Changes in the Nikkei 500: New Evidence for Downward Sloping Demand Curves for Stocks
Shinhua Liu (University of Missouri-Columbia)

This Study investigates the price and trading volume effects of changes in the Nikkei 500. On average, prices increase (decrease) significantly for stocks added (deleted) with no significant post-event reversals. Trading volume, on average, increases significantly for both stocks added and deleted in the short run. In the long run, however, trading volume falls (rises) significantly for stocks added (deleted), contrary to previous findings. These results support the hypothesis of downward sloping demand curves for stocks and refute three competing hypotheses. Finally, the Nikkei 500 changes cause considerably less pronounced price changes than do the S&P 500 changes.
*I wish to thank John Stowe, Sheridan Titman (the editor) and an anonymous referee for comments and suggestions. Research assistance from Ron Howren is gratefully acknowledged. Errors remaining are mine alone.

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Interest Rate, Currency and Equity Derivatives Valuation Using the Potential Approach
Naosuke Nakamura (Financial Technology Department No.3, IBJ-DL Financial Technology Co. Ltd.)
Fan Yu (Graduate School of Management, University of California at Irvine)

Based on the potential approach to interest rate modelling, we introduce a simple tractable model for the unified valuation of interest rate, currency and equity derivatives. Our model is able to accommodate the initial term structure of zero-coupon bond prices, generate positive and bounded interest rates, and handle cross products such as differential swaps, quanto options and equity swaps. As our model is specified under the actual probability measure, it can be directly used for portfolio risk management and the computation of value at risk. Furthermore, our model yields simple analytical formulas that are easy to calibrate and implement.
*We would like to thank the Editors, Nai-fu Chen and Sheridan Titman, an anonymous referee and Daisuke Nakazato for their valuable comments and careful review.

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The Contributions of Professors Fischer Black, Robert Merton and Myron Scholes to the Financial Services Industry
Terry Marsh (Walter A. Haas School of Business, University of California at Berkeley)
Takao Kobayashi (Faculty of Economics, University of Tokyo)

This paper is written as a tribute to Professors Robert Merton and Myron Scholes, winners of the 1997 Nobel Prize in economics, as well as to their collaborator, the late Professor Fischer Black. We first provide a brief and very selective review of their seminal work in contingent claims pricing. We then provide an overview of son of the recent research on stock price dynamics as it relates to contingent claim pricing. The continuing intensity of this research, some 25 years after the publication of the original Black-Scholes paper, must surely be regarded as the ultimate tribute to their work. We discuss jump-diffusion and stochastic volatility models, subordinated models, fractal models and generalized binomial tree models for stock price dynamics and option pricing. We also address questions as to whether derivatives trading poses a systemic risk in the context of models in which stock price movements are endogenized, and give our views on the ‘LTCM crisis’ and liquidity risk.
*This is the first in a series of articles that are sponsored by Goldman Sachs Asset Management. The purpose of these articles is to provide an interface between the academic world and new developments in the financial markets that may warrant further research. We wish to thank Goldman Sachs Asset Management for their generous financial support.

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