the internationalisation of stock markets and the abolition of u k exchange control this paper aims to assess the impact of the abolition of u k exchange control on the degre of integration of u k and overseas stock markets using cointegration techniques we find that although there is no significant increase in the correlation of short run stock market returns for the united kingdom and certain overseas markets post 1979 there does appear to be a marked increase in the degree to which these markets move together in the long run after this date there appears to be no long run gain from diversification since cointegration of two variables implies that at least one of them can be used to help forecast the other our findings also imply the inefficiency of a number of stock markets

mean reversion in real exchange rates evidence and implications for forecasting abstract the stationarity of real exchange rates over the recent flexible exchange rate period is an issue that has long bedeviled researchers in international finance using a constrained multivariate framework this paper provides the strongest evidence yet that real exchange rates were mean reverting over the 1973 93 period we also investigate shifts in long run real exchange rates which may be important for the purpose of forecasting out of sample forecasting shows that the random walk model is outperformed by a mean stationary model especially at long horizons in addition there are substantial forecasting benefits from using a multivariate approach

econometric developments in agricultural and resource economics the first 100 years this article reviews the major contributions of agricultural and resource economists in the area of econometrics over the past 100 years early on a number of agricultural economists were in on the ground floor in terms of developing new econometric methods over time as the economics profession became more empirically oriented agricultural and resource economists increasingly assumed the role of early adopters of new econometric methods even so agricultural and resource economists continue to make useful modifications to econometric techniques in order to adapt the methods to the unique nature of the problems and applications that we study

costly arbitrage through pairs trading abstract we study the optimal trading policy of an arbitrageur who can exploit temporary mispricing in a market with two convergent assets we build on the model of liu and timmermann 2013 and include transaction costs which impose additional limits to the implementation of such convergence trade strategy we show that the presence of transaction costs could reveal an endogenous stop loss concern in a certain economy which affects the optimal policy of the arbitrageur in significant ways using pairs of dual listed chinese stock shares as samples and a pairs trading strategy based on standard deviation of the spread as benchmark we demonstrate the efficiency of the strategy implied by our model several extensions of our model are also discussed

system theoretic time series forecasts of weekly live cattle prices multivariate time series forecasts of weekly live cattle prices in six different geographic markets are developed using a procedure based on the principles of linear systems theory these forecasts were found to be informative and superior to those obtained from an alternative model following the approach developed for stock prices by cerchi and havenner arbitrage portfolios were constructed from the model parameters a simulation exercise based on 208 weekly observations withheld from model specification and estimation suggests that these arbitrage activities would have been profitable in practice

multi period mean variance portfolio selection with stochastic interest rate and uncontrollable liability abstract while the literature on dynamic portfolio selection with stochastic interest rates only confines its investigation to the continuous time setting up to now this paper studies a multi period mean variance portfolio selection problem with a stochastic interest rate where the movement of the interest rate is governed by the discrete time vasicek model invoking dynamic programming approach and the lagrange duality theory we derive the analytical expressions for both the efficient investment strategy and the efficient mean variance frontier of the model formulation we then extend our model to the situation with an uncontrollable liability

mean variance portfolio selection of cointegrated assets abstract this paper considers the continuous time mean variance portfolio selection problem in a financial market in which asset prices are cointegrated the asset price dynamics are then postulated as the diffusion limit of the corresponding discrete time error correction model of cointegrated time series the problem is completely solved in the sense that solutions of the continuous time portfolio policy and the efficient frontier are obtained as explicit and closed form formulas the analytical results are applied to pairs trading using cointegration techniques numerical examples show that identifying a cointegrated pair with a high mean reversion rate can generate significant statistical arbitrage profits once the current state of the economy sufficiently departs from the long term equilibrium we propose an index to simultaneously measure the departure level of a cointegrated pair from equilibrium and the mean reversion speed based on the mean variance paradigm an empirical example is given to illustrate the use of the theory in practice

critical barriers in implementing reverse logistics in the chinese manufacturing sectors reverse logistics rl is gaining momentum worldwide due to global awareness and as a consequence of resource depletion and environmental degradation firms encounter rl implementation challenges from different stakeholders both internally and externally on the one hand various governmental agencies are coming out with different environmental regulations while on the other hand academics and researchers are contributing solutions and suggestions in different country contexts in a real sense however the benefits of rl implementation is not yet fully realized in the emerging economies this paper proposes a theoretical rl implementation model and empirically identifies significant rl barriers with respect to management financial policy and infrastructure in the chinese manufacturing industries such as automotive electrical and electronic plastics steel construction textiles and paper and paper based products key barriers from our study with respect to these four categories are within management category a lack of reverse logistics experts and low commitment within financial category a lack of initial capital and funds for return monitoring systems within policy category a lack of enforceable laws and government supportive economic policies and finally within infrastructure category a the lack of systems for return monitoring contingency effect of ownership was carried out to understand the similarities and differences in rl barriers among the multinational firms and domestic firms investigated

mean reversion in g 10 nominal exchange rates according to conventional wisdom industrial country floating exchange rates contain unit roots sur tests on panels of monthly group of ten g 10 log nominal rates reject the null of unit roots for various samples over the current float with significance levels from 0 5 to 15 on average in out of sample forecasts mean reversion models beat random walks significantly in some forecast periods for monthly data the range of expected usd dem appreciation rates exceeds 15 per year in the mean reversion model mean reversion places strong restrictions on international models over the sample period the g 10 had to run monetary policies consistent with stable long run nominal rates

cointegration and market efficiency abstract recently many economists have asserted that asset prices determined in efficient asset markets cannot be cointegrated we show that there is no general equivalence between the existence of arbitrage opportunities and cointegration or for that matter a lack of cointegration whether asset prices are cointegrated is a function of the relevant model we first show a convenient way to calculate the cointegrating vector based on necessary and sufficient conditions for cointegration we then examine particular cases including exchange rates interest rates and spot and forward exchange rates and asset prices with incoem flows reinvested and not reinvested jel f31

undermining the principle of concentration european union regional policy and the socio economic disadvantage of european regions crescenzi r undermining the principle of concentration european union regional policy and the socio economic disadvantage of european regions regional studies this paper sets out to analyse the regional policy of the european union by assessing whether the actual distribution of funds to the regions undermines the principle of territorial concentration the empirical analysis shows that due to either political equilibriums or inaccurate assumptions about the most cost effective allocation of the funds the sources of structural disadvantage are more spatially concentrated than the funds devoted to compensating this disadvantage and reveals a weak association between socio economic disadvantage and european union funding corrections in allocation mechanisms are recommended in order to increase fund concentration and earmark resources more adequately to disadvantaged regions crescenzi r saper le principe de la concentration la politique regionale de l union europeenne et le desavantage socio econom

the impact of remanufacturing in the economy very few durable goods are recovered at the end of their useful lives however this situation could reverse with the development of a stronger remanufacturing industry in the economy this paper evaluates the impact of remanufacturing in a hypothetical situation where remanufacturing holds a significant share of the economy presently dominated by the original manufacturing industries it would have direct impacts on the demand for several inputs we adapt the inter industry input output framework with the development of a methodology to consider these changes subsequently we apply the model to the 30 sector aggregation of the french input output national data to illustrate the nethod and to evaluate the impact that remanufacturing may have on the economy the analysis assumes that remanufacturing sectors substitute labor and transport services for the usual inputs such as raw materials and semi finished goods we find that remanufacturing may satisfy the same final demand from all sectors requiring fewer intermediate resources with proportionally higher demand of labor

inventory management under joint product recovery and cap and trade constraints abstract the influence of environmental legislation in inventory control policies is explored previous work on product recovery is extended using the introduction of a cap and trade mechanism in an infinite horizon inventory system in which demand and returns are uncertain demand is met through two different sources namely manufacturing and remanufacturing which differ in cost and greenhouse gas emissions the main contributions of this paper are 1 comparison of system operation in terms of cost and environmental performance under conventional and green inventory policies and 2 managerial insights into the structure of green inventory policies to illustrate the impact of a cap and trade scheme a numerical example is used we solved the problem as a markov decision process and characterized the inventory policies based on the optimal replenishment strategy we also conducted a sensitivity analysis to examine the effect of underlying environmental parameters such as the emission cap and the allowance price in the policy structures the results indicate that decisions are sensitive to carbon prices the inventory policy could play an important role in compliance with environmental legislation although there is threshold carbon price beyond which the company must focus on strategic decisions rather than tactical decisions

cointegration between oil spot and future prices of the same and different grades in the presence of structural change the purpose of this study is to examine whether crude oil spot and futures prices of the same and different grades are cointegrated using a residual based cointegration test that allows for one structural break in the cointegrating vector and high frequency data we choose the us wti and the uk brent as the representative crudes for this analysis since these two crudes have well established spot and futures markets we find that spot and future prices of the same grade as well as spot and futures prices of different grades are cointegrated we examine potential causes of structural change as revealed by the cointegration test in terms of events that have impacted on world oil markets as well as discuss the implications of the results for hedge managers investors and regulators

evaluating remanufacturing industry of china using an improved grey fixed weight clustering method a case of jiangsu province abstract remanufacturing industry can solve the issues of resource depletion and environment deterioration by reducing consumptions of raw materials and minimizing emissions of wastes it has been strongly promoted by chinese government in recent years however its current development situation has been unsatisfactory all the time the aim of this paper is to evaluate development level of remanufacturing industry of china and point out future directions of industrial improvement to achieve the above objective this paper establishes an evaluation index system of remanufacturing industry and puts forward an improved grey fixed weight clustering method which is suitable for assessing remanufacturing industry then taking jiangsu province of china as a practical case this method is used to evaluate its remanufacturing industry and identify rank order of improvement measures for each city research results show that overall development level of remanufacturing industry is still low and development unbalance is remarkable two more important findings are as follows the first is that rank orders of improvement measures for all cities are different from each other and decision maker should adopt differentiated industrial policies and improvement measures the second is that the cities which belong to the 2nd and 3rd grey class should paid more attention to improvement measures for four evaluation sub indices annual sale of remanufacturing industry total assets of remanufacturing enterprise total investment of under construction and total number of research institution and university participated in remanufacturing the major contribution of this study is to offer an effective decision making approach for evaluation of remanufacturing industry it helps in classifying development levels of remanufacturing industry in different cities and providing decision makers with a scientific basis for adopting appropriate industrial policies and improvement measures which will efficiently enhance remanufacturing industry in the future

the numeraire portfolio abstract a portfolio formed from a given list of assets is defined as a numeraire portfolio for the list if a it is self financing b its value is always positive and c zero is always the best conditional forecast of the numeraire dominated rate of return of every asset on the list the numeraire portfolio exists if and only if there are no profit opportunities from trading assets on the list for a sample list of heterogeneous assets nyse size quintile portfolios corporate bonds and short term bills numeraire dominated returns are similar to market model forecast errors and as abnormal return measures clearly dominate market adjusted returns

cointegration market integration and market efficiency abstract this paper uses a standard dynamic general equilibrium asset pricing model to study the relationship among the concepts of efficient markets integrated markets and cointegrated prices within this setting we show that these concepts are independent of one another and any zero one two or three of these characteristics can emerge in equilibrium depending upon taste endowment and technology parameters in particular the results of tests of cointegration among asset prices have no implications about market efficiency or market integration without additional restrictions on the economy or economies

analyzing internal barriers for automotive parts remanufacturers in china using grey dematel approach abstract automotive industries have attracted attention from international sectors recently this attention to the industry results in many innovative technologies being integrated in these manufacturing arenas in developing countries such as the bric brazil russia india and china countries especially china who is a global leader in automotive sales and production researchers see substantial attempts to increase economic and societal values in automotive sectors through the use of many sustainable strategies among these sustainable strategies remanufacturing has witnessed much debate in recent years in china automotive parts remanufacturing is still in a nascent stage but the country is striving hard to implement a strategy in industries to result in cleaner production additionally remanufacturing yields high financial societal and environmental returns and it provides advantages such as reducing costs compared to virgin products an increase in jobs and the conservation of scare resources some earlier studies examined chinese remanufacturing issues but they only focused on modeling concepts without considering significant barriers to bridge this gap this paper analyzes internal barriers met by automotive parts remanufacturers and evaluates causal barriers by a proposed model framework this objective is illustrated by employing the grey decision making trial and evaluation laboratory dematel approach by virtue of these findings remanufacturers can eradicate major internal barriers and can increase the chances of practicing more productive remanufacturing in the chinese automotive environments this study extends the scope of this problem through varied applications of different techniques such as a fuzzy approach matrix laboratory and operations research tools by diversifying and including additional barriers

arbitrage cointegration and testing the unbiasedness hypothesis in financial markets we use a no arbitrage cost of carry asset pricing model to show that the existence of coin tegration between spot and forward futures prices depends on the time series properties of the cost of carry we argue that the conditions for cointegration are more likely to hold in currency markets than in commodity markets explaining many of the empirical results in the literature we also use this model to demonstrate why the forward rate forecast error the basis and the forward premium are serially correlated and to develop econometric tests ofthe unbiasedness hypothesis sometimes called the simple efficiency hypothesis in various financial markets the unbiasedness hypothesis is so prevalent in the finance liter ature that many tests for it have been developed we examine four of the common tests and and use our cointegration results to demonstrate why each of these tests should reject the null hypothesis of unbiasedness we find strong support for our hypothesis in the existing empirical literature

a state space forecasting approach to optimal intertemporal cross hedging cross commodity hedging between fishmeal and soybean meal is investigated the approach uses successively updated out of sample forecasts to approximate subjective price expectations and forecast error variance covariance matrices to measure risk forecasts are generated by state space models of vector valued time series in a stationary environment uncertainty reduces to the difference between the historical autocovariance of the random process and the variance covariance of out of sample forecasts results indicate that weakly risk averse agents can increase average marketing returns within acceptable risk levels by combining information from price forecasting models with an appropriate hedging strategy

cointegration based tests of daily foreign exchange market efficiency abstract an immediate implication of cointegration is the existence of granger causal orderings among cointegrated series this implies that asset prices determined in a weakly efficient market cannot be cointegrated this proposition is tested using daily data for 18 foreign currencies tests are conducted for both pairwise combinations of currencies and higher order systems no significant evidence of cointegration among exchange rates is found

optimal consumption and portfolio policies when asset prices follow a diffusion process abstract we consider a consumption portfolio problem in continuous time under uncertainty a martingale technique is employed to characterize optimal consumption portfolio policies when there exist nonnegativity constraints on consumption and on final wealth we also provide a way to compute and verify optimal policies our verification theorem for optimal policies involves a linear partial differential equation unlike the nonlinear partial differential equation of dynamic programming the relationship between our approach and dynamic programming is discussed we demonstrate our technique by explicitly computing optimal policies in a series of examples in particular we solve the optimal consumption portfolio problem for hyperbolic absolute risk aversion utility functions when the asset prices follow a geometric brownian motion the optimal policies in this case are no longer linear when nonnegativity constraints on consumption and on final wealth are included by these examples one can see that our approach is much easier than the dynamic programming approach

mean variance asset liability management cointegrated assets and insurance liability abstract the cointegration of major financial markets around the globe is well evidenced with strong empirical support this paper considers the continuous time mean variance mv asset liability management alm problem for an insurer investing in an incomplete financial market with cointegrated assets the number of trading assets is allowed to be less than the number of brownian motions spanning the market the insurer also faces the risk of paying uncertain insurance claims during the investment period we assume that the cointegration market follows the diffusion limit of the error correction model for cointegrated time series using the markowitz 1952 mv portfolio criterion we consider the insurer s problem of minimizing variance in the terminal wealth given an expected terminal wealth subject to interim random liability payments following a compound poisson process we generalize the technique developed by lim 2005 to tackle this problem the particular structure of cointegration enables us to solve the alm problem completely in the sense that the solutions of the continuous time portfolio policy and efficient frontier are obtained as explicit and closed form formulas

dynamic asset allocation with mean variance preferences and a solvency constraint abstract the aim of this article is to analyze the portfolio strategies that are mean variance efficient when continuous rebalancing is allowed and a solvency constraint wealth positiveness is imposed at each point in time under very general assumptions ito processes for the security price dynamics those efficient strategies are identified as synthetic put options on the particular inefficient portfolio yielding the return with minimal second moment this general characterization allows us to derive a closed form formula for the optimal portfolio weights when the investment opportunity set is constant the optimal weights are explicit functions of the current market index the formula is then used to simulate dynamically efficient strategies for different horizons and targets and to describe the time pattern of the allocation to stocks versus bonds

dynamic asset allocation in a mean variance framework the aim of this article is to analyze the portfolio strategies that are mean variance efficient when continuous rebalancing is allowed between the current date 0 and the horizon t under very general assumptions when a zero coupon bond of maturity t exists the dynamic efficient frontier is a straight line the slope of which is explicitly characterized every dynamic mean variance efficient strategy can be viewed as buy and hold combinations of two funds the zero coupon bond of maturity t and a continuously rebalanced portfolio an appropriate dynamic strategy defining the latter is explicitly derived for two particular price processes and comparisons of the efficient frontiers static versus dynamic are provided in these cases

a re examination of an irish popularity function this paper focuses on replication in the sense of herrnson 1995 it re examines the only study of an irish popularity function borooah and borooah 1990 in the light of recent developments in econometric methodology and in irish politics using error correction models the analysis provides an alternative account of the relationship between economics and government popularity to that provided by borooah and borooah the findings indicate that the short term impact of the economy is weaker than and different from that suggested by them economic influences at most set the general level of government approval rather than determine the quarter by quarter fluctuations

structural funds and the evaluation of community economic development initiatives in the uk a critical perspective armstrong h and wells p 2006 structural funds and the evaluation of community economic development initiatives in the uk a critical perspective regional studies 40 259 272 since their inception within uk structural funds programmes in the 1990s community economic development ced initiatives have experienced a rapid expansion evaluation methods have struggled to adapt to what was a radically new type of policy this paper charts the rise of ced in the uk s objective 1 and 2 programmes and it examines the main problems posed by ced for structural funds monitoring and evaluation whilst progress in adapting the monitoring and evaluation methods to ced has been good a number of key challenges remain to be faced by the eventual ex post evaluations of the 2000 06 programmes and for the 2007 13 programming period the key challenges are identified and possible ways forward are discussed community economic development structural funds evaluation uk programmes armstrong h et wells p 2006 les

dynamic asset allocation for stocks bonds and cash closed form solutions for hara optimal portfolios are obtained in a dynamic portfolio optimization model in three assets stocks bonds and cash in a vasicek type model of stochastic interest rates with correlated stock prices the hara is a buy and hold combination of a zero coupon bond with maturity matching the investor s horizon and a crra mutual fund this simple characterization facilitates insights about investor behavior over time and provides explanations on the rational use of convex versus concave investment strategies the model illuminates clearly the role of the different market parameters and relative risk aversion in portfolio strategies

a framework linking intangible resources and capabilities to sustainable competitive advantage this article is concerned with the role of intangible resources in business strategy in particular it is concerned with identifying the intangible sources of sustainable competitive advantage sustainable competitive advantage results from the possession of relevant capability differentials regulatory and positional capabilities are concerned with intangible assets functional and cultural capabilities are concerned with competencies a framework linking intangible resources to capabilities has been devised and is used as the basis of a new technique for identifying the relative contribution which the different intangible resources make to competitive advantage the results of the use of this technique in six case studies are reported

robust tracking error portfolio selection with worst case downside risk measures abstract this paper proposes downside risk measure models in portfolio selection that captures uncertainties both in distribution and in parameters the worst case distribution with given information on the mean value and the covariance matrix is used together with ellipsoidal and polytopic uncertainty sets to build up this type of downside risk model as an application of the models the tracking error portfolio selection problem is considered by lifting the vector variables to positive semidefinite matrix variables we obtain semidefinite programming formulations of the robust tracking portfolio models numerical results are presented in tracking sse50 of the shanghai stock exchange compared with the tracking error variance portfolio model and the equally weighted strategy the proposed models are more stable have better accumulated wealth and have much better sharpe ratio in the investment period for the majority of observed instances

labor supply flexibility and portfolio choice in a life cycle model abstract this paper examines the effect of the labor leisure choice on portfolio and consumption decisions over an individual s life cycle the model incorporates the fact that individuals may have considerable flexibility in varying their work effort including their choice of when to retire given this flexibility the individual simultaneously determines optimal levels of current consumption labor effort and an optimal financial investment strategy at each point in his life cycle we show that labor and investment choices are intimately related the ability to vary labor supply ex post induces the individual to assume greater risks in his investment portfolio ex ante

optimal hedging in a dynamic futures market with a nonnegativity constraint on wealth abstract this paper examines the issue of optimal hedging demands for futures contracts from an investor who cannot freely trade his portfolio of primitive assets in the context of lognormal rather than normal returns and of a constant absolute risk aversion utility function in this context the nonnegativity constraint on wealth is binding and the optimal hedging demands are not identical with those encountered in the bulk of the literature which has largely overlooked this problem negative results concerning the derivation of equilibrium in the futures markets and the computation of the open interests then follow

commodity derivatives pricing with cointegration and stochastic covariances abstract empirically cointegration and stochastic covariances including stochastic volatilities are statistically significant for commodity prices and energy products to capture such market phenomena we develop a continuous time dynamics of cointegrated assets with a stochastic covariance matrix and derive the joint characteristic function of asset returns in closed form the proposed model offers an endogenous explanation for the stochastic mean reverting convenience yield the time series of spot and futures prices of wti crude oil and gasoline shows cointegration relationship under both physical and risk neutral measures the proposed model also allows us to fit the observed term structure of futures prices and calibrate the market implied cointegration relationship we apply it to value options on a single commodity and on multiple commodities

a minimum variance result in continuous trading portfolio optimization the problem of minimizing the variance of discounted wealth at the end of a fixed period is solved when the expectation of terminal wealth is constrained to a specified investment goal the results are obtained in a continuous trading framework under the assumption that the funds can be exchanged between a riskless bond and a stock whose discounted price is described by a geometric brownian motion transaction costs are ignored i e the market is frictionless and unlimited borrowing is permitted at the same rate as the return on the bond typically the optimal trading policy under the above assumptions involves a highly leveraged investment in the stock in the early stages followed by an accumulation of the bond in the later stages numerical results are provided as an illustration of the theory

long and short term dynamic causal transmission amongst international stock markets abstract this paper investigates the dynamic causal linkages amongst nine major international stock price indexes in order to gauge the causal transmission patterns we employ very recent methods of i vector error correction modeling and ii level var modeling with possibly integrated and cointegrated processes advocated by i toda and phillips econometrica 61 1993 1367 and ii toda and yamamoto j econometrics 66 1995 225 respectively the paper illustrates how such methods may be appropriately augmented in a compatible fashion to unearth previously unfounded linkage properties inherent amongst a system of stock price indexes in particular we demonstrate that previous research by using ordinary difference vars ignored an important component of linkages displayed purely over the long run this untapped evidence essentially provides robust and very useful information to international financial analysts and investors at a substantive level results of this study tend to support the contention offered by several studies in the literature of significant interdependencies between the established oecd and the asian markets and also the leadership of the us and uk markets over the short and long run the levels var however illustrate the japanese market s influence as an additional long run leader findings seem to be plausible given that these three markets us uk and japan have consistently contributed over 75 of global stock market capitalization over the major part of the sample under consideration at a methodological level this analysis also provides a primer for the wealth of applied financial econometric research focusing on dynamic causal inference which involve systems containing possibly integrated and cointegrated processes

the displacement and multiplier effects of regional selective assistance a computable general equilibrium analysis this paper uses a hybrid approach to simulate the effects of regional selective assistance rsa for scotland this combines industrial survey estimation of the direct impacts and computable general equilibrium cge modelling of the system wide effects the results are compared to those derived using the method currently adopted in official evaluation studies of rsa and other regional regeneration policy instruments the cge approach captures capacity labour market displacement and migration effects ignored in existing studies simulation identifies the conditions under which these effects are likely to be quantitatively important a partir d une facon hybride cet article cherche a simuler pour l ecosse l impact des primes regionales une estimation des effets directs a partir d une enquete aupres de l industrie se voit allier a la modelisation des effets generalises par une analyse d equilibre general sur ordinateur on compare les resultats a ceux qui proviennent des methodes employees actuellement

cointegration and dynamic time series models abstract this paper provides a survey of some of the recent developments in the field of econometric modelling with cointegrated time series in particular we describe the testing and estimation procedures which have become increasingly popular in the recent applied literature in addition to the two stage procedure proposed by engle and granger we consider extensions to the modelling of dynamic models with cointegrated variables such as the estimation of models with multiple cointegration vectors simultaneous systems models with seasonally integrated and cointegrated variables furthermore we illustrate the practical application of the techniques describes in the paper by means of a tutorial data set

cointegration and stock prices the random walk on wall street revisited abstract one of the more famous and empirically regular instances of unit roots occurs in stock price series where they are consistent with rational expectations and efficient markets under certain assumptions in this paper we investigate the dynamic behavior of five stock prices over the volatile period from january 1972 through december 1979 finding that the series are cointegrated with one dominant common trend a component with an estimated root of 0 95 in addition we find a lesser trend and two complex roots in the cycle model these findings are validated by out of sample forecasts beginning in january 1980 in addition to mean squared error criteria the forecasts are evaluated nonparametrically in two separate applications of a test due to henriksson and merton

qualitative forecast evaluation a comparison of two performance measures agricultural producers and marketers often have access to several sets of forecasts on the same series decision makers must be able to evaluate the relative accuracy of the forecasts the ability to evaluate whether a series will move up or down is important for series related to futures options other asset prices and situations where processes can be modified according to changing economic conditions a measure of qualitative forecast accuracy from naik and leuthold is compared to a probability based measure developed by henriksson and merton the henriksson merton measure is shown to provide additional and more accurate information concerning a model s qualitative forecasting ability

common stochastic trends in a system of exchange rates univariate tests reveal strong evidence for the presence of a unit root in the univariate time series representation for seven daily spot and forward exchange rate series furthermore all seven spot and forward rates appear to be cointegrated that is the forward premiums are stationary and one common unit root or stochastic trend is detectable in the multivariate time series models for the seven spot and forward rates respectively this is consistent with the hypothesis that the seven exchange rates possess one longrun relationship and that the disequilibrium error around that relationship partly accounts for subsequent movements in the exchange rates a general consensus has emerged in recent years that many macroeconomic time series such as gnp consumption expenditures disposable income etc can be characterized by a stochastic trend model in particular nelson and plosser 22 described this property as one of being difference stationary so that the first difference of a time series is stationary an alternative trend stationary model where a stationary component is added to a deterministic trend term has generally been found to be less appropriate 1 similarly it has long been recognized that many financial time series such as foreign exchange rates are nonstationary e g in meese and singleton 21 the issue of nonstationary is not merely a statistical curiosity but has several important implications for the modeling of exchange rates for instance many models of exchange rate determination under rational expectations require stationarity assumptions when solving out the expected future values of the fundamentals further there has been some controversy over the appropriate transformations to use when conducting tests of whether the forward rate is an unbiased and efficient predictor of the future spot exchange rate 2 some authors e g frenkel 11 12 have conducted tests in levels while geweke and feige 14

option valuation with co integrated asset prices abstract this paper investigates theoretical and practical aspects of options that are based upon two or more assets which are co integrated for this purpose a new discrete time model of asset prices is developed a model featuring both the co integration property as well as stochastic volatilities using a garch equilibrium based option pricing approach it is shown that when volatilities are deterministic the option prices do not depend on the co integration parameters except for the mis specification effect as to the manner in which the volatilities are estimated however with stochastic volatilities the option prices explicitly depend upon the co integration parameters in order to understand these results better this paper also examines a continuous time diffusion limit of the asset price system and empirically studies the co integration effect using spread options based upon the s p500 and the nasdaq100 these numerical results suggest that consideration of co integration can substantially alter the value delta and vega of a spread option