who s on first an empirical test of the coase theorem in baseball because of their highly developed skills major league baseball players generate significant economic rents according to the weak version of the coase theorem the allocation of these players is independent of who controls the rights to these rents which depends on the rules governing competition in the baseball labour market the rules of major league baseball establish a dual system for senior players the market is competitive and players have the right of free agency allowing them to attempt to contract with the team of their choice for players with fewer years of experience the market is monopsonistic and a player s right to play baseball is owned by his current team consequently we simultaneously observe two different allocations of property rights using individual player data for 1979 and 1980 we test whether baseball player movement is independent of the ownership of these rents we estimate the wage marginal revenue determination process for free agent and non free agent movers and

migration trends and earnings of free agents in major league baseball 1976 1979 this paper is an empirical investigation of the effect of team characteristics on the migration pattern of free agents in major league baseball during the period 1976 1979 the results indicate that high quality free agents tend to leave winning teams and move to teams in cities with large or rapidly growing populations the compensation paid to free agents is shown to depend on these team characteristics as well as the players personal characteristics and market conditions

externalities property rights and the allocation of resources in major league baseball most economists who have analyzed professional baseball have concluded that two distinctive features of its labor market the reserve clause and player draft influence the distribution of wealth between players and owners but do not affect the allocation of playing talent among teams such conclusions which are strongly at variance with laymen s views of such matters are derived from theoretical considerations rather than empirical examinations our paper examines data from the two decades of major league history and concludes that on the basis of that data the empirical generalizations of previous economists do not appear to be justified

the pricing of options on assets with stochastic volatilities one option pricing problem that has hitherto been unsolved is the pricing of a european call on an asset that has a stochastic volatility this paper examines this problem the option price is determined in series form for the case in which the stochastic volatility is independent of the stock price numerical solutions are also produced for the case in which the volatility is correlated with the stock price it is found that the black scholes price frequently overprices options and that the degree of overpricing increases with the time to maturity one option pricing problem that has hitherto remained unsolved is the pricing of a european call on a stock that has a stochastic volatility from the work of merton 12 garman 6 and cox ingersoll and ross 3 the differential equation that the option must satisfy is known the solution of this differential equation is independent of risk preferences if a the volatility is a traded asset or b the volatility is uncorrelated with aggregate consumption if either of these conditions holds the risk neutral valuation arguments of cox and ross 4 can be used in a straightfoward way this paper produces a solution in series form for the situation in which the stock price is instantaneously uncorrelated with the volatility we do not assume that the volatility is a traded asset also a constant correlation between the instantaneous rate of change of the volatility and the rate of change of aggregate consumption can be accommodated the option price is lower than the blackscholes b s 1 price when the option is close to being at the money and higher when it is deep in or deep out of the money the exercise prices for which overpricing by b s takes place are within about ten percent of the security price this is the range of exercise prices over which most option trading takes place so we may in general expect the b s price to overprice options this effect is exaggerated as the time to maturity increases one of the most surprising implications of this is that if the b s equation is used to determine the implied volatility of a near the money option the longer the time to maturity the lower the implied volatility numerical solutions for the case in which the volatility is correlated with the stock price are also examined the stochastic volatility problem has been examined by merton 13 geske 7 johnson 10 johnson and shanno 11 eisenberg 5 wiggins 16 and

option prices and the underlying asset s return distribution this work examines the relation between option prices and the true as opposed to risk neutral distribution of the underlying asset if the underlying asset follows a diffusion with an instantaneous expected return at least as large as the instantaneous risk free rate observed option prices can be used to place bounds on the moments of the true distribution an illustration of the paper s results is provided by the analysis of the information concerning the mean and standard deviation of market returns contained in the prices of s p 100 index options although it seems natural that the prices of claims to various parts of the underlying asset s distribution should contain information about the shape of that distribution cox and ross 1976 established that an option s price equals its expected payoff discounted at the risk free rate where the expectation is taken over the risk neutral rather than the true distribution of the underlying asset linking the risk neutral distribution implicit in option prices to the true distribution remains a comparative mystery a necessary condition for the risk neutral pricing methodology to be applicable is that the true and the risk neutral distribution share a common support the only information about the true distribution that can be obtained from observed option prices alone is information about that support this paper demonstrates though that observed option prices when used in conjunction with simple assume d restrictions on the true distribution do contain information about the noncentral moments of the true distribution not directly implied by those assumed restrictions alone the intuition for the result that option prices can be useful in placing bounds on the moments of the true distribution is straightforward first we generalize the results in lo 1987 to show how the expected payoff to a call can be bounded above in terms of any chosen set of the noncentral moments of the return on the underlying asset second we establish restrictions on the

recovering probability distributions from option prices this article derives underlying asset risk neutral probability distributions of european options on the s p 500 index nonparametric methods are used to choose probabilities that minimize an objective function subject to requiring that the probabilities are consistent with observed option and underlying asset prices alternative optimization specifications produce approximately the same implied distributions a new and fast optimization technique for estimating probability distributions based on maximizing the smoothness of the resulting distribution is proposed since the crash the risk neutral probability of a three four standard deviation decline in the index about 36 percent 46 percent over a year is about 10 100 times more likely than under the assumption of lognormality recently the increasing popularity of derivatives and some highly publicized failures to control risk have led to increased efforts to find reasonable methods to measure the sensitivity of large institutional derivatives portfolios to extreme events merely because such events are rare is not sufficient to ignore them since on the few occasions when they do occur significant amounts of money can change hands potentially wiping out profits accumulated over long prior periods a key assumption behind methods of estimation is the joint probability distribution of constituent underlying asset returns this has long been a concern of financial economists since probability assumptions are critical to much of their research during the last quarter century heretofore probability distributions of stock market returns have typically been estimated from historical time series unfortunately common hypotheses may not capture the probability of extreme events and the events of interest are rare or may not be present in the historical record even though they are clearly possible

the statistical properties of daily foreign exchange rates 1974 1983 abstract this paper examines the statistical properties of daily rates of change of five foreign currencies from 1974 to 1983 the main purpose is to discriminate between two competing explanations for the observed heavy tails of the distribution that the data are independently drawn from a heavy tail distribution which remains fixed over time and that the data come from distributions which vary over time evidence point to the rejection of the first hypothesis further investigations show that the rejection can be attributed to changing means and variances in the data which can be described by a simple statistical model

using option prices to estimate realignment probabilities in the european monetary system the case of sterling mark abstract this paper describes a procedure for estimating the market s perceived probability distribution of future exchange rates from the prices of risk reversals strangles and other currency options and uses the procedure to estimate the risk neutral ex ante probability of a realignment of the pound sterling the procedure for estimating the realignment probabilities relies on the jump diffusion model of exchange rate behavior and the resulting option pricing formula by fitting this model to market option price data i retrieve the unobserved parameters of the jump diffusion process i then use these parameter estimates to estimate the ex ante probability distribution of exchange rates and thus the realignment probabilities

ownership of property rights and the allocation of talents under the reserve clause system that assigns the property rights on the major league baseball players services to teams player transfers are negotiated between teams without the involvement of players in contrast under the current free agency system players with free agent status negotiate directly with potential suitors thus the system assigns the property rights to players using data extracted from the baseball archive http baseball1 com this article examines the effect of the change in the property rights assignment on the allocation of talents across teams we find that the change increased large market teams shares of veteran all star players and the concentration of senior players

arbitrage based tests of target zone credibility evidence from erm cross rate options this paper introduces two arbitrage based tests of target zone credibility using a new data source exchange rate mechanism cross rate options using daily option prices from september 1991 to august 1994 the authors assess the credibility of the pound mark and mark lira target zones that collapsed in september 1992 and the ongoing mark french franc target zone these tests are based on restrictions that must apply to all option prices within a credible target zone and are free from specification error and estimation error the authors also identify a minimum intensity of realignment an expression indicating the probability weighted average realignment size copyright 1996 by american economic association

free agency long term contracts and compensation in major league baseball estimates using longitudinal data for major league baseball players this paper estimates the effects of eligibility for free agency or arbitration on compensation and contract duration becaus e eligibility is based on experience and better players are kept longe r a fixed effects approach is used arbitration and free agency eligibility both raised annual compensation however only free agen cy raised contract duration the free agency findings are consistent wi th nash bargaining however additionally considering the arbitration results suggests the winner s curse duration rises only when a team might lose a player the auction market is thus avoided copyright 1993 by mit press

an interpretation of recent research on exchange rate target zones how do exchange rate bands work compared to completely fixed rates between realignments or more precisely what are the dynamics of exchange rates interest rates and central bank interventions within exchange rate bands does the difference between bands and completely fixed exchange rates matter and if so which of the two arrangements is best or more precisely what are the tradeoffs that determine the optimal bandwidth this article will present an interpretation of some selected recent theoretical and empirical research on exchange rate target zones with emphasis on main ideas and results and without technical detail

the coase theorem free agency and major league baseball a panel study of pitcher mobility from 1961 to 1992 a great deal of conceptual and empirical work in the economic analysis of the law and property rights has been directed towards resolving a controversy surrounding the coase theorem many economists and legal scholars interpret the theorem as containing two propositions the first is that in the absence of transactions costs and wealth effects parties will bargain to an efficient outcome the second holds that the same outcome will be achieved regardless of the distribution of property rights the latter is known as the invariance thesis and it has been a source of dispute among scholars and between economic theorists and owners of economic enterprises e g owners of professional sports teams 5 11 16 23 24 25 26 28 29 this paper provides an econometric test of the invariance proposition major league baseball presents a natural experiment consisting of an industry in which there has been an explicit change in the assignment of property rights beginning in 1879 the reserve clause gave monopsony power to team owners a player could negotiate salary only with the team that owned his contract and the team could trade or sell the player as management saw fit in 1976 this system was replaced by the institution of free agency whereby a player with at least six years of major league experience acquired

the neoclassical firm under moral hazard we develop a model of the neoclassical firm under moral hazard with endogenous capital and employment and perfectly competitive capital labor and product markets we assume that effort becomes harder to measure as the firm gets larger and the exogenous parameters are affiliated the model explains why incentives decline but wages rise with firm size the mixed evidence on the risk reward tradeoff and the positive correlation between wages and profits in the long run incentives are increasing in risk via endogenous capital finally the model makes novel predictions about the relationship between incentives and labor market conditions

forecasting stock return variance toward an understanding of stochastic implied volatilities we examine the behavior of measured variances from the options market and the underlying stock market under the joint hypotheses that markets are informationally efficient and that option prices are explained by a particular asset pricing model forecasts from time series models of the stockreturn process should not have predictive content given the market forecast as embodied in option prices both in sample and out of sample tests suggest that this hypothesis can be rejected using simulations we show that biases inherent in the procedure we use to imply variances cannot explain this result thus we provide evidence inconsistent with the orthogonality restrictions of option pricing models that assume that variance risk is unpriced these results also have implicationsfor optimal variance forecast rules

the crash of ʼ87 was it expected the evidence from options markets transactions prices of s p 500 futures options over 1985 1987 are examined for evidence of expectations prior to october 1987 of an impending stock market crash first it is shown that out of the money puts became unusually expensive during the year preceding the crash second a model is derived for pricing american options on jump diffusion processes with systematic jump risk the jump diffusion parameters implicit in options prices indicate that a crash was expected and that implicit distributions were negatively skewed during october 1986 to august 1987 both approaches indicate no strong crash fears during the 2 months immediately preceding the crash attempts to explain what caused the stock market crashes around the world in october 1987 have suffered from the paucity of major economic developments occurring around that time that could have triggered the crashes shifting expectations regarding monetary policy foreign investors fears of a dollar decline increasing riskiness of assets none of these appeared major enough if present at all to explain the magnitude of the crashes and although portfolio insurance strategies could conceivably magnify the effects of a jump in fundamentals the initiating jump in fundamentals appears to be lacking

predicting volatility in the foreign exchange market measures of volatility implied in option prices are widely believed to be the best available volatility forecasts in this article we examine the information content and predictive power of implied standard deviations isds derived from chicago mercantile exchange options on foreign currency futures the article finds that statistical time series models even when given the advantage of ex post parameter estimates are outperformed by isds isds however also appear to be biased volatility forecasts using simulations to investigate the robustness of these results the article finds that measurement errors and statistical problems can substantially distort inferences even accounting for these however isds appear to be too variable relative to future volatility it is widely believed that the volatility implied in option prices is the market s best estimate of future volatility after all if it were not one could devise a trading strategy that could generate profits by identifying mispriced options the purpose of this article is to investigate the information content and predictive power of volatility implied in options on foreign currencies the paper focuses on options on currency futures traded on the chicago mercantile exchange cme because of the depth and liquidity of cme futures and options traded side by side in the same market implied standard deviations isds allow for clean tests of the predictive power of implied volatilities early studies of the information content of isds have generally found that these contain substantial information for future volatility latane and rendleman 1976 chiras and manaster 1978 and beckers 1981 for example regress future volatility on the weighted implied volatility across a broad sample of chicago board options exchange cboe stocks and find that options contain volatility forecasts that are more accurate than historical measures 1 these studies performed shortly after the 1973 beginning of the cboe option market could only use a relatively short time span and therefore focused on cross sections rather than time series predictions

the economic design of sporting contests what is the optimal number of entrants in a race or the optimal number of teams in a baseball league what is the optimal structure of prizes for a golf tournament or degree of revenue sharing for a football championship how evenly balanced should the competing teams be in the nascar or formula one championships what is the maximum number of entrants per nation to the olympic games that should be permitted what quota of qualifying teams to the soccer world cup should be allocated to the developing nations

recovering an asset s implied pdf from option prices an application to crude oil during the gulf crisis we develop a general method for estimating the implied martingale equivalent probability density function pdf for futures prices from american options prices the early exercise feature of american options precludes expressing the price of the option in terms of the pdf there exist tight bounds for the price of american options in terms of the pdf we demonstrate how these bounds together with observed option prices can be used to estimate the parameters of the pdf we estimate the distribution for crude oil during the persian gulf crisis and find the distribution differs significantly from that recovered using standard techniques

are free agents perspicacious peregrinators the perspicacious peregrinator model of solomon w polachek and francis w horvath hypothesizes that individuals decide to migrate based on the size of potential gains this model is tested using themigration decisions of major league baseball players between 1977 and1979 potential gains are measure d as the differ ence between earnings with and without migration a distinction is made between players eligible for free agency and those ineligible so as to a ccount for differences in the level of competition for players services in diff erent segments of this market migration is found tobe related to the expected gain from earnings for players eligible for free agency but not for those ineli gible copyright 1987 by mit press

wage disparity and team productivity evidence from major league baseball using data describing baseball teams from 1985 to 1998 it is found that levine s levine d i 1991 cohesiveness productivity and wage dispersion journal of economic behavior and organization 15 237 255 team cohesiveness hypothesis is supported over ramaswamy and rowthorn s ramaswamy r rowthorn e 1991 efficiency wages and dispersion economica 58 501 514 danger potential hypothesis the implication is that teams with greater wage disparity experience a reduction in team performance 2000 elsevier science s a all rights reserved

target zones and realignments recent contributions emphasize that the presence of exchange rate target zones has important effects on the within band behavior of exchange rates when agents are forward looking the authors find that the implications of available models are inconsistent with european exchange rate data and they suggest that the frequent realignments occurring in the period they consider may be responsible for this they construct a model in which the likelihood of a realignment in the near future increases as the exchange rate approaches the limits of its fluctuation band and show that its implications are broadly consistent with the evidence copyright 1992 by american economic association

the sports business as a labor market laboratory with superior data on compensation and productivity as well as the occurrence of abrupt dramatic market structure and player allocation rules changes sports labor markets offer an excellent setting in which to test economic hypotheses this paper reviews evidence from sports in four areas employer monopsony discrimination the coase theorem and incentive contracts supervision and performance there is considerable evidence of monopsony as well as for the existence of some forms of discrimination against minority athletes incentive contracts have strong effects on player performance and behavior and there is mixed evidence on the predictions of the coase theorem

erm bandwidths for emu and after evidence from foreign exchange options ems credibility exchange rate expectations implied by derivatives prices are the wide bands adopted in the summer of 1993 too large the official answer is that wide bands offer a protection against speculative pressure while exchange rates may be kept within narrower margins at the discretion of the authorities yet if exchange rate fixity and predictability are desirable as implicitly assumed by the mere existence of the system there must exist a trade off between protection against speculative pressure and predictability in that case the bandwidth chosen should be as narrow as possible and yet unlikely to be challenged by the markets this paper offers estimates of safe bandwidths for the long term member currencies french franc peseta danish krone and escudo the existing 15 bands are found to be unnecessarily wide narrower 3 5 bands would capture at least 95 of expected exchange rate realizations over a three month horizon for the lira finnish markka and swedish krone wider bands of 5 6 would capture a similar amount of the exchange rate distribution the pound s exchange rate expectations are the most dispersed requiring 8 4 bands to capture 95 of exchange rate expectations jose m campa p h kevin chang and robert l reider

pay and performance in major league baseball the case of the first family of free agents it is well established that a baseball player s salary is based on his performance experience star status bargaining power mobility and his team s ability to pay this paper focuses on veteran players who are on the brink of retirement and on the

stochastic devaluation risk and the empirical fit of target zone models in the model of this paper an exchange rate fluctuates between given boundaries for random lengths of time and jumps discretely when devaluation occur we provide explicit solutions for the stochastic processes followed by the exchange rate and by the expected rate of depreciation when the likelihood and the size of devaluations vary stochastically over time the model produces realistic patterns of covariation between exchange rates and interest rate differentials and provides interesting interpretations of available empirical evidence we also specify how to infer devaluation risk from target zone data

modeling heteroscedasticity in daily foreign exchange rates this article estimates autoregressive conditionally heteroscedastic arch and generalized arch garch models for five foreign currencies using 10 years of daily data a variety of arch and garch specifications a number of nonnormal error densities and a comprehensive set of diagnostic checks it finds that arch and garch models can usually remove all heteroscedasticity in price changes in all five currencies goodness of fit diagnostics indicate that exponential garch with certain nonnormal distributions fits the canadian dollar extremely well and the swiss franc and the deutsche mark reasonably well only one nonnormal distribution fits the japanese yen reasonably well none fit the british pound

implied exchange rate distributions evidence from otc option markets abstract this paper uses a rich new dataset of option prices on the dollar mark dollar yen and key ems cross rates to extract the entire risk neutral probability density function pdf over horizons of 1 and 3 months we compare three alternative smoothing methods cubic splines an implied binomial tree trimmed and untrimmed and a mixture of lognormals for transforming option data into the pdf despite their methodological differences the three approaches lead to a similar pdf clearly distinct from the lognormal benchmark and typically characterized by skewness and leptokurtosis we then document a striking positive correlation between skewness in these pdfs and the spot rate the stronger a currency the more expectations are skewed towards a further appreciation of that currency we interpret this finding as a rejection that innovations in these exchange rates are independent of the level or characteristic of a credible target zone explicit or implicit instead this positive correlation is consistent with target zones with endogenous realignment risk we discuss two interpretations of our results on skewness when a currency is stronger the actual probability of further large appreciation is higher or because of risk such states are valued more highly

property rights and resource use evidence from mlb starting pitchers we conduct a unique test of the efficiency of property rights in major league baseball the rights to the services of players are resources that can be possessed by the clubs or by the players them

testing coase theorem the case of free agency in nba this study seeks to test the applicability of the coase theorem to the allocation of players within according to the coase theorem a player s final allocation would be the same no matter who has ownership of his playing rights if there are no transaction costs what ownership affects is just the allocation of wealth using data from the national basketball association nba this article argues that player mobility is likely to be affected by player ownership due to transaction cost imposed by the institution it is also concluded that performance indicators used for value estimation vary by position and that this also affects player transfer

dollar jump fears 1984 1992 distributional abnormalities implicit in currency futures options abstract deutsche mark and yen futures options over 1984 1992 and 1986 1992 respectively are examined for deviations from the lognormal assumption underlying standard option pricing models two methods are used an atheoretic skewness premium and daily estimates of moments using a model for pricing american foreign currency futures options under systematic exchange rate jump risk substantial variation over time is found in all moments including implicit skewness and kurtosis the implicit abnormalities predict future abnormalities in log differenced dm futures prices but not yen the peso problem implications do not explain standard rejections of uncovered interest parity

free agency competitive balance and diminishing returns to pennant contention e woodrow eckard this article argues that the 1976 introduction of free agency increased competitive balance in major league baseball the evidence is based on a new empirical measure that captures the key dynamic element of balance year to year fluctuations in team performance my hypothesis is that diminishing returns to each additional year s production of a pennant contending team reduces the incentive to bid continually for top players free agency allows talent to be reallocated more readily to potential new contenders given that player sales had been restricted prior to 1976 the hypothesis is supported by evidence of declining attendance during contending streaks jel l83 i introduction since the inception of free agency in major league baseball mlb over 20 years ago its effect on competitive balance has been controversial for almost a century the reserve system had assigned de facto property rights in players services to mlb teams this changed after 1976 when veteran players were allowed to unilaterally sell their services to the highest bidder team owners predicted a consequent decline in competitive balance arguing that large market clubs would outbid others for talent and come to dominate this claim is still made today as the basis for major restructuring proposals such as new restrictions on player salaries and mobility team payroll caps and various cross subsidization schemes 1 economists have examined the issue from both theoretical and empirical angles theorists such as el hodiri and quirk 1971 implicitly agree with the owners that the best players concentrate where their marginal revenue products mrps are the highest that is in high demand cities that also may be the most populous debate has revolved instead around rottenberg s 1956 invariance proposition which states that the distribution of playing talent will be the same under both systems if player sales are unrestricted teams where mrps are the highest purchase the services of the best players whether from other low mrp clubs or directly from the players themselves free agency therefore should not affect competitive balance critics such as daly 1992 argue that before 1976 first line players seldom were sold so the invariance proposition does not apply several studies examine empirically the effect of free agency on competitive balance taken together the results are consistent with the invariance proposition namely balance did not change this article argues that these studies use balance measures that ignore a critical aspect of competition namely year to year changes in a team s position in league standings using empirical measures that capture this dynamic i report new evidence that balance improved after free agency i then extend the existing theory of sports leagues to explain why free agency might cause such an outcome and provide an independent test of the theory specifically there are diminishing marginal returns to each additional year s production of a pennant contending team reducing the incentive to bid continually for top players this allows also rans to obtain the talent necessary to improve their performance and become contenders i also provide evidence that quality players were seldom sold under the old reserve system ren dering the invariance proposition moot the article is organized as follows the next section reviews the relevant theoretical and empirical literature section iii describes my measures of competitive balance and section iv presents empirical results comparing balance in mlb before and after free agency section v provides evidence that sales of first line players were sufficiently rare as to nullify the invariance proposition section vi presents the theoretical argument linking free agency to an improvement in balance followed by a supporting empirical test in section vii section viii summarizes and concludes the article