Robert Litzenberger - Academia.edu (original) (raw)

Papers by Robert Litzenberger

Research paper thumbnail of On Distributional Restric-tions for Two Fund Separation

Research paper thumbnail of The E ects of Personal Taxes and Dividends on Capital Asset Prices: Theory and Empirical Evidence

Research paper thumbnail of The effect of personal taxes and dividends on capital asset prices

Journal of Financial Economics, 1979

Research paper thumbnail of Empirical Tests of the Consumption‐Oriented CAPM

The Journal of Finance, 1989

ABSTRACTThe empirical implications of the consumption‐oriented capital asset pricing model (CCAPM... more ABSTRACTThe empirical implications of the consumption‐oriented capital asset pricing model (CCAPM) are examined, and its performance is compared with a model based on the market portfolio. The CCAPM is estimated after adjusting for measurement problems associated with reported consumption data. The CCAPM is tested using betas based on both consumption and the portfolio having the maximum correlation with consumption. As predicted by the CCAPM, the market price of risk is significantly positive, and the estimate of the real interest rate is close to zero. The performances of the traditional CAPM and the CCAPM are about the same.

Research paper thumbnail of Prices of State-Contingent Claims Implicit in Option Prices

The Journal of Business, 1978

Research paper thumbnail of On the CAPM Approach to the Estimation of A Public Utility's Cost of Equity Capital

The Journal of Finance, 1980

Research paper thumbnail of Market Equilibrium in a Multiperiod State Preference Model with Logarithmic Utility†

Journal of Finance, Dec 1, 1975

I. INTRODUCTION THREE MAIN APPROACHES to asset choice under uncertainty are state preference, mea... more I. INTRODUCTION THREE MAIN APPROACHES to asset choice under uncertainty are state preference, mean-variance and growth-optimal or logarithmic utility. Although state preference is the most general approach, Hirshleifer [16, p. 277] notes that "the absence of a natural, agreed upon, and manageably small set of state definitions puts severe obstacles in the way of examining data about observable security behavior in terms of underlying choices for sequences of time state claims." The mean-variance approach may be viewed as a special case of the state preference model, requiring either quadratic utility or normally distributed returns on securities. The lack of generality of the mean-variance approach is compensated for by its susceptibility to testable propositions about security returns. The growth-optimal or logarithmic utility approach may also be viewed as a special case of the state preference model. While it would be presumptuous to suggest that all investors should have logarithmic utility functions, Roll [28] shows that this assumption permits the derivation of a testable equilibrium relation regarding security returns with no specification of return distributions. Unlike quadratic utility functions, logarithmic utility functions display the desirable behavioristic attribute of decreasing absolute risk aversion. Hakansson [10, 12, 13] shows that a time-state-independent logarithmic utility function for life time consumption and bequest induces an indirect single period utility function that is logarithmic in end of period wealth. Under conditions of state dependent investment opportunities this is the only multiperiod utility function known to induce a concave, indirect single period utility function that is a function only of wealth. The maximization of a single period logarithmic utility function is equivalent to the growth-optimal portfolio selection

Research paper thumbnail of Arbitrage pricing, transaction costs and taxation of capital gains

Journal of Financial Economics, Sep 1, 1984

Research paper thumbnail of On the Distributional Conditions for a Consumption-oriented Three Moment CAPM

Journal of Finance, Dec 1, 1983

In this paper, we develop sufficient conditions on probability distributions for a three moment (... more In this paper, we develop sufficient conditions on probability distributions for a three moment (mean, variance, and skewness) consumption-oriented capital asset pricing model (CAPM) to price correctly a subset of assets. The assumptions that individuals in an allocationally ...

Research paper thumbnail of Some Observations on Capital Structure and the Impact of Recent Recapitalizations on Share Prices

Journal of Financial and Quantitative Analysis, Mar 1, 1986

This paper discusses two fundamental issues in capital structure theory and analyzes the recent r... more This paper discusses two fundamental issues in capital structure theory and analyzes the recent recapitalizations of Phillips and Unocal. It is shown that a value-maximizing capital structure may be inconsistent with shareholder utility maximization and that the Miller debt and taxes equilibrium may be inconsistent with a complete capital market. In spite of these and other unresolved issues, the markets's reactions to the recent recapitalizations of Phillips and Unocal are consistent with the predictions of capital structure theory. Except for small redistribution effects against bondholders, the recapitalizations per se had no positive impact on common stock values.

Research paper thumbnail of Size and Timing of Corporate Bond Flotations

Journal of Financial and Quantitative Analysis, 1972

Research paper thumbnail of A Utility-Based Model of Common Stock Price Movements

Journal of Finance, Mar 1, 1986

ABSTRACTThis paper develops and tests a nonlinear utility‐based econometric model of the temporal... more ABSTRACTThis paper develops and tests a nonlinear utility‐based econometric model of the temporal behavior of aggregate stock price movements based on a constant relative risk aversion utility function and an observable information set consisting of aggregate consumption, aggregate dividends, and past stock prices. The stochastic process derived from time‐series analyses of consumption and dividends measured over annual intervals is used to derive and empirically test a closed‐form solution for stock‐price movements. The endogenization of discount rate changes in the utility‐based model is shown to be more consistent with aggregate stock price movements over a twenty‐year holdout period than constant discount rate models. The model is also used to estimate the representative investor's relative risk aversion. The estimate of 4.22 is consistent with that used by Grossman and Shiller in their perfect foresight model and is significantly higher than the relative risk aversion of 1.0 implied by logarithmic utility.

Research paper thumbnail of Elimination of the Double Taxation of Dividends and Corporate Financial Policy

Journal of Finance, Jun 1, 1978

... Elimination of the Double Tax on Dividends and Corporate Financial Policy 741 ... firm's... more ... Elimination of the Double Tax on Dividends and Corporate Financial Policy 741 ... firm's after-tax operating cash flow in period t contingent on state s (ie, after-tax cash flow under a hypothetical all-equity capital structure) and IJ= the jth firm's gross investment in period t ...

Research paper thumbnail of A State-Preference Model of Optimal Financial Leverage

Journal of Finance, Sep 1, 1973

Page 1. A STATE-PREFERENCE MODEL OF OPTIMAL FINANCIAL LEVERAGE ... Assuming that the firm earns i... more Page 1. A STATE-PREFERENCE MODEL OF OPTIMAL FINANCIAL LEVERAGE ... Assuming that the firm earns its debt obligation, financial everage decreases the firm's corporate income tax liability and increases its after-tax operating earnings. ...

Research paper thumbnail of Private Information, Trading Volume, and Stock-Return Variances

Review of Financial Studies, Apr 1, 1990

Page 1. Private Information, Trading Volume, and Stock-Return Variances Michael J. Barclay Univer... more Page 1. Private Information, Trading Volume, and Stock-Return Variances Michael J. Barclay University of Rochester Robert H. Litzenberger Wharton School University of Pennsylvania Jerold B. Warner University of Rochester ...

Research paper thumbnail of Leverage, Diversification and Capital Market Effects on a Risk-Adjusted Capital Budgeting Framework

Journal of Finance, Jun 1, 1968

ASSUMING THAT THE PRIMARY GOAL of the firm is the maximization of wealth of its owners, corporate... more ASSUMING THAT THE PRIMARY GOAL of the firm is the maximization of wealth of its owners, corporate management should choose that group of investments that is expected to have the largest positive effect on the present market value of the firm's outstanding ...

Research paper thumbnail of Announcement effects of new equity issues and the use of intraday price data

Journal of Financial Economics, May 1, 1988

Research paper thumbnail of Sharing rules and equilibrium in an international capital market under uncertainty

Journal of Financial Economics, Jun 1, 1976

Research paper thumbnail of William F. Sharpe's Contributions to Financial Economics

The Scandinavian Journal of Economics, Mar 1, 1991

William Sharpe's published work on the capital asset pricing model (CAPM) and his related wor... more William Sharpe's published work on the capital asset pricing model (CAPM) and his related work on portfolio theory and portfolio performance measurement have had and continue to have enormous impact on scholarly research in financial economics. However, the impact of this pathbreaking research goes far beyond the academic community by ultimately improving, through numerous applications to practical problems in both investments and financial management, the allocative efficiency of capital markets. These applications range from the riskadjusted performance measurement for mutual funds (sometimes called "unit trusts") and pension funds, to the determination of prices for regulated natural monopolies such as electric and telephone utilities. His empirical work on mutual fund performance and the subsequent research that it inspired have led to the establishment of passively managed index funds with enormous savings in transaction costs to pension fund participants and investors in mutual funds. Other major contributions to financial economics by Sharpe include: (i) the binomial pricing model, which provided an efficient method for determining the values of complicated American options; and (ii) his rigorous analysis of the incorrect incentives created by constant cost deposit insurance, which predicted the subsequent debacle in the U.S. thrift industry.

Research paper thumbnail of Equilibrium in the Equity Market Under Uncertainty†

Journal of Finance, Sep 1, 1969

IN RECENT YEARS important contributions to a theory of the valuation of risk assets' have bee... more IN RECENT YEARS important contributions to a theory of the valuation of risk assets' have been made by Sharpe [15], Lintner [8,9] and Mossin [13]. Each of these authors has assumed that investors are risk averse, have homogeneous expectations,2 have utility functions definable over the first two moments of the probability distribution of portfolio rates of returns, have a given amount of their present wealth committed to investment in financial assets, have adequate funds for diversification, and can borrow and lend freely at the pure rate of interest. Given these assumptions they have developed analogous models of the relative price and/or yield structure of individual risk assets in equilibrium. Each of these authors treats the supply of risk assets as fixed and the rate of interest as exogenously determined. Sharpe's paper is essentially a verbal-diagrammatic presentation. He showed that through borrowing or lending, an investor may linearly alter the expected rate of return and standard deviation of the rate of return on his portfolio of financial assets. Since investors would prefer the portfolio or portfolios having the most favorable potential trade-off between expected rate of return and the standard deviation of the rate of return, he theorized that investors would purchase risk assets belonging to this (those) efficient portfolio (portfolios) and simultaneously sell others. The actions of investors would result in price revisions until every risk asset belonged to at least one efficient portfolio. Since portfolio diversification across securities enables investors to escape all but the risk resulting from swings in economic activity, he argued that only the responsiveness or proportionate change in the rate of return of an asset to changes in the level of economic activity is relevant in assessing its risk. He theorized that prices of individual risk assets would adjust until there is a linear relationship

Research paper thumbnail of On Distributional Restric-tions for Two Fund Separation

Research paper thumbnail of The E ects of Personal Taxes and Dividends on Capital Asset Prices: Theory and Empirical Evidence

Research paper thumbnail of The effect of personal taxes and dividends on capital asset prices

Journal of Financial Economics, 1979

Research paper thumbnail of Empirical Tests of the Consumption‐Oriented CAPM

The Journal of Finance, 1989

ABSTRACTThe empirical implications of the consumption‐oriented capital asset pricing model (CCAPM... more ABSTRACTThe empirical implications of the consumption‐oriented capital asset pricing model (CCAPM) are examined, and its performance is compared with a model based on the market portfolio. The CCAPM is estimated after adjusting for measurement problems associated with reported consumption data. The CCAPM is tested using betas based on both consumption and the portfolio having the maximum correlation with consumption. As predicted by the CCAPM, the market price of risk is significantly positive, and the estimate of the real interest rate is close to zero. The performances of the traditional CAPM and the CCAPM are about the same.

Research paper thumbnail of Prices of State-Contingent Claims Implicit in Option Prices

The Journal of Business, 1978

Research paper thumbnail of On the CAPM Approach to the Estimation of A Public Utility's Cost of Equity Capital

The Journal of Finance, 1980

Research paper thumbnail of Market Equilibrium in a Multiperiod State Preference Model with Logarithmic Utility†

Journal of Finance, Dec 1, 1975

I. INTRODUCTION THREE MAIN APPROACHES to asset choice under uncertainty are state preference, mea... more I. INTRODUCTION THREE MAIN APPROACHES to asset choice under uncertainty are state preference, mean-variance and growth-optimal or logarithmic utility. Although state preference is the most general approach, Hirshleifer [16, p. 277] notes that "the absence of a natural, agreed upon, and manageably small set of state definitions puts severe obstacles in the way of examining data about observable security behavior in terms of underlying choices for sequences of time state claims." The mean-variance approach may be viewed as a special case of the state preference model, requiring either quadratic utility or normally distributed returns on securities. The lack of generality of the mean-variance approach is compensated for by its susceptibility to testable propositions about security returns. The growth-optimal or logarithmic utility approach may also be viewed as a special case of the state preference model. While it would be presumptuous to suggest that all investors should have logarithmic utility functions, Roll [28] shows that this assumption permits the derivation of a testable equilibrium relation regarding security returns with no specification of return distributions. Unlike quadratic utility functions, logarithmic utility functions display the desirable behavioristic attribute of decreasing absolute risk aversion. Hakansson [10, 12, 13] shows that a time-state-independent logarithmic utility function for life time consumption and bequest induces an indirect single period utility function that is logarithmic in end of period wealth. Under conditions of state dependent investment opportunities this is the only multiperiod utility function known to induce a concave, indirect single period utility function that is a function only of wealth. The maximization of a single period logarithmic utility function is equivalent to the growth-optimal portfolio selection

Research paper thumbnail of Arbitrage pricing, transaction costs and taxation of capital gains

Journal of Financial Economics, Sep 1, 1984

Research paper thumbnail of On the Distributional Conditions for a Consumption-oriented Three Moment CAPM

Journal of Finance, Dec 1, 1983

In this paper, we develop sufficient conditions on probability distributions for a three moment (... more In this paper, we develop sufficient conditions on probability distributions for a three moment (mean, variance, and skewness) consumption-oriented capital asset pricing model (CAPM) to price correctly a subset of assets. The assumptions that individuals in an allocationally ...

Research paper thumbnail of Some Observations on Capital Structure and the Impact of Recent Recapitalizations on Share Prices

Journal of Financial and Quantitative Analysis, Mar 1, 1986

This paper discusses two fundamental issues in capital structure theory and analyzes the recent r... more This paper discusses two fundamental issues in capital structure theory and analyzes the recent recapitalizations of Phillips and Unocal. It is shown that a value-maximizing capital structure may be inconsistent with shareholder utility maximization and that the Miller debt and taxes equilibrium may be inconsistent with a complete capital market. In spite of these and other unresolved issues, the markets's reactions to the recent recapitalizations of Phillips and Unocal are consistent with the predictions of capital structure theory. Except for small redistribution effects against bondholders, the recapitalizations per se had no positive impact on common stock values.

Research paper thumbnail of Size and Timing of Corporate Bond Flotations

Journal of Financial and Quantitative Analysis, 1972

Research paper thumbnail of A Utility-Based Model of Common Stock Price Movements

Journal of Finance, Mar 1, 1986

ABSTRACTThis paper develops and tests a nonlinear utility‐based econometric model of the temporal... more ABSTRACTThis paper develops and tests a nonlinear utility‐based econometric model of the temporal behavior of aggregate stock price movements based on a constant relative risk aversion utility function and an observable information set consisting of aggregate consumption, aggregate dividends, and past stock prices. The stochastic process derived from time‐series analyses of consumption and dividends measured over annual intervals is used to derive and empirically test a closed‐form solution for stock‐price movements. The endogenization of discount rate changes in the utility‐based model is shown to be more consistent with aggregate stock price movements over a twenty‐year holdout period than constant discount rate models. The model is also used to estimate the representative investor's relative risk aversion. The estimate of 4.22 is consistent with that used by Grossman and Shiller in their perfect foresight model and is significantly higher than the relative risk aversion of 1.0 implied by logarithmic utility.

Research paper thumbnail of Elimination of the Double Taxation of Dividends and Corporate Financial Policy

Journal of Finance, Jun 1, 1978

... Elimination of the Double Tax on Dividends and Corporate Financial Policy 741 ... firm's... more ... Elimination of the Double Tax on Dividends and Corporate Financial Policy 741 ... firm's after-tax operating cash flow in period t contingent on state s (ie, after-tax cash flow under a hypothetical all-equity capital structure) and IJ= the jth firm's gross investment in period t ...

Research paper thumbnail of A State-Preference Model of Optimal Financial Leverage

Journal of Finance, Sep 1, 1973

Page 1. A STATE-PREFERENCE MODEL OF OPTIMAL FINANCIAL LEVERAGE ... Assuming that the firm earns i... more Page 1. A STATE-PREFERENCE MODEL OF OPTIMAL FINANCIAL LEVERAGE ... Assuming that the firm earns its debt obligation, financial everage decreases the firm's corporate income tax liability and increases its after-tax operating earnings. ...

Research paper thumbnail of Private Information, Trading Volume, and Stock-Return Variances

Review of Financial Studies, Apr 1, 1990

Page 1. Private Information, Trading Volume, and Stock-Return Variances Michael J. Barclay Univer... more Page 1. Private Information, Trading Volume, and Stock-Return Variances Michael J. Barclay University of Rochester Robert H. Litzenberger Wharton School University of Pennsylvania Jerold B. Warner University of Rochester ...

Research paper thumbnail of Leverage, Diversification and Capital Market Effects on a Risk-Adjusted Capital Budgeting Framework

Journal of Finance, Jun 1, 1968

ASSUMING THAT THE PRIMARY GOAL of the firm is the maximization of wealth of its owners, corporate... more ASSUMING THAT THE PRIMARY GOAL of the firm is the maximization of wealth of its owners, corporate management should choose that group of investments that is expected to have the largest positive effect on the present market value of the firm's outstanding ...

Research paper thumbnail of Announcement effects of new equity issues and the use of intraday price data

Journal of Financial Economics, May 1, 1988

Research paper thumbnail of Sharing rules and equilibrium in an international capital market under uncertainty

Journal of Financial Economics, Jun 1, 1976

Research paper thumbnail of William F. Sharpe's Contributions to Financial Economics

The Scandinavian Journal of Economics, Mar 1, 1991

William Sharpe's published work on the capital asset pricing model (CAPM) and his related wor... more William Sharpe's published work on the capital asset pricing model (CAPM) and his related work on portfolio theory and portfolio performance measurement have had and continue to have enormous impact on scholarly research in financial economics. However, the impact of this pathbreaking research goes far beyond the academic community by ultimately improving, through numerous applications to practical problems in both investments and financial management, the allocative efficiency of capital markets. These applications range from the riskadjusted performance measurement for mutual funds (sometimes called "unit trusts") and pension funds, to the determination of prices for regulated natural monopolies such as electric and telephone utilities. His empirical work on mutual fund performance and the subsequent research that it inspired have led to the establishment of passively managed index funds with enormous savings in transaction costs to pension fund participants and investors in mutual funds. Other major contributions to financial economics by Sharpe include: (i) the binomial pricing model, which provided an efficient method for determining the values of complicated American options; and (ii) his rigorous analysis of the incorrect incentives created by constant cost deposit insurance, which predicted the subsequent debacle in the U.S. thrift industry.

Research paper thumbnail of Equilibrium in the Equity Market Under Uncertainty†

Journal of Finance, Sep 1, 1969

IN RECENT YEARS important contributions to a theory of the valuation of risk assets' have bee... more IN RECENT YEARS important contributions to a theory of the valuation of risk assets' have been made by Sharpe [15], Lintner [8,9] and Mossin [13]. Each of these authors has assumed that investors are risk averse, have homogeneous expectations,2 have utility functions definable over the first two moments of the probability distribution of portfolio rates of returns, have a given amount of their present wealth committed to investment in financial assets, have adequate funds for diversification, and can borrow and lend freely at the pure rate of interest. Given these assumptions they have developed analogous models of the relative price and/or yield structure of individual risk assets in equilibrium. Each of these authors treats the supply of risk assets as fixed and the rate of interest as exogenously determined. Sharpe's paper is essentially a verbal-diagrammatic presentation. He showed that through borrowing or lending, an investor may linearly alter the expected rate of return and standard deviation of the rate of return on his portfolio of financial assets. Since investors would prefer the portfolio or portfolios having the most favorable potential trade-off between expected rate of return and the standard deviation of the rate of return, he theorized that investors would purchase risk assets belonging to this (those) efficient portfolio (portfolios) and simultaneously sell others. The actions of investors would result in price revisions until every risk asset belonged to at least one efficient portfolio. Since portfolio diversification across securities enables investors to escape all but the risk resulting from swings in economic activity, he argued that only the responsiveness or proportionate change in the rate of return of an asset to changes in the level of economic activity is relevant in assessing its risk. He theorized that prices of individual risk assets would adjust until there is a linear relationship