option pricing for a jump diffusion model with general discrete jump size distributions we obtain a closed form solution for pricing european options under a general jump diffusion model that can incorporate arbitrary discrete jump size distributions including nonparametric distributions such as an empirical distribution the flexibility in the jump size distribution allows the model to better capture leptokurtic features found in real world data the model uses a discrete time framework and leads to a pricing formula that is provably convergent to the continuous time price as the discretization is increased the solution is easy to implement with fast convergence properties numerical results illustrate the efficiency and accuracy of the proposed model and highlight its robustness and flexibility this paper was accepted by noah gans stochastic models and simulation

the variance gamma v g model for share market returns a new stochastic process termed the variance gamma process is proposed as a model for the uncertainty underlying security prices the unit period distribution is normal conditional on a variance that is distributed as a gamma variate its advantages include long tailedness continuous time specification finite moments of all orders elliptical multivariate unit period distributions and good empirical fit the process is pure jump approximable by a compound poisson process with high jump frequency and low jump magnitudes applications to option pricing show differential effects for options on the money compared to in or out of the money copyright 1990 by the university of chicago

models of stock returns a comparison in this paper a discrete mixture of normal distributions is proposed to explain the observed significant kurtosis fat tails and significant positive skewness in the distribution of daily rates of returns for a sample of common stocks and indexes stationarity tests on the parameter estimates of this discrete mixture of normal distributions model revealed significant differences in the mean estimates that can explain the observed skewness and significant differences in the variance estimates that can explain the observed kurtosis an alternative explanation for the observed fat tails is the symmetric student model the result of a comparison between the models is that the discrete mixture of normal distributions model has substantially more descriptive validity than the student model for many years both financial economists and statisticians have been concerned with the description of stock market returns the form of the distribution of stock returns is a crucial assumption for mean variance portfolio theory theoretical models of capital asset prices and the prices of contingent claims for example understanding the behavior of the variance is essential to option pricing models empirical tests of asset pricing models and the efficient markets hypothesis draw statistical inferences that are also conditional on distributional assumptions the most convenient assumption for financial theory and empirical methods is that the distribution of security rates of return be multivariate normal with parameters that are stationary over time since the normal distribution is stable under addition any arbitrary portfolio of stocks will also be normally distributed with the additional assumption of risk aversion mean variance theory follows furthermore the assumptions of normality and parameter stationarity are required for most of the econometric techniques typically used in empirical research tests of the normality hypothesis on the daily returns of the dow jones industrial stocks by fama 121 revealed more kurtosis fatter tails than that predicted from a sample of independent and identically distributed normal variates fama concluded from this evidence that the distribution of price changes conforms better to the stable paretian distribution with characteristic exponent

the proportional solution for economies with both private and public ownership abstract we ask how should a planner whose job is to respect public ownership of some productive assets in conjunction with private ownership of some inputs allocate resources we call our proposal the proportional solution it is characterized by the requirement that the final allocation be pareto efficient and by the condition of equal returns to the use of privately owned inputs we discuss this idea in a publicly owned firm a cooperative and a common pool resource our main result is the existence of proportional solutions in general convex economies journal of economic literature classification numbers d50 d51 d62 l32 h23 h82 p13

an introduction to the law and economics of intellectual property although economists have written on topics of intellectual property for a long time the impact of economics on public policy in this area has been slight especially as compared to the influence of professional writings in areas such as antitrust and taxation we believe that too few of the profession s resources have been devoted to these issues and that of those resources that have been employed too few have been devoted to empirical analyses we hope that this introductory essay and the three papers that follow will stimulate interest in this subject this introductory essay first describes some of the basic economic tradeoffs involved in intellectual property law and then describes the framework of the law in the six areas described above patent copyright semiconductor protection trademark trade secret and misappropriation it is intended both to provide thumbnail descriptions of the various intellectual property regimes to economists working in this area and to indicate where additional economic research might be useful

genetically modified crops and product differentiation trade and welfare effects in the soybean complex a partial equilibrium four region world trade model for the soybean complex is developed in which roundup ready rr products are weakly inferior substitutes to conventional ones rr seeds are priced at a premium and costly segregation is necessary to separate conventional and biotech products solution of the calibrated model illustrates how incomplete adoption of rr technology arises in equilibrium the united states argentina brazil and the rest of the world row all gain from the introduction of rr soybeans although some groups may lose the impacts of rr production or import bans by the row or brazil are analyzed u s price support helps u s farmers despite hurting the united states and has the potential to improve world efficiency

a data analytic look at skewness and elongation in common stock return distributions this article explores the nature of skewness and elongation in daily common stock return distributions of individual firms using estimates of g for skewness and h for elongation obtained from tukey s g and h distributions both parametric and nonparametric bootstrap estimates of standard errors of the g estimates are computed and compared daily return distributions are first examined cross sectionally over a large sample of firms the estimates of the skewness parameter exhibit variation across individual firms but some general trends are evident across industry groups and firm sizes return distributions typically seem to be more elongated than the gaussian distribution from a time series perspective both skewness and elongation are persistent in the return distributions of individual firms and vary over a finite range first order autocorrelation coefficients of monthly g and h estimates are large and suggest a certain degree of predictability

intellectual property rights and the welfare effects of agricultural r d the profound changes that have affected agriculture in modern times are perhaps best illustrated by the evolution of production techniques due to mechanization new chemical inputs such as herbicides pesticides and fertilizers genetic selection of crops and animals new crop varieties and countless other technical and organizational improvements these innovations have allowed a generalized increase in physical output while at the same time agriculture has suffered a massive exodus of labor forces towards the non farm sectors indeed a stylized fact of developed countries post war growth is that productivity in agriculture has grown faster than in other sectors jorgenson and gollop 1992 this remarkable record naturally begs the question of what is at its root and a view that commands considerable consensus is that agricultural productivity growth is due to past investments in scientific research and development r d

large indivisibles an analysis with respect to price equilibrium and fairness an exchange economy is considered in which there are a finite number of individuals the same number of indivisibles and a fixed amount of a divisible good each individual consumes exactly one of the indivisibles and a certain quantity of the divisible good the existence of prices corresponding to pareto efficient allocations is proved it is also shown that this economy possesses fair allocations income fair allocations coalition fair allocations and pareto efficient egalitarian equivalent allocations in this study the effect of including large indivisibles in an exchange economy will be analyzed the analysis will be carried out with respect to the existence of price equilibrium and with respect to the existence of different forms of fairness the economy consists of a finite number of individuals the same number of indivisibles and a fixed amount of a divisible good it is assumed that each individual consumes exactly one of the indivisibles and some quantity of the divisible good we may interpret the indivisibles as being professions or houses the relationship between price equilibrium and a pareto efficient allocation is well known and proved in a number of cases under different assumptions about preferences and commodities for a standard economy see e g debreu 5 in case of nonconvexities which may also describe a certain type of indivisibility we may have an exact relationship in economies with a continuum of individuals see e g hildenbrand 11 but otherwise an approximate relationship obtains the degree of approximation depends on the degree of nonconvexities in preferences and not on the number of individuals see e g arrow and hahn 1 we will prove the existence of prices characterizing a pareto efficient allocation in a case where the indivisibles play an essential role and where approximate results would be too approximate the indivisibles may be considered large for the individual compared to his total consumption the theory of fairness has developed considerably during the seventies different kinds of concepts of fairness have been introduced and analyzed see daniel 41 foley 81 pazner and schmeidler 121 and schmeidler and vind 141 among others normally these authors have considered models with divisible goods or an infinite number of individuals for exchange economies the existence of fair allocations an envy free and pareto efficient allocation has been proved in

microeconomics of agricultural grading impacts on the marketing channel in this paper i focus on how grade prices affect the provision of product transformation skills in the food marketing system a self protection model is used to show how resources are allocated to protect the potential value of commodities in the marketing channel resource allocations may be complementary and complementarity may be exploited to expand an industry further uncertainty concerning skill levels may inhibit expansion because two primary objectives of agricultural extension involve facilitating skill acquisition and disseminating market information the model confirms roles for extension personnel the optimal location of transformation skills in a sequence of operations is also studied

on measuring skewness and elongation in common stock return distributions the case of the market index this article is an exploratory investigation of the distributional properties of market index returns using j w tukey s g and h distributions specifically it is shown that over sufficiently long periods of time the distribution of the market index is adequately explained as a skewed elongated g x h distribution estimates of skewness and elongation are developed that are easy to calculate and are robust with respect to outliers functional forms for the appropr iate distributions are provided the findings reported here have implications for understanding skewness and elongation developing appropriate portfolio strategies and devising pricing models incorporating higher moments copyright 1988 by the university of chicago

nonnormalities and tests of asset pricing theories the robustness of the multivariate test of gibbons ross and shanken 1986 to nonnormalities in the residual covariance matrix is examined after considering the relative performance of various tests of normality simulation techniques are used to determine the effects of nonnormalities on the multivariate test it is found that where the sample nonnormalities are severe the size and or power of the test can be seriously misstated however it is also shown that these extreme sample values may overestimate the population parameters hence we conclude that the multivariate test is reasonably robust with respect to typical levels of nonnormality in traditional hypothesis testing a nonrandom test maps the values of a random variable into a sample space dichotomized into regions where a hypothesis is either accepted or rejected there are three possible outcomes from this process 1 a correct decision 2 a false rejection type i error or 3 failure to reject the hypothesis when it is false type ii error of the latter two types of error an error of the first kind is usually considered less desirable so typically a level of significance is selected with low probability of type i error e g 0 05 or 0 01 and a test is chosen so as to maximize power minimize probability of type ii error for the specified level of type i error knowledge of the relative level of these two errors is critical in assimilating the results of an experiment for example if the power of a test is equal to its significance level i e a weak test rejection of the null contains zero information 2 additionally in constructing parametric tests of hypotheses it is necessary to assume some distribution for the underlying data consequently when using parametric tests rejection of the null is only equivalent to rejection of at least one of the underlying hypotheses i e the null hypothesis or the distributional assumption interestingly the size significance level and power of procedures used to test

cost share equilibria a lindahlian approach abstract we offer a new formalization of lindahl s equilibrium notion for public goods which yields an endogenous theory of profit distribution in line with the benefit approach to taxation increasing returns in the production of public goods are not a priori excluded our equilibrium notion coincides with kaneko s ratio equilibrium for economies with only one public good by reinterpreting the commodity space the equilibrium concept can be applied to economies with purely private goods or with externalities in the pure private good case our concept singles out allocations that are efficient and where individual net payments agree with average cost

extracting market information from equity options with exponential levy processes levy processes have been successfully applied in the modeling of financial assets useful information such as implied volatility skewness and risk preferences can be derived from market option prices in this paper we advocate using esscher conjugate levy processes to estimate risk neutral and empirical densities more specifically we employ the exponential meixner and nig processes to calculate in closed form the pricing kernel in the equity market and then study the evolution of equity market behavior between 2002 and 2010 our empirical analysis using s p 500 options shows that the risk preferences of equity investors were signalling an anomaly in the market well before the subprime prime mortgage crisis august 2007 and the crisis of confidence that followed anticipating the downfall in equity markets in 2008 but then returning to normal levels in 2009

rational entry into risky markets with negative expected returns the role of biased misestimation of profit potential abstract we extend the theory of negative long run profits in risky industries by incorporating a negatively skewed profit distribution rational behavior with incomplete information is introduced by allowing economic agents to know the median rather than the mean rate of return we compare this to the case involving postdecision bolstering where entrants choose to discount available information on the industry profit distribution monte carlo experiments are tailored to the experience of the u s home building industry

reward patterns of fair solutions abstract the solutions proposed in the literature on fair allocations are sensitive to the preference profiles of the agents as a consequence each of them displays a specific distribution pattern which may be interpreted as rewarding certain kinds of preferences at the expense of others in the basic models with private goods and decreasing returns the equal income competitive equilibrium tends to favor the eccentric preferences whereas most egalitarian equivalent solutions tend to reward the agents who like particular resources the identification of the rewarding pattern of each mechanism sheds light on its ethical content and may help select the adequate solution in concrete applications in this analysis a preference monotonicity property turns out to be satisfied by many solutions

extracting probabilistic information from the prices of interest rate options tests of distributional assumptions return distributions in general and interest rates in particular have been observed to exhibit skewness and kurtosis that cannot be explained by the log normal distribution using g and h distribution we derived a closed form option pricing formula for pricing european options we measured its performance using interest rate cap data and compared it with the option prices based on the lognormal burr 3 weibull and gb2 distributions we observed that the g and h distribution exhibited a high degree of accuracy in pricing options much better than those other distributions in extracting probabilistic information from the option market

bounds and prices of currency cross rate options abstract this paper derives the pricing bounds of a currency cross rate option using the option prices of two related dollar rates via a copula theory and presents the analytical properties of the bounds under the gaussian framework our option pricing bounds are useful because 1 they are general in the sense that they do not rely on the distribution assumptions of the state variables or on the selection of the copula function 2 they are portfolios of the dollar rate options and hence are potential hedging instruments for cross rate options and 3 they can be applied to generate bounds on deltas the empirical tests suggest that there are persistent and stable relationships between the market prices and the estimated bounds of the cross rate options and that our option pricing bounds obtained from the market prices of options on two dollar rates and the historical correlation of two dollar rates are highly informative for explaining the prices of the cross rate options moreover the empirical results are consistent with the predictions of the analytical properties under the gaussian framework and are robust in various aspects

joint ownership of a convex technology comparison of three solutions a given set of agents jointly own and operate a decreasing returns to scale technology with a single input and a single output they all contribute some input and receive some of the output what first best allocation is equitable we discuss three allocation mechanisms the equal benefits solution gives every agent the same benefit computed at the supporting price the equal returns solution equalizes returns output shares input contributions across agents the constant returns equivalent solution gives every agent his indirect utility level at some common price of output relative to input a lower and an upper bound on individual welfares play a key role in these axiomatic characterisation results

the replacement principle in public good economies with single peaked preferences abstract we study the implications for a simple public good model with single peaked preferences of a replacement principle we apply the principle to situations when the preferences of one of the agents may change then the principle results in a condition used by moulin in the context of binary public decision as a consequence of the replacement all other agents should be affected in the same direction they all gain or they all lose we characterize the family of efficient solutions satisfying the property it is a subfamily of the family of strategy proof solutions introduced by moulin under the name of generalized condorcet winner solutions

the replacement principle in economies with single peaked preferences abstract our objective is to investigate the implications of the replacement principle for the fair allocation of an infinitely divisible commodity among agents with single peaked preferences the principle says that when one of the components of the data entering the description of the problem to be solved changes all of the relevant agents should be affected in the same direction they all gain or they all lose we apply it to situations in which the preferences of one of the agents may change under the name ofwelfare domination under preference replacement we show that there is no selection from the no envy and pareto solution satisfying it then we weaken it by limiting its application to situations in which the change is not so disruptive that it turns the economy from one in which there is too little of the commodity to one in which there is too much or conversely we show that there is only one selection from the no envy and pareto solution satisfying this property andreplication invariance it is the uniform rule a solution that has played a central role in previous analyses of the problem journal of economic literatureclassification numbers d51 d63 d70

insider trading abnormal return and preferential information supervising through a probabilistic model abstract the enforcement of the ban on insider trading requires an evaluation of the disgorgement i e the capital gain of the insider trader who takes advantage of the exploitation of preferential information an initial step forward on this topic has been taken by the sec the united states securities and exchange commission which has developed a quantitative procedure based on the event study methodology this paper develops an adaptation of this procedure for the italian market and explains the limits of these methodologies in the analysis of the insider trading phenomenon in particular it emerges that the econometric approach cannot be applied to all insider trading schemes in fact in order to work out statistically significant results it relies on a series of assumptions such as the existence of a robust reference market index or the availability of long time series data for this reason a new procedure for computing the economic value of the information exploited by the insider based on a probabilistic approach has also been developed this methodology overcomes the issues connected to the event study procedure and can be applied by construction to all insider trading schemes and not only to the simplest ones in fact the model parameters are defined by using the trading strategy of the single insider thus if insider trading takes place the model is able to offer a disgorgement computation hence by hypotheses of its construction it is able to detect the difference between insiders and followers the new procedure has been adopted by consob and has been presented to the judicial system which is in charge of inflicting the fine

welfare bounds in the fair division problem to any anonymous division method corresponds a lower and an upper bound function they measure the impact on a given agent s utility of the other agents preferences the highest lower bound is the equal split utility the lowest upper bound is the indirect utility from equal split at a canonical price these two bounds are compatible yet any method with the elqual split lower bound exhibits the growth paradox and any method with the lowest upper bound generates envy we criticize competitive equilibrium from equal split because it puts no finite upper bound on any agent s welfare

economic benefits and costs of biotechnology innovations in agriculture the conceptual model necessary for an assessment of biotechnology s economic benefits and costs is outlined emphasizing the need to account for the proprietary nature of biotechnology innovations the model is illustrated with an application to roundup ready soybeans the estimated value of this innovation is sizeable with consumers and innovators claiming the larger share of net benefits also disparities in intellectual property rights protection across countries affect the distribution of benefits consumer resistance toward genetically modified organisms gmos and the issues of labeling and market segregation complicate the economic evaluation of biotechnology innovations and a number of related regulation and public policy issues are discussed emerging output trait gmos are potentially less controversial and ma y bring more benefits to all participants in the agri food sector but this outcome depends crucially on the development of an effective credible and internationally harmonized regulatory system

a general distribution for describing security price returns this paper introduces a generalized distribution called the gb2 distribution for describing security returns the distribution is extremely flexible containing a large number of well known distributions such as the lognormal log t and log cauchy distribu tions as special or limiting cases and allowing large even infinite higher moments this flexibility allows a direct representation of different degrees of fat tails in the distribution the properties of the gb2 make it useful in empirical estimation of security returns and in facilitating the development of option pricing models and other models that depend on the specification and mathematical manipulation of distributions copyright 1987 by the university of chicago

egalitarian equivalent cost sharing of a public good in an economy with one public and one private good egalitarian equivalent cost sharing consists of finding the highest public good level x such that consuming x for free yields a feasible utility distribution the corresponding feasible allocation typically unique called egalitarian equivalent is in the core of the economy conversely any cost sharing method satisfying pareto optimality cost monotonicity nobody suffers a utility loss if the production technology improves upon ceteris paribus and individual rationality no single agent coalition objects or no private transfers no agent receives a positive amount of private good must select an egalitarian equivalent allocation in every economy copyright 1987 by the econometric society

skewness persistence in common stock returns recent empirical studies have found ex post common stock returns to be consistently positively skewed the frequency of positive skewness in this study is found to be relatively stable over varying time periods from 1961 to 1980 however the skewness of individual stocks and portfolios of stocks does not persist across different time periods positively skewed equity portfolios in one period are not likely to be positively skewed in the next time period past positively skewed returns do not predict future positively skewed returns

no envy and consistency in economies with indivisible goods we consider the problem of fair allocation in economies with indivisible goods our main objective is to identify appealing subsolutions of the no envy solution we formulate desirable properties of solutions and look for solutions satisfying them given an allocation chosen by a solution for some economy and given a subgroup of the agents consider the problem of fairly distributing among its members the resources that this group has collectively received the solution is consistent if it recommends that the same bundle be attributed to each of these agents as initially we show that there is no proper subsolution of the no envy solution that satisfies consistency however many subsolutions satisfy bilateral consistency or the converse of consistency but again there is no proper subsolution satisfying these two properties together

the bootstrap approach for testing skewness persistence this study presents a new methodology for testing changes in skewness between time periods or samples using the bootstrap method a monte carlo simulation experiment was conducted to compare the effectiveness of the bootstrap method with the method suggested by lau wingender and lau 1989 to test skewness persistence the results show the bootstrap method to be more powerful than the other method the bootstrap method was also used to determine the persistence of skewness in stock returns the results show that in a large percentage of stocks skewness persists over time

the time variance relationship of security returns implications for the return generating stochastic process using a test statistic which specifically allows for parameter shifts over time we investigate the time variance relationship of security returns the null hypothesis of stationary and independent increments is rejected and the existence of a complex short term reversal phenomenon is reported

fair allocation of indivisible goods and criteria of justice a set of n objects and an amount m of money is to be distributed among m people example the objects are tasks and the money is compensation from a fixed budget an elementary argument via constrained optimization shows that for m sufficiently large the set of efficient envy free allocations is nonempty and has a nice structure in particular various criteria of justice lead to unique best fair allocations that are well behaved with respect to changes of m this is in sharp contrast to the usual fair division theory with divisible goods