tick size and the compass rose further insights abstract this paper investigates two differing perspectives on the compass rose those of crack and ledoit 1996 the journal of finance 51 2 751 762 and szpiro 1998 journal of banking and finance 22 1559 1569 neither perspective has explicitly considered the effect of time and we consider the implications of this with illustrations using market micro data

asymmetric international minimum quality standards and vertical differentiation this paper develops a two country model of a vertically differentiated duopoly that spans two countries which are not integrated without additional costs equilibrium qualities prices profits and consumer s surplus are compared when 1 minimum quality standards are identical and 2 standards differ across countries both markets turn out to be connected by the quality choices of the two firms both firms prices in the two countries and their profits are lower whereas consumer s surplus and the two offered qualities are higher in both countries if no firm is forced out of the country s market with the more demanding minimum quality standard copyright 1995 by blackwell publishing ltd

direct tests of the reservation wage property this paper provides the first direct experimental tests of the reservation wages predicted by finite horizon job search models previous indirect tests were based on search duration and search income the authors show that such indirect tests are weak by demonstrating that a naive rule performs essentially as well as the risk neutral model in predicting search duration in contrast direct tests of predicted reservation wages imply rejections of both the naive rule and the risk neutral model the general concave model survives direct tests with reservation wage data as does a specific logistic concave model copyright 1992 by royal economic society

optimal pricing and quality choice when investment in quality is irreversible this paper examines the price and quality choice of a single product risk neutral monopolist who can delay irreversible investments required for market entry it is shown that the price and quality she chooses at entry increase with uncertainty about the size of future demand in a stackelberg leader follower game the leader and follower pre commit immediately up to a certain level of uncertainty in this case the leader produces the higher quality good when uncertainty is higher than this threshold the follower will wait and enter the market later with a higher quality good

stock price clustering and discreteness stock prices cluster on round fractions clustering increases with price level and volatility and decreases with capitalization and transaction frequency clustering is pervasive price clustering will occur if traders use discrete price sets to simplify their negotiations exchange regulations require that most stocks be traded on eighths clustering on larger fractions will occur if traders choose to use discrete price sets based on quarters halves or whole numbers an econometric model of clustering is derived and estimated projections from the results suggest that traders would frequently use odd sixteenths when trading low price stocks if exchange regulations permitted trading on sixteenths article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

tick size the compass rose and market nanostructure abstract economists have begun using methods borrowed from the physical sciences to search for non linearities in economic and financial data the so called phase portrait from chaos theory in which the values of a time series are plotted against their delayed values is one of the techniques employed for this purpose it has recently been shown however that when returns on traded assets are plotted in this manner in two or three dimensional space surprising patterns arise which seriously distort the conclusions that can be drawn about the underlying data these patterns which resemble a compass rose reflect the microstructure of the market or more specifically the finite size of the ticks by which prices can change in a market the present paper clarifies the reason for this phenomenon it is shown that within the microstructure there exists nanostructure that becomes visible only when the computations are performed without approximation high frequency data from a foreign exchange market are used to illustrate this phenomenon

a note on the wang and wang measure of the quality of the compass rose abstract h wang and c wang visibility of the compass rose in financial asset returns a quantitative study j bank financ 26 2002 1099 1111 derive a measure of the visibility of the radial patterns that appear in a plot of current and past returns which are more commonly known as the compass rose in theory this measure should be positively related to the tick volatility ratio in practice however we find that this relationship does not hold for higher tick volatility ratios that are common to stock market data thus the use of this measure is limited in real world applications we propose a correction factor that improves the behaviour of the quality measure over higher tick volatility ratios however further research is required to fully identify and correct the problem

testing models of consumer search using data on web browsing and purchasing behavior using a large data set on web browsing and purchasing behavior we test to what extent consumers are searching in accordance to various classical search models we nd that the benchmark model of sequential search with a known distributions of prices can be rejected based on the recall patterns we observe in the data moreover we show that even if consumers are initially unaware of the price distribution and have to learn the price distribution observed search behavior for given consumers over time is more consistent with non sequential search than sequential search with learning our

strategic investment under uncertainty a synthesis abstract investment is a central theme in economics finance and operational research traditionally the focus of analysis has been either on assessing the value of flexibility investment under uncertainty or on describing commitment effects in competitive settings industrial organization research contributions addressing the intersection of investment under uncertainty and industrial organization have become numerous in recent years in this paper we provide an overview aimed at categorizing and relating these research streams we highlight managerial insights concerning the nature of competitive advantage first versus second mover advantage the manner in which information is revealed firm heterogeneity capital increment size and the number of competing firms

unemployment insurance and male unemployment duration in canada a model of unemployment duration is estimated with weekly micro data on canadian men entitlement provisions in the unemployment insurance program and demand conditions are found to have a significant effect on the probability of leaving unemployment the probability of a worker leaving unemployment declines with the duration of unemployment holding unemployment insurance entitlement constant when entitlement is allowed to vary the probability of leaving first falls and then generally rises with unemployment duration these results are robust with respect to allowing for person specific unobserved heterogeneity and alternative specifications of duration dependence

an explanation for the compass rose pattern abstract the compass rose pattern cannot be observed in daily returns in the spot foreign exchange forex market but is observable when intraday forex returns are used monte carlo simulations show that the pattern is visible only when the tick volatility ratio is above some threshold level a condition that is readily met with intraday returns

chaos and the compass rose abstract we show that the recently discovered compass pattern in stock returns that results from discrete jumps of stocks seriously distorts the null distribution of the brock dechert scheinkmann bds chaos test under the null hypothesis of i i d returns the true rejection probability exceeds the nominal size by wide margins which suggests that much of the evidence for chaos that has so far been found in stock returns might well be due to the fact that prices change only in discrete ticks

an econometric analysis of reservation wages this paper describes an analysis of survey data on unemployed people who reported their asking wage and the wage they expected to earn we show that if agents behavior is described by the standard optimal job search model one can use these data to deduce structural parameters rather than estimate them and we report our deductions from two surveys 1 of british unemployed people

strategic growth options we provide a strategic rationale for growth options under uncertainty and imperfect competition in a market with strategic competition investment confers a greater capability to take advantage of future growth opportunities this strategic advantage leads to the capture of a greater share of the market either by dissuading entry or by inducing competitors to make room for the stronger competitor as a result of this strategic effect payoffs are in a rough sense more convex than in the case of no investment in a growth option when the strategic advantage is strong increased uncertainty encourages investment in growth options higher uncertainty means more opportunity rather than simply larger risk if the strategic effect is weak the reverse is true on the other hand an increase in systematic risk discourages the acquisition of growth options our results contradict the view that volatility is a strong disincentive for investment

quality in contestable markets a historical problem the theory of contestable markets has made notable inroads into the traditional way of looking at markets with only a few producers but its relationship to the theory of monopolistic competition in general and the quality of goods in particular has not been explored in depth such a connection is suggested by a feature of contestable markets emphasized by william baumol in his presidential address baumol emphasizes the fact that an incumbent is always vulnerable to hit and run entry if he ever tries to exert his potential monopoly power 1

estimating a structural search model the transition from school to work this paper presents a finite horizon search model that is econometrically implemented using all of the restrictions impli ed by the theory following a sample of male high school graduates fr om the youth cohort of the national longitudinal surveys from graduat ion to employment search parameters are estimated reservation wages and offer probabilities are estimated to be quite low simulations a re performed of the impact of changing the parameters on the expected duration of unemployment copyright 1987 by the econometric society

optimal pricing and quality choice of a monopolist under knightian uncertainty abstract this paper analyzes a simple vertical product differentiation model with demand uncertainty and derives a risk neutral monopolist s optimal market entry timing her optimal pricing and optimal quality choice by incorporating knightian uncertainty irreversibility and flexibility in quality enhancing investment into a continuous time stochastic model it is shown that an increase in knightian uncertainty induces decreases in the optimal price the optimal quality and the value of undertaking the quality enhancing investment by the monopolist the social optimal entry timing pricing and quality are also analyzed

strategic choice of quality when quality is costly the persistence of the high quality advantage in a two firm two stage model of vertical product differentiation i show that for every convex fixed cost function of quality the firm that chooses the higher quality at the first stage earns the higher profits the result holds for the pure strategy equilibrium in the simultaneous quality game and it holds as well if firms choose their qualities in sequential order

declining reservation wages and learning empirical studies of job search strongly suggest that the reservation wages of unemployed job seeking individuals decline with the length of their respective unemployment spells previous explanations of this behaviour based on age effects liquidity constraints and limited unemployment benefits are not adequate we provide a new answer to this question based on the reasonable assumption that workers do not have precise knowledge of the distribution of the prevailing wages an individual model of job search and learning is formulated it is shown that the declining trend of reservation wages naturally arises due to the selection process when search costs are not too small the example of a normal wage offer distribution is analysed and the implications are discussed

sequential versus simultaneous choice with endogenous quality abstract in this paper we examine how the timing of investment affects the levels of quality chosen by firms we show that in a model with vertical quality differentiation a game with sequential quality choice induces both firms to make smaller quality investments than they would in a game with simultaneous quality choice furthermore we show that while aggregate profit is higher both consumer and social surplus are lower under sequential quality choice

pre commitment and flexibility abstract this paper considers several related strategic duopoly settings in which uncertainty creates an option value from retaining flexibility by delaying investment or output decisions until after uncertainty is resolved this value of flexibility must be weighed against the strategic value of pre commitment yielding a trade off between flexibility and pre commitment we obtain a simple characterization of the timing of output decisions as a consequence of the degree of uncertainty particular attention is paid to the implications for entry deterrence by an incumbent firm and to the possible flexibility enhancing effects of investment in capital

visibility of the compass rose in financial asset returns a quantitative study abstract the compass rose phenomenon is studied based on the random walk model of stock prices it is found that the structure is inherently present in any financial data having a finite precision but becomes visible only under some conditions a quantitative description of the pattern visibility condition is given providing a method for the interpretation of pattern appearance and a more comprehensive understanding of the compass rose phenomenon this is achieved by defining a measure of pattern quality the arguments and the proposed method are supported by numerical examples one such example is the presentation of patterns in portfolios with some specific weights

real options and preemption under incomplete information abstract this paper introduces incomplete information and preemption into an equilibrium model of firms facing real investment decisions the optimal investment strategy may lie anywhere between the zero npv trigger level and the optimal strategy of a monopolist depending on the distribution of competitors costs and the implied fear of preemption our model implies that the equity returns of firms which hold real options and are subject to preemption will contain jumps and positive skewness

garch estimation and discrete stock prices an application to low priced australian stocks the garch model is misspecified if applied to returns calculated from discrete prices we propose a modification of the above model for handling such cases we find large differences between the standard and the extended model estimates although the results sometimes are obscured by large standard errors

labor market search an experimental study the theoretical results derived from models of economic search have implications which relate to the structure and performance of labor markets utilizing a series of laboratory experiments we attempt to capture many of the features of workers search and also the conditions under which labor markets operate by varying certain of the experimental conditions we are able to determine the searchers responses to changes in the terms of unemployment insurance to the existence of a minimum wage and to different states of information about the underlying distribution of wages in most cases the behavior of the searchers is consistent with that predicted by theory

implications of the discreteness of observed stock prices stock prices on the organized exchanges are restricted to be divisible by 1 8 therefore the true price usually differs from the observed price this paper examines the biases resulting from the discreteness of observed stock prices it is shown that the natural estimators of the variance and all of the higher order moments of the rate of returns are biased an approximate set of correction factors is derived and a procedure is outlined to show how the correction can be made the natural estimators of the beta and of the variance of the market portfolio on the other hand are nearly unbiased the behavior of stock prices has been an issue of interest to the financial economist for many years this interest resulted in a growing number of empirical studies which attempt to estimate this behavior e g blattberg and gonedes 2 fama 6 fama and roll 7 8 barnea and downes 1 to date stock price behavior is estimated under the assumption that the observed trading price is the true equilibrium price however observed stock prices and stock price changes on the organized exchanges are restricted to multiples of 1 8 of a dollar 1 therefore if the true distribution of stock prices is continuous an observed trading price can be different from the true price this paper examines the biases in estimating the moments of stock price changes caused by the discreteness of observed stock prices the major focus of the paper is in noting this problem providing a model which explains the source of these biases and quantifying their size section i demonstrates that due to the discrete nature of observed stock prices the natural estimators for the variance and for the higher order moments of the rate of returns are biased upward this bias is larger for stocks with lower prices and smaller standard deviation for instance assuming that the standard deviation a is 0 001 the stock price is one dollar the true probability distribution of stock prices is lognormal and the observed prices are as close as possible to the true prices then the natural estimator of r has expectation 0 01400 hence it is biased upward by 1300 significant biases have important implications in option pricing we derive an approximate set of correction factors which can be applied to the

effects of manpower policies on duration dependence in re employment rates the example of sweden in contrast to the evidence from other countries swedish studies of the transition from unemployment to employment have consistently reported a non negative duration dependenice in the hazard this study examines the extent to which this results from large scale labour market programmes a limited duration of unemployment benefits or differences among available jobs the labour market programmes are here found to be the primary factor behiind the earlier swedish results the programmes thus pick up those with the worst employment prospects thereby postponing a decrease in the re employment probability among job searchers this in turn generates an on average constant duration dependence

estimation bias induced by discrete security prices commonly equilibrium security prices are modeled by continuous state stochastic processes while observed prices are rounded into discrete units this paper models the rounding mechanism and examines the probabilistic structure of the resultant rounded process we provide accurate and simple estimates of the inflation in estimated variance and kurtosis induced by ignoring rounding in particular the maximum likelihood estimate of security price volatility using rounded prices is developed and a simulation analysis is performed to examine the small sample properties of this estimator for many practical applications a simple correction for rounding becomes available

endogenous quality choice price vs quantity competition two versions of a vertical product differentiation model one with fixed and the other with variable costs of quality are analyzed to study how the hypotheses of price versus quantity competition affect equilibrium solutions product differentiation arises under all the scenarios considered contrasting previous findings of symmetric quality choices under cournot behavior however to relax harsher market competition firms differentiate more under bertrand than under cournot a simple welfare measure also indicates that the economy is better off when firms compete on prices with fixed costs of quality not only consumer but also producer surplus is higher under price competition copyright 1993 by blackwell publishing ltd

keeping doors open the effect of unavailability on incentives to keep options viable many of the options available to decision makers such as college majors and romantic partners can become unavailable if sufficient effort is not invested in them taking classes sending flowers the question asked in this work is whether a threat of disappearance changes the way people value such options in four experiments using door games we demonstrate that options that threaten to disappear cause decision makers to invest more effort and money in keeping these options open even when the options themselves seem to be of little interest this general tendency is shown to be resilient to information about the outcomes to increased experience and to the saliency of the cost the last experiment provides initial evidence that the mechanism underlying the tendency to keep doors open is a type of aversion to loss rather than a desire for flexibility

real time search in the laboratory and the market the standard model of labor market search posits repeated infinite horizon search from a fixed distribution of wages in a stationary environment under these circumstances the optimal search policy has a reservation wage property i e the decision to accept an offer involves a comparison of the offer with a time invariant constant w which itself is a function of the parameters characterizing the search environment a wage offer greater than or equal to w is accepted while any other is rejected and search is continued some early empirical job search studies however accumulated evidence of a declining trend in reservation wages over the course of an unemployment spell 1 since then several theoretical explanations for the declining reservation wage profiles have emerged all of which relax the stationarity assumption of the standard model for example reuben gronau 1971 assumes searchers have finite lives kenneth burdett 1977 gerard j van den berg 1990 james albrecht and susan vroman 2005 and others model short term unemployment benefits albrecht pieter a gautier and vroman 2006 permit directed search to heterogeneous prospects 2 john p danforth 1979 and silvio rendon 2006 consider general liquidity con strained search and burdett and tara vishwanath 1988 model learning about the job offer distribution behavioral explanations for declining reservation wages have been suggested by braunstein and schotter 1981 schotter and braunstein 1982 and others in this paper we present the results of the first ever to our knowledge real time search laboratory experiment performed in an effort to investigate this falling res ervation wage phenomenon where field studies of unemployed search often rely on strong identifying assumptions to recover searchers unobservable reservation wages in the laboratory we are able to elicit subjects complete reservation wage profiles in an incentive compatible manner 3 further in the laboratory we are able to

robust structure without predictability the compass rose pattern of the stock market plotting daily stock returns against themselves with one day s lag reveals a striking pattern evenly spaced lines radiate from the origin the thickest lines point in the major directions of the compass this compass rose pattern appears in every stock it is caused by discreteness however counter examples demonstrate that the existence of exchange imposed tick sizes e g eighths is neither necessary nor sufficient for the compass rose the compass rose cannot be used to make abnormal profits it is structure without predictability among other consequences the compass rose may bias estimation of arch models and tests for chaos technical analysts attempt to identify recurring patterns in stock prices e g edwards and magee 1992 similarly chaos researchers embed time series of stock returns into multi dimensional spaces and attempt to identify lowdimensional attractors e g barnett and chen 1988 figure 1 the hope is that with structure comes predictability and abnormal profits in fact neither of these literatures has yet discovered indisputable structure we follow a procedure similar to a chaos researcher s we look at a simple scatter diagram of daily stock returns plotted against themselves with one day s lag we document a structural relationship the compass rose that is strikingly geometrical in contrast to the products of technical analysis and chaos theory the structure we find is indisputably present in every stock unfortunately the compass rose cannot be used for predictive purposes by market participants it is an artifact of market microstructure it follows that even a successful search for significant structure in stock market data need not enhance predictability nor lead to abnormal profits an equally important lesson is that microstructure effects can be spectacular in daily and even weekly data several areas for future research are given these include potential biases caused by the compass rose in the estimation of autoregressive conditional heteroskedasticity arch models and in a standard test for chaos

firm scale and the endogenous timing of entry a choice between commitment and flexibility abstract this paper presents a model of stochastic oligopoly with demand uncertainty where firms endogenously choose entry timing we examine two extreme types of market structure and show that the equilibrium correspondence that connects them is continous with two identically sized firms there are symmetric cournot type equilibria where the probability of early entry declines with greater uncertainty and for low uncertainty two asymmetric equilibria with one large firm with a continuum of nonatomic firms there is a unique stackelberg equilibrium we conclude that the behavior of a dominant firm with a finite fringe can be approximated by stackelberg equilibrium journal of economic literatureclassification numbers d21 l11

endogenous leadership in a new market in this article i analyze strategic investment under uncertainty in a new market where firms face a tradeoff between commitment and flexibility the model predicts asymmetric equilibria under fairly general conditions even though firms are ex ante identical and have symmetric opportunities to enter the market in equilibrium one firm commits to early investment and the other firm follows a wait and see strategy in the ex post outcome firms end up with asymmetric sizes if the market profitability turns out close to or lower than expected firms end up in symmetric position if the market turns out highly profitable if uncertainty is small the model yields approximately stackelberg outcomes