This paper documents a long‐lived asymmetrical relationship between interest rate changes and subsequent stock returns. Drops in interest rates are followed by twelve months of excess stock returns, while increases in interest rates have little effect. The results are robust to the choices of short‐term interest rate and stock index. These findings cannot be explained by Geske and Roll's [10] reversed causality argument; nor do they appear to result from periods of unusual interest rates or stock returns. Since interest rate changes are generally used as proxies for changes in expected inflation, the results provide new insights into previous research on inflation and stock returns, and there are important implications for the literature on time‐varying risk premia.

This paper modifies the Black-Scholes option pricing model to include the effects of transaction costs and different borrowing and lending rates. The paper demonstrates that these market imperfections tend to offset each other yielding a bounded range of prices for each option. The paper also shows that under some conditions the option pricing hedge may be society's lowest cost financial intermediary. IN THEIR ANALYSIS of options, Black and Scholes [1] created a risk-free hedgeby taking opposite positions in options and common stock. If the hedge consists of a long position in common stock and a short position in call options, the hedge will require a positive net investment which will earn the risk-free rate (an "investment hedge"). If the hedge consists of a long position in call options and a short position in stock, the hedge supplies funds which will cost the borrowing rate (a "borrowing hedge").1If transaction costs are ignored, the option price appropriate to an investment hedge is the traditional Black-Scholes price (and therefore earns the risk-free rate) and the option price appropriate to a borrowing hedge is the Black-Scholes price with the investor's borrowing rate substituted for the Treasury bill rate + This research was conducted while the authors were, respectively, an Assistant Professor of Finance and a Doctoral Candidate in Physics at the University of Illinois. They are now employed as a Visiting Assistant Professor of Finance at the University of New Mexico and a researcher for California Laser, respectively. The authors would like to thank the University of Illinois Investors in Business Education and the University of Illinois Research Board for financial support. Special thanks to George Constantinides who was smart enough (and kind enough) to point out a serious error in an earlier version of the paper. Remaining errors are, of course, the authors'.'There are a variety of possible applications of the Black-Scholes option hedge concept. In its most elegant incarnation, a zero risk, zero return hedge is formed with either a long position in stock, a short position in call options, and borrowing; or short stock, long options, and lending. Unfortunately, in practice, market imperfections (i.e., discrimination against short sales, transaction costs, and different borrowing and lending rates) make this classical hedge position unprofitable.Other uses for the option pricing hedge result from the fact that any two of the three elements of the hedge can be used to duplicate the third, thus providing the investor with a choice of mechanisms for achieving the same results. For example, the introduction of this paper makes use of the fact that a long position in stock and a short position in call options (rebalanced) can be used to duplicate the behavior of a Treasury bill, thus providing investors with a choice of risk-free investments. On the other hand, footnote 7 makes use of the fact that a call option (with rebalancing) can be used to duplicate the behavior of a long position in stock that has...

The concentrations of strontium-90 in deciduous incisor teeth of children born in St. Louis between 1949 to 1957 are in accord with estimated bone levels, suggesting that human deciduous teeth are useful as an index of strontium-90 accumulation during the time the teeth are formed.

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