou, G., 302, 344, 748
Author Index 1019

Zhu, N., 660 Zin, S.E., 228–230, 232, 266, 676, 678, 811
Zhu, Y., 740 Zion, D., 312
Zhuravskaya, E., 660 Zmijewski, M.E., 361
Ziemba, W.T., 685, 731 Zombanakis, G., 562
Zietlow, J.T., 288 Zumpano, L.V., 705