directed matching and monetary exchange we develop a model of monetary exchange where as in the random matching literature agents trade bilaterally and not through centralized markets rather than assuming they match exogenously and at random however we determine who meets whom as part of the equilibrium we show how to formalize this process of directed matching in dynamic models with double coincidence problems and present several examples and applications that illustrate how the approach can be used in monetary theory some of our results are similar to those in the random matching literature others differ significantly

the incremental information content of investor fear gauge for volatility forecasting in the crude oil futures market abstract this paper aims to investigate whether investor fear gauge ifg contains incremental information content for forecasting the volatility of crude oil futures for this purpose we use oil volatility index ovx to measure the ifg adding the ifg to existing heterogeneous autoregressive har models we develop many har models with ifg subsequently we employ these har models to predict the volatility of crude oil futures the results from the parameter estimation and out of sample forecasting show that the in sample and out of sample performances of har models with ifg are significantly better than their corresponding har models without ifg the results are robust in different ways thus the har models with ifg are more beneficial to the decision making of all participants including financial traders manufacturers and policymakers in the crude oil futures market more importantly the results suggest that the investor fear gauge has a significant positive effect on volatility forecasting and can help improve the performances of almost all the existing har models

dynamic jump intensities and risk premiums evidence from s p500 returns and options we build a new class of discrete time models that are relatively easy to estimate using returns and or options the distribution of returns is driven by two factors dynamic volatility and dynamic jump intensity each factor has its own risk premium the models significantly outperform standard models without jumps when estimated on s p500 returns we find very strong support for time varying jump intensities compared to the risk premium on dynamic volatility the risk premium on the dynamic jump intensity has a much larger impact on option prices we confirm these findings using joint estimation on returns and large option samples

model complexity and out of sample performance evidence from s p 500 index returns abstract we apply a range of out of sample specification tests to more than forty competing stochastic volatility models to address how model complexity affects out of sample performance using daily s p 500 index returns model confidence set estimations provide strong evidence that the most important model feature is the non affinity of the variance process despite testing alternative specifications during the turbulent market regime of the global financial crisis of 2008 we find no evidence that either finite or infinite activity jump models or other previously proposed model extensions improve the out of sample performance further applications to value at risk demonstrate the economic significance of our results furthermore the out of sample results suggest that standard jump diffusion models are misspecified

the distribution of money and prices in search equilibrium this article considers a search theoretic model of monetary exchange agents bargain over both the amount of money and the quantity of goods to be exchanged in bilateral meetings determining endogenously the distributions of money and of prices i show that money is neutral if changes in the money supply are accomplished via proportional transfers however within the class of lump sum transfers an increase of the rate of monetary expansion tends to decrease the dispersion of wealth and prices and to improve welfare when inflation is low but when inflation is high enough the opposite effects occur

what type of process underlies options a simple robust test we develop a simple robust method to distinguish the presence of continuous and discontinuous components in the price of an asset underlying options our method examines the prices of at the money and out of the money options as the option s time to maturity approaches zero we show that these prices converge to zero at speeds that depend upon whether the underlying asset price process is purely continuous purely discontinuous or a combination of both we apply the method to s p 500 index options and nd the existence of both a continuous component and a jump component in the index to effectively price or hedge derivative securities or to understand the behavior of nancial asset prices in general it is important to know if they are best modeled using a purely continuous process pc a pure jump process pj or a combination of both cj we develop a method to distinguish between these possibilities using options written on the asset in question speci cally we examine the market prices of at the money atm and out of the money otm options as the option s maturity date approaches the valuation date while the prices of all atm and otm options converge to zero as the time to maturity approaches zero our theoretical work shows that the speed of convergence diiers across the three possibilities pc pj or cj we can thus identify the type of an asset price process by examining the convergence speeds of these option prices the simplest approach for determining the type of process governing an asset price is to examine the time series of asset prices directly however the discretely sampled paths from the three types of processes look very similar unless the sampling frequency is extremely high furthermore increasing the sampling frequency introduces market microstructure eiects since our method does not examine the sample path of the underlying asset directly it circumvents these di culties our method is able to distinguish the type of process governing the price of an asset because diierent types of processes have dramatically diierent implications

beyond search fiat money in organized exchange am odel offiat money is constructed in which spatial separation and the logistics of communication are made explicit as in search theory but in which exchange is organized by profit seeking business enterprises as in all market economies firms mitigate search costs by opening shops that are easily located the model endogenizes the number of shops and which objects are traded in each shop it permits the double coincidence of wants and deals easily with divisible commodities equilibria may exist in which fiat money is used as a universal medium of exchange when such an equilibrium exists fiat money is essential in the sense that it is the universal medium of exchange in any efficient network of shops the model provides a foundation to cash in advance theory without specifying in advance that one object will be used as the universal medium of exchange

inflation and welfare in a monetary economy it is in everyone s private interest to try to get someone else to hold non interest bearing cash and reserves but someone has to hold it all so these efforts must simply cancel out all of us spend several hours per year in this effort and employ thousands of talented and highly trained people to help us these person hours are simply thrown away wasted on a task that should not have to be performed at all

general equilibrium with nonconvexities and money in a general equilibrium economy with nonconvexities there are sunspot equilibria with good welfare properties sunspots can ameliorate the effects of the nonconvexities for these economies we show that agents act as if they have quasi linear utility functions we use this result to construct a new model of monetary exchange along the lines of lagos and wright where trade occurs in both centralized and decentralized markets but instead of quasi linear preferences we assume general preferences but with indivisible labor this suggests that modern monetary theory is more robust than one might have thought it also constitutes progress on the classic problem of integrating monetary economics and general equilibrium theory

a rudimentary random matching model with divisible money and prices abstract we consider a version of kiyotaki and wright s monetary search model in which agents can hold arbitrary amounts of divisible money a continuum of stationary equilibria indexed by the aggregate real money stock exists with all trading occurring at a single price there is always a maximum level of the real money stock consistent with existence of such an equilibrium in the limit as trading becomes faster relative to discounting any real money stock becomes feasible in such an equilibrium in contrast to the original kiyotaki wright model higher equilibrium real money stocks unambiguously correspond to higher welfare in this costless production environment journal of economic literature classification numbers d51 e40

parametric inference and dynamic state recovery from option panels we develop a new parametric estimation procedure for option panels observed with error we exploit asymptotic approximations assuming an ever increasing set of option prices in the moneyness cross sectional dimension but with a fixed time span we develop consistent estimators for the parameters and the dynamic realization of the state vector governing the option price dynamics the estimators converge stably to a mixed gaussian law and we develop feasible estimators for the limiting variance we also provide semiparametric tests for the option price dynamics based on the distance between the spot volatility extracted from the options and one constructed nonparametrically from high frequency data on the underlying asset furthermore we develop new tests for the day by day model fit over specific regions of the volatility surface and for the stability of the risk neutral dynamics over time a comprehensive monte carlo study indicates that the inference procedures work well in empirically realistic settings in an empirical application to s p 500 index options guided by the new diagnostic tests we extend existing asset pricing models by allowing for a flexible dynamic relation between volatility and priced jump tail risk importantly we document that the priced jump tail risk typically responds in a more pronounced and persistent manner than volatility to large negative market shocks

money as the mechanism of exchange abstract the existence and use of money remained an embarrassing puzzle for monetary analysis we observe over man s history that social groups without generally accepted media of exchange exhibit poor survival characteristics most social groups do not use assets or commodities at random in the execution of exchanges one observes that a small subset of assets is dominantly used in transactions these transaction dominating assets are usually referred to as money the literature contains many suggestive attempts to explain the emergence and role of money the classic writers made passing references in somewhat pictorial language to the extension markets and increasing labor productivity induced by the use of a general medium of exchange this idea has never been systematically developed however karl brunner 1971

measuring the impact of water supply interruptions on household welfare water scarcity frequently leads to a need for rationing the choice of an adequate rationing method should be based on the impact on consumer welfare that is produced by each rationing plan some rationing schemes such as the frequently used supply interruption method can be regarded as changes in the characteristics of the good in this case time availability that do not modify the pre set consumer budget under the standard theoretical restrictions on consumer behavior compensating or equivalent variations surpluses cannot be used to identify the impacts of these methods on household welfare in this paper we propose a set of sufficient conditions with respect to the utility function that allows for the evaluation of the compensating or equivalent variations surpluses associated with changes in goods quality even if those goods are considered to be essential for consumers we use these conditions to compare the welfare losses associated with the water supply cuts implemented in seville spain to those that would result if water was instead rationed using price changes

a search theoretic approach to monetary economics the essential function of money is its role as a medium of exchange the authors formalize this idea using a search theoretic equilibrium model of the exchange process that captures the double coincidence of wants problem with pure barter one advantage of the framework described here is that it is very tractable the authors also show that the model can be used to addre ss some substantive issues in monetary economics including the potenti al welfare enhancing role of money the interaction between specializat ion and monetary exchange and the possibility of equilibria with multip le fiat currencies copyright 1993 by american economic association

a tractable monetary model under general preferences this article studies an economy with both centralized and decentralized monetary exchanges under search frictions a degenerate asset distribution is featured under a broad class of preferences including for example constant return to scale constant elasticity of substitution cara and others from a range of macroeconomic literatures some novel applications impossible under quasi linear preferences for example endogenous growth are illustrated under this class of preferences this article finds that the welfare cost and growth loss of inflation can be much higher in these applications than previous estimates

equilibrium using credit or money with indivisible goods this note studies the trade of indivisible goods using credit or money in a frictional market we show how indivisibility matters for monetary equilibrium under different assumptions about price determination bargaining generates a price and allocation that are independent of the nominal interest or inflation rate over some range this is not the case with price posting and directed search in either case we provide conditions the nominal rate cannot be too high under which stationary monetary equilibrium exists and we show it is unique or generically unique

standard auctions with financially constrained bidders we develop a methodology for analyzing the revenue and efficiency performance of auctions when buyers have private information about their willingness to pay and ability to pay we then apply the framework to scenarios involving standard auction mechanisms in the simplest case where bidders face absolute spending limits first price auctions yield higher expected revenue and social surplus than second price auctions the revenue dominance of first price auctions over secondprice auctions carries over to the case where bidders have access to credit these rankings are explained by differences in the extent to which financial constraints bind in different auction formats

early exercise decision in american options with dividends stochastic volatility and jumps using a fast numerical technique we investigate a large database of investors suboptimal nonexercise of short maturity american call options on dividend paying stocks listed on the dow jones the correct modeling of the discrete dividend is essential for a correct calculation of the early exercise boundary as confirmed by theoretical insights pricing with stochastic volatility and jumps instead of the black scholes merton benchmark cuts the amount lost by investors through suboptimal exercise by one quarter the remaining three quarters are largely unexplained by transaction fees and may be interpreted as an opportunity cost for the investors to monitor optimal exercise

wage differentials employer size and unemployment the unique equilibrium solution to a game in which a continuum of individual employers choose permanent wage offers and a continuum of workers search by sequentially sampling from the set of offers is characterized wage dispersion is a robust outcome provided that workers search while employed as well as when unemployed the unique nondegenerate equilibrium distribution of wage offers is constructed for three cases 1 identical workers and employers 2 identical employers and an atomless distribution of worker supply prices and 3 identical workers and an atomless distribution of job productivities copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

a model of money with multilateral matching we develop a model of decentralized monetary exchange to examine the distributional effects of inflation across heterogeneous agents the agents have private information about their productivity preferences or money holdings matching is multilateral and each seller is visited by a stochastic number of buyers the good is allocated according to a second price auction in money in equilibrium homogeneous buyers hold different amounts of money leading to price dispersion we find the closed form solution for the distribution of money holdings entry of sellers is suboptimal except at the friedman rule inflation acts as a regressive tax

search money and inflation under private information abstract i study monetary exchange and inflation when buyers have private information about their willingness to pay for certain goods introducing imperfect information in the lagos wright a unified framework for monetary theory and policy analysis j polit economy 113 3 2005 463 484 economy shows that the existence of monetary equilibrium is a more robust feature of the environment in general my model has a monetary steady state in which only a proportion of the agents hold money agents who do not hold money cannot participate in trade in the decentralized market the proportion of agents holding money is endogenous and depends negatively on the level of expected inflation as in lagos and wright s model in equilibrium there is a positive welfare cost of expected inflation but the origins of this cost are very different

on the welfare gains of price dispersion can price dispersion be associated with higher levels of welfare to answer we compare two economies that differ only in the way prices are formed in the first sellers post a unique price quantity pair with no price dispersion in the second sellers post a quantity only and let prices be determined ex post by realized demand resulting in price dispersion we show that while agents trade lower quantities when prices are dispersed an intensive margin effect they also trade more often an extensive margin effect at low inflation the extensive margin dominates making agents better off with price dispersion

search bargaining money and prices the goal of this paper is to extend existing search theoretic models of fiat money which until now have assumed that the price level is exogenous by explicitly incorporating bilateral bargaining this allows us to determine the price level endogenously and leads to additional insights concerning the role of money for example we find that monetary equilibria are generally inefficient in the sense that output and prices differ from the solution to a social planner s problem although the difference can become small as the discount rate or search friction vanishes we also find that there exist nonstationary inflationary equilibria

price dispersion with directed search we model a market where identical buyers direct their search to identical capacity constrained sellers sellers cannot fully commit to the list price so strategic bargaining may determine the sale price we study search and pricing behavior in symmetric equilibrium sale prices exhibit equilibrium dispersion as they respond naturally to local demand conditions uncoordinated search decisions lead to equilibrium demand heterogeneity so sellers realizing large demand bargain prices up we characterize the sale price distribution parametrically studying how different commitment limitations and market features affect pricing and surplus shares we also determine endogenously

dynamic matching two sided incomplete information and participation costs existence and convergence to perfect competition consider a decentralized dynamic market with an infinite horizon and participation costs in which both buyers and sellers have private information concerning their values for the indivisible traded good time is discrete each period has length and each unit of time continuums of new buyers and sellers consider entry traders whose expected utility is negative choose not to enter within a period each buyer is matched anonymously with a seller and each seller is matched with zero one or more buyers every seller runs a first price auction with a reservation price and if trade occurs both the seller and the winning buyer exit the market with their realized utility traders who fail to trade continue in the market to be rematched we characterize the steady state equilibria that are perfect bayesian we show that as converges to zero equilibrium prices at which trades occur converge to the walrasian price and the realized allocations converge to the competitive allocation we also show the existence of equilibria for sufficiently small provided the discount rate is small relative to the participation

discrete choice experiments in developing countries willingness to pay versus willingness to work a concern when conducting stated preference valuation studies in rural developing or very low income contexts is the use of monetary willingness to pay wtp estimates in circumstances where cash incomes are extremely low a significant proportion of the population are not engaged in waged labour and the exchange of goods or services is augmented through barter or work exchange the role of money is likely to be different from that within an urban developed setting as such ability to pay using money may be impaired and downwardly biased when compared with other mediums of exchange in recognition of this several studies have used hypothetical labour contributions as payment vehicles and a common finding is that households are more often willing to contribute labour than they are money in this paper we present the results of a split sample dce using money and labour contributions as payment vehicles for improved drinking water quality in kandal province cambodia we find little differences between the payment vehicles in terms of attribute non attendance marginal utilities of attributes or derived welfare values we argue that this provides support for the use of wtp in rural developing areas where there are functioning labour markets

spanning and completeness with options the role of ordinary options infacilitating the completion of securities markets is examined in the context of a model of contingent claims sufficiently general to accommodate the continuous distributions of asset pricing theory and option pricing theory in this context it is shown that call options written on a single security approximately span all contingent claims written on this security and that call options written on portfolios of call options on individual primitive securities approximately span all contingent claims that can be written on these primitive securities in the case of simple options explicit formulas are given for the approximating options and porfolios of options these results are applied to the pricing of contingent claims by arbitrage and to irrelevance propositions in corporate finance

the risk premia embedded in index options we study the dynamic relation between aggregate stock market risks and risk premia via an exploration of the time series of equity index option surfaces the analysis is based on estimating a general parametric asset pricing model for the risk neutral equity market dynamics using a panel of options on the s p 500 index while remaining fully nonparametric about the actual evolution of market risks we nd that the risk neutral jump intensity which controls the pricing of left tail risk cannot be spanned by the market volatility and its components so an additional factor is required to account for its dynamics this tail factor has no incremental predictive power for future equity return volatility or jumps beyond what is captured by the current and past level of volatility in contrast the novel factor is critical in predicting the future market excess returns over horizons up to one year and it explains a large fraction of the future variance risk premium we contrast our ndings with those implied by structural asset pricing models that seek to rationalize the predictive power of option data relative to those studies our ndings suggest a wider wedge between the dynamics of equity market risks and the corresponding risk premia with the latter typically displaying a far more persistent reaction following market crises

dynamic auction markets with fiat money in this paper we consider various types of models where fiat money is used to facilitate trades and investigate whether models with fiat money have the same equilibrium allocations in particular we investigate whether or not such models have a continuum of stationary equilibria we first present a dynamic centralized auction market model with money which has not been investigated in the literature we compare its outcome with that of walrasian models with cash in advance constraints and show that the outcomes are very different the walrasian markets model has determinate stationary equilibria and the auction markets model has a continuum of stationary equilibria moreover we also build models on decentralized auction markets and on decentralized markets with bargaining and obtain results similar to those of the dynamic centralized auction markets model

whither monetary economics i argue that monetary economics should be pursued by applying implementation theory to models which contain explicit frictions that make money essential the argument has two parts first i argue that models in which real balances are assumed to be productive models with money in utility or production functions or with cash in advance constraints contain hidden inconsistencies second i argue that the approach advocated is capable of providing new insights about some of the main issues in monetary economics the effects of monetary shocks the welfare cost of inflation and the roles of inside and outside money

money in search equilibrium in competitive equilibrium and in competitive search equilibrium we compare three market structures for monetary economies bargaining search equilibrium price taking competitive equilibrium and price posting competitive search equilibrium we also extend work on the microfoundations of money by allowing a general matching technology and entry we study how equilibrium and the effects of policy depend on market structure under bargaining trade and entry are both inefficient and inflation implies first order welfare losses under price taking the friedman rule solves the first inefficiency but not the second and inflation may actually improve welfare under posting the friedman rule yields the first best and inflation implies second order welfare losses

money and price dispersion we relax restrictions on the storage technology in a prototypical monetary search model to study price dispersion in this case buyers and sellers enter matches with potentially different willingness to trade across the distribution of possible bilateral matches prices generally will differ even though agents have identical preferences and technologies we provide existence conditions for a particularly simple equilibrium pattern of exchange we prove that in the limiting case where search frictions are eliminated equilibrium prices are uniform we also show that a higher initial money stock can raise the average price level and increase price dispersion

on the multiplicity of monetary equilibria green zhou meets lagos wright abstract green and zhou relax the assumption made in early search based models of monetary exchange of indivisible money their paper and various extensions make much technical progress and derive some interesting substantive results in particular they show there is an indeterminacy of steady state monetary equilibria we reconsider this result in the framework of lagos and wright which is more tractable we show that a similar multiplicity arises and is much easier to derive and understand we also compare the results to those in related nonmonetary models and discuss how they depend on details including the number of agents and the timing

money holdings inflation and welfare in a competitive market this paper examines an environment where money is essential and agents exchange in perfectly competitive walrasian markets agents consume and produce a homogeneous good but hold money to purchase consumption in the event of a relatively low productivity shock a walrasian market delivers a non degenerate distribution of money holdings across agents and avoids some of the computational difficulties associated with the market and pricing assumptions of bilateral matching and bargaining common to search theoretic environments the model is calibrated to long run us velocity and the welfare costs of inflation are assessed for variable buyer seller ratios and persistent states of buying and selling

on inflation as a regressive consumption tax abstract evidence on the portfolio holdings and transaction patterns of households suggests that the burden of inflation is not evenly distributed we build a monetary growth model consistent with key features of cross sectional household data and use this framework to study the distributional impact of inflation at the aggregate level our model economy behaves similar to standard monetary growth models within the representative agent abstraction inflation has however important distributional effects since it is effectively a regressive consumption tax thus neglecting the distributional consequences of inflation may prove misleading in assessing the effects of inflation in our economy

mechanism design by competing sellers a dynamic model with many sellers and buyers is constructed agents failing to trade may trade in the next period an equilibrium is found where sellers hold identical auctions and buyers randomize over the sellers they visit the distribution of buyer valuations is endogenous an auction with efficient reserve is an optimal mechanism from each seller s point of view in spite of the ability of any seller to alter the distribution of buyer types participating in the seller s mechanism by altering the mechanism copyright 1993 by the econometric society

dynamic monetary equilibrium in a random matching economy this article concerns an infinite horizon economy where trade must occur pairwise using a double auction mechanism and where fiat money overcomes lack of double coincidence of wants traders are anonymous and lack market power goods are divisible and perishable and are consumed at every date preferences are defined by utility stream overtaking money is divisible and not subject to inventory constraints the evolution of individual and economywide money holdings distributions is characterized there is a welfare ordered continuum of single price equilibria reflecting indeterminacy of the price level rather than of relative prices

a model of money and credit with application to the credit card debt puzzle many individuals simultaneously have significant credit card debt and money in the bank the credit card debt puzzle is given high interest rates on credit cards and low rates on bank accounts why not pay down the debt while economists have gone to elaborate lengths to explain this observation we argue it is a special case of the rate of return dominance puzzle from monetary economics we analyze the issue by extending standard monetary theory to incorporate consumer debt this seems interesting in its own right since developing models where money and credit coexist is a long standing challenge and it helps put into context recent discussions of consumer debt

model selection for the mixed logit with bayesian estimation in this paper the mixed logit ml using bayesian methods was employed to examine willingness to pay wtp to consume bread produced with reduced levels of pesticides so as to ameliorate environmental quality from data generated by a choice experiment model comparison used the marginal likelihood which is preferable for bayesian model comparison and testing models containing constant and random parameters for a number of distributions were considered along with models in preference space and wtp space as well as those allowing for misreporting we found strong support for the ml estimated in wtp space little support for fixing the price coefficient a common practice advocated and adopted in the environmental economics literature and weak evidence for misreporting

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

u s stock market crash risk 1926 2010 abstract this paper examines how well alternate time changed levy processes capture stochastic volatility and the substantial outliers observed in u s stock market returns over the past 85 years the autocorrelation of daily stock market returns varies substantially over time necessitating an additional state variable when analyzing historical data i estimate various one and two factor stochastic volatility levy models with time varying autocorrelation via extensions of the bates 2006 methodology that provide filtered daily estimates of volatility and autocorrelation the paper explores option pricing implications including for the volatility index vix during the recent financial crisis

optimal auctions with endogenous budgets we study the benchmark independent private value auction setting when bidders have endogenously determined budgets before bidding a bidder decides how much money she will borrow bidders incur a cost to borrowing we show that bidders are indifferent between participating in a first price second price and all pay auction the all pay auction gives higher revenue than the first price auction which gives higher revenue than the second price auction in addition when the distribution of values satisfies the monotone hazard rate condition the revenue maximizing auction is implemented by an all pay auction with a suitably chosen reserve price

bidding for money we analyze monetary exchange in a model that allows for directed search and multilateral matches we consider environments with divisible goods and indivisible money and compare the results with those in models that use random matching and bilateral bargaining two different pricing mechanisms are used ex ante price posting and ex post bidding auctions also we consider settings both with and without lotteries we find that the model generates very simple and intuitive equilibrium allocations that are similar to those with random matching and bargaining but with different comparative static and welfare properties

the fine structure of asset returns an empirical investigation we investigate the importance of diffusion and jumps in a new model for asset returns in contrast to standard models we allow for jump components displaying finite or infinite activity and variation empirical investigations of time series indicate that index dynamics are devoid of a diffusion component which may be present in the dynamics of individual stocks this leads to the conjecture confirmed on options data that the risk neutral process should be free of a diffusion component we conclude that the statistical and risk neutral processes for equity prices are pure jump processes of infinite activity and finite variation

designing conjoint choice experiments using managers prior beliefs abstract the authors provide more efficient designs for conjoint choice experiments based on prior information elicited from managers about the parameters and their associated uncertainty the authors use a bayesian design procedure that assumes a prior distribution of likely parameter values and optimizes the design over that distribution the authors propose a way to elicit prior information from managers and show in monte carlo studies that the procedure provides more efficient designs than the current procedures the authors provide an empirical application in which they elicit prior information on the parameter values and the associated uncertainty from managers here the bayesian design provides 30 50 lower standard errors of the estimates and an expected predictive validity that is approximately 20 higher

money with partially directed search abstract partially directed search replaces the total randomness of monetary search models agents choose whether to stay in their production location or visit other locations each visiting agent randomly chooses one shop among many in each location as in random matching models a commodity or fiat object can endogenously become money but the details are richer and conform better with evidence any commodity can be money the best commodity is the most likely money fiat money can totally crowd out commodity money in an asymmetric environment going shopping is more likely than door to door sales the model nests walrasian equilibria

asking for individual or household willingness to pay for environmental goods implication for aggregate welfare measures the aggregate welfare measure for a change in the provision of a public good derived from a contingent valuation cv survey will be higher if the same elicited mean willingness to pay wtp is added up over individuals rather than households a trivial fact however once respondents are part of multi person households it becomes almost impossible to elicit an uncontaminated wtp measure that with some degree of confidence can be aggregated over one or the other response unit the literature is mostly silent about which response unit to use in wtp questions and in some cv studies it is even unclear which type has actually been applied we test for differences between individual and household wtp in a novel web administered split sample cv survey asking wtp for preserving biodiversity in old growth forests in norway two samples are asked both types of questions but in reverse order followed by a question with an item battery trying to reveal why wtp may differ we find in a test between samples that the wtp respondents state on behalf of their households is not significantly different from their individual wtp however within the same sample household wtp is significantly higher than individual wtp in particular if respondents are asked to state individual before household wtp our results suggest that using individual wtp as the response unit may overestimate aggregate wtp thus the choice of response format needs to be explicitly and carefully addressed in cv questionnaire design and further research in order to avoid the risk of unprofitable projects passing the benefit cost test

the price of the smile and variance risk premia using a new specification of multifactor volatility we estimate the hidden risk factors spanning s p 500 index spx implied volatility surfaces and the risk premia of volatility sensitive payoffs

a jump diffusion model for option pricing brownian motion and normal distribution have been widely used in the black scholes option pricing framework to model the return of assets however two puzzles emerge from many empirical investigations the leptokurtic feature that the return distribution of assets may have a higher peak and two asymmetric heavier tails than those of the normal distribution and an empirical phenomenon called volatility smile in option markets to incorporate both of them and to strike a balance between reality and tractability this paper proposes for the purpose of option pricing a double exponential jump diffusion model in particular the model is simple enough to produce analytical solutions for a variety of option pricing problems including call and put options interest rate derivatives and path dependent options equilibrium analysis and a psychological interpretation of the model are also presented

does it matter when a power outage occurs a choice experiment study on the willingness to pay to avoid power outages using a choice experiment survey the marginal willingness to pay wtp among swedish households for reductions in power outages is estimated the results from the random parameter logit estimation indicate that the marginal wtp increases with the duration of the outages and is higher if the outages occur during weekends and during winter months moreover the random parameter logit model allows us to estimate a sample distribution of wtp and we find a significant unobserved heterogeneity in some of the outage attributes given that households have negative welfare effects from outages it is important that policy makers consider these negative impacts on household utility when regulating the swedish electricity market

short term market risks implied by weekly options we study short maturity weekly s p 500 index options which provide a direct way to analyze volatility and jump risks unlike longer dated options they are largely insensitive to the risk of intertemporal shifts in the economic environment adopting a novel seminonparametric approach we uncover variation in the negative jump tail risk which is not spanned by market volatility and helps predict future equity returns as such our approach allows for easy identification of periods of heightened concerns about negative tail events that are not always signaled by the level of market volatility and elude standard asset pricing models

price dispersion inflation and welfare we examine the implications of inflation for both price dispersion and welfare in a monetary search economy in our economy if the degree of buyers incomplete information about prices is fixed both price dispersion and real prices are increasing in inflation as the inflation rate approaches the friedman rule both price dispersion and welfare losses vanish if households choose the number of prices to observe then the optimal inflation rate may exceed the friedman rule as inflation induces search and up to a point raises welfare by eroding market power

a unified framework for monetary theory and policy analysis search theoretic models of monetary exchange are based on explicit descriptions of the frictions that make money essential however tractable versions of these models typically make strong assumptions that render them ill suited for monetary policy analysis we propose a new framework based on explicit micro foundations within which macro policy can be studied the framework is analytically tractable and easily quantifiable we calibrate the model to standard observations and use it to measure the cost of inflation we find that going from 10 percent to 0 percent inflation is worth between 3 and 5 percent of consumption much higher than previous estimates

model selection and misspecification in discrete choice welfare analysis this study extends the work by herriges and kling 1997 to further evaluate the impact of discrete choice modelling techniques on welfare measures particularly we evaluate the performance of the increasingly popular mixed logit model and the computational strategy for deriving discrete choice welfare measures our simulation results show that model misspecification can have profound effects on welfare measures in general the flexible mixed logit model performs relatively well in the presence of misspecification however when the nesting structure can be appropriately identified via statistical tests and a priori knowledge experience the nested logit model provides more reliable welfare measures than the mixed logit model

money and prices a model of search and bargaining abstract this paper makes commodities divisible and incorporates bargaining into the search theoretic model of money to determine the purchasing power of money or price it is shown that two monetary equilibria always coexist where fiat money is universally accepted the two equilibria differ in price output welfare and the velocity of money sunspot monetary equilibria exist in which money is universally accepted in all states of the economy multiplicity has novel implications on the effectiveness of currency substitution and exchange market intervention journal of economic literature classification numbers c78 e40

supplier choice and wtp for electricity attributes in an emerging market the role of perceived past experience environmental concern and energy saving behavior abstract this study analyzes customers preferences and their willingness to pay wtp for certain service attributes in an electricity supplier choice context specifically a stated preference choice experiment is conducted in the canary islands residential market where limited competition exists preferences for different electricity suppliers and three level of service attributes are investigated namely supply reliability share of renewable energies and availability of a complementary energy audit service the results might be interpreted as an indication of different aspects new firms need to consider if they plan to enter in the market there is an opportunity for new companies to establish in the market though evidence of brand loyalty to the current company and or significant switching costs are also found especially in the case of older people regarding the estimated wtp several results should be highlighted first customers who have experienced more serious outages in the past tend to show a higher wtp to reduce the outage frequency second highly educated respondents those who state a great concern for the greenhouse gases ghg emissions and those who carry out energy saving actions in their homes exhibit a larger wtp for renewable energies this empirical evidence provides useful information for authorities responsible for energy policy design

a contribution to the pure theory of money abstract this article analyzes a general equilibrium model with search frictions and differentiated commodities because of the many differentiated commodities barter is difficult in that it requires a double coincidence of wants and this provides a medium of exchange role for fiat currency we prove the existence of equilibrium with valued fiat money and show it is robust to certain changes in the environment rate of return dominance liquidity and the welfare implications of fiat money are discussed

households willingness to pay for water service attributes water consumption and disposal are often taken for granted as essential services with required levels of service quality yet little is known about how much consumers are willing to pay for specific service levels as customers in many countries face changing levels of water availability especially shortages linked possibly to climate change and limited catchment capacity the need to assess the value and hence benefit to society of varying service levels and prices in an effort to secure the provision of and disposal of water has risen on public agendas in an attempt to establish how much customers are willing to pay for specific levels of service we use a series of stated choice experiments and mixed logit models to establish the willingness to pay to avoid interruptions in water service and overflows of wastewater differentiated by the frequency timing and duration of these events the empirical evidence is an important input into the regulatory process for establishing service levels and tariffs as well as useful planning information for agencies charged with finding cost effective ways of delivering services at prices that customers deem to be value for money

multi item auctions a collection of items is to be distributed among several bidders and each bidder is to receive at most one item assuming that the bidders place some monetary value on each of the items it has been shown that there is a unique vector of equilibrium prices that is optimal in a suitable sense for the bidders in this paper we describe two dynamic auction mechanisms one achieves this equilibrium and the other approximates it to any desired degree of accuracy

spanning and completeness in markets with contingent claims abstract we characterize financial markets that are complete or that contain portfolios which span all measurable functions of a particular asset payoffs either finite and infinite dimensional these results are then employed to describe the extent to which options trading is sufficient to complete markets to investigate the existence of efficient funds and to establish the extent of market completeness required to ensure the unanimity and irrelevance results of modern corporation finance

money is memory abstract this paper examines the sets of feasible allocations in a large class of economic environments in which commitment is impossible following myerson 8 the standard definition of feasibility is adapted to take account of the lack of commitment the environments feature either memory or money memory is defined as knowledge on the part of an agent of the full histories of all agents with whom he has had direct or indirect contact in the past money is defined as an object that does not enter utility or production functions and is available in fixed supply the main proposition is that any allocation that is feasible in an environment with money is also feasible in the same environment with memory depending on the environment the converse may or may not be true hence from a technological point of view money is equivalent to a primitive form of memory journal of economic literature classification numbers e40 c73 d82

self confirming price dispersion in monetary economies abstract in a monetary economy we show that price dispersion arises as an equilibrium outcome without the need for costly simultaneous search or any heterogeneity in preferences production costs or search technologies a distribution of money holdings among buyers makes sellers indifferent across a set of posted prices leading to a non degenerate price distribution this price distribution in turn makes buyers indifferent across a range of money balances rationalizing the non degenerate distribution of money holdings we completely characterize the distribution of posted prices and money holdings in any equilibrium equilibria with price dispersion admit higher maximum prices than observed in any single price equilibrium and feature an increasing density of prices in contrast to existing theories price dispersion reduces welfare by creating mismatch between posted prices and money balances inflation exacerbates this welfare loss by shifting the distribution towards higher prices

money banking and monetary policy abstract an important function of banks is to issue liabilities like demand deposits that are relatively safe and liquid we introduce a risk of theft and a safe keeping role for banks into modern monetary theory this provides a general equilibrium framework for analyzing banking in historical and contemporary contexts the model can generate the concurrent circulation of cash and bank liabilities as media of exchange or inside and outside money it also yields novel policy implications for example negative nominal interest rates are feasible and for some parameters optimal for other parameters strictly positive nominal rates are optimal

identification of maximal affine term structure models building on duffie and kan 1996 we propose a new representation of affine models in which the state vector comprises infinitesimal maturity yields and their quadratic covariations because these variables possess unambiguous economic interpretations they generate a representation that is globally identifiable further this representation has more identifiable parameters than the maximal model of dai and singleton 2000 we implement this new representation for select three factor models and find that model independent estimates for the state vector can be estimated directly from yield curve data which present advantages for the estimation and interpretation of multifactor models

liquidity a new monetarist perspective this essay surveys the new monetarist approach to liquidity work in this literature strives for empirical and policy relevance plus rigorous foundations questions include what is liquidity is money essential in achieving desirable outcomes which objects can or should serve in this capacity when can asset prices differ from fundamentals what are the functions of commitment and collateral in credit markets how does money interact with credit and intermediation what can and should monetary policy do the research summarized emphasizes the micro structure of frictional transactions and studies how institutions like monetary exchange credit arrangements or intermediation facilitate the exchange process

the value of household water service quality in lahore pakistan most existing literature focuses on the benefits of establishing basic drinking water access for unserved populations the extensive water supply margin in contrast this article examines the intensive margin the benefits of improving water service to under served households a growing population in developing country cities we use contingent valuation to estimate willingness to pay wtp for improved piped water quality and reductions in supply interruptions among a sample of 193 households in lahore pakistan the distribution of wtp is described using parametric and non parametric models results indicate that households in lahore are willing to pay about 7 50 to 9 per month for piped water supply that is clean and drinkable directly from the tap comparable to the monthly cost of in home water treatment and about three to four times the average monthly water bill for sample households using piped water estimates of wtp for reducing supply interruptions are both smaller and more difficult to interpret since a significant fraction of the estimated wtp distribution for supply improvements is negative all of our wtp estimates are well below 4 of monthly household income the world bank s benchmark upper bound for affordable water service

the dynamics of bidding markets with financial constraints we develop a model of bidding markets with financial constraints a la che and gale 15 in which two firms choose their budgets optimally and we extend it to a dynamic setting over an infinite horizon we provide three main results for the case in which the exogenous cash flow is not too large and the opportunity cost of budgets is positive but arbitrarily low first firms keep small budgets and markups are high most of the time second the dispersion of markups and money left on the table across procurement auctions hinges on differences both endogenous and exogenous in the availability of financial resources rather than on significant private information third we explain why the empirical analysis of the size of markups based on the standard auction model may have a bias downwards or upwards positively correlated with the availability of financial resources a numerical example illustrates that our model is able to generate a rich set of values for markups bid dispersion and concentration

a competitive distribution of auctions in this paper a competitive distribution of auctions is described for an economy consisting of an infinite number of buyers and sellers all of whom differ according to their valuation for the single indivisible object being traded a competitive distribution of auctions is such that no seller can improve his profits by deviating to any alternative direct mechanism it is shown that the competitive distribution of auctions will have the property that each buyer and seller s best reply is independent of his beliefs about the tastes of other buyers and sellers on the market the purpose of this paper is to provide an equilibrium for an economy in which sellers compete by offering different direct mechanisms to buyers no attempt is made to give a complete characterization of all possible equilibria rather we focus on one equilibrium in which the contracts that are offered by sellers in equilibrium and buyer s behaviour under these contracts are both independent of traders beliefs about one another the equilibrium illustrates one of the reasons why contracts that are employed in practice may not be as finely tuned to beliefs as the theory of mechanism design says that they should be the answer is simply that contracts are not offered in a vacuum sellers in the model studied in this paper need to compete with one another in order to attract buyers highly tuned mechanisms tend to extract buyer surplus in such an environment sellers are able to attract many buyers by offering to use cruder mechanisms that leave some surplus for buyers in this paper sellers are allowed to have different costs for the commodity that is being traded nonetheless the equilibrium for the limit economy in which there are infinitely many buyers and sellers is such that every seller offers a second price auction and publicizes a reserve price equal to his cost in a standard monopoly auction the optimal reserve price for the seller exceeds his cost by an amount that depends on his beliefs about buyers valuations myerson 1981 a seller who raises his reserve price has his profits affected in two distinct ways by raising his reserve price the seller makes it unprofitable for some buyer types to participate in his auction the seller therefore loses any surplus that he might have earned by trading with these buyers the buyers who still find it profitable to participate in the seller s auction will end up having to pay a higher price when they win because of this increase in the seller s reserve price this means that the seller will be able to extract a bit more surplus from buyers who continue to participate the seller raises the reserve price until the marginal cost associated with raising the reserve price is just equal to the marginal gain associated with the ability to extract more surplus from remaining buyers competition mitigates this argument since there is a limit to the amount of surplus that the seller can extract from remaining buyers before they decide that they should instead choose one of the alternative auctions that are being held on the market with

contingent prices and money price posting with directed search is a widely used trading mechanism coles and eeckhout showed that if sellers are allowed to post prices contingent on realized demand instead of one price then there is real market indeterminacy in this article we fit this contingent price posting protocol into a monetary economy we show that as long as holding money is costly there exists a unique equilibrium rather than a continuum in this equilibrium sellers post a low price for when the buyer is alone a high price for when several buyers show up and buyers randomize between sellers and money holdings

risk aversion and willingness to pay for energy efficient systems in rental apartments abstract this paper uses a random utility model to estimate consumers valuation of energy efficient insulation and ventilation systems in rental apartments given consumers limited experience in residential buildings and the perceived uncertainty about their comfort benefits and resulting energy savings these relatively new technologies might be undervalued by risk averse consumers using the concept of certainty equivalence this paper proposes a model to assess the consumers risk aversion for adopting energy efficient systems these systems are treated as risky assets while conventional commodities are assumed to be risk free the curvature of the utility function is interpreted as a measure of aversion to perceived risks as opposed to explicit risks measured by observed variances the proposed formulation is applicable in stated preference data with qualitative variables the model is applied to data from a choice experiment conducted among 264 apartment tenants in switzerland the estimated curvatures reject the risk neutrality hypothesis the range of the estimated risk premiums suggests that risk considerations remain a central issue in dealing with energy efficiency in residential buildings the analysis also indicates that assuming same risk attitudes toward new and conventional systems could bias the estimates of the willingness to pay especially when the system is comprised of several components

estimating the willingness to pay for reliable electricity supply a choice experiment study abstract this research examines households willingness to pay wtp for an improved electricity service households stated wtp is estimated using the choice experiment ce method the data used in the estimations come from 350 in person interviews conducted during the period 5 22 august 2008 in north cyprus compensating variation cv estimates for a zero outage scenario are calculated using the parameter estimates from the mixed logit ml model these are 6 65 ytl turkish lira per month 3 02 usd for summer and 25 83 ytl per month 11 74 usd for winter in order to avoid the cost of outages households are willing to incur a 3 6 and a 13 9 increase in their monthly electricity bill for summer and winter respectively the wtp per hour unserved is 0 28 ytl 0 13 usd for summer and 1 08 ytl 0 49 usd for winter a preliminary cost benefit analysis indicates that the annualized economic benefits are approximately 42 7 million ytl 19 4 million usd for the residential sector this would justify an investment in additional generation capacity of approximately 268 mw which is far more than that which is needed to eliminate the service reliability problem

open market operations abstract in an open market operation the central bank swaps currency for bonds we show how injecting money in this way is different from transfers the way policy is usually formulated the model captures liquidity explicitly by modeling the roles of assets in frictional exchange under various specifications for market structure and the acceptability or pledgeability of assets we discuss implications for the fisher and quantity equations the possibility of negative nominal yields liquidity traps and market segmentation when liquidity is endogenized using information theory multiple equilibria emerge with different policy predictions interest on reserves and quantitative easing are discussed