the valuation of american options with stochastic interest rates a generalization of the geske johnson technique the geske johnson approach provides an efficient and intuitively appealing technique for the valuation and hedging of american style contingent claims here we generalize their approach to a stochastic interest rate economy the method is implemented using options exercisable on one of a finite number of dates we illustrate how the value of an american style option increases with interest rate volatility the magnitude of this effect depends on the extent to which the option is in the money the volatilities of the underlying asset and the interest rates as well as the correlation between them

stochastic equilibria existence spanning number and the no expected financial gain from trade hypothesis stochastic equilibria under uncertainty with continuous time security trading and consumption are demonstrated in a general setting a common question is whether the current price of a security is an unbiased predictor of the future price of the security plus intermediate dividends this is the hypothesis of no expected financial gains from trade the relevance of this hypothesis in multi good economies is called into question by the following demonstrated fact for each set of probability assessments there exists a corresponding equilibrium one with the original agents original equilibrium allocations and no expected financial gains from trade under the given probability assessments the spanning number of the economy is defined as the fewest number of security markets required to sustain a complete markets equilibrium in a dynamic sense made precise in the paper the spanning number is linked directly to agent primitives in particular the manner in which new information resolves uncertainty over time the spanning number is shown to be invariant under bounded changes in expectations several examples are given in which the spanning number is finite even though the number of potential states of the world is infinite

asset pricing with loss aversion using standard preferences for asset pricing has not been very successful to match asset price characteristics such as the risk free interest rate equity premium and the sharpe ratio to time series data behavioral nance has recently proposed more realistic preferences such as preferences with loss aversion to model asset pricing research has now started to explore the implications of behaviorally founded preferences for asset price characteristics encouraged by some studies of benartzki and thaler 1995 and barberis et al 2001 we study asset pricing with loss aversion in a production economy we here employ a stochastic growth model and use a stochastic version of a dynamic programming method with adaptive grid scheme to compute the above mentioned asset price characteristics of a model with loss aversion in preferences as our results show a model with loss aversion performs considerably better than pure consumption based asset pricing models

an efficient approach for optimal allocation and parameters determination of tcsc with investment cost recovery under competitive power market this paper proposes an investment cost recovery based efficient and reliable optimization approach to optimal allocation of thyristor controlled series compensator tcsc in double auction power market the optimization technique has been used with an objective to maximizing the social welfare and minimizing the device investment cost by suitable location and rating of single tcsc in the system the effectiveness of proposed approach for location of tcsc has been compared with some existing methods of single tcsc placement in terms of its impact on social welfare tcsc investment recovery and optimal generation as well as load patterns the results have been obtained on 5 bus system modified ieee 14 bus system and 246 bus indian practical northern regional power grid nrpg system

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

issue convergence or issue divergence in a political campaign in this article a two party contest where candidates allocate their campaign resources strategically between two salient issues is studied the analysis aims to determine the circumstances under which there is issue convergence both parties emphasizing the same issue or issue divergence different parties emphasizing different issues during a political campaign for this purpose the concepts of a party s absolute and comparative advantage are used a party has an absolute advantage on an issue if a majority of voters prefer its position on this issue to that of its opponent a party has a comparative advantage on an issue if the percentage of votes that it would obtain if voters cared only about that issue is larger than those that it would obtain if voters cared only about the other issue it is shown here that issue convergence can occur only if one of the parties has an absolute advantage on both issues but its comparative advantage is not too large otherwise there will be issue divergence in the political campaign

rhetoric on the economy have european parties changed their economic messages abstractthis study analyses the determinants of dispersion of economic issue mentions in european party manifestos we examined three main economic domains governmental control of the economy free market capitalism and support for the welfare state as consequences of globalization forces economic conditions partisanship and electoral turnout employing aggregate level comparative manifesto project cmp data from legislative elections in 15 european countries from 1970 to 2010 we confirm that parties hold a common view of the salience of economic control of the state as a consequence of globalization pressure and economic growth levels partisanship of the cabinets regardless of the political orientation counteracted issue salience concentration in the welfare domain government size favoured dispersion in the free market realm our results do not indicate clear homogenization of parties economic messages in elections over the last 40 years

bargaining search and outside options abstract this paper studies a two sided incomplete information bargaining model between a seller and a buyer the buyer has an outside option which is modeled as a sequential search process during which he can choose to return to bargaining at any time two cases are considered in regime i both agents have symmetric information about the search parameters we find that in contrast to bargaining with complete information the option to return to bargaining is not redundant in equilibrium however the no delay result still holds in regime ii where agents have asymmetric information about the outside option delay is possible the solution characterizes the parameters for renegotiation and those for search with no return to the bargaining table

partisan governments the international economy and macroeconomic policies in advanced nations 1960 93 this article examines the impact of parties domestic institutions and the international economy on the conduct of monetary and fiscal policies using time series cross section data from nineteen oecd countries for the years between 1960 and the mid 1990s the results are as follows partisan governments have affected alone and in interaction with the organization of labor markets the pattern of macroeconomic management still their impact has varied over time partly as a function of economic conditions but fundamentally as a function of the degree of financial liberalization and the exchange rate system in place after following broadly similar macroeconomic policies in the 1960s oecd governments pursued divergent monetary and fiscal policies in response to the economic slowdown of the 1970s even when they initially adopted countercyclical measures conservative governments quickly favored tight monetary policies and strove to achieve fiscal discipline by contrast taking advantage of generalized capital controls and floating exchange rates socialist cabinets embraced demand management policies in a systematic fashion mostly through budget deficits in corporatist countries and through both loose monetary and loose fiscal measures in noncorporatist settings as financial liberalization progressed in the early 1980s partisan and institution led differences in macroeconomic policies waned across countries

on the recoverability of preferences and beliefs we examine the extent to which an investor s tastes and beliefs can be jointly recovered from knowledge of his her consumption choice more precisely we assume that the investor s preferences admit an expected utility representation but with subjective unknown probabilities and investigate what joint restrictions can be placed on utility functions and beliefs if the investor draws utility from intertemporal consumption we show that the set of utility functions and beliefs that are consistent with a given consumption choice can be characterized by a martingale condition in the markovian case this characterization can be restated in terms of a riccati differential equation that must be satisfied by the investor s relative risk aversion function to each solution of this differential equation is associated a unique utility function and a unique set of beliefs supporting the given consumption choice moreover we show that the differential equation has at most one solution in the class of utility functions displaying infinite absolute risk aversion at the origin thus preferences and associated beliefs can be uniquely recovered within this class article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

investor heterogeneity asset pricing and volatility dynamics abstract we provide an explicit characterization of the equilibrium when investors have heterogeneous risk preferences given market completeness investors can achieve full risk sharing thus a representative agent can be constructed though this agent s risk aversion changes over time as the relative wealths of the individual investors change we show that volatility depends on the covariance of aggregate risk aversion and stock returns we find that heterogeneity increases volatility produces volatility clustering arch effects and leverage like effects option prices exhibit implied volatility skews there is predictability and we assess the magnitude of investors hedging demands and trading volume further diversity is beneficial to all agents and entails welfare gains that can be substantial

fairness price stickiness and history dependence in decentralized trade this chapter investigates the implications that social preferences have for the stationary strategic equilibrium of such a decentralized market agents are supposed to be averse to unfairly unfavorable as well as unfairly favorable deals in the spirit of fehr and schmidt 1999 but we stay rather close to standard individualistic preferences the negative weights on advantageous and disadvantageous deviations from what is considered as the fair benchmark are such that utility remains strictly increasing in own surplus share and in contrast to the original fehr schmidt model the fair split need not automatically be a 50 50 division any price between sellers cost and buyers willingness to pay may be the one which for whatever reasons is agents reference point in a given market this makes it possible to consider a more flexible notion of fairness than is usually done it is in line with cognitive dissonance theory from psychology and the noteworthy experiments of binmore et al 1991 1993 where subjects who were triggered to play different bargaining equilibria ended up considering very different surplus distributions as fair

optimal vs traditional securities under moral hazard this paper provides an explanation for the widespread use of traditional securities by wellestablished firms standard moral hazard models predict that equity debt and warrants are almost never optimal financing instruments i show that issuing these securities is nevertheless nearly optimal the issuer would gain very little by using non traditional securities instead combined with equity one debt issue without multiple layers of seniority and one warrant issue without multiple exercise prices suffice to achieve near optimality the near optimality of traditional financing depends crucially on the issuer s ability to use war rants in addition to debt and equity

on viable diffusion price processes of the market portfolio the assumption that the market portfolio follows a specified diffusion process implies in a simple equilibrium framework that the representative individual must have a certain utility function which is identified in the paper not every diffusion process is viable i e can be endogenized to be the market portfolio s price process in such an equilibrium model the paper provides necessary and sufficient conditions for viability which imply that viable diffusion processes constitute a rather restricted family it is common in financial economics especially in the option pricing literature to take a certain price dynamics of an underlying asset as a primitive assumption the results are then seemingly preference free but it is known that if one wishes to embed such a partial equilibrium model in a general equilibrium framework this can be obtained only with certain individuals preferences for example the black scholes 1973 model in which the underlying asset follows a geometric brownian motion is known to be consistent with utility functions which exhibit constant proportional risk aversion cpra see rubinstein 1976 breeden and litzenberger 1978 brennan 1979 stapleton and subrahmanyam 1984 and bick 1987 by this we mean that if the market portfolio follows a geometric brownian motion then necessarily the utility function of the representative individual exhibits cpra conversely one can construct a simple economy with a stock and a riskless bond where identical individuals have cpra type utility functions and where the endogenous stock price enumerated by the bond follows a prespecified geometric brownian motion however the utility function which corresponds in equilibrium to a general diffusion process has never been identified this was the initial motivation for this paper the problem loosely stated is as follows suppose we are told that in a simple equilibrium model as above the market portfolio follows a given diffusion process what does it imply regarding individuals preferences it is clear that the problem is not well formulated if a dividend process is also postulated e g as in merton 1973 1977 in this case consistency with two processes the price process and the dividend process is to be required this

on the consistency of the black scholes model with a general equilibrium framework we construct a simple economy with consumption only at the final date in which we endogenize the stochastic behavior of prices assumed in the black scholes model certain preferences constant proportional risk aversion and beliefs are shown to be sufficient and necessary in certain respects for the existence of such an equilibrium the analysis is then generalized to a continuous consumption framework in which we embed the merton proportional dividend model

complexity and the character of stock returns empirical evidence and a model of asset prices based on complex investor learning empirical evidence on the distributional characteristics of common stock returns indicates 1 a power law tail index close to three describes the behavior of the positive tail of the survivor function of returns pr r x x a reflection of fat tails 2 general linear and nonlinear dependencies exist in the time series of returns 3 the time series return process is characterized by short run dependence short memory in both returns as well as their volatility the latter usually characterized in the form of autoregressive conditional heteroskedasticity and 4 the time series return process probably does not exhibit long memory but the squared returns process does exhibit long memory we propose a model of complex self referential learning and reasoning amongst economic agents that jointly produces security returns consistent with these general observed facts and which are supported here by empirical results presented for a benchmark sample of 50 stocks traded on the new york stock exchange the market we postulate is populated by traders who reason inductively while compressing information into a few fuzzy notions that they can in turn process and analyze with fuzzy logic we analyze the implications of such behavior for the returns on risky securities within the context of an artificial stock market model dynamic simulation experiments of the market are conducted from which market clearing prices emerge allowing us to then compute realized returns we test the effects of varying values of the parameters of the model on the character of the simulated returns the results indicate that the model proposed in this paper can jointly account for the presence of a power law characterization of the positive tail of the survivor function of returns with exponent on the order of three for autoregressive conditional heteroskedasticity for long memory in volatility and for general nonlinear dependencies in returns

liquid capital and market liquidity this article considers how the supply of liquid capital affects the liquidity of asset markets the article views the former notion as a technological property of real investments and the latter as an endogenous property of financial market equilibrium and describes a channel by which the two are linked when agents hold more wealth in technologically liquid investments a marginal adjustment to portfolio holdings alters discount rates less causing a smaller price impact thus even without intermediaries or frictions the stock of transformable capital may be a crucial determinant of the resilience of financial markets

market resolution and valuation in incomplete markets the arrow debreu approach to general equilibrium in an economy has been recognized as one of the most general and conceptually elegant frameworks for the study of financial problems under uncertainty 2 9 equally well known is its elusiveness when it comes to ready application to practical problems like capital budgeting or empirical testing see 6 15 18 however some recent research see 1 3 6 12 16 18 and 19 has made a serious attempt to put the state preference theoretic model in an operational setting breeden and litzenberger 6 have developed an interesting approach to derive constructively the prices of elementary arrow debreu securities from the prices of call options on aggregate consumption banz and miller 3 use a similar technique to value capital budgeting projects based on values for state contingent claims computed from prices of call options written on the market portfolio the supershare securities proposed by hakansson 14 16 and related work by garman 13 ross 24 etc have also served to give the so called state contingent approach a practical flavor

a partisan model of government expenditure partisan models of budget politics largely concentrate on the size of government budget deficits and debt but most theories have little to say as to what the effect of party politics on both the size and the composition of budgets is this paper seeks to extend previous literature in two directions first a model of spending preferences is developed that relates actors preferred level and allocation of expenditure to electoral gains from fiscal policies second changes in both total expenditure and the expenditure mix of two budget categories are analyzed for the effect of parties spending preferences as stated in their election manifestos using data on 19 oecd countries from 1971 to 1999 the paper finds support for general partisan hypothesis the results suggest that the actual spending preferences of parties matter whereas they do not indicate that parties of the left consistently differ from parties of the right in their spending behavior

does globalization affect growth evidence from a new index of globalization the study develops an index of globalization covering its three main dimensions economic integration social integration and political integration using panel data for 123 countries in 1970 2000 it is analysed empirically whether the overall index of globalization as well as sub indexes constructed to measure the single dimensions affect economic growth as the results show globalization indeed promotes growth the dimensions most robustly related with growth refer to actual economic flows and restrictions in developed countries although less robustly information flows also promote growth whereas political integration has no effect

what moves parties the role of public opinion and global economic conditions in western europe do western european political parties adjust their ideological positions in response to shifts in public opinion and to changing global economic conditions based on a time series cross sectional analysis of parties ideological dynamics in eight western european democracies from 1976 1998 the authors conclude that both factors influence parties ideological positions but that this relationship is mediated by the type of party specifically they find that parties of the center and right react to both public opinion and the global economy whereas parties of the left display no discernible tendency to respond to public opinion and also appear less responsive to global economic conditions the findings on leftist parties distinctiveness support arguments about these parties long term policy orientations as well as about their organizational structures the authors also find little support for neoliberal convergence arguments

managerial incentives risk aversion and debt we investigate the risk choices of risk averse ceos following recent theoretical work we expect ceo risk aversion to be more pronounced in firms with high leverage or high default probability we find that the ceos of these firms reduce firm risk even in the presence of strong risk taking incentives our results are robust to controls for the sensitivity of ceo wealth to stock price changes firm risk determinants the endogenous feedback effects of firm risk on ceo incentives unobserved firm and market effects and debt governance the impact of ceo risk aversion is economically significant

equilibrium portfolios in the neoclassical growth model abstract this paper studies equilibrium portfolios in the standard neoclassical growth model under uncertainty with heterogeneous agents and dynamically complete markets preferences are purposely restricted to be quasi homothetic the main source of heterogeneity across agents is due to different endowments of shares of the representative firm at date 0 fixing portfolios is the optimal equilibrium strategy in stationary endowment economies with dynamically complete markets however when the environment displays changing degrees of heterogeneity across agents the trading strategy of fixed portfolios cannot be optimal in equilibrium very importantly our framework can generate changing heterogeneity if and only if either minimum consumption requirements are not zero or labor income is not zero and the value of human and non human wealth are linearly independent

optimal transmission switching sensitivity analysis and extensions in this paper we continue to analyze optimal dispatch of generation and transmission topology to meet load as a mixed integer program mip with binary variables representing the state of the transmission element line or transformer previous research showed a 25 savings by dispatching the ieee 118 bus test case this paper is an extension of that work it presents how changing the topology affects nodal prices load payment generation revenues cost and rents congestion rents and flowgate prices results indicate that changing the topology to cut costs typically results in lower load payments and higher generation rents for this network computational issues are also discussed

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

the pricing of stock index options in a general equilibrium model this paper analyzes the pricing of stock index options in a simple general equilibrium model in this model the volatility of the stock index and the spot rate of interest are functions of a stochastic variable the paper investigates the biases that arise when using the black scholes model with the assumed volatility and interest rate dynamics it is shown that the model can in principle explain the biases observed in empirical work on stock index options

equilibrium interest rates and multiperiod bonds in a partially observable economy this paper analyzes the market for financial assets in a production and exchange economy with several realized outputs and a single unobservable source of nondiversifiable risk the paper demonstrates that for a large class of diffusion outputs and preferences optimizing consumers first estimate the realizations of the unobservable factor and then use these estimates to determine portfolio and consumption rules moreover the explicit consideration of this unobservable productivity factor affects equilibrium demands and prices the equilibrium spot rate of interest emerges as the best estimate of the unobservable factor and multiperiod default free bonds arise as the optimal hedge for the unobservable changes of the stochastic investment opportunity set this paper analyzes the market for financial assets in a production and exchange economy with several realized outputs and a single unobservable source of nondiversifiable risk the paper poses and answers three questions 1 how do consumers determine equilibrium demands and prices when their investment opportunities are unobservable 2 in equilibrium what financial assets provide an optimal hedge for the

comments on the valuation of derivative assets abstract this paper presents an alternative approach to derive the breeden litzenberger valuation formula which expresses the price of an arbitrary derivative security in terms of call options prices this valuation formula follows from the observation that a continuous derivative security can be replicated by a portfolio including a bond and call options with all possible exercise prices discrete terms are added to the original breeden litzenberger formula to reflect possible discontinuities of the call option price s derivative with respect to the exercise price these discontinuities are subsequently shown to correspond to mass points of the probability distribution of the stock price several applications of the breeden litzenberger valuation formula are demonstrated

on the fluctuations in consumption and market returns in the presence of labor and human capital an equilibrium analysis abstract we examine the effects of human capital on consumption stock market and other fluctuations in a general equilibrium continuous time model a representative consumer worker investor derives utility from consumption and leisure a representative firm demands labor as the sole input to a stochastic production technology driven by general possibly nonmultiplicative shocks for cobb douglas utility and multiplicative shocks labor is nonstochastic and consumption and stock market volatility are equated as under no human capital deviations from this are analyzed for logarithmic utility and constant elasticity of substitution production technology cases are identified where the presence of labor causes consumption to be smoother than the stock market

non marketability and the value of employee stock options abstract we adapt the benninga et al 2005 framework to value employee stock options esos the model quantifies non diversification effects is computationally simple and provides an endogenous explanation of eso early exercise using a proprietary dataset of eso exercise events we measure the non marketability eso discount we find that the eso value on the grant date is approximately 45 of a similar plain vanilla black scholes value the model is aligned with empirical findings of esos gives an exercise boundary of esos and can serve as an approximation to the fair value estimation of share based employee and executive compensation using the model we give a numerical measure of non diversification in an imperfect market

partisan embedding of liberalism how trade investment and immigration affect party support for the welfare state political scientists have long debated how economic globalization influences national social policies but they have so far not explored the political demands of political parties implicitly underl

contract costs and financing decisions like bondholders most agents contract for fixed payoffs thus corporate capital structures which are less than 50 percent debt are less levered than overall contract structures in which about 90 percent of total flows are fixed payoffs the hypothesis analyzed here is that loans and bonds lower contract costs by delegating the monitoring and bonding of the default risks of fixed payoffs to credible specialists financial intermediaries bond holder trustees rating agencies and auditors other agents can then focus on their specialties that is efficient supply of labor materials and other services and the contract problems of these specialties copyright 1990 by the university of chicago

search for a monetary propagation mechanism abstract this paper examines a monetary propagation mechanism in an economy where exchanges in goods and labor markets involve costly search it is shown that an increase in the money growth rate increases steady state employment and output when the money growth rate is low but reduces steady state employment and output when the money growth rate is already high the model produces persistent hump shaped responses in employment and output to money growth shocks even when the shocks have no persistence the model also generates desirable features in job vacancy sales inventory and the velocity of money all these features emerge here in an economy with perfectly flexible prices and wages journal of economic literatureclassification numbers e40 e30

securities markets diffusion state processes and arbitrage free shadow prices this paper develops the parametric restrictions imposed on diffusion state processes by the requirement of arbitrage free asset pricing using the equivalent martingale measure as a starting point the diffusion property is exploited to specify the shadow pricing func tion which takes conditional state variable probabilities under the reference measure into arbitrage free contingent claim prices the main results of the paper provide differential equations associated with the shadow price function that are used to identify restrictions on the parameters of assumed diffusion processes the paper concludes with an application to the cir model where the state variable the instantaneous interest rate is assumed to follow a square root process calculations are also provided for the parametric restrictions imposed on the brownian bridge and ou state variable processes

the valuation of multivariate contingent claims in discrete time models there are several examples in the literature of contingent claims whose payoffs depend on the outcomes of two or more stochastic variables familiar cases of such claims include options on a portfolio of options options whose exercise price is stochastic and options to exchange one asset for another this paper derives risk neutral valuation relationships rnvrs in a discrete time setting that facilitate the pricing of such complex contingent claims in two specific cases joint lognormally distributed underlying variables and constant proportional risk aversion on the part of investors and joint normally distributed underlying variables and constant absolute risk aversion preferences respectively this methodology is then applied to the valuation of several interesting complex contingent claims such as multiperiod bonds multicurrency option bonds and investment options

dc power flow revisited linear mw only ldquodcrdquo network power flow models are in widespread and even increasing use particularly in congestion constrained market applications many versions of these approximate models are possible when their mw flows are reasonably correct and this is by no means assured they can often offer compelling advantages given their considerable importance in today s electric power industry dc models merit closer scrutiny this paper attempts such a re examination

animal spirits financial crises and persistent unemployment this article uses a rational expectations model with multiple equilibrium unemployment rates to explain financial crises the model has equilibria where asset prices are unbounded above i argue that this is an important feature of any rational agent explanation of a financial crisis since for the expansion phase of the crisis to be rational investors must credibly believe that asset prices could keep increasing forever with positive probability i explain the sudden crash in asset prices that precipitates a financial crisis as a large shock to expectations that leads to a permanent increase in the unemployment rate

globalization party positions and the median voter the authors argue that the effects of economic globalization on social democratic parties in western europe are conditional on the position of the median voter if the median is far enough to the right such parties will adopt business friendly policies because they are required to win office only when the median is relatively far to the left will globalization constrain social democratic parties forcing them to adopt policies further to the right in order to retain credibility it is on this basis the authors argue that empirical studies are misspecified unless they include an interaction between measures of globalization and the position of the median in addition to presenting formal theoretical arguments the article reports empirical findings from fifteen countries in the period from 1973 to 2002 that support the conclusion that the effects of globalization are indeed contingent on the median the authors find that the effects of globalization are significant for social democratic parties only in circumstances in which the median is relatively far to the left

the equity premium in brock s asset pricing model abstract in this paper we combine dynamic programming methods with projection methods for solving stochastic growth models as an application of these methods we solve brock s asset pricing model with a variety of parameterizations we focused on finding parameterizations that result in an equity premium that is high relative to the variation in consumption we show both analytically and numerically that the equity premium can be higher in a production based asset pricing model than it is in the consumption based asset pricing model even when the real output level is the same in both models

capital market equilibrium with externalities production and heterogeneous agents abstract the paper studies general equilibrium in an economy with externalities production and heterogeneous agents the model developed builds on brock brock w a 1982 asset prices in a production economy in mccall j j ed the economics of information and uncertainty university of chicago press chicago pp 1 43 and merton merton r c 1987 a simple model of capital market equilibrium with incomplete information journal of finance 42 483 510 it involves both a stock market and a market for loans together with negative externalities produced by a subset of firms importantly the technological production structure of the firms is reflected in the properties of the shares traded in the stock market agents are heterogeneous in their financial choices potentially discriminating against the firms producing a negative externality the model sheds light on the utility costs of the discriminating behavior and on the impact on the price of the stock issued by the firm which is responsible for the externality the model is used to study the factors which may magnify or reduce the impact of discrimination a set of discriminated firms may be seriously affected only if the discriminating investors command a large portion of overall wealth and or they do not represent important diversification instruments the model can be applied to understanding the effects of socially responsible investment whereby investors discriminate against companies belonging to some sectors which are perceived as socially dangerous or unethical

transmission switching in expansion planning transmission switching ts is introduced to add flexibility to the transmission and generation capacity expansion planning problem ts could improve the performance of the capacity expansion planning model and reduce the total planning cost the capacity expansion planning problem is decomposed into a master problem and two subproblems the master problem utilizes the candidate set for additional generating unit and transmission capacity investments to find the optimal plan throughout the planning horizon the subproblems use the optimal plan apply transmission switching to relieve any transmission flow violations and calculate the optimal dispatch of generating units the transmission network contingencies are also considered in the subproblems the case studies exhibit the effectiveness of the proposed expansion planning approach

constructing accountability party position taking and economic voting a positive relationship between economic performance and support for incumbents is routinely taken as evidence that elections work for accountability recent investigations into this relationship h

policy positions issue importance and party competition in new democracies this article examines the dynamics of vote redistribution after new party entry in the context of east european democracies contrary to the dominant institutional and sociological approaches the author focuses on the strategic policy choices of the new contestants the author argues that a new party s choice about where to place itself in relation to existing parties and which issues to emphasize can determine its electoral success or failure aggregate and individual level analyses confirm this argument the findings underline the importance of policy based party competition in the region as a broader theoretical contribution the study underscores the relevance of issue importance and not just party issue positions in political competition

how large are the benefits from using options the paper explores the economic value of being able to span market outcomes through the use of options we model an economy with a single risky asset consumption takes place at one date corresponding to the horizon of all investors options on the consumption good are not redundant securities in the economy because volatility is uncertain the model enables us to examine the benefits to investors of using options to optimize their investments within this model the gains from the use of options appear to be relatively minor

an intertemporal general equilibrium asset pricing model the case of diffusion information this paper provides sufficient conditions for the equilibrium price system and a vector of exogenously specified state variable processes to form a diffusion process in a pure exchange economy the conditions involve smoothness of agents utility functions and certain nice properties of the aggregate endowment process and the dividend processes of traded assets in place of the dynamic programming a martingale representation technique is utilized to characterize equilibrium portfolio policies this technique is useful even when there does not exist a finite dimensional markov structure in the economy and thus the markovian stochastic dynamic programming is not applicable a gents are shown to hold certain hedging mutual funds and the riskless asset in contrast to earlier results the market portfolio does not have a special role in hedging since the markets are dynamically complete when there exists a finite dimensional markov system in the economy the dimension of the hedging demand identified through the markovian dynamic programming may be much larger than that identified by the martingale method copyright 1987 by the econometric society

did globalization restrict partisan politics an empirical evaluation of social expenditures in a panel of oecd countries this paper evaluates empirically how in the course of globalization partisan politics affected social expenditures in a panel of oecd countries i introduce an updated indicator of government ideology and investigate its interaction with the kof index of globalization two basic results emerge first at times when globalization proceeded at an average pace partisan politics had no effect on social expenditures but leftist governments increased social expenditures when globalization was proceeding rapidly second policies differed in the 1980s and 1990s leftist governments pursued expansionary policies in the 1980s yet partisan politics disappeared in the 1990s but not because of globalization

how economic integration affects party issue emphases the economic dimension has typically been considered the primary dimension of political party competition however parties often rally voters on the basis of non economic issues in this article we argue that integration into global markets and into the european union eu constrains parties abilities to credibly differentiate themselves on economic issues given these constraints and voters awareness of them parties activate other non economic issues along which to compete using data across 49 countries between 1961 and 2010 this study shows that increased economic integration is associated with increased emphasis on non economic issues during election campaigns this effect persists over time and remains robust to a number of alternative explanations and modeling strategies we also explore the proposed causal mechanisms and show that integration is indeed associated with convergence of party positions on economic issues and that all types of parties not just new and niche parties respond to int

the effects of a shift in monetary policy regime on the profitability and risk of commercial banks abstract this paper examines the effects of the fed s october 6th 1979 change in monetary policy regime on the profitability and risk of commercial banks using capital market data and an event study methodology it was found that bank stocks exhibited significant abnormal returns during the announcement week of the policy change when these abnormal returns were decomposed into a part related to unexpected interest rate changes and a part assumed to reflect increased rate variability the results were consistent with a negative relationship between bank returns and interest rate surprises as well as between bank returns and rate variability

the valuation of options when asset returns are generated by a binomial process this paper values options on assets whose returns over a finite interval of time are generated by a binomial process it shows that a simple valuation relationship between the option and the underlying stock obtains if investors have preference functions that belong to a particular class even if opportunities to hedge do not exist one particular application of the theory is in the case where the stock price over a finite interval could increase by an amount fall by the same amount or stay at the same level the results in this paper may be viewed as the foundation of the preference based approaches to obtaining a risk neutral valuation relationship in this paper we value options on assets whose returns over a single period of time are generated by a multi stage binomial process of the additive and multiplicative types the market is open only at the beginning and end of the single period and consequently the risks involved in holding options cannot be hedged the case of a single stage binomial process in such a setting has been

the evolution of new industries and the determinants of market structure several empirical regularities concerning firm growth rates and industry firm size distributions have been developed by studying primarily mature industries the primary purpose of this article is to bring together and extend empirical regularities on the evolution of new industries and to use these regularities to gain further insight into the forces governing industry evolution to explain these regularities a model is constructed which emphasizes how factors governing the early evolution of industries may shape their market structure at maturity it stresses how chance events and exogenous factors that influence the number of potential entrants to the industry the growth rate of incumbents and the ease of imitation of industry leaders will influence the ultimate number and size distribution of firms in the industry

on the adjustment speed of smes to their optimal capital structure the aim of this paper is to analyse the speed of adjustment of small and medium sized enterprises smes to the target leverage by applying a system gmm technique to spanish panel data collected during the period 1995 2005 we estimate a partial adjustment model in which both target leverage and speed of adjustment are simultaneously endogenized we provide empirical evidence on the determinants of target leverage and the speed of adjustment more specifically the rate of financial flexibility growth opportunities and size are positively related to the speed of adjustment whereas the distance to the optimal ratio of debt shows a negative impact our findings demonstrate that in terms of sample mean a high percentage of spanish smes adjust rationally to their target additionally the smes analysed appeared to be over levered and fairly motivated to adjust annual adjustment speed 26

technological competition uncertainty and oligopoly abstract in an oligopoly context the present technological choice of a firm which expects to receive private revelant information just prior to the uncertain market stage has both a flexibility value and a strategic commitment value in contrast to some common wisdom ideas we provide a natural two stage competition framework in which an increase in uncertainty always raises the commitment value of the technological choice of the firm and may decrease its flexibility value when the increased uncertainty takes the form of more variable beliefs the first result tends to reinforce therefore the findings of the strategic commitment literature under certainty

the interdependence between transmission switching and variable impedance series facts devices high congestion costs and new congestion patterns formed by intermittent renewable generation demand for more efficient utilization of the transmission system transmission switching ts and variable impedance series facts devices are two technologies that provide such efficiency gains through controlling the power flows as the system operators begin to utilize these tools it is essential to understand the interdependence between them at various stages such as planning and operation this paper develops an optimal power flow framework that incorporates both facts and ts to study the link between the two power flow control technologies the simulation results on an rts 96 bus system suggest that 1 substantial economic savings can be achieved through utilization of both ts and facts beyond the independent capabilities of each technology 2 performing ts actions affect the optimal location and set point of facts devices and 3 operation of facts devices affect the location and frequency of ts actions it is thus essential to acknowledge the interdependence between the two technologies both at the planning and operation stage failure to do so will lead to economic inefficiencies that can be avoided through co optimization of generation dispatch ts and facts

do capm results hold in a dynamic economy a numerical analysis in this research we use the projection method reported by judd to find numerical solutions to the euler equations of a stochastic dynamic growth model the mode1 that we solve is brock s asset pricing model for a variety of parameterizations of the production functions using simulated data from the model conjectures which are not analytically tractable can be verified we show that the market portfolio is mean variance efficient in this dynamic context we also show a result that is not available from the static capm theory the efficient frontier shifts up and down over the business cycle