the pricing of foreign currency options this study examines the assumption that the exchange rate follows a log normal probability distribution and it tests whether different stochastic specifications translate into important differences in implied option prices we investigate a class of processes which includes the log normal probability distribution as a limiting case none of the models performs particularly well the main problem appears to be that the volatility estimates from actual exchange rate data are significantly smaller than those implied by observed option prices la formation du prix des options sur des devises etrangeres cette etude examine le pos tulat que le taux de change suit une courbe de probabilite log normale et verifie si des specifications stochastiques differentes se traduisent en des diff6rences importantes dans les prix des options qui en decoulent les auteurs examinent une famille de processus dont le processus log normal est un cas limite aucun des modeles ne donne des resultats particu lierement bons le probleme principal semble etre que la volatilite des evaluations a partir des donnees sur les taux de change reel est plus faible et de maniere significative que celle des evaluations derivees des prix d options observes

the message in weekly exchange rates in the european monetary system mean reversion conditional heteroscedasticity and jumps weekly rates of the european monetary system ems vis a vis the deutsche mark from april 1979 to march 1991 are modeled as a combined ma 1 garch 1 1 jump process the moving average ma part accounts for mean reversion required for the rates to stay inside the target zone the generalized autoregressive conditional heteroscedasticity garch part accounts for changing volatility whereas the jump process models parity changes and other erratic movements using an adjusted pearson chi squared goodness of fit test we find similar results for the bernoulli and the poisson jump processes in those cases in which the bernoulli normal distribution does not pass the goodness of fit test a mixture of three normals does finally the ma 1 garch 1 1 bernoulli jump models are jointly estimated assuming a constant contemporaneous correlation matrix for the disturbances and a common jump probability for all the currencies

public services increasing returns and equilibrium dynamics abstract this paper is concerned with casting off the standard assumption the production function displays socially constant returns to scale in a simple growth model with public inputs in the model public services work as a source of utility and as an input to production making use of the global bifurcation technique we show that the model can generate a whole spectrum of interesting dynamics which do not arise with constant returns specifically when increasing returns are not exceedingly strong not only does an indeterminate steady state take place but also there exist divergent perfect foresight paths in expanding oscillations and economic cycles the role of history and expectations in shaping equilibrium is also considered

models of stock returns a comparison in this paper a discrete mixture of normal distributions is proposed to explain the observed significant kurtosis fat tails and significant positive skewness in the distribution of daily rates of returns for a sample of common stocks and indexes stationarity tests on the parameter estimates of this discrete mixture of normal distributions model revealed significant differences in the mean estimates that can explain the observed skewness and significant differences in the variance estimates that can explain the observed kurtosis an alternative explanation for the observed fat tails is the symmetric student model the result of a comparison between the models is that the discrete mixture of normal distributions model has substantially more descriptive validity than the student model for many years both financial economists and statisticians have been concerned with the description of stock market returns the form of the distribution of stock returns is a crucial assumption for mean variance portfolio theory theoretical models of capital asset prices and the prices of contingent claims for example understanding the behavior of the variance is essential to option pricing models empirical tests of asset pricing models and the efficient markets hypothesis draw statistical inferences that are also conditional on distributional assumptions the most convenient assumption for financial theory and empirical methods is that the distribution of security rates of return be multivariate normal with parameters that are stationary over time since the normal distribution is stable under addition any arbitrary portfolio of stocks will also be normally distributed with the additional assumption of risk aversion mean variance theory follows furthermore the assumptions of normality and parameter stationarity are required for most of the econometric techniques typically used in empirical research tests of the normality hypothesis on the daily returns of the dow jones industrial stocks by fama 121 revealed more kurtosis fatter tails than that predicted from a sample of independent and identically distributed normal variates fama concluded from this evidence that the distribution of price changes conforms better to the stable paretian distribution with characteristic exponent

realignment risk and currency option pricing in target zones abstract this paper extends the krugman target zone model by including a realignment mechanism various properties of that realignment mechanism are discussed the movement of the exchange rate is governed both by a wiener process on fundamental and by a poisson jump process with endogenous realignment size the realignment mechanism is such that except in cases where a speculative attack occurs no jump in fundamental is needed to accompany the jump in the exchange rate a risk neutral valuation of currency options is constructed some properties of option values under realignment risk are illustrated by numerical results

oil prices brownian motion or mean reversion a study using a one year ahead density forecast criterion abstract for oil related investment appraisal an accurate description of the evolving uncertainty in the oil price is essential for example when using real option theory to value an investment a density function for the future price of oil is central to the option valuation the literature on oil pricing offers two views the arbitrage pricing theory literature for oil suggests geometric brownian motion and mean reversion models empirically driven literature suggests arma garch models in addition to reflecting the volatility of the market the density function of future prices should also incorporate the uncertainty due to price jumps a common occurrence in the oil market in this study the accuracy of density forecasts for up to a year ahead is the major criterion for a comparison of a range of models of oil price behaviour both those proposed in the literature and following from data analysis the kullbach leibler information criterion is used to measure the accuracy of density forecasts using two crude oil price series brent and west texas intermediate wti representing the us market we demonstrate that accurate density forecasts are achievable for up to nearly two years ahead using a mixture of two gaussians innovation processes with garch and no mean reversion

fiscal policy and growth in a small open economy with elastic labour supply endogenizing labour supply leads to fundamental changes in the equilibrium structure of the ak growth model of a small open economy the balanced growth equilibrium is described by two tradeoff loci relating the equilibrium growth rate to the fraction of time devoted to leisure the implications of endogenous labour supply for fiscal policy are addressed the effects of distortionary taxes and government expenditure on the equilibrium growth leisure employment tradeoff are analysed the responses contrast with both those of a closed economy having an elastic labour supply and an open economy with fixed labour supply optimal fiscal policy is also characterized jel classification f41 f43 politique fiscale et croissance dans une petite economie ouverte quand l offre de travail est elastique l endogeneisation de l offre de travail entraine des changements fondamentaux dans la structure d equilibre du modele de croissance du type ak d une petite economie ouverte l equilibre de croissance balancee est decrit par deux lieux de relations d equivalence reliant le taux de croissance d equilibre a la fraction du temps allouee au loisir on examine les implications de cette endogen6isation de l offre de travail pour la politique fiscale on analyse les effets de taxes distorsionnantes et des depenses gouvemementales sur la relation d 6equivalence entre taux de croissance et loisir et donc emploi on obtient des reactions differentes de celles qu on obtient en economie ferm6e quand l offre de travail est elastique et en economie ouverte quand l offre de travail est fixe on proc ede alors a la definition de la politique fiscale optimale

jump risks and the intertemporal capital asset pricing model the specification of the stochastic process for stock prices is an important assumption underlying most equilibrium and option pricing models in modern finance this is particularly true of the continuous time capital asset pricing models where it is assumed that asset prices follow diffusion processes with continuous sample paths see merton 1973a breeden 1979 grossman and shiller 1982 the extent to which the implications of these models generalize to discontinuous sample paths is an unanswered question in theoretical finance however the answer to this question is of more than just theoretical interest since accumulated empirical evidence appears to be inconsistent with the continuous sample path assumption see rosenberg 1972 oldfield rogalski and jarrow 1977 rosenfeld 1982 one purpose of this paper is to provide some answers to this question we do this by extending merton s 1973a intertemporal asset pricing model in the special case of a constant investment opportunity set to include discontinuous sample paths for asset prices the constant investment opportunity set assumption is imposed because we are interested in obtaining sufficient conditions under which an instantaneous capital asset pricing model capm results the extension of our model to a stochastic opportunity set is discussed briefly in the text this paper investigates an economy where stock prices follow a jump diffusion process the first part of the analysis derives a sufficient condition under which an instantaneous capm will characterize equilibrium expected returns the sufficient condition is that the jump component of a stock s return must be unsystematic and diversifiable in the market portfolio the second part of the paper is an empirical investigation of the satisfaction of this condition the evidence is seen to be inconsistent with the satisfaction of this hypothesis that is the market portfolio appears to contain a jump component

schooling and public capital in a model of endogenous growth this paper studies the allocation of public spending between education services and infrastructure investment in an endogenous growth model where public capital in infrastructure affects the process of human capital accumulation the balanced growth path is derived and the dynamics associated with a budget neutral reallocation of spending from education to infrastructure are studied through numerical simulations the growth maximizing tax rate is shown to depend only on the production technology as in standard flow models of public expenditure whereas the optimal share of infrastructure investment depends also on the productiveness of infrastructure relative to education services in the schooling technology

is the relationship between financial development and economic growth monotonic evidence from a sample of middle income countries summary we revisit the relationship between financial development and economic growth in a panel of 52 middle income countries over the 1980 2008 period using pooled mean group estimations in a dynamic heterogeneous panel setting we show that there is an inverted u shaped relationship between finance and growth in the long run in the short run the relationship is insignificant this suggests that too much finance can exert a negative influence on growth in middle income countries the finding of a non monotonic effect of financial development on growth is confirmed by estimating a threshold model

moving out but not up economic outcomes in the great migration the migration of millions of southerners out of the south between 1910 and 1970 is largely attributed to economic and social push factors in the south combined with pull factors in other regions o

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

risk the financial market and macroeconomic equilibrium growing recognition of the importance of stock market phenomena to the real economy underscores the need for models linking exogenous uncertainty asset market performance and the rest of the economy in an optimizing framework without certainty equivalence this paper constructs a three agent model with continuous time stochastic variables uncertain private production and government expenditure and forward looking rational agents the growth rate of output physical capital accumulation financial asset returns and uncertain inflation are determined as functions of the exogenous uncertainty in the economy analysis of the model finds that increased risk associated with government policy often reverses in an explainable way the conventional comparative static predictions of nonstochastic macro models

using option prices to estimate realignment probabilities in the european monetary system the case of sterling mark abstract this paper describes a procedure for estimating the market s perceived probability distribution of future exchange rates from the prices of risk reversals strangles and other currency options and uses the procedure to estimate the risk neutral ex ante probability of a realignment of the pound sterling the procedure for estimating the realignment probabilities relies on the jump diffusion model of exchange rate behavior and the resulting option pricing formula by fitting this model to market option price data i retrieve the unobserved parameters of the jump diffusion process i then use these parameter estimates to estimate the ex ante probability distribution of exchange rates and thus the realignment probabilities

the short run dynamics of inter state migration a space time economic adjustment model of in migration to fast growing states ballard k p and clark g l 1981 the short run dynamics of inter state migration a space time economic adjustment model of in migration to fast growing states reg studies 15 213 228 interregional migration is analyzed with respect to its short run responsiveness to economic fluctuations and its efficiency as a spatial labour market allocation mechanism using a space time analytical framework in migration to four fast growing states of the united states is analyzed over the period 1958 1975 it is shown via a time series model employing a koyck distributed lag methodology that short run in migration is in fact responsive to economic fluctuations both employment and turnover variables figure prominently in this regard by a cross sectional analysis it is also shown that in migrants to fast growing states do not necessarily come from depressed or low growth regions thus interregional migration may not be an efficient allocator of labour across the aggregate spatial system in the short or long

outmigration and the depressed area problemt t he post war emergence of full employment and the attendant rise in prosperity levels in most western countries have highlighted the existence of the less fortunate regions the so called depressed areas these depressed areas are characterized by persistently high rates of unemployment or in the case of many rural depressed areas high rates of underemployment furthermore such areas commonly possess in varying degrees one or more of the following characteristics a narrow range of economic activities declining basic industries unskilled or unadaptable labor forces and decayed or inefficient infrastructures depressed areas owe their origins generally to downward structural and or cyclical trends in the national economy as well as to problems associated with their location vis a vis centers of population and growth areas within the country concerned in the absence of any public policy it can be expected that with increasing national economic development the condition of depressed areas will become relatively worse according to various criteria which may be applied growth rates per capita income unemployment differentials the founders of the european economic community recognized this tendency and tried to make provision for it through various supra national agencies among them the european social fund given this trend toward polarization in levels of economic development between areas two broad approaches to the solution of the problems of the depressed area are possible the first involves the encouragement of new economic activity i e the policy of bringing work to the workers the second approach which can be described as a market adjustment involves the movement of workers out

an alternative to steady state comparisons in perfect foresight models abstract this note examines a technique for the computation of the welfare impact of a pertubation of the steady state in a typical perfect foresight model the major innovation is the ability to analyze non stationary perturbations

money and endogenous growth the ramsey romer model of endogenous growth is extended to allow for holdings of real money balances and government debt as well as capital and for non interconnected generations of households tax financed increases in government consumption and debt depress growth prospects and boost inflation as long as a positive birth rate ensures that future taxes are shouldered by future yet unborn generations debt financed increases in government consumption depress growth and boost inflation even more money financed increases in government consumption depress growth less but increase inflation by more giving subsidies through an increase in monetary growth is non neutral since this increases real growth and thus inflation increases by a lesser amount than monetary growth bond financed increases in monetary growth lead to a larger increase in real growth and a smaller increase in inflation if there are cost adjustment for investment cuts in monetary growth and increases in government debt and government consumption induce an increase in the real interest rate copyright 1994 by ohio state university press

extreme returns the case of currencies abstract financial market crashes can occur even in the absence of news this paper highlights four properties of price contingent trading that increase the frequency of such events price contingent trading is common across financial market since it includes algorithmic trading technical trading and dynamic option hedging the four properties we consider are 1 high kurtosis in the distribution of order sizes 2 clustering of trades within the day 3 clustering of trades at certain prices and 4 feedback between trading and returns the paper estimates the relative importance of these factors using data from the foreign exchange market calibrated simulations indicate that interactions among these factors are at least as important as any single one among individual factors the orders size distribution and feedback effects have the strongest influence overall price contingent trading could account for half of realized excess kurtosis the paper suggests that extreme returns unaccompanied by news are statistically inevitable in the presence of price contingent trading

public budgetary rules and gdp growth an empirical study on oecd and twelve european countries we study the long term effects of budgetary rules on gdp growth rate and analyse the determinants of the short term gdp growth dynamics for both a sample of 19 oecd and a subsample of 12 european countries we show that in the long run improvements in the cyclically adjusted budget balance as well as increases in the tax burden have negative effects on gdp growth the highest effect of fiscal policy on gdp growth would be obtained if the structural deficits were used to increase the market size by reducing the tax burden in line with barro 1990 a deficit financed reduction of tax burden has a stronger effect for european than for oecd countries because in europe the government size with respect to market size is too large therefore if gdp growth is a dominant policy objective in europe specific actions should redress the 2012 treaty toward a reduction of the tax burden

filling potholes macroeconomic effects of maintenance versus new investments in public infrastructure abstract the maintenance of existing public infrastructure has often been neglected in favor of building new infrastructure in developing countries this paper develops a dynamic general equilibrium model that analyzes the reasons and effects of such neglect first the optimal level of maintenance is shown to depend on the size of new investments as a share of existing public infrastructure and on the productivity of infrastructure second the model is parameterized and solved numerically for a sample of latin american countries quantitative results show that reallocating funds from new infrastructure to maintenance can have positive effects on these countries gdp

macroeconomic policies growth and welfare in a stochastic economy an integrated stochastic equilibrium growth model is constructed and directed to various questions pertaining to monetary and tax policy two main issues addressed include 1 the tradeoff between the rate of capital accumulation and inflation in a stochastic environment and 2 economic welfare and optimal policy making the key result is that policy variables impact on welfare through their effect on the after tax nominal interest rate which therefore serves as an intermediate policy target the welfare maximizing interest rate target is derived and the author discusses its attainment through appropriate monetary and tax policies tradeoffs between policy instruments are also addressed copyright 1993 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

productive government expenditures and long run growth the purpose of this paper is to review some of the recent developments in endogenous growth models specifically our focus is on the growth effects of productive government spending in dynamic general equilibrium models we use a simple overlapping generations model as our basic framework and illustrate the role of taxes and spending we then examine several related issues nonrivalry in publicly provided goods existence and uniqueness of competitive equilibrium endogenous public policy ways of financing public expenditures composition of publicly provided goods and services and private alternatives finally we review some empirical results related to output elasticity of public capital and educational expenditures

international portfolio diversification the basket peg regime abstract the paper compares and contrasts optimal investment strategies in two alternative monetary arrangements namely in the regime with freely floating bilateral exchange rates and the basket peg system it is shown that in the basket peg arrangement investors can form a domestic currency denominated risk free asset of the foreign risk free assets without entering into the forward currency markets furthermore investors have an incentive to hold fewer assets and the structure of capital flows tends to be more volatile but also more predictable in the basket peg system than in the regime with freely floating bilateral exchange rates

alternative government financing and stochastic endogenous growth abstract this paper addresses a stochastic endogenous model in which the stock of securities both money and bonds are required to finance the government budget we study how the expected rate of real growth the expected inflation rate and economic welfare are influenced by changes in the first and second moments of public spending the analyses will enable us to assess the merits and demerits of mixed financing case of money and bonds relative to financing one of taxes on wealth examined in grinols and turnovsky j econom dyn control 17 1993 1 and turnovsky int econom rev 34 1993 953 in addition we construct a model where government relies on a larger ratio of bonds to money to raise the necessary revenue and show how the consequences of mixed financing are affected by the policy decision of government

tests of rational expectations and no risk premium in forward exchange markets abstract this paper tests the simple efficiency hypothesis i e that traders have rational expectations and charge no risk premium in the forward exchange market it uses a statistical procedure which is consistent under a large class of heteroscedasticity and a set of data which takes into account the institutional features of the forward exchange market the results show that this procedure leads to stronger rejections of the simple efficiency hypothesis than do procedures using the standard assumption of homoscedasticity

alternative forms of government expenditure financing a comparative welfare analysis this paper derives criteria for evaluating the impact of an increase in government expenditure on both the time path of instantaneous utility and overall welfare under alternative forms of tax financing these consist of three factors the first is the direct crowding out effect which reflects the utility differential between the government expenditure being undertaken and the private consumption it is displacing the second describes the intertemporal trade off between the effect on the short run rate of capital accumulation and the resulting change in the the long run capital stock the final term is due to the distortion arising from the pre existence of a tax on wage income copyright 1992 by the london school of economics and political science

the european exchange rate mechanism and the volatility of the sterling deutschemark exchange rate sterling membership of the erm focused interest on the sterling deutsche mark exchange rate with commentators predicting a reduction in exchange rate volatility this paper analyzes the sterling deutsche mark rate pre and post erm entry and finds that erm membership significantly reduced volatility this reduction in volatility is characterized by the disappearance of arch effects evident prior to erm membership the paper argues that the disappearance of arch is probably associated with a reduction in activity of speculators particularly technical analysts copyright 1993 by royal economic society

conditional jump dynamics in stock market returns this article develops a new conditional jump model to study jump dynamics in stock market returns we propose a simple filter to infer ex post the distribution of jumps this permits construction of the shock affecting the time t conditional jump intensity and is the main input into an autoregressive conditional jump intensity model the model allows the conditional jump intensity to be time varying and follows an approximate autoregressive moving average arma form the time series characteristics of 72 years of daily stock returns are analyzed using the jump model coupled with a generalized autoregressive conditional heteroscedasticity garch specification of volatility we find significant time variation in the conditional jump intensity and evidence of time variation in the jump size distribution the conditional jump dynamics contribute to good in sample and out of sample fits to stock market volatility and capture the rally often observed in equity markets following a significant downturn

differences between foreign exchange rate regimes the view from the tails abstract in the literature on the empirical unconditional distribution of foreign exchange rate returns there is indication that the type of distribution function is related to the form of exchange rate regime the analysis has been hampered by the nonnestedness of alternative distribution models the paper investigates the issue by means of extremal analysis which allows for a unified treatment in particular we try to sort out whether apparent distributional differences are due to differences in techniques or in regimes jel f31 f33

transitional dynamics in two sector models of endogenous growth the steady state and transitional dynamics of two sector models of endogenous growth are analyzed in this paper we describe necessary conditions for endogenous growth the conditions allow us to reduce the dynamics of the solution to a system with one state like and two control like variables we analyze the determinants of the long run growth rate we use the time elimination method to analyze the transitional dynamics of the models we find that there are transitions in real time if the point in time production possibility frontier is strictly concave which occurs for example if the two production functions are different or if there are decreasing point in time returns in any of the sectors we also show that if the models have a transition in real time the models are globally saddle path stable we find that the wealth or consumption smoothing effect tends to dominate the substitution or real wage effect so that the transition from relatively low levels of physical capital is carried over through high work effort rather than high savings we develop some empirical implications we show that the models predict conditional convergence in that in a cross section the growth rate is predicted to be negatively related to initial income but only after some measure of human capital is held constant thus the models are consistent with existing empirical cross country evidence authors

spill over effects of supply side changes in a two country economy with capital accumulation abstract using a two country dynamic optimization model with capital accumulation we explore the effect of such supply side changes as a rise in productivity and a reduction in the corporate tax rate on the equilibrium path and the welfare of two countries the welfare effect consists of a tax distortion term and a wealth term those supply side changes in the creditor country increase its welfare but unambiguously decrease the debtor country s welfare as capital moves from the debtor country to the creditor country

growth versus welfare in a model of nonrival infrastructure abstract the paper constructs a model of endogenous growth where infrastructure acts as an accumulable stock generating a nonrival input service steady state growth paths are studied for market and command economies in the former a final good is produced privately and as in many developing economies infrastructure accumulated on noncompetitive basis by the state the command economy allocates resources by solving a grand optimization exercise the transitionally stable steady growth rate for the market economy dominates the command economy growth rate due to the joint presence of noncompetitive behaviour by the state and noninternalizable externalities

budget balance welfare and the growth rate dynamic scoring of the long run government budget this paper determines conditions under which a reduction in the role of government either through a tax cut alone or together with accompanying expenditure cuts will improve long run government fiscal balance for a ceteris paribus cut in the income tax rate to improve long run government balance the intertemporal elasticity of substitution must exceed unity a tax cut balanced by an expenditure cut is likely to improve the long run balance even if it does not improve the short run balance the relationship between improving the long run fiscal balance and economic welfare is also analyzed

infrastructure provision and macroeconomic performance this paper studies the differences between private and government provision of infrastructure capital utilization decisions and their differential role in determining market prices for capital goods under the two regimes of infrastructure provision serve as a critical transmission mechanism for fiscal policy a subsidy to private providers of infrastructure is preferable to direct government provision irrespective of how the subsidy or expenditure is financed the case for private provision is much stronger in economies characterized by high levels of congestion the choice between private and government provision also has a crucial effect on the design of optimal fiscal policy 2011 elsevier b v all rights reserved

public investment congestion and private capital accumulation this paper analyses the impact of public investment on the dynamics of private capital formation in an intertemporal optimising market clearing framework the key feature characterising the analysis is that the public good is treated as a durable capital good subject to congestion we show how in the presence of congestion the effect of government investment on private capital formation involves a tradeoff between the degree of substitution between private and public capital in production and the degree of congestion both lump sum and distortionary tax financing are considered with this tradeoff being tightened in the latter case

exchange rates and fundamental variables a semi parametric analysis of binary choice this study is motivated by the dearth of models that provide good out of sample fit for exchange rates that is current models of exchange rate behaviour are poor predictors of subsequent currency movements an attempt is made to determine if the relationship between exchange rates and fundamental variables can help explain the more extreme exchange rate movements distributional switches models are developed that relate fundamental economic variables to the resulting estimates based on the mixture of normal probability distributions parametric estimation procedures logit and probit are compared with a semi parametric technique maximum score estimation mscore which is relatively untested in the field of finance the fundamental variables of these models include information on trade balances money supply changes interest rate changes real economic growth relative inflation rates and changes in stock market indexes classification results favour mscore implications of results and improvements

anticipated inflation and the capital stock in a cash in advance economy abstract an economy is constructed in which the steady state capital stock is inversely related to the rate of inflation as a result that is directly opposite the usual conclusion

optimal hedged portfolios the case of jump diffusion risks abstract the paper derives rules for optimal hedged portfolios when the foreign spot exchange rate changes follow a mixed jump diffusion process the paper shows that the sign of the third order derivative of the utility function plays a crucial role in differentiating the jump risk from the diffusion risk the result of the paper is compared to earlier ones under a diffusion process for the foreign exchange rate changes the paper also draws some important implications along the line of the issue of the time varying risk premiums in the foreign exchange market jel 431

public spending endogenous growth and endogenous fluctuations abstract this article studies indeterminacy and endogenous growth in a simple one sector model of capital accumulation endowed with inelastic labor supply in which the presence of public goods creates positive externalities both in the production and the consumption sectors because of increasing returns in the utility function the economy exhibits not only perpetual growth but also indeterminacy and therefore endogenous stochastic growth fluctuations the possibility of sunspot equilibrium growth paths is shown to be consistent with plausible parameter values journal of economic literatureclassification numbers e32 o41 h40

is public expenditure productive abstract this paper considers the relationship between aggregate productivity and stock and flow government spending variables the empirical results indicate that i the nonmilitary public capital stock is dramatically more important in determining productivity than is either the flow of nonmilitary or military spending ii military capital bears little relation to productivity and iii a core infrastructure of streets highways airports mass transit sewers water systems etc has most explanatory power for productivity the paper also suggests an important role for the net public capital stock in the productivity slowdown of the last fifteen years

the probability distribution of foreign exchange price changes tests of candidate processes this study investigates empirically candidate processes for characterizing foreign exchange price changes measured over limited horizons extant empirical studies find distributions of exchange returns too long tailed and leptokurtic to satisfy normality four processes are investigated here because of their potential to model o bserved discontinuities in exchange rates and nonstationary sample moments as well as their economic appeal the results favor a mixed jump model for all six major trading currencies tested copyright 1988 by mit press

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

the transitional dynamics of fiscal policy long run capital accumulation and growth this paper analyzes the effects of fiscal policies in a non scale growing economy with public and private capital the equilibrium dynamics are characterized and we contrast the dynamic effects of government expenditure on investment and expenditure on consumption under four alternative modes of tax financing most of our attention focuses on the numerical simulations of a calibrated economy the results emphasize the lengthy transition periods which implies that policies have sizeable level effects leading to substantial welfare effects even though long run growth rates are unaffected the paper highlights the intertemporal dimensions of fiscal policy and the tradeoffs these involve for economic performance especially growth and welfare

infrastructure alternative government finance and stochastic endogenous growth abstract this paper constructs a stochastic version of an endogenously growing economy with a public good that raises the productivity of private capital we explore how growth and welfare are influenced by changes in the mean and variance of productive public spending under two alternative financing methods mixed money bond financing and wealth tax financing in addition to evaluate the differences between money financing and bond financing we consider mixed money bond financing under which a larger ratio of bonds to money is utilized to finance a given increase in public spending

optimal taxation of capital income in general equilibrium with infinite lives this paper analyzes the optimal tax on capital income in general equilibrium models of the second best agents have infinite lives and utility functions which are extensions from the koopmans form the population is heterogeneous the important property of the models is the equality between the social and the private discount rates in the long run i find that the optimal tax rate is zero in the long run for a special case of additively separable utility functions i then determine the tax rates along the dynamic path and conditions that are sufficient for the local stability of the steady state

the composition of government expenditure and its consequences for macroeconomic performance abstract this paper employs the intertemporal optimizing market clearing framework to compare the effects of government consumption expenditure and government infrastructure expenditure on macroeconomic adjustment and performance particular attention is focused on the time path of the capital stock and its adjustment to both permanent and temporary changes in government expenditure are considered we show how the effects of both forms of government expenditure on economic welfare can be broken down into 1 i a direct crowding out effect and 2 ii a second component which describes the intertemporal tradeoffs between the short run rate of capital accumulation and the resulting change in the capital stock

siegel s paradox and the pricing of currency options abstract it is an important property of a currency option that its value does not depend on whose point of view is taken that of the domestic or foreign investor option values obtained from the garman kohlhagen model do satisfy this property the merton jump diffusion model has been proposed as a more realistic currency option model to eliminate pricing biases inherent in the garman kohlhagen model the jump diffusion model assumes that the jump risk is non priced ie can be diversified away if both the domestic and foreign investor make that assumption then the jump diffusion model produces option values which are different for the two investors thus violating the law of one price this is an instance of the siegel paradox the extent to which computed option values may differ between the two investors is indicated through numerical examples

the speed of convergence and alternative government financing abstract in this paper we are concerned with the speed of convergence in the sidrauski monetary optimizing model sidrauski am econ rev 57 1967 534 in which the steady state capital stock is not influenced by a change in public spending the paper studies how different the speed of convergence to the steady state is affected by a change in government spending under the various ways of financing in exploring the transitional adjustment to the public policy shock it will be convenient to focus upon the degree of relative risk averse

nonparametric tests of alternative option pricing models using all reported trades and quotes on the 30 most active cboe option classes from august 23 1976 through august 31 1978

dynamic analysis of an endogenous growth model with public capital this paper develops an endogenous growth model with productive public capital along with private capital in a spirit similar to that of r j barro 1990 since the authors model includes two stock variables it has transitional dynamics unlike most of the previous studies on endogenous growth including barro s where concerns are restricted to the steady state analysis first they show that the transitional path is unique and stable second the character of the transitional path is explored third the authors show that the optimal tax rate is smaller than the rate that maximizes the national growth rate with a log linear utility function copyright 1993 by the editors of the scandinavian journal of economics