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A three parameter stochastic process, termed the variance gamma process, that generalizes Brownian motion is developed as a model for the dynamics of log stock prices. The process is obtained by evaluating Brownian motion with drift at a random time given by a gamma process. The two additional parameters are the drift of the Brownian motion and the volatility of the time change. These additional parameters provide control over the skewness and kurtosis of the return distribution. Closed forms are obtained for the return density and the prices of European options. The statistical and risk neutral densities are estimated for data on the S&P500 Index and the prices of options on this Index. It is observed that the statistical density is symmetric with some kurtosis, while the risk neutral density is negatively skewed with a larger kurtosis. The additional parameters also correct for pricing biases of the Black Scholes model that is a parametric special case of the option pricing model developed here.

While voluminous studies have attributed the continuing decline of institutional trust to political corruption, the link between corruption and institutional trust in Asia has yet to be explored systematically. Testing the effect of corruption on institutional trust is theoretically important and empirically challenging, since many suggest that contextual factors in Asia, such as political culture and electoral politics, might neutralize the negative impact of corruption. Utilizing data from the East Asia Barometer, we find a strong trust-eroding effect of political corruption in Asian democracies. We also find no evidence that contextual factors lessen the corruption-trust link in Asia. The trust-eroding effect holds uniformly across all countries examined in this study and remains robust even after taking into account the endogenous relationship between corruption and trust.

Short-sales practices in the Hong Kong stock market are unique in that only stocks on a list of designated securities can be sold short. By analyzing the price effects following the addition of individual stocks to the list, we find that short-sales constraints tend to cause stock overvaluation and that the overvaluation effect is more dramatic for individual stocks for which wider dispersion of investor opinions exists. These findings are consistent with Miller's (1977) intuition and other optimism models. We also document higher volatility and less positive skewness of individual stock returns when short sales are allowed. Copyright 2007 by The American Finance Association.

the university of trento, nuffield college (oxford), Washington university in st. Louis, stanford university, the Pontificia universidad católica de chile, and carleton university (canada). We are grateful for comments from members of those audiences and for additional comments by James alt, donatella della Porta, andrew healy, douglas a. hibbs, Jr., Lucio Picci, steven reed, susan roseackerman, salvatore vassallo, and andrea vindigni. the data were gathered by Miriam golden with support of the national science foundation (ses-0074860), the russell sage foundation, and the academic senate of the university of california at Los angeles. the data on malfeasance were originally provided by the gruppo democratici di sinistra-L'ulivo of the senato della repubblica italiana and are publicly available via dataverse at http://dvn.iq.harvard.edu/dvn/dv/golden. for research assistance, we thank daniel smith, Jonathan slapin, Matthew spence, and yuki yanai.

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