While much attention has been focused on the optimal ratio of a firm's debt to equity, the "optimal" or best balance between bond financing and (longer-term) bank financing has scarcely been addressed. This essay examines the principal differences between an economy with a well-developed...

This paper shows how to decompose the dollar profit earned from an option into two basic components: 1) mispricing of the option relative to the asset at the time of purchase, and 2) profit from subsequent fortuitous changes or mispricing of the underlying asset. This separation hinges on...

This paper examines the interaction between a firm's volatility and dividend policies and capital structure and maturity policies. The firm is permitted to costlessly and continuously select any asset volatility and dividend yield, within bounds. Simple and intuitive rules are derived for the...

This paper develops a simple technique for valuing European and American derivatives with underlying asset risk-neutral returns which depart from lognormal in terms of prespecified non-zero skewness and greater-than-three kurtosis. Instead of specifying the entire risk-neutral distribution by...

This paper presents a model that derives both housing returns and housing construction patterns from events in the real economy. The value of a home, unlike the value of many other financial assets, depends upon the care its owner exerts on upkeep. Within the model banks respond to this moral...