The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Swaps: Plain and Fanciful
Published: 07/01/1992 | DOI: 10.1111/j.1540-6261.1992.tb03996.x
ROBERT H. LITZENBERGER
The outstanding face amount of plain vanilla interest rate swaps exceeds two trillion dollars. While pricing and hedging of such swaps appear to be quite simple, many existing theories are based on the incorrect characterization of a swap as a simple exchange of a fixed for a floating rate note. This characterization is not consistent with standarized swap contracts and the treatment of swaps in bankruptcy. This paper provides an alternative perspective on swaps.
An International Study of Tax Effects on Government Bonds
Published: 03/01/1984 | DOI: 10.1111/j.1540-6261.1984.tb03857.x
ROBERT H. LITZENBERGER, JACQUES ROLFO
It is shown that coupon bonds alone are not sufficient to span time‐dated claims on ordinary income, capital gains, and non‐taxable wealth. In an incomplete bond market where the pure dated claims are not spanned by existing bonds, marginal rates of substitution between present consumption and pure dated claims on ordinary income, capital gains income, and non‐taxable wealth, respectively, can differ across bondholders. However, the relative pricing of coupon bonds in each of these countries is shown to be consistent with the tax status of the major (non‐tax‐exempt) holders of government debt.
Backwardation in Oil Futures Markets: Theory and Empirical Evidence
Published: 12/01/1995 | DOI: 10.1111/j.1540-6261.1995.tb05187.x
ROBERT H. LITZENBERGER, NIR RABINOWITZ
Oil futures prices are often below spot prices. This phenomenon, known as strong backwardation, is inconsistent with Hotelling's theory under certainty that the net price of an exhaustible resource rises over time at the rate of interest. We introduce uncertainty and characterize oil wells as call options. We show that (1) production occurs only if discounted futures are below spot prices, (2) production is non‐increasing in the riskiness of future prices, and (3) strong backwardation emerges if the riskiness of future prices is sufficiently high. The empirical analysis indicates that U.S. oil production is inversely related and backwardation is directly related to implied volatility.
A Utility‐Based Model of Common Stock Price Movements
Published: 03/01/1986 | DOI: 10.1111/j.1540-6261.1986.tb04492.x
ROBERT H. LITZENBERGER, EHUD I. RONN
This paper develops and tests a nonlinear utility‐based econometric model of the temporal behavior of aggregate stock price movements based on a constant relative risk aversion utility function and an observable information set consisting of aggregate consumption, aggregate dividends, and past stock prices. The stochastic process derived from time‐series analyses of consumption and dividends measured over annual intervals is used to derive and empirically test a closed‐form solution for stock‐price movements. The endogenization of discount rate changes in the utility‐based model is shown to be more consistent with aggregate stock price movements over a twenty‐year holdout period than constant discount rate models. The model is also used to estimate the representative investor's relative risk aversion. The estimate of 4.22 is consistent with that used by Grossman and Shiller in their perfect foresight model and is significantly higher than the relative risk aversion of 1.0 implied by logarithmic utility.
DISCUSSION
Published: 05/01/1975 | DOI: 10.1111/j.1540-6261.1975.tb01835.x
Keith V. Smith, Robert H. Litzenberger