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Economic Review

Economic Review
December 1996, Volume 81, Numbers 3-6

Economic Review articles are posted on the Web as they become available. Page numbers in the PDF file posted here may not reflect the page numbers of the printed version.

1 Wildcat Banking, Banking Panics, and Free Banking in the United States

Gerald P. Dwyer Jr.

Banks in the United States issued currency with no oversight of any kind by the federal goverment from 1837 to 1865. Many of these banks were part of "free banking" systems with no discretionary approval of entry into banking, and these banks issued notes that were used for payments in transactions just as Federal Reserve notes are today. There was no central bank or goverment insurance, and the ultimate guarantee of the value of a bank's notes was the value of the bank's assets. As the author indicates, these banknotes have similarities to some forms of electronic money.

Free banking in the United States sometimes has been equated with wildcat banking, a name that suggests that opening a bank has much in common with drilling an oil well. The author examines notorious instances of supposed wilcat banking and finds little evidence that free banks were imprudent, let alone financially reckless. Instead, episodic difficulties faced by free banks occurred because of developments outside the banking systems.

18 Options and Volatility

Peter A. Abken and Saikat Nandi

Because volatility of the underlying asset price is a critical factor affecting option prices and hedge ratios, the modeling of volatility and its dynamics is of vital interest to traders, investors, and risk managers. This modeling is a difficult task because the path of volatility during the life of an option is highly unpredictable. There has been a proliferation of volatility specifications since the original, simple constant-volatility assumption of the famous Black and Scholes option pricing model. This article gives an overview of different specifications of asset price volatility that are widely used in option pricing models.

While the authors cite evidence that some stochastic-volatility option pricing models provide better market prices and hedges than the Black-Scholes model, they acknowledge that for both academic researchers and market practitioners, no consensus exists regarding the best specification of volatility for option pricing. Although a number of alternative approaches can account, at least partially, for the pricing deficiencies of the Black-Scholes models, none dominates as a clearly superior approach for pricing options.

Jack Guynn

Senior Vice President and
Director of Research

Robert A. Eisenbeis

Research Department
B. Frank King, Vice President and Associate Director of Research
Mary Susan Rosenbaum, Vice President, Macropolicy
Roberto Chang, Research Officer, Macropolicy
Thomas J. Cunningham, Research Officer, Regional
William Roberds, Research Officer, Macropolicy
Larry D. Wall, Research Officer, Financial

Public Affairs
Bobbie H. McCrackin, Vice President
Joycelyn Trigg Woolfolk, Editor
Lynn H. Foley, Managing Editor
Carole L. Starkey, Graphics
Ellen Arth, Circulation
Linda Mundy, Administrative Assistance

The Economic Review of the Federal Reserve Bank of Atlanta presents analysis of economic and financial topics relevant to Federal Reserve policy. In a format accessable to the nonspecialist, the publication reflects the work of the Research Department. It is edited, designed, produced, and distributed through the Public Affairs Department.

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ISSN 0732-1813

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