Psychologists and economists hold vastly different views about human behavior. Psychologists contend that economists' models bear little relation to actual behavior. This view is supported by a large body of psychological research that shows that emotional state can significantly affect decision...

Market frictions, which exist even in efficient markets and change over time, impede trade but also offer profit opportunities. To provide a framework for understanding market frictions, the authors classify frictions into five categories.

Valuing financial securities often assumes that the contractual obligations of the security are going to be honored. However, frequently a party to a contract will default on its obligations. Because the contractual features of defaultable securities are usually complex and it is difficult to...

The behavior of securities dealers has been closely scrutinized in the 1990s. Recent investigations of the National Association of Securities Dealers and the Nasdaq market by the U.S. Department of Justice and the Securities and Exchange Commission suggest that market makers colluded to fix...

World financial markets have experienced tremendous growth in recent years. New financial instruments have emerged, transaction volumes in markets has skyrocketed, and capital flows across countries have risen dramatically. While these developments have made financial markets more efficient,...

Advances in communications and information management, combined with new developments in financial theory, will radically alter the way that financial services are delivered in the next century. This is the view of Charles Sanford, Chairman of Bankers Trust, as expressed in his luncheon address...

In a speech delivered this spring to the Board of Directors of the Federal Reserve Bank of Kansas City and to the CS First Boston Corporation Global Banking Conference in New York City, Henry Kaufman predicted that the latest swings in bond and stock prices are likely to be merely a prologue to...

The volatility of financial markets in recent years has led to increased concern. As trading of financial assets on organized exchanges and over-the-counter markets has grown, events such as the 1987 stock market crash and the 1992 Exchange Rate Mechanism crisis in Europe have raised fundamental...

In recent years, revolutionary changes in financial markets, combined with incidents such as Barings and Daiwa, have revived concerns about the adequacy of financial regulation. Historically, financial regulatory policy has been driven by the view that to maintain the health of the financial...