David J. Fowler

The Capital Asset Pricing Model and the Liquidity Effect: A Theoretical Approach

In this paper we develop a CAPM-based model which incorporate liquidity costs. This model implies, that for markets with nontrivial liquidity costs, the measure of systematic risk is based on returns net of bid-ask spread. Another implications of our CAPM-based model is that the relationship between the expected return and the bid-ask spread is positive and convex. This results differs from Amihud and Mendelsons (1986) concave relationship, but is consistent with empirical evidence obtained by Brennan and Subrahmanyam (1996).

Why are some pension plans partially funded

Abstract This paper develops a model of the employees reaction to the level of pension plan funding. The model shows that the employee will be overpaid whenever the firm offers a funded pension, but that there will be a level of funding that maximizes the employees output and, hence, minimizes the amount of overpayment. The optimum level of funding will depend on the employees attitudes toward risk and toward participation in the company pension plan.