arch and bilinearity as competing models for nonlinear dependence in this article we consider whether the wide acceptance of autoregressive conditional heteroscedasticity arch models may be at the expense of other nonlinear processes such as bilinear models we first propose a joint test for arch and bilinearity a nonnested test is then suggested to determine whether nonlinear dependence should be attributed to arch or bilinearity the tests are then applied to three series when generalized arch garch models are taken as the null hypothesis we fail to reject it for all the data series when bilinearity is taken as the null however it is rejected in two cases moreover an out of sample forecasting exercise shows that the garch model is superior the results therefore indicate a strong preference for the garch model

endogenous formation of coalitions in noncooperative games abstract in this paper we extend the definitions of coalition proof nash equilibrium and communication proof equilibrium to situations of partial communication then we use the model of endogenous formation of coalitions of aumann and myerson to find that one of these situations in which the corresponding equilibrium exists will be endogenously determined by the players in the game journal of economic literatureclassification numbers c70 c72

testing for nonlinear dependence in daily foreign exchange rates the purpose of this article is to investigate whether daily changes in five major foreign exchange rates contain any nonlinearities although the data contain no linear correlation evidence indicates the presence of substantial nonlinearity in a multiplicative rather than additive form further examination reveals that a generalized autoregressive conditional heteroskedasticity model can explain a large part of the nonlinearities for all five exchange rates copyright 1989 by the university of chicago

exchange rate target zones a survey of the literature this work selectively reviews the literature on exchange rate target zones and their theoretical and empirical methodologies and examines whether they can be used to clarify to what extent this type of exchange rate regime could contribute to greater exchange rate stability we discuss the main contributions of the first and second generations of exchange rate target zone models in an attempt to reconcile the poor empirical performance of the krugman model with the reality of exchange rate target zone regimes this line of research integrates target zones with alternative underlying economic models such as imperfect credibility intra marginal interventions and sticky price models it was thus possible to understand the correlations observed between the exchange rate its fundamentals determinants and the interest rate differential and to explain the fact that the statistical distribution of the exchange rate is hump shaped rather than u shaped this implies that the initial emphasis of target zone models on nonlinearities honeymoon effect smooth pasting and marginal interventions has vanished exchange rate target zones are better described as similar to managed floating regimes with intra marginal interventions with some marginal interventions when the exchange rate reaches the edges of the floating band

cooperative outcomes through noncooperative games abstract this paper shows the equivalence between the stable solution set of any cooperative game in characteristic form g1 and the subgame perfect nash equilibria in pure strategies of a certain noncooperative game g2 players of g1 are named agents g2 is played by different players principals who compete in wages to attract agents the equivalence result holds when there are enough principals if the game is superadditive two principals suffice finally another related cooperative game g3 is constructed with both principals and agents as players for g2 and g3 the same result is then proven for any number of principals journal of economic literature classification numbers c71 and c72

target zone models with stochastic realignments an econometric evaluation abstract this paper provides empirical support for the second generation of target zone models with stochastic devaluation risk i propose a simple non linear framework with a time varying probability of exchange rate realignment this model nests alternatives i with no devaluation risk ii with constant devaluation risk and iii the random walk i reject these three in favor of a stochastic realignment model where devaluation risk varies with economic fundamentals the model predicts 13 of 17 realignments for the franc and lira including an out of sample episode in august 1993

nonlinear nonparametric nonessential exchange rate estimation a wide variety of empirical exchange rate mo dels have been estimated over the years but despite the considerable energies that have been devoted to this work the economics profession has remarkably little to show for itself there is little evidence that conclusively links the bilateral exchange rates of typical oecd countries to fundamental macroeconomic determinants of exchange rates such as money output relative prices or interest differentials coefficient estimates are notoriously unstable and frequently mis signed compared with theoretical predictions exchange rate equations do not fit particularly well and forecast no better than the simplest naive alternatives recently a new class of exchange rate models was introduced by paul krugman 1988 these models provide a potential reason for the poor performance of traditional exchange rate models because they are nonlinear if the exchange rate actually depends in a nonlinear way on exogenous macroeconomic fundamentals linear exchange rate models may work poorly even though the exchange rate is closely linked to fundamentals in this paper we provide a brief sketch of some of this work as well as some preliminary evidence on the actual performance of these nonlinear models in our empirical analysis we use a nonparametric estimator that can handle a wide variety of nonlinear phenomena we examine fixed exchange rate regimes where nonlinearities should be quite easy to detect however we do not find strong empirical support for the hypothesis that the incorporation of nonlinear effects significantly improves models of exchange rate determination in section i we briefly review the theoretical literature on nonlinear target zone exchange rate models linking this work to the tests for intrinsic bubbles we draw heavily on recent papers by kenneth froot and maurice obstfeld 1989a b our methodology and data are discussed in section ii section iii contains new empirical tests for nonlinearities in exchange rate models

target zones and exchange rate dynamics this paper develops a simple model of exchange rate behavior under a target zone regime it shows that the expectation that monetary policy will be adjusted to limit exchange rate variation affects exchange rate behavior even when the exchange rate lies inside the zone and is thus not being defended actively somewhat surprisingly the analysis of target zones turns out to have a strong formal similarity to problems in option pricing and investment under uncertainty

modelling and forecasting exchange rates with a bayesian time varying coefficient model this paper employs a multivariate bayesian time varying coefficients tvc approach to model and forecast exchange rate data it is shown that if used as a data generating mechanism a tvc model induces nonlinearities in the conditional moments and leptokurtosis in the unconditional distribution of the series it is also shown that leptokurtic behavior disappears under time aggregation as a forecasting device a bayesian tvc model improves over a random walk model the improvements are robust to several changes in the forecasting environment

an empirical assessment of endogeneity issues in demand analysis for differentiated products this article explores the issue of price and expenditure endogeneity in empirical demand analysis the analysis focuses on the u s carbonated soft drink market we test the null hypothesis that price and expenditures are exogenous in the demand for carbonated soft drinks using an almost ideal demand system aids specification we strongly reject exogeneity for both prices and expenditures we find that accounting for price expenditures endogeneity significantly impacts demand elasticity estimates we also evaluate the implications of endogeneity issues for testing weak separability over the last few decades strong linkages between economic theory and econometric methods have stimulated much empirical analysis of consumer behavior e g deaton and muellbauer 1980b the basic approach involves estimating marshallian demand functions expressing quantities consumed as functions of prices and household expenditures the usual practice is to treat prices and expenditure as exogenous variables in this article we question the validity of these exogeneity assumptions especially when focusing on the demand for differentiated products 1 this is particularly important to the extent that food consumption typically involves differentiated products in market economies we also examine the interactions between endogeneity of prices expenditure in demand systems and the testing for weak separability of consumer preferences

the type agent core for exchange economies with asymmetric information abstract the type agent core is a new solution concept for exchange economies with asymmetric information it coincides with the set of subgame perfect equilibrium outcomes of a simple competitive screening game uninformed intermediaries help the agents to cooperate in an attempt to make some profit the paper extends the work of perez castrillo cooperative outcomes through non cooperative games games econ behav 7 1994 428 440 to exchange economies with non transferable utility and asymmetric information the type agent core is a subset of wilson s coarse core wilson information efficiency and the core of an economy econometrica 46 1978 807 816 it is never empty even though it may be a strict subset of wilson s fine core in addition it converges towards the set of constrained market equilibria as the economy is replicated

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

endogenous risk in a portfolio balance rational expectations model of the deutschemark dollar rate abstract a portfolio balance model of the dm s rate under rational expectations is specified in which systematic risk induced deviations from uncovered interest parity are allowed this leads to a reduced from containing a potentially time varying risk premium which we approximate and estimate using an arch in mean approach the maximum likelihood estimator and a lagrande multiplier test for arch in mean are developed the estimation results indicate a small but non negligible time varying risk premium

predicting the effects of sugar sweetened beverage taxes on food and beverage demand in a large demand system a censored exact affine stone index incomplete demand system is estimated for 23 packaged foods and beverages and a numeraire good instrumental variables are used to control for endogenous prices a half cent per ounce increase in sugar sweetened beverage prices is predicted to reduce total calories from the 23 foods and beverages but increase sodium and fat intakes as a result of product substitution the predicted decline in calories is larger for low income households than for high income households although welfare loss is also higher for low income households neglecting price endogeneity or estimating a conditional demand model significantly overestimates the calorie reduction

a trading approach to testing for predictability we propose a market timing test for conditional mean independence of financial returns the new excess predictability ep test statistic has an interpretation of a properly normalized return of a certain trading strategy we discuss similarities of the ep test to the popular directional accuracy da test of pesaran and timmermann power properties of the ep test are advantageous and size properties are comparable to those of the da test we illustrate application of the test using weekly data on the s p500 index

the statistical distribution of exchange rates empirical evidence and economic implications the abundant evidence that changes in exchange rates have distributions with fatter tails than the normal distribution has led researchers to consider non normal distributions including the student the stable paretian and mixtures of distributions this paper compares the empirical fits of three non normal candidates and the normal distribution for daily changes in the logarithms of exchange rates using maximum likelihood estimation of the parameters and chi square goodness of fit tests the student and mixture of two normals provide the best fits but there is evidence that the distribution parameters may vary over time

bidding for the surplus a non cooperative approach to the shapley value abstract we propose a simple mechanism to determine how the surplus generated by cooperation is to be shared in zero monotonic environments with transferable utility the mechanism consists of a bidding stage followed by a proposal stage we show that the subgame perfect equilibrium outcomes of this mechanism coincide with the vector of the shapley value payoffs we extend our results to implement the weighted shapley values finally we generalize our mechanism to handle arbitrary transferable utility environments the modified mechanism generates an efficient coalition structure and implements the shapley values of the super additive cover of the environment journal of economic literature classification numbers c71 c72

non cooperative bargaining and the incomplete informational core abstract in an exchange economy with incomplete information the signaling core is defined by the set of state contingent allocations to which no coalitions object under informational leakage through proposals by informed agents an objection underlying the signaling core is supported by a sequential equilibrium of an ultimatum bargaining game with an informed proposer we prove that a stationary sequential equilibrium allocation in a rubinstein type sequential bargaining game with a restart rule belongs to the signaling core if the belief of players satisfies a self selection property

hiring procedures to implement stable allocations abstract we implement the stable correspondence of a job matching market in subgame perfect equilibrium we use a simple sequential mechanism in which firms propose a salary to each worker first stage and then each worker accepts at most one proposal second stage moreover if agents preferences are additive this mechanism implements in subgame perfect equilibrium the firms optimal corre spondence when firms use undominated strategies finally we construct another simple sequential mechanism where the order of decisions is permuted and which implements the workers optimal correspondence when agents preferences are additive journal of economic literature classification numbers c78 d78

modeling non linearities in real effective exchange rates abstract the aim of this paper is to test for and model non linearities in the real effective exchange rates of 10 major industrial countries the g 10 to exploit non linear dependencies in exchange rates we apply the star smooth transition autoregressive family of models these non linear models imply the existence of two distinct regimes in exchange rates with potentially different dynamic properties but the transition between the regimes is smooth tests reject linearity for eight exchange rates the real exchange rate process is cyclical in both regimes for almost all countries and there appears to be some evidence of asymmetry star models outperform hamilton s markov regime switching model in an out of sample forecasting contest

habit formation and demand for sugar sweetened beverages using scanner data we estimated demand for nine nonalcoholic beverages under habit formation we found strong evidence for habit formation although demand for sugar sweetened beverages by low income households is less elastic to own price changes compared with high income households there is evidence that high income households consider beverages to be more substitutable than low income households do a half cent per ounce tax on store purchased sugar sweetened beverages will result in a moderate reduction in consumption of sugar sweetened beverages for both income strata because of habit formation long run national tax revenue from a sugar sweetened beverage tax is about 15 to 20 lower than short run revenue

implementation of bargaining sets via simple mechanisms abstract we propose two simple mechanisms that implement two bargaining sets in super additive environments the first bargaining set is a close variation of the one proposed by l zhou 1994 games econom behav 6 512 526 and the second is the pareto optimum payoffs of the a mas colell 1989 j math econom 18 129 139 bargaining set we adopt a simple framework in which the cooperative outcomes are realized as non cooperative subgame perfect equilibria in pure strategies of a two stage game played by an auxiliary set of individuals competing over the cooperative agents journal of economic literature classification numbers c71 c72

multivariate nearest neighbour forecasts of ems exchange rates exchange rate modelling has been a persistent puzzle for international economists forecasts from popular models for the exchange rate generally fail to improve upon the random walk out of sample while a multivariate nonparametric approach provides useful information about exchange rates the model produces forecasts superior to the random walk for only one of the three ems currencies examined using a statistic developed in mizrach 1991 i find that the forecast improvement a 4 5 percent reduction in mean squared error for the lira in daily returns is not statistically significant a cross validation exercise suggests that the improvement is also not robust

a simple selling and buying procedure abstract for the assignment game we analyze the following mechanism sellers simultaneously fix their prices first then buyers sequentially decide which object to buy also each buyer may report his or her indifferences along with the previous buyers indifferences to the following buyer the first phase determines the potential prices while the second phase determines the actual matching reporting truthfully the indifferences is always a dominant strategy for the buyers moreover when buyers state their true indifferences the subgame perfect equilibria outcomes of the mechanism correspond to the maximum equilibrium price vector together with optimal matchings journal of economic literature classification numbers c78 d78

exchange rate predictability the main goal of this article is to provide an answer to the question does anything forecast exchange rates and if so which variables it is well known that exchange rate fluctuations are very difficult to predict using economic models and that a random walk forecasts exchange rates better than any economic model the meese and rogoff puzzle however the recent literature has identified a series of fundamentals methodologies that claim to have resolved the puzzle this article provides a critical review of the recent literature on exchange rate forecasting and illustrates the new methodologies and fundamentals that have been recently proposed in an up to date thorough empirical analysis overall our analysis of the literature and the data suggests that the answer to the question are exchange rates predictable is it depends on the choice of predictor forecast horizon sample period model and forecast evaluation method predictability is most apparent when one or more of the following hold the predictors are taylor rule or net foreign assets the model is linear and a small number of parameters are estimated the toughest benchmark is the random walk without drift

bargaining and bargaining sets abstract we argue that in exchange economies various versions of the bargaining set cannot be implemented in nash equilibrium we then propose an extensive form mechanism that exactly implements the aumann davis maschler bargaining set in subgame perfect equilibrium the mechanism corresponds closely to the description of the bargaining set and respects feasibility in and out of equilibrium journal of economic literature classification numbers c71 c72 c78 d51

forecast improvements using a volatility index this paper explores the possibility of improved out of sample forecasting for stock returns and foreign exchange rates using observed nonlinearities in the two series forecasting is done using nonparametric techniques where important information is obtained from the current level of volatility in the series for both series forecast improvements are observed but for stock returns the improvements are only marginal these results indicate the usefulness and stability of some types of nonlinear modelling for financial markets

implementation in the many to many matching market abstract this paper deals with a discrete many to many matching market of firms and workers we analyze the following mechanism firms announce the set of workers they want to hire then workers select the set of firms with which they want to work the first phase of the game determines the potential partners while the second phase determines the actual matching we prove that subgame perfect nash equilibria spne always exist while strong equilibria se may not exist we characterize the spne outcomes as the pairwise stable matchings and show that there may be no spne outcome in the core when the preferences of the agents are not maximin however when the preferences of the firms respectively workers are maximin the core always contains the equilibrium outcomes

potential dietary outcomes of changing relative prices of healthy and less healthy foods the case of ready to eat breakfast cereals abstract many prevalent and costly health disorders in the u s can be attributed in part to poor diets overconsumption of calories and physical inactivity taxing less healthy foods and subsidizing healthy foods as a strategy to improve diet and health has attracted growing interest among policy makers and researchers we test this strategy by using national household purchase data to estimate a censored price and expenditure endogenous demand system for 12 food groups that are commonly consumed at breakfast low and high nutrition ready to eat breakfast cereals eggs breads hot cereals breakfast bars juice whole and reduced fat milk yogurt meats and coffee the estimated demand elasticities are applied to nationally representative food intake data to simulate under the assumption of perfectly price elastic supply the potential dietary improvement from taxing low nutrition and subsidizing high nutrition ready to eat breakfast cereals we find that the demand for both types of cereals is own price inelastic suggesting that consumers are not likely to make large shifts in consumption of cereals if the price changes thus only limited dietary improvement can be expected from taxes and subsidies furthermore when the healthfulness of breakfast foods is evaluated using a comprehensive list of nutrients and food components a price intervention strategy may result in unintended adverse impacts our simulation results suggest that the hypothetical price intervention actually increases the calorie content of foods consumed at breakfast

stock return serial dependence and out of sample portfolio performance we study whether investors can exploit serial dependence in stock returns to improve out of sample portfolio performance we show that a vector autoregressive var model captures stock return serial dependence in a statistically significant manner analytically we demonstrate that unlike contrarian and momentum portfolios an arbitrage portfolio based on the var model attains positive expected returns regardless of the sign of asset return cross covariances and autocovariances empirically we show however that both the arbitrage and mean variance portfolios based on the var model outperform the traditional unconditional portfolios only for transaction costs below ten basis points

subgame perfect cooperation in an extensive game abstract we propose a new solution concept for games in extensive form that incorporates both cooperation and subgame perfection from its definition and properties the new solution concept named the subgame perfect core is a refinement of the core of an extensive game in the same sense as the set of subgame perfect nash equilibria is a refinement of the set of nash equilibria to further characterize the subgame perfect core we show that each subgame perfect core payoff vector can be implemented as a non cooperative solution as it is a subgame perfect nash equilibrium payoff vector of an extensive form game that is closely related to the original game we also motivate and introduce a related concept of subgame perfect strong nash equilibrium of an extensive game that is coalition proof

getting consumers to eat more whole grains the role of policy information and food manufacturers the 2005 dietary guidelines were unique because they offered quantitative recommendations for consumption of whole grains this case study examines the hypothesis that the changed recommendations were responsible for the recent increase in retail sales and consumption of whole grain food products we find that release of the dietary guidelines and related media attention did increase availability and sales of whole grain foods a large impact on consumption occurred through reformulation of existing products induced by competition among food suppliers this study reveals the key role product reformulation plays in inter firm competition and in realization of dietary changes recommended by public

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

quantity and quality effects of advertising a demand system approach quantity and quality effects of advertising are investigated in this article a censored demand system is estimated for fish beef pork and other meats using norwegian household data in the demand model generic fish advertising and meat advertising is introduced as demand shifters and at the same time unit values are treated as endogenous the unit values capture the quality of the commodities empirical findings show that advertising can have both quantity and quality effects on household demand

brand supermarket demand for breakfast cereals and retail competition the berry levinsohn and pakes 1995 market equilibrium model is extended to the supermarket chain level to examine consumer choices and retail competition for thirty seven brands of breakfast cereals in boston estimated taste parameters for product characteristics vary significantly across consumers although consumers are price sensitive with respect to their chosen cereals they exhibit strong brand and supermarket loyalty retail markups increase and marginal costs decrease with grocery market shares attesting to oligopoly power with efficiencies markups decrease with the own price elasticity of demand with corn flakes having the highest markups a detailed picture of consumer response and supermarket competition is provided

the implications of heterogeneous habit in consumer beverage purchases on soda and sin taxes abstract in this article we study the heterogeneity of habit strength in households demand for regular carbonated sweetened beverages csbs and beer in the united states a demand model that nests a smooth transition function is used to describe habit based consumption patterns revealing heterogeneous strengths of habits among households we find that more habitual consumers those with a strong preference for a particular product are not as sensitive to price or expenditure as the aggregate population this finding is further supported by simulations of the potential effects of soda and beer taxes we find the aggregate response to soda and beer taxes is smaller than when the influence of habit is assumed to be homogeneous

a spoonful of sugar helps the medicine go down the relationship between food prices and medical expenditures on diabetes we investigate the impact of changes in the relative price of low and high carbohydrate foods on medical expenditures for diabetes care using nielsen homescan price data merged to the 2000 2005 medical expenditure panel survey we find that an increase in low high carbohydrate food price increases decreases both the likelihood of a diabetes diagnosis and the level of medical expenditures among those with diabetes we also find small impacts of food prices on body mass index that differ by gender policy simulations suggest that subsidizing the low carbohydrate food purchases of people with diabetes could result in significant reductions in health care costs

conditional variance and the risk premium in the foreign exchange market abstract we investigate the existence of a risk premium in the foreign exchange market based on the conditional variance of market forecast errors the forecast errors are assumed to follow the arch process introduced by engle 1982 estimation and diagnostic testing of the model are discussed and results are presented for the currencies of the united kingdom france germany japan and switzerland