the trade effects of the eu turkey customs union in the present study we argue that the salient features of both the eu 15 countries and turkey are conducive to making the effects of the 1995 eu turkey customs union asymmetric among the incumbent eu countries in order to support our argument we rely on a model in which trade involves the exchange of vertically differentiated products this model generates the prediction that the more contiguous an incumbent country is to the joining country in terms of technological sophistication the larger will be the crowding out of this country s exports to the other incumbent countries as a result of the cu expansion using a gravity model we estimate the effects of the customs union between turkey and the eu 15 by differentiating between exports from a lower technology eu 15 countries we term this group of countries south to higher technology eu 15 countries the north b north to south c south to turkey d north to turkey and e turkey to eu 15 our econometric results indicate that in contrast to north s exports to the other eu 15 countries which have remained intact the southern countries exports to the other eu 15 countries have declined as a result of the cu moreover the extra penetration of the turkish market by the eu 15 countries has not been more favourable to the southern group

option prices as predictors of equilibrium stock prices the black scholes option pricing model modified for dividend payments is used to calculate jointly implied stock prices and implied standard deviations a comparison of the implied stock prices with observed stock prices reveals that the implied prices contain information regarding equilibrium stock prices that is not fully reflected in observed stock prices the implications of this finding are discussed this study investigates the role of call option prices as predictors of the equilibrium prices of their underlying stocks using the black scholes 3 bs model previous tests of the bs model have shown that the formula is highly successful in explaining the observed market prices of options see black and scholes 2 galai 8 chiras and manaster 6 and macbeth and merville 12 according to the model the option price is a function of the current value of the underlying stock the instantaneous variance of the stock s rate of return the time to maturity of the option the risk free rate of interest and the exercise price of the option 1 given an observed option price and known values of all input parameters to the bs model except the stock price one can determine the price of the underlying stock that equates the observed option price to its calculated value it follows from the underlying logic of the model that the implied price is the value of the underlying stock for which a continuously revised option bond portfolio would be a perfect substitute for the stock hence if options are actually priced according to the model implied stock prices will be the option market s assessment of equilibrium stock values previous empirical studies have assumed that observed stock prices are the relevant stock prices for option valuation however just as stock prices may differ in the short run from one exchange to another i e nyse midwest

the distribution of foreign exchange price changes trading day effects and risk measurement this study investigates the nature of price changes in a variety of major and minor foreign exchange markets the results suggest that the log of price changes over one trading day intervals seems to follow a non normal stable distribution function different measures of location and to lesser extent scale are present for different days of the week dollar denominated price changes are high on mondays and wednesdays and low on thursdays and fridays for all currencies the wednesday thursday result is consistent with the settlement procedures used in foreign exchange transactions in the dollar the friday monday result is consistent with an increase in demand for the dollar prior to the weekend this study offers some previously unavailable results on the nature of price changes in a certain set of speculative markets in particular this is a study of the distributional characteristics of daily and weekly price changes for a number of major and minor foreign exchange markets the results document the existence of non normal stable distributions for price changes in foreign exchange markets these price change distributions differ by day of the week in ways that are only partly attributable to the institutional structure of the market the results of the study are interpreted within the context of understanding how foreign exchange markets operate and within the context of prior studies of stock market data concerned with summarizing the probability distribution of price changes for different intervals including days of the week since bachelier s 1 original treatise that contained the proposition that speculative market prices follow a process that could be described by a normal distribution there have been numerous alternative attempts to describe the stochastic processes which characterize speculative market prices these studies have not resulted in any generalized description of the probability distribution of price changes in such markets indeed the evidence suggests substantial differences in the process among various types of financial instruments the failure to achieve consensus can be traced to the lack of robustness in the statistical procedures employed to estimate processes and to differences in the underlying institutional or economic arrangements which are unique to that market the possibility of differences in the information set used to assess value or differences in technology for transmitting information makes it important to secure additional

efficiency tests of the foreign currency options market based on a new options transactions data base from the philadelphia stock exchange foreign currency options market this paper examines the importance of the effect of nonsynchronous prices and transaction costs on the usual option market efficiency tests the tests conducted are based on the transaction cost adjusted early exercise and put call parity pricing boundaries applicable to the american foreign currency options market the test results show that the put call parity boundary tests are sensitive to both nonsynchronous prices and transaction costs the early exercise boundary tests are sensitive to transaction costs but are not very sensitive to simultaneity of the option price and the underlying spot price under the no transaction costs scenario a large number of early exercise boundary violations is found even when simultaneous spot and option prices are used these violations disappear when actual transaction costs are taken into account

pricing exports a cross country study abstract this paper applies cointegration and error correction analysis to estimate the long run steady state and short run dynamic relationships between the exchange rate and export prices in industrial and newly industrializing economies the data coherent analysis allowing the endogeneity of domestic cost and the exchange rate shows that the exchange rate has smaller effects on the export price than previous studies would indicate it contradicts some widely accepted relationships e g smaller more open countries have greater coefficients of pass through the results also exhibit important differences among the usa japan and germany in their export pricing behavior jel f30 f31

arbitrage tests of the efficiency of the foreign currency options market in this paper the lower boundary excercise price and put call parity conditions for foreign currency options are subjected to empirical testing the tests are directed towards the examination of the hypothesis that the foreign currency option market is efficient the evidence in the ex post tests is inconsistent with this hypothesis since a large number of violations of theoretical conditions are found in the data

hyteresis in import prices the beachhead effect this paper shows that temporary real exchange rate fluctuations can have persistent hysteretic effects on trade specifically when market entry costs are sunk sufficiently large exchange rate shocks alter domestic market structure and thereby induce hysteresis this simple result has strong implications for exchange rate theory t rade policy and estimation of trade equations empirical evidence su ggests that the recent dollar overvaluation induced hysteresis in u s import prices namely the aggregate pass through equation of exchange rates to import prices shifted in the 1980s the shift s nature and timing is broadly consistent with the hysteresis hypothesis copyright 1988 by american economic association

inflation targeting and exchange rate pass through this paper analyzes how endogenous imperfect exchange rate pass through affects inflation targeting optimal monetary policies in a new keynesian small open economy the paper shows that an inverse relation exists between the pass through and the insulation of the economy from foreign and monetary policy shocks and that imperfect pass through tends to decrease the variability of the terms of trade furthermore with cpi inflation targeting in the short run delayed pass through constrains monetary policy more than incomplete pass through and interest rate smoothing amplifies this effect when the pass through decreases the variability in economic activity tends to rise and the trade off between the stabilization of cpi inflation and output worsens in direct relation to how strictly the central bank is targeting cpi inflation in contrast with domestic inflation targeting optimal monetary policy is not constrained and opposite results occur consequently imperfect pass through favors the choice of domestic to cpi inflation targeting

price discrimination in the context of vertical differentiation an application to canadian wheat exports this study examines the ability of the canadian wheat board cwb to price discriminate in bread wheat exports this study models wheat as a vertically differentiated intermediate good and modifies the model of vertical differentiation by mussa and rosen to the realities of wheat import demand the conceptual model isolates the bases of price discrimination and demonstrates that the cwb s ability to exploit cost differences in pricing depends on the extent of the differentiation between canadian and u s wheat this model is implemented using monthly confidential price data provided by the cwb for exports to japan the united kingdom and two markets aggregating remaining exports through canada s west and east coasts for 1982 1994 the data indicate that the cwb charges different prices to different countries for wheat of the same grade and protein content results from the model indicate that the price difference between any two markets is not completely explained by elements of perfect competition however the evidence is mixed regarding the ability of the cwb to utilize all the instruments available to price discriminate thus the cwb s pricing strategy may be more complex and dynamic than the prescription for static producer surplus maximization derived in this study

implied spot rates as predictors of currency returns a note currency call option transactions data and the black scholes option pricing model as modified by merton for continuous dividends and as adapted to currency options by biger and hull and by garman and kohlhagen are used to imply spot foreign exchange rates the proportional deviation between implied and simultaneously observed spot rates is found to be a direct and statistically significant determinant of subsequent returns on foreign currency holdings after controlling for interest rate differentials further an ex ante trading rule reveals that the additional information contained in implied rates often is sufficient to generate significant economic profits manaster and rendleman 18 in a recent study of the informational efficiency of the u s stock market investigate the ability of call option prices to predict through implied stock prices the equilibrium values of their underlying common stocks in an ex post test manaster and rendleman find that closing option prices contain information beyond that reflected in closing stock prices due to data synchronization problems however these authors are unable to distinguish whether these results reflect superior or simply more recent information in an ex ante test manaster and rendleman are unable to reject the null hypothesis of no additional information content in implied stock prices bhattacharya 1 employing synchronized transactions data finds that option prices possess information not contained in contemporaneous stock prices although it is not clear whether the value of this information exceeds associated trading costs jennings and starks 15 provide evidence supporting the stock options market s role in determining equilibrium stock prices specifically jennings and starks examine stock price adjustments to quarterly earnings announcements using samples of firms with and without listed options and find that nonoption firms require substantially more time to adjust similar to stock options the possibility exists that foreign currency options contain information beyond that represented in their underlying market spot exchange rates this study extends the manaster and rendleman methodology to call options on foreign exchange to investigate empirically this possibility specifically this is accomplished by testing whether daily exchange rates that are implied from currency option prices and a version of the black and scholes 3 option pricing model opm contain information that may be employed to signal profitable trading strategies in foreign exchange currency option transactions data are supplied by the philadelphia stock exchange phlx results

option pricing when the variance is changing the monte carlo method is used to solve for the price of a call when the variance is changing stochastically

exchange rate pass through when market share matters the authors investigate the pass through from exchange rates to import prices when firms future demands depend on their current market shares they show that profit maximizing foreign firms may either raise or lower their dollar export prices when the dollar appreciates temporarily i e the pass through may be perverse and that current import prices may be more sensitive to expected future exchange rates than to current exchange rates they present evidence that suggests the behavior of expected future exchange rates may provide a clue to the puzzling recent behavior of u s import prices copyright 1989 by american economic association

conditional volatility and the informational efficiency of the phlx currency options market abstract the relative performance of implied and historical volatility predictors is compared for four exchange rates from 1985 to 1991 for three currencies arch models estimated up to 1989 show that phlx implied volatilities provide specifications for daily conditional variances which can not be significantly improved by using past returns this result is consistent with the informational efficiency of the philadelphia currency options market out of sample forecasts of the average volatility over four week periods are evaluated for 1990 and 1991 once more the implied predictors are superior to historical predictors

exchange rate pass through and currency invoicing implications for monetary integration in east asia exporter s price setting behaviour and currency invoicing play a key role in the literature on the new open economy macroeconom ics this paper estimates exchange rate pass through coefficients for the exports of four asean

incomplete pass through and the welfare effects of exchange rate variability abstract this paper considers the implications of incomplete exchange rate pass through for optimal monetary and exchange rate policy a two country model is presented which allows an explicit derivation of welfare functions in terms of a weighted sum of the second moments of producer prices and the nominal exchange rate from a single country perspective the optimal exchange rate variance depends on the degree of pass through the size and openness of the economy the elasticity of labour supply and the volatility of foreign producer prices welfare may be decreasing or increasing in the volatility of the exchange rate

forward exchange rates as predictors of future spot rates and the efficiency of the foreign exchange market abstract the theory of informationally efficient markets emit is applied to the foreign exchange market and some of its operational implications are illustrated the emit is joined with alternative models of the equilibrium return on the foreign exchange market the pure expectations hypothesis the modern theory and tentative formulations of return as a function of risk the alternative joint hypotheses are rejected by the data but this does not necessarily imply the rejection of emit the rejection may be due to the inadequacies of the equilibrium return models used notwithstanding the fact that the risk premium has been captured to a certain extent in the empirical tests and the evidence against the emit weakened

exchange rate pass through for strategic pricing and advertising abstract this paper builds a model in the new empirical industrial organization framework bresnahan t 1989 industries and market power in schmalensee r willig r eds handbook of industrial organization north holland amsterdam to estimate exchange rate pass through in price and advertising price cost margins market structure and firm conduct are estimated endogenously allowing for precise estimation of the degree of and reasons for incomplete pass through i demonstrate that price and advertising pass through are functions of demand cost and market conduct in the short run in the long run the market conduct and cost technologies are in turn determined by the exchange rate movements 1997 elsevier science b v

pricing to market behaviour of india s high value agri food exporters an empirical analysis of major destination markets the pricing behaviour of india s high value agricultural and food exporters in their major destination markets is examined using a pricing to market ptm model for noncompetitive and exchange rate related pricing behaviour the analysis was undertaken in a context where india is showing high commodity concentration in agricultural trade the econometric analysis employed is panel corrected standard errors pcse estimation technique the results indicated evidence of a greater degree of imperfect competition either through price discrimination across destinations or through imperfect exchange rate pass through the analysis of exchange rate effects showed that the local currency price stabilization by the indian exporters were more prominent than the amplification of exchange rates the analysis of the asymmetric effects of exchange rates on export prices showed that in most cases the depreciation of indian rupee had a greater impact than the appreciation moreover the results showed that the exchange rate pass through is sensitive to the kind of exchange rate index utilised in our analysis we found that the commodity specific exchange rate better predicts the pricing to market behaviour in most cases

animal spirits and the composition of innovation this paper shows that the schumpeterian model with both vertical and horizontal innovative research admits many more equilibria than the unique symmetric balanced growth path bgp usually highlighted in the literature each of a continuum of bgps is characterized by a different composition of aggregate r d vertical versus horizontal this appears if firms expect self fulfilling waves of enthusiasm in the newly introduced sectors as is very common in the real world pioneers are challenged by more outsiders and the first monopoly of every new good is likely to last less than in more mature industries by expecting this horizontal innovation is depressed while vertical innovation is more intense such waves of enthusiasm have a positive effect on growth rates and a negative effect on consumption levels

emerging differences in state grain trading australia and canada the australian wheat board awb and canadian wheat board cwb have attracted attention recently because they are two of the largest state trading enterprises stes engaged in agricultural trade they have traditionally been viewed as nearly sister agencies among major stes in the world market these two agencies historically had similar characteristics including price pooling cost pooling export sales monopolies monopoly powers within domestic markets grain quality control and government underwriting of initial producer prices and export credit however during the past 6 years similarities between the awb and cwb have begun to diverge and the importance of their differences is becoming increasingly apparent this paper identifies major emerging differences between the awb and cwb and explores potential explanations hypotheses for these dissimilarities a major point is that reforms in institutional design and legislative changes have given rise to emerging differences in key aspects of the marketing systems and performance

do capital importing countries pay higher prices for their imports of goods abstract we examine the effects that a country s net capital flows have on the border prices that a country pays for its imports of goods using data from 2000 to 2009 for 11 euro area countries we utilize a pricing to market specification to study exporters pricing behavior to the rest of the countries in the sample at the industry level for 900 goods disseminated at the 4 digit standard international trade classification level this allows us to construct a panel dataset which contains observations across exporters importers industries and time we find a strong positive influence of the importing country s net capital inflows on the border prices of its imports of goods this result is robust across different specifications of the underlying model as well to different sample dis aggregations across types of capital flows product categories and exporters

exchange rate shocks and the speed of trade price adjustment 1 introduction theoretical and empirical work in the international trade literature dealing with the relationship between exchange rate and trade prices has been dominated and guided by the static pass through and profit markup model see e g feinberg 1986 mann 1986 fisher 1989 hooper and mann 1989 knetter 1989 gagnon and knetter 1995 feenstra gagnon and knetter 1996 and lee 1997 the shortcoming of such models is well captured by william branson 1989 p 333 difference in adjustment response signals to me the need for a reconsideration of the theoretical framework for the analysis of the pass through question by now we should be thinking about optimizing price policy for investors and exporters who know that they face an exchange rate that follows some sort of stochastic process over time these differences call for a revision of pass through theory along the lines of time series analysis our explicit incorporation of profit maximizing firms facing adjustment costs develops the model introduced by krugman 1987 it transforms the traditional markup and pass through model to explain from first principles a dynamic markup and a price adjustment speed both depending on fundamental characteristics of the firms involved krugman 1989 concludes his paper on pricing to market by calling for further research on the adjustment cost model regarding the adjustment cost approach he states krugman 1989 p 44 it is still a speculative idea not grounded in solid empirical tests but it is a good story and if it is correct it has extremely important implications for economic policy the present paper provides the quantity adjustment cost approach that krugman calls for as such it complements the work of gagnon 1989 and kasa 1992 while gagnon and kasa employ quantity adjustment cost models with many of the same features as the model developed here they provide only approximate solutions and focus on a quite different set of issues gagnon examines the effect of exchange rate variability on trade volume kasa investigates the importance of mean reversion in exchange rates as an explanation for the pricing to market hypothesis in contrast our focus is on the relation between adjustment speeds and pass through thus our contribution relative to gagnon 1989 and kasa 1992 is that we provide the passthrough issue in a dynamic context with exact analytical solutions that relate the degree of passthrough to adjustment speeds and identify the determinants of commodity specific adjustment speeds in response to exchange rate shocks the remainder of the paper is organized as follows in section 2 we develop a partial equilibrium model taking exchange rates as given of the pricing policies of a profit maximizing firm competing in foreign markets and subject to a convex quantity adjustment cost section 3 develops testable implications directly from the model section 4 discusses the data and empirical methodology for preliminary two stage time series and cross sectional tests section 5 provides the tentative estimation and section 6 concludes 2 a simple partial equilibrium model consider a representative firm producing fox export that maximizes the expected discounted value of infinite horizon real profits the firm generates its revenue abroad in foreign currency it has no influence on the exchange rate may adjust its price at any point in time but is subject to a convex cost of quantity adjustment the firm maximizes where x is the exogenously given real exchange rate at time t we define x as the units of domestic currency per unit of foreign currency multiplied by the export destination country s price index and divided by the home country s price index instantaneous profits are discounted at a rate r which is specific to the firm this rate accounts for a standard risk premium inherent in the riskiness of the firm s activities

the changing composition of innovative activity in the us a portrait based on patent analysis abstract in this paper patent bibliometrics are used to investigate shifts underway in the american innovation system patent indicators point to extraordinarily dynamic innovation in information and health technologies accompanied by a shift in the center of us innovation from the east to the west coast innovating companies are adapting to the demise of large corporate basic research laboratories by using their own research instead growth in university patenting is also striking and universities have become dominant patentees in a few large economically vibrant cities the importance of universities to local innovation has also been revealed by the growth in referencing from patents to papers which allows us to see that companies preferentially reference papers from in state public sector institutions

measurement of monopoly behavior an application to the cigarette industry a simple scheme is proposed to measure monopoly pricing behavior the coefficient of the tax rate term in a price equation identifies the ratio of price to marginal cost no direct measurement of costs is required so a major problem for other empirical studies of monopoly is avoided empirical results for cross section time series data support rejection of atomistic competition but also provide evidence against the operation of an effective cartel in the cigarette industry the model represents an alternative interpretation of related results in a recent paper by barzel application of the methodology to other markets is feasible

testing the market integration process in the european car sector evidence from pricing to market behaviour in this study we investigate the process of the european car market integration by analysing the evolution of cross country differences in the degree of pricing to market behaviour of united kingdom exporters we estimate these country differences by exploiting statistical information for pre tax retail prices and for export unit values conclusions from both independent data sets are in general quite consistent results support the claim that in the period before the block exemption regulation 1400 2002 came fully into force international price discrimination was an important source of car price dispersion within the euro area for a more recent period we found that estimated deviations in pricing to market behaviour across destinations have become lower this convergence suggests that car market integration was progressively improved at the end of the last decade

international credit and welfare a paradoxical theorem and its policy implications abstract this paper considers a developing nation that faces a foreign exchange shortage and hence its demand for foreign goods is limited both by its income and its foreign exchange balance availability of international credit relaxes the second constraint we develop a simple model of strategic interaction between lending institutions and firms and show that the availability of international credit at concessionary rates can leave the borrowing nation worse off than if it had to borrow money at higher market rates this paradox of benevolence is then used to motivate a discussion of policies pertaining to international lending and the southern government s method of rationing out foreign exchange to the importers

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

a study of diffusion processes for foreign exchange rates abstract the nature of the stochastic process generating the time path of foreign exchange rates plays an important role in dynamic theories of international financial economics an important consideration in this stochastic process is the relationship between currency return variances and exchange rate levels using five years of daily data separated into quarterly intervals this study demonstrates that currency return variances depend on exchange rate levels and the dependency is unstable intertemporally thus these empirical results contradict the assumption of stable log normal distribution and the more general assumption of constant elasticities of variances for elasticity coefficients ordinary least squares estimates are compared to maximum likelihood estimates the maximum likelihood estimator clearly is superior implications of these results for models of foreign exchange rates are discussed

terms of trade and real exchange rates the canadian evidence abstract this paper presents empirical evidence linking the canada us real exchange rate with the terms of trade using recently developed econometric methods for nondashstationary data we find that the real exchange rate is cointegrated with terms of trade variables and that causality runs from the terms of trade to the exchange rate we then construct a simple exchange rate equation that satisfies several specification tests and performs better than a random walk in post sample forecasting experiments the results suggest that much of the variation in the real exchange rate is attributable to movements in the terms of trade and that the influence of monetary factors is secondary

exchange rate expectations and market shares abstract we consider an asymmetric duopoly comprised of a domestic and a foreign firm we derive optimal collusion equilibria and examine how market shares vary in response to changes in the exchange rate our analysis implies some surprising results first a temporary depreciation has a greater impact on market shares than a permanent depreciation second if the change in the expected future rates is of sufficient magnitude then the domestic firm s market share may decrease following a depreciation of the home currency a seemingly perverse effect 1997 elsevier science s a

the response of the us export prices to changes in the dollar s effective exchange rate further evidence from industry level data the relationship between the dollar s effective exchange rate and the export price indexes for 13 two digit us manufacturing industries is analysed to determine i which industry adjusts its dollar export price to dampen or amplify the effect of the exchange rate fluctuations on the foreign currency price of its exports and ii whether the response of the export price index to appreciation and depreciation of the exchange rate is asymmetric for several industries evidence consistent with dampening the foreign currency price of exports in an asymmetric fashion is found the implications of the results for the price competitiveness of the industries studied is discussed

price changes of related securities the case of call options and stocks this paper tests the hypothesis that option prices contain information not reflected in con temporaneous stock prices an options transactions data base is used for the purpose the evidence suggests that the magnitude of anticipation of stock prices by option prices is insufficient to overcome the bid ask spread for intra day holding periods implications of the profits in the overnight holding periods are discussed

is free trade passe abstract if there were an economist s creed it would surely contain the affirmations i understand the principle of comparative advantage and i advocate free trade yet the case for free trade is currently more in doubt than at any time since the 1817 publication of ricardo s principles of political economy and this is due to changes that have recently taken place in the theory of international trade while new developments in international trade theory may not yet be familiar to the profession at large they have been substantial and radical in the last ten years the traditional constant returns perfect competition models of international trade have been supplemented and to some extent supplanted by a new breed of models that emphasizes increasing returns and imperfect competition these new models call into doubt the extent to which actual trade can be explained by comparative advantage they also open the possibility that government intervention in trade via import restrictions export subsidies

government spending composition technical change and wage inequality in this paper we argue that government spending played a significant role in stimulating the wave of innovation that hit the u s economy in the late 1970s and in the 1980s as well as the simultaneous increase in inequality and in education attainments since the late 1970s u s policymakers began targeting commercial innovations more directly and explicitly we focus on the shift in the composition of public demand toward high tech goods which by increasing the market size of innovative firms functions as a de facto innovation policy tool we build a quality ladders non scale growth model with heterogeneous industries and endogenous supply of skills and show that an increase in the technological content of public spending stimulates r d raises the wage of skilled workers and at the same time stimulates human capital accumulation a calibrated version of the model suggests that government policy explains between 12 and 15 of the observed increase in wage inequality in the period 1976 1991 jel e62 j31 o33 o41

why do the free trade gain numbers differ so much the role of industrial organization in general equilibrium a small general equilibrium model calibrated approximately to match the canadian tradeable goods sector is used to examine the implications of a range of assumptions about pricing behaviour and entry barriers for the impact of free trade with the united states it turns out that only a model with an extreme combination of non competitive product market and free entry as well as unexploited scale economies can generate substantial gains from free trade other assumptions modelled include monopolistic competition market share pricing an economist s model and a mainstream industrial organization approach the predicted welfare gains range from zero to more than 7 per cent of gnp pourquoi est ce que les evaluations numeriques des gains derives de l accord de libre echange different tellement le role de l organisation industrielle dans l analyse d equilibre g6neral l auteur utilise un petit modele d equilibre general calibre pour approximer le secteur canadien des biens echangeables avec l exterieur dans son analyse des implications d un ensemble de postulats quant a la tarification et aux barrieres a l entree sur l impact du libre echange avec les etats unis il appert que seul un modele impliquant une combinaison extreme de marches de produit non concurrentiels et d entree libre ainsi que d economies d echelle non exploitees peut engendrer des gains substantiels comme resultat du libre echange on examine aussi d autres postulats concurrence monopolistique tarification pour maintenir une part du marche un modele a saveur economiste et 1 approche standard d organisation industrielle les gains de bien etre qu on predit selon les postulats de base couvrent un eventail de zero a 7 pour cent du pnb

the refoundation of the symmetric equilibrium in schumpeterian growth models abstract we provide a refoundation of the symmetric growth equilibrium characterizing the research sector of vertical r d driven growth models we argue that the usual assumptions made in this class of models leave the agents indifferent as to where targeting research hence the problem of the allocation of r d investment across sectors is indeterminate by introducing an contamination of confidence in the expected distribution of r d investment we prove that the symmetric structure of r d investment is the unique rational expectations equilibrium compatible with ambiguity averse agents adopting a maxmin strategy

price discrimination by u s and german exporters the insensitivity of the u s trade balance to the sharp depreciation of the dollar in the past three years has revived interest in the relationship between exchange rates and the trade balance a central issue in most analyses of the relation between the current account and the exchange rate concerns the price adjustment process the simple integrated competitive market model predicts that local currency prices should change in proportion to the nominal exchange rate for a country too small to influence world prices the relationship between local currency import prices and exchange rates has been referred to as the pass through relationship in the empirical literature in international economics if the proportional relationship between import prices and exchange rates holds pass through is said to be complete accounts of recent u s experience cite the failure of dollar prices of imported goods to rise in proportion to exchange rates i e incomplete pass through as an important factor in explaining the persistence of the trade deficit unfortunately observations on pass through alone provide limited insight into the behavior of markets since incomplete pass through is consistent with at least two fundamentally different paradigms one is the standard competitive model of trade in which the law of one price holds but exchange rate fluctuations are associated with large changes in import demand due to other factors for example if dollar appreciation is correlated with increases in world demand and industry marginal cost is increasing then pass through will be less than complete the other is an imperfectly competitive model in which exporters are capable of price discriminating across destination markets a phenomenon paul krugman 1987 has labeled pricing to market in this model incomplete pass through is typically associated with fluctuations in the markup of price over marginal cost on exports 2 these fluctuations in markups are believed to be countryspecific they do not reflect the behavior of prices to other export destinations both models are plausible explanations of recent u s experience unfortunately it is impossible to distinguish between these competing models using only information on import prices and exchange rates for a single country in order to distinguish between the competing models an empirical analysis of goods prices and exchange rates must be capable of measuring either marginal cost or the markup over marginal cost either of these tasks poses formidable empirical problems much of the empirical literature in industrial organization has been concerned with precisely these issues since markups are an important measure of the competitiveness of industries

exchange rate hysteresis large versus small policy misalignments abstract using a monetary model in the spirit of dornbusch 1976 and a sunk cost model of trade hysteresis we show that a sufficiently large policy misalignment can induce hysteresis in the trade balance and thereby alter the steady state real exchange rate hence exchange rate dynamics are path dependent since hysteresis in our model can entail industrial dislocation and the scrapping of sunk assets we suggest that these factors constitute a welfare cost of large policy misalignments that have not been considered formally additionally since the long run exchange rate is path dependent standard empirical tests of exchange rate models may involve a misspecification

purchasing power parity over two centuries abstract this paper re examines the purchasing power parity hypothesis for the dollar sterling exchange rate using the two centuries of data from lothian and taylor lt 1996 real exchange rate behavior the recent float from the perspective of the past two centuries journal of political economy 104 3 488 509 unlike lt we conclude that the dollar sterling rer is nonstationary implying a rejection of the long run ppp hypothesis the differences in our conclusions are explained by 1 sensitivity of adf unit root tests to the choice of lag length and or 2 the presence of significant time trends in the adf or phillips perron unit root test equations

markup adjustment and exchange rate fluctuations evidence from panel data on automobile exports abstract this paper uses data on bilateral automobile export prices from the usa germany and japan to gauge the importance of markup adjustment driven by exchange rate movements across several destination markets we find that japanese exports are characterized by a high degree of markup adjustment designed to stabilize the price measured in the buyer s currency there is weak evidence for such behavior on the part of german exporters and no evidence of markup adjustment by us exporters where it exists markup adjustment tends to be highly persistent the dynamic pattern of markup adjustment is consistent with invoicing in the exporter s currency except for exports to the usa and canada

declining exchange rate pass through to u s import prices the potential role of global factors this paper documents a robust and sustained decline in exchange rate pass through to u s import prices from well above 0 5 during the 1970s and 1980s to around 0 2 over the last decade we attribute this decline to the rising prominence of competition from china a shift in import pricing behavior since the asian financial crisis and the reduced share of material intensive goods in u s imports we also find evidence that foreign exporters are increasingly setting their prices with an eye on u s prices these results in turn suggest a new and more general hypothesis linking the decline in pass through to the evolving nature of competition in global markets and structural changes in international production patterns

currency areas and monetary coordination we integrate a monetary search model into open economy macro to analyze the gains from coordinating on inflation search frictions and local congestion lead to a determinate exchange rate between two currencies relative prices deviate from the law of one price because the deviations depend on the cross country differential in money growth each country is tempted to inflate to exploit the deviations policy coordination reduces inflation and improves welfare for all countries in contrast to traditional models the gains from coordination continue to exist even after each country optimally sets a direct tax on the foreign use of the country s currency

exchange rates and market power evidence from the petrochemical industry abstract this paper takes a microeconometric approach to the study of exchange rate pass through in imperfectly competitive markets we provide evidence for the hypothesis that incomplete exchange rate pass through can be attributed to non competitive conduct by foreign firms a unique feature of our approach is the use of highly disaggregated industry data which is compatible with the behavioral assumptions of a homogeneous product oligopoly model we employ a panel data set consisting of location and product specific price and cost data for 29 traded petrochemicals for the us germany and japan during 1982 to 1993 our empirical estimates indicate that german and japanese firms exercised statistically significant market power in the us petrochemical market during our sample period

did the strong dollar increase competition in u s product markets sunk cost models of new trade theory have demonstrated that large unanticipated swings in currency values can have permanent effects on trade flows by altering market structure in imperfectly competitive markets the author tests an implication of these models using panel data on export unit values from germany and japan to a number of foreign markets including the united states he finds weak evidence in support of the thesis that u s product markets became more competitive as a result of the large dollar appreciation of the 1980s although the results vary by industry and comparison country copyright 1994 by mit press

capital market liberalization globalization and the imf one of the most controversial aspects of globalization is capital market liberalization not so much the liberalization of rules governing foreign direct investment but those affecting short term capital flows speculative hot capital that can come into and out of a country in the 1980s and 1990s the imf and the us treasury tried to push capital market liberalization around the world encountering enormous opposition not only from developing countries but from economists who were less enamoured of the doctrines of free and unfettered markets of market fundamentalism that were at that time being preached by the international economic institutions the economic crises of the late 1990s and early years of the new millennium which were partly or even largely attributable to capital market liberalization reinforced those reservations this paper takes as its point of departure a recent imf paper to provide insights both into how the imf could have gone so wrong in its advocacy of capital market liberalization and into why capital market liberalization has so often led to increased economic instability not to economic growth copyright 2004 oxford university press

pass through of exchange rates and purchasing power parity abstract in this paper we develop and test two hypotheses about purchasing power parity ppp the first is that changes in the price of traded goods relative to domestic substitutes will affect the ppp relation due to the partial pass through of exchange rates the second is that ppp should hold on forward rather than spot exchange rates due to hedging by firms which implies that the interest rate differential should enter the ppp relation for spot rates using quarterly data for several countries we find support for both these hypotheses though the magnitude of the interest rate effect is very small

self fulfilling prophecies in the quality ladders economy if r d difficulty increases as it accumulates as recent evidence suggests then there is a value in the diversification of the aggregate r d efforts over the whole range of industries in the economy however this paper proves that the quality ladders models allow for self fulfilling prophecies to divert r d from an arbitrary number of sectors with potentially dramatic effects on the dynamics of industry structure and on the long run aggregate growth performance moreover in developing countries perfect markets might allow stagnant monopolies to resist despite the removal of fundamental entry barriers to dynamic competition this kind of coordination failure implies potentially strong effects of socio cultural factors on growth and suggests a positive role for public r d policy even in a framework of semi exogenous growth

inequality and the us import demand function in this paper we build a model of trade in vertically differentiated products and find that income inequality can affect the demand for imports even in the presence of homothetic preferences the empirical importance of changes in inequality on the demand for imports is then assessed by examining panel data for 36 developing and developed countries for the 1980 1997 period we find significant evidence supporting our prediction that inequality has a large influence on the demand for imports moreover we find that in line with the predictions of our theoretical model this influence is positive for high income countries countries that produce the high quality variety of the vertically differentiated product and negative for low income countries countries that produce the low quality variety of the vertically differentiated product

the life cycle of a competitive industry firm numbers first rise then later fall as an industry evolves this nonmonotonicity is explained using a competitive model in which innovation opportunities fuel entry and relative failure to innovate prompts exit equilibrium time paths for price and quantity also share features of the data the model is estimated using data from the u s automobile tire industry a particularly dramatic example of the nonmonotonicity in firm numbers

linear and nonlinear exchange rate exposure abstract this paper presents a new methodological approach to examine exchange rate exposure which takes account of the role of the market portfolio and macroeconomic variables in exposure regressions exchange rate regimes based on periods of depreciation and appreciation and nonlinear exposure within each regime we show that the stock market s own exposure to exchange rates should be taken into account before considering industry exposure in addition we adjust the exchange rate and the stock market for common economy wide factors that are unrelated to exchange rates within this framework we show that exposure to bilateral exchange rates is statistically and economically important and that industries with extensive international trade are more often exposed than industries with low levels of international trade the signs of exposure coefficients in each regime are consistent with the extent to which an industry exports we also show that nonlinear exposure is often statistically and economically significant interestingly there is little evidence that industries are exposed to a currency basket

exchange rates and prices the adjustment of relative prices to exchange rate movements is explained in an industrial organization approach given labor costs in the respective currencies exchange rate movements change costs for firms selling in the home market and thus disturb the industry equilibrium the extent of absolute and relative price adjustment is shown to depend on market integration product substitutability the relative number of domestic and foreign firms and the market structure the impact of exchange rates on prices is illustrated in a variety of approaches including the cournot a dixit and j stiglitz 1977 and s salop 1979 models some empirical evidence is offered in support of the theory copyright 1987 by american economic association

valuation of foreign currency options some empirical tests this paper investigates the efficiency of the market for foreign currency options with the help of a modified version of the black scholes model the evidence in the ex post tests is inconsistent with this hypothesis since we find a large number of opportunities for abnormal profits a second set of tests is conducted on an ex ante basis to determine whether these profit opportunities exist even if the execution of the strategy is delayed by one day the evidence from these tests provides more support for the hypothesis of market efficiency

market share and exchange rate pass through in world automobile trade abstract using a bertrand differentiated products model we show that pass through should be high for exporters based in a country with a very large share of total destination market sales for source countries with small and intermediate market shares the relationship is potentially nonlinear and sensitive to assumptions about demand and firm interactions the model is estimated using a panel data set of automobile exports from four source countries to 12 destination markets over the period 1970 1988 the relationship between pass through and market share is significantly nonlinear pass through is lowest when the source country s market share is around 40 percent and highest when market share approaches 100 percent

incidents of gray market activity among u s exporters occurrences characteristics and consequences each year the value of gray market products sold throughout the world runs into the billions of dollars past research has stated that exporters of manufactured goods can hardly afford to ignore the possibility of this phenomenon due to the often severe effects on their sales volume margins and relationships with distributors and end users through a survey of export managers of manufacturing firms coupled with a series of qualitative interviews this study investigates how organizational specific control specific and market specific factors drive gray market activity and in turn explores the effects of unauthorized distribution on export performance several factors are shown to evaluate the potential of unauthorized distribution in their export markets namely the centralization of decision making the degree to which the product is standardized channel integration and channel control international experience market volatility and the number of markets served were found to have no effect on gray market activity this contrary to traditional thinking furthermore the effects of gray market activity on strategic versus economic performance is shown to be significantly different each of these issues is discussed in detail along with the implications for export managers

trade deficit surprises and the ex ante volatility of foreign exchange rates abstract we investigate the effects of us balance of trade deficit announcements on the ex ante volatility of foreign exchange rates specifically we analyze the association between currency option implied standard deviation isds and the surprise component of monthly merchandise trade deficit disclosures our results indicate that larger surprises regardless of their sign are associated with increased currency isds we also find that deficit disclosures regardless of their content temper market uncertainty on average finally we find that larger than expected deficits tend to depreciate the us dollar jel f31

symmetric pass through of tariffs and exchange rates under imperfect competition an empirical test abstract this paper examines the effect of tariffs and exchange rates on u s prices of japanese cars trucks and motorcycles in particular we test whether the long run pass through of tariffs and exchange rates are identical the symmetry hypothesis we find that this hypothesis is easily accepted in our sample we also find that the pass through relation varies across products ranging from about 0 6 for trucks to unity for motorcycles these coefficients have very different implications for trade policy we explain the results based on demand cost and institutional conditions in each industry

ppp strikes back aggregation and the real exchange rate we show the importance of a dynamic aggregation bias in accounting for the ppp puzzle we prove that the aggregate real exchange rate is persistent because its components have heterogeneous dynamics established time series and panel methods fail to control for this using eurostat data we find that when heterogeneity is taken into account the estimated persistence of real exchange rates falls dramatically its half life for instance may fall to as low as eleven months significantly below the consensus view of three to five years

exchange rate pass through at the product level we use a detailed database to investigate exchange rate pass through at the product level for a large number of countries the empirical analysis suggests that pricing behaviours are dichotomous with complete pass through in around 25 of sectors and significant pricing to market in the remaining ones average long run pass through coef ficient is close to 80 this result hides a strong heterogeneity of pass through behaviours across sectors even when composition effects are controlled for average pass through varies across importing countries the econometric analysis shows that pass through tends to be higher in volatile environments in less developed countries in weakly integrated markets jel classification f12 f31 f41

an empirical model of mark ups in a quality differentiated export market abstract this paper develops an empirical model to allow for imperfect competition in the market for traded goods a simultaneous equation model incorporating the demand for and supply of taiwanese footwear exports to the united states is specified and estimated the model allows the identification of two separate sources of mark ups in export prices the first comes from the u s imposed quantitative restriction on these exports the second comes from imperfect competition in the international market for these exports the results suggest competitive behavior by taiwanese footwear exporters the quantitative restriction resulted in a 16 9 percent mark up of prices over marginal cost

the growth of network computing quality adjusted price changes for network servers in this paper we investigate the evolution of quality adjusted prices for servers motivated by two facts first the productivity acceleration in the us economy since the mid 1990s is closely linked to spread of information technology of which networked computing is a large component second the growth of network computing itself has been fostered by the rapid growth in the quality and quantity of the network server market like pakes 2003 analysis of the pc market we show that our preferred version of the hedonic price index complete hybrid fell much more rapidly than the standard matched model price index the hedonic index fell on average by about 30 per annum compared to 17 p a for the matched model this difference is mainly due to the selection bias in the standard matched model price index due to the exit of obsolete models which would have had the fastest price falls

is price adjustment asymmetric evaluating the market share and marketing bottlenecks hypothesis abstract export price adjustment is asymmetric with respect to currency fluctuations in at least two circumstances if firms face capacity constraints in distribution networks or quantitative trade restrictions then pricing to market may be greater during depreciations of the exporter s currency if firms attempt to build market share subject to the threat of trade restrictions then pricing to market may be greater during appreciations of the exporter s currency this paper tests for asymmetries using panel data on german and japanese 7 digit industry exports the data seldom reject the hypothesis of a symmetric response of prices to exchange rates

measuring the intensity of competition in export markets abstract this paper develops an approach to measuring the intensity of competition in international markets using readily available data on destination specific values and quantities of exports at the seven digit industry level the intensity of competition a group of exporters faces in a particular export market is measured by the residual demand elasticity the group faces this elasticity is identified by exchange rate shocks which rotate the supply relation of the source country export group relative to competitors located in other countries we apply this method to german exports of beer and us exports of linerboard paper the resulting estimates of market power appear to be plausible and consistent with other indicators of competition e g market shares the number of competitors providing support for the applicability of our framework in measuring competition in international markets

predicting currency return volatility abstract standard deviations and elasticity of variance coefficients implied in currency option prices are employed to predict subsequent currency return volatility despite documented variance non stationarity strong predictive relationships are found the predictive accuracies of standard deviations and elasticity coefficients are statistically indistinguishable finally predictive accuracy is invariant to the weighting techniques employed

cross border integration in the european electricity market evidence from the pricing behavior of norwegian and swiss exporters abstract this paper examines the electricity market integration process in two european areas based on the pricing behavior of norwegian and swiss exporters the aim is to gain evidence for the period after the adoption of the second legislative package 2003 the pricing behavior of norwegian exporters indicates that the wholesale markets for denmark and sweden are highly integrated moreover results are fully compatible with the existence of a very competitive marketplace for electricity this clearly contrasts with the evidence provided by swiss exporters in this last case analysis revealed differences in pricing to market behavior between italy france and germany which indicates that exporters take advantage of international market segmentation and divergences between market structures this outcome provides a reasonable explanation as to why price differences between countries cannot be fully attributed to transmission costs as has been claimed in previous research we also found cross country convergence in levels of markups and in pricing to market behavior of the swiss exporters for the first part of the period that was analyzed the evidence is fully consistent with an initial impulse toward market integration originated by reforms implemented at the beginning of the last decade

a note on the effect of cost changes on prices in a recent article in this journal sumner 1981 took an ingenious approach to estimating the level of monopoly power in the cigarette industry he noted that differences in marginal costs exist in the industry due to varying levels of state taxes the sales prices established will satisfy the equation p i liq l mr mc where p price and q the elasticity of demand for the product in question if elasticity is a constant observing the change in marginal cost and the change in price enables one to infer the elasticity of demand perceived by the firm elasticity could then be used as a proxy for the firm s market power this technique turns out to be of very limited applicability however because it is extremely sensitive to the functional form assumed for the demand curve consider the general problem of a firm facing constant marginal costs of c in maximizing profits the firm solves

further results on the constant elasticity of variance call option pricing model the black scholes 4 call option model is a member of the class of constant elasticity of variance call option models proposed by cox 6 while the black scholes model assumes that the volatility or instantaneous variance of return is constant through time the other members of the class allow the volatility to change with the stock price this property is of interest because empirical evidence suggests that returns to common stock are heteroscedastic and also that volatilities implied from the black scholes model and market prices of call options are not constant

cost pass through in the u s automobile market we study cost pass through in the u s automobile market using a framework that incorporates the effects of cost changes on input decisions we find that accounting for firms factor market decisions significantly increases measured cost pass through although we reject the hypothesis of full cost pass through and constant markups in addition our evidence suggests that cost shocks common to all manufacturers have a greater effect on prices than do model specific cost shocks finally we examine how pass through varies with manufacturer nationality finding that u s firm cost pass through exceeds that of european and asian firms

international deviations from the law of one price the role of search frictions and market share this article examines the size and persistence of international deviations from the law of one price in an industry with search frictions cost differences lead foreign and domestic firms to price differently within countries when local firms are more common in each country there are large and persistent price differences across countries large and persistent changes in international relative costs lead to large and persistent changes in international relative prices dynamic considerations imply that the amount of a cost shock firms pass through to prices is u shaped in the market share of firms receiving the shock

the evolution of price dispersion in the european car market car prices in europe are characterized by large and persistent differences across countries the purpose of this paper is to document and explain this price dispersion using a panel data set extending from 1980 to 1993 we first demonstrate two main facts concerning car prices in europe i the existence of significant differences in quality adjusted prices across countries with italy and the u k systematically representing the most expensive markets 2 substantial year to year volatility that is to a large extent accounted for by exchange rate fluctuations and the incomplete response of local currency prices to these fluctuations these facts are analysed within the framework of a multiproduct oligopoly model with product differentiation the model identifies three potential sources for the international price differences price elasticities generating differences in markups costs and import quota constraints local currency price stability can be attributed either to the presence of a local component in marginal costs or to markup adjustment that is correlated with exchange rate volatility the latter requires that the perceived elasticity of demand is increasing in price we find that the primary reason for the higher prices in italy is the existence of a strong bias for domestic brancs that generates high markups for the domestic firm fiat in the u k higher prices are mainly attributed to better equipped cars and or differences in the dealer discount practices the import quota constraints are found to have a significant impact on japanese car prices in italy france and the u k with respect to local currency price stability a large percentage of the documented price inertia can be attributed to local costs and a smaller fraction to markup adjustment that is indicative of price discrimination based on these results we conjecture that the emu will substantially reduce the year to year volatility observed in the car price data but without further measures to increase european integration it will not completely eliminate existing cross country price differences

the competitive structure of u s agricultural exports the competitive structure of u s agricultural exports is examined using a model of exporter behavior based on pricing decisions across destination markets market power is revealed in the adjustment patterns of export prices in response to exchange rate movements the results reject the hypothesis that the export pricing decisions by u s firms are consistent with price discrimination across destination markets for cotton corn and soybeans the strongest evidence against the competitive market structure is obtained for international trade in wheat where results indicate that the two largest importers soviet union and prc may exert market power to obtain lower prices

consumer search price dispersion and international relative price fluctuations this article develops a model of consumer search consistent with the evidence of substantial price dispersion and time spent shopping within countries to study international deviations from the law of one price lop and relative price fluctuations search frictions lead firms to price discriminate across markets based on the opportunity cost of search which depends on the local wage with productivity and taste shocks estimated from the data deviations from the lop are as volatile and persistent as in the data fluctuations in relative wages real exchange rates and the terms of trade are also consistent with the data

short run fluctuations in foreign exchange rates evidence from the data 1973 1979 abstract the paper examines the statistical properties of daily changes in foreign exchange fx rates for nine currencies it finds that these changes are leptokurtotic i e have long tailed and sharp peaked histograms the evidence suggests that this leptokurtosis does not arise from an underlying paretian stable distribution nor from a stationary mixture of normal distributions but rather from normal processes with time varying parameters this finding casts doubt on the validity of many standard techniques t stats arima methods some moving statistics for estimating the time varying parameters are also presented

long run price effects of exchange rate changes in finnish pulp and paper exports this paper presents long run exchange rate elasticities of finnish newsprint and pulp export prices in the united kingdom uk and germany over the period 1980 94 the elasticities were estimated for a markup pricing model using johansen s cointegration method the magnitudes of the elasticity estimates obtained by imposing price homogeneity indicate that pass through of exchange rate changes to export prices has been incomplete in both markets for newsprint the pass through elasticity was 0 60 in the uk and 0 46 in germany which means that about one half of the changes in the exchange rates is reflected in prices as expressed in the destination countries currencies and about a half in prices measured in finnish markka instead in pulp exports the pass through elasticities differed from each other between the two destination countries more clearly than in newsprint exports indicating a different pricing behaviour of finnish pulp exporters in the uk and germany when exchange rate changes pass throug

tests of an american option pricing model on the foreign currency options market this paper tests the ability of the american option pricing model proposed by parkinson 18 or mason 14 to explain the pricing of the foreign currency options traded on the philadelphia stock exchange from february 28 1983 to march 26 1985 we find that the model underprices out of the money options relative to at the money and in the money options this relative underpricing is driven by an underpricing of out of the money call options of short maturity in addition the degree of relative mispricing for most categories of options is shown to be a decreasing function of the time to maturity of the options longer maturity options appear to trade at similar levels of implied volatility whether they are in at or out of the money most of these biases appear consistent with the fact that the underlying spot currency rate follows a mixed jump diffusion process as described in 17

adjustment costs and pricing to market theory and evidence abstract this paper develops an adjustment cost model of pricing to market the model consists of a monopolist who supplies an identical nondurable good to two foreign markets it is shown that the degree of pricing to market increases with the relative importance of the transitory component in exchange rates customs data from 1978 through 1987 on u s and canadian imports of seven german commodities are used to estimate the model s parameters and test its over identifying restrictions

standard deviations implied in option prices as predictors of future stock price variability abstract standard deviations implied in option prices have recently been introduced as being better than average predictors of future stock price variability this article specifically studies the predictive ability of implicit standard deviations taking into account the dividend problem and the problem of optimal weighting schemes of the standard deviations when there are several options on the same stock transaction data information was used to study the importance of non simultaneities in observing stock and option prices

exposure and markups this article examines how to properly specify and test for factors that affect exchange rate exposure starting from theoretical underpinnings and a sample of u s manufacturing industries between 1979 and 1995 we find that 4 of 18 industry groups are significantly exposed to exchange rate movements through the effect of industry competitive structure export share and imported input share on average a 1 appreciation of the dollar decreases the return of the average industry by 0 13 consistent with our model s predictions as an industry s markups fall rise its exchange rate exposure increases decreases exchange rate movements are an important source of risk for a firm they affect a firm s expected cash flows and or change the terms of competition for exporters importers and multinationals hung 1992 estimates that during the 1980s u s manufacturing industries lost approximately 23 billion year or 10 of total profits due to the dollar s movements surprisingly early studies which assume exchange rate exposure to be constant e g jorion 1990 bodnar and gentry 1993 and amihud 1994 find that exchange rates have no effect on the stock returns of u s multinationals exporters or manufacturing industries recently however allayannis 1997 and bodnar dumas and marston 1998 examine time varying exposure of industry returns 1 in particular the former article focuses on the effect the variation of u s industries import and export shares have on exposure while the latter focuses on pass through and exposure in a sample of japanese export oriented industries besides trade shares and pass through exchange rate exposure also depends on the markup of an industry specifically in industries with