Andrew H. Chen

Cash demand, liquidation costs and capital market equilibrium under uncertainty

Abstract In this paper, the portfolio and the liquidity planning problems are unified and analyzed in one model. Stochastic cash demands have a significant impact on both the composition of an individuals optimal portfolio and the pricing of capital assets in market equilibrium. The derived capital asset pricing model with cash demands and liquidation costs shows that both the market price of risk and the systematic risk of an asset are affected by the aggregate cash demands and liquidity risk. The modified model does not require that all investors hold an identical risky portfolio as implied by the Sharpe-Lintner-Mossin model. Furthermore, it provides a possible explanation for the noted discrepancies between the empirical evidence and the prediction of the traditional capital asset pricing model.

IMPACT OF DIFFERENTIAL AND DOUBLE TAXATION ON CORPORATE FINANCIAL POLICIES IN AN INFLATIONARY WORLD

This paper uses the capital asset pricing model to show that, in realistic circumstances, double taxation and differential tax rates on personal and capital-gains income affect corporate stock values and financial policies in non-neutral ways. This non-neutrality holds whenever inflation is uncertain and tax-avoidance activity is neither costless nor riskless. The model also allows us to explore how a series of frequently proposed changes in the interplay of corporate and personal taxes would affect corporate dividend payouts and debt usage. Our analysis clarifies that conscientious efforts to integrate corporate and personal tax rates must make supporting changes in the size and character of capital-gains tax preferences built into the tax code.

A contingent claim analysis of the closed-end mutual fund discount puzzle

In this paper, we develop a specific valuation model far the American perpetual put option with uncertain exercise price and empirically verify that the closed-end fund (CEF) discount puzzle can be explained by a put model.Using available sample data of 56 CEFs for the most recent seven years, we find strong empirical evidence for our discount approach. We find no significant differences between the average discounts and average returns of domestic and international funds. However, the international funds seem to have significantly greater volatility of returns than that of domestic funds, implying that foreign financial assets could be priced differently from domestic funds.