Previous attempts to reject the hypothesis that real exchange rates follow a random walk have produced mixed results. This paper incorporates mean reversion and conditional heteroscedasticity into tests based on a theoretical model of deviations from the law of one price by Dumas (1988). The...

Project with negative expected value cannot obtain financing in competitive capital markets if all potential investors are risk neutral and have identical beliefs about the distribution of the project’s net revenue. We present a series of examples with heterogeneous beliefs in which it is...

Transferring physical capital and transferring production and sales activities from one country to the other, typically entails large adjustment costs. The model of this paper features two homogeneous stocks of physical capital located in two different countries, separated by an "ocean." The two...