option pricing when the variance changes randomly theory estimation and an application in this paper we examine the pricing of european call options on stocks that have vari ance rates that change randomly we study continuous time diffusion processes for the stock return and the standard deviation parameter and we find that one must use the stock and two options to form a riskless hedge the riskless hedge does not lead to a unique option pricing function because the random standard deviation is not a traded security one must appeal to an equilibrium asset pricing model to derive a unique option pricing function in general the option price depends on the risk premium associated with the random standard deviation we find that the problem can be simplified by assuming that volatility risk can be diversified away and that changes in volatility are uncorrelated with the stock return the resulting solution is an integral ofthe black scholes formula and the distribution function for the variance of the stock price we show that accurate option prices can be computed via monte carlo simulations and we apply the model to a set of actual prices

it only takes a few moments to hedge options abstract we propose a novel non structural method for hedging european options relying on two model independent results first under suitable regularity conditions an option price can be disentangled into a linear combination of risk neutral moments second there exists an explicit approximate functional form linking the risk neutral moments to the futures price of the underlying asset and the related variance swap contracts we show that s p 500 call prices are mainly explained by two factors that are related to level and volatility of the underlying index we empirically compare the performance of two strategies where the vega exposure is adjusted either by a direct position in a variance swap contract or indirectly through an at the money call while both strategies ensure effective immunization in periods of market turmoil taking direct exposure on variance swaps is not optimal during extended periods of subdued volatility

on the indeterminacy of capital accumulation paths abstract in neoclassical optimal growth models the stability of the accumulation paths depends on the discount parameter we prove that for discount factors small enough the policy function which describes an optimal path can be of any type the result is achieved using the notion of concavity we adopt a constructive approach given any twice differentiable map we show how to construct an optimal growth problem which produces that map as the optimal policy function a consequence is that chaos can appear in these models we also provide bounds on the values of the discount parameter for which indeterminacy is possible

a quantitative evaluation of payroll tax subsidies for low wage workers an equilibrium search approach abstract phelps phelps e 1994 low wage employment subsidies versus the welfare state american economic review 84 54 58 presented the case for a low wage subsidy policy since the mid 1990s france has experimented with this strategy this paper evaluates the effect of this policy on employment and also on output and welfare we construct an equilibrium search model incorporating wage posting and specific human capital investment where unemployment and the distribution of both wages and productivity are endogenous we estimate this model using french data numerical simulations show that the prevailing minimum wage allows a high production level to be reached by increasing training investment even though the optimal minimum wage is lower we show that payroll tax subsidies enhance welfare more than a reduction in the minimum wage when they are spread over a large range of wages in order to avoid specialization in low productivity jobs

the pricing of options on assets with stochastic volatilities one option pricing problem that has hitherto been unsolved is the pricing of a european call on an asset that has a stochastic volatility this paper examines this problem the option price is determined in series form for the case in which the stochastic volatility is independent of the stock price numerical solutions are also produced for the case in which the volatility is correlated with the stock price it is found that the black scholes price frequently overprices options and that the degree of overpricing increases with the time to maturity one option pricing problem that has hitherto remained unsolved is the pricing of a european call on a stock that has a stochastic volatility from the work of merton 12 garman 6 and cox ingersoll and ross 3 the differential equation that the option must satisfy is known the solution of this differential equation is independent of risk preferences if a the volatility is a traded asset or b the volatility is uncorrelated with aggregate consumption if either of these conditions holds the risk neutral valuation arguments of cox and ross 4 can be used in a straightfoward way this paper produces a solution in series form for the situation in which the stock price is instantaneously uncorrelated with the volatility we do not assume that the volatility is a traded asset also a constant correlation between the instantaneous rate of change of the volatility and the rate of change of aggregate consumption can be accommodated the option price is lower than the blackscholes b s 1 price when the option is close to being at the money and higher when it is deep in or deep out of the money the exercise prices for which overpricing by b s takes place are within about ten percent of the security price this is the range of exercise prices over which most option trading takes place so we may in general expect the b s price to overprice options this effect is exaggerated as the time to maturity increases one of the most surprising implications of this is that if the b s equation is used to determine the implied volatility of a near the money option the longer the time to maturity the lower the implied volatility numerical solutions for the case in which the volatility is correlated with the stock price are also examined the stochastic volatility problem has been examined by merton 13 geske 7 johnson 10 johnson and shanno 11 eisenberg 5 wiggins 16 and

the distribution of earnings in an equilibrium search model with state dependent offers and counteroffers we construct an equilibrium job search model with on the job search in which firms implement optimal wage strategies under full information in the sense that they leave no rent to their employees and counter the offers received by their employees from competing firms productivity dispersion across firms results in wage mobility both within and across firms workers may accept wage cuts to move to firms offering higher future wage prospects equilibrium productivity dispersion across ex ante homogeneous firms can be endogenously generated productivity dispersion then generates a nontrivial wage distribution which is generically thin tailed as typically observed in the data

incentives and transactions costs within the firm estimating an agency model using payroll records we estimate an agency model using the payroll records of a copper mine that paid a production bonus to teams of workers we estimate the cost of incomplete information due to insurance and incentives considerations and the inefficiency caused by the simple form of the incentive contract itself at the estimated parameters the cost of worker risk aversion insurance is of similar magnitude to moral hazard incentives overall incomplete information accounted for one half of the bonus system s inefficiency relative to potential full information profits the other half is attributed to the bonus system s inefficient generation of incentives and insurance relative to the optimal incentive contract

static hedging of exotic options this paper develops static hedges for several exotic options using standard options the method relies on a relationship between european puts and calls with different strike prices the analysis allows for constant volatility or for volatility smiles or frowns

dynamics of the cobweb model with adaptive expectations and nonlinear supply and demand the price quantity dynamics of the cobweb model with adaptive expectations and nonlinear supply and demand curves is analysed we prove that chaotic dynamical behaviour can occur even if both the supply and demand curves are monotonic the introduction of adaptive expectations into the cobweb model leads to price quantity fluctuations with a smaller amplitude however at the same time the price quantity cycles may become unstable and chaotic oscillations may arise we present a geometric explanation why chaos can occur for a large class of nonlinear monotonic supply and demand curves

a search interpretation of male female wage differentials a general equilibrium search framework is used to examine the role of gender differences in labor market behavior patterns e g quit rates for personal reasons in determining gender wage differentials for samples of high school and college graduates from the national longitudinal survey of youth nlsy these behavioral patterns are found to be significantly different across the sexes and account for 20 30 of the wage differentials in particular they play a key role in explaining the male female wage differential that remains after controlling for the gender composition across occupations

using price distributions to estimate search costs we show how the equilibrium restrictions implied by standard search models can be used to estimate search cost distributions using price data alone we consider both sequential and nonsequential search strategies and develop estimation methodologies that exploit equilibrium restrictions to recover estimates of search cost heterogeneity that are theoretically consistent with the search models we illustrate the method using online prices for several economics and statistics textbooks

estimating a market equilibrium search model from panel data on individuals from albrecht and axell 1984 and is based on workers who are homogeneous in terms of market productivity and heterogeneous in terms of nonmarket productivity and on firms which are heterogeneous in terms of productive efficiency the equilibrium model is contrasted in terms of its fit to the data with an unrestricted version of the model which is based on a mixture of negative binomial distributions the equilibrium model fails to conform to the data in exactly the dimension of its major focus namely it implies that measurement error accounts for almost all of the dispersion in observed wages the equilibrium model also does not do well in fitting the unemployment duration distribution compared to the unrestricted model the problem is that the duration distribution itself does not support the existence of significant heterogeneity as evidenced by the estimates of the unrestricted model the paper also illustrates the use of such models for policy analysis by simulating the welfare effects of a minimum wage

maximum likelihood estimation of search costs abstract in a recent paper hong and shum 2006 using price distributions to estimate search costs rand journal of economics 37 257 275 present a structural method to estimate search cost distributions we extend their approach to the case of oligopoly and present a new maximum likelihood method to estimate search costs we apply our method to a data set of online prices for different computer memory chips the estimates suggest that the consumer population can be roughly split into two groups which either have quite high or quite low search costs search frictions confer a significant amount of market power to the firms despite more than 20 firms operating in each of the markets we estimate price cost margins to be around 25 the paper also illustrates how the structural method can be employed to simulate the effects of the introduction of a sales tax

relative efficiencies and comparative advantages in job search a model of employed and unemployed job search is estimated from a panel of new entrants into the labor force as well as prime age workers after investigating the relative efficiency of the two mai

search theoretic models of the labor market a survey we survey the literature on search theoretic models of the labor market we show how this approach addresses many issues including the following why do workers sometimes choose to remain unemployed what determines the lengths of employment and unemployment spells how can there simultaneously exist unemployed workers and unfilled vacancies what determines aggregate unemployment and vacancies how can homogeneous workers earn different wages what are the tradeoffs firms face from different wages how do wages and turnover interact what determines efficient turnover we discuss various modeling choices concerning wage determination and the meeting process including recent models of directed search

option replication in discrete time with transaction costs option replication is discussed in a discrete time framework with transaction costs the model represents an extension of the cox ross rubinstein binomial option pricing model to cover the case of proportional transaction costs the method proceeds by constructing the appropriate replicating portfolio at each trading interval numerical values of these prices are presented for a range of parameter values the paper derives a simple black scholes type approximation for the option prices with transaction costs and demonstrates numerically that it is quite accurate for plausible parameter values

pricing options under generalized garch and stochastic volatility processes in this paper we develop an efficient lattice algorithm to price european and american options under discrete time garch processes we show that this algorithm is easily extended to price options under generalized garch processes with many of the existing stochastic volatility bivariate diffusion models appearing as limiting cases we establish one unifying algorithm that can price options under almost all existing garch specifications as well as under a large family of bivariate diffusions in which volatility follows its own perhaps correlated process through an equilibrium argument duan 1995 shows that options can be priced when the dynamics for the price of the underlying instrument follows a general autoregressive conditionally heteroskedastic garch process the theory of pricing under such processes is now well understood however the design of efficient numerical procedures for pricing them is lacking most applications resort to large sample simulation methods with a variety of variance reduction techniques the complexity of pricing arises from the massive path dependence inherent in garch models this path dependence causes typical lattice based procedures to grow exponentially in the number of time increments the lack of efficient numerical schemes hinders empirical tests among the wide array of competing garch models most tests of garch models limit themselves to the use of high frequency data on spot assets with little attention placed on the information content of options 1

minimum wage effects on labor market outcomes under search matching and endogenous contact rates building upon a continuous time model of search with nash bargaining in a stationary environment we analyze the effect of changes in minimum wages on labor market outcomes and welfare although minimum wage increases may or may not lead to increases in unemployment in our model they can be welfare improving to labor market participants on both the supply and demand sides of the labor market we discuss identification of the model using current population survey data on accepted wages and unemployment durations and show that by incorporating a limited amount of information from the demand side of the market it is possible to obtain credible and precise estimates of all primitive parameters we show that the optimal minimum wage in 1996 depends critically on whether or not contact rates can be considered to be exogenous and we note that the limited variation in minimum wages makes testing this assumption problematic

an equilibrium model of search unemployment this paper develops a simple general equilibrium model with sequential search in which a nondegenerate wage offer distribution is endogenously determined we use this model to analyze the comparati

an empirical equilibrium job search model with continuously distributed heterogeneity of workers opportunity costs of employment and firms productivities and search on the job in this paper we present and estimate a synthesis of previous equilibrium search models allowing for continuous distributions of workers opportunity costs of employment as wellas firms productivities the model allows for on the job search and we assume that job offer arrival rates for workers are independent of their labormarket state we derive the theoretical implications of these assumptions we provide simulations and we develop a semi parametric estimation procedure that we apply to a dataset ofindividual labor market histories

frictional wage dispersion in search models a quantitative assessment we propose a new measure of frictional wage dispersion the mean min wage ratio for a large class of search models we show that this measure is independent of the wage offer distribution but depends on statistics of labor market turnover and on preferences under plausible preference parameterizations observed magnitudes for worker flows imply that in the basic search model and in most of its extensions frictional wage dispersion is very small notable exceptions are some of the most recent models of on the job search our new measure allows us to rationalize the diverse empirical findings in the large literature estimating structural search models

an econometric analysis of reservation wages this paper describes an analysis of survey data on unemployed people who reported their asking wage and the wage they expected to earn we show that if agents behavior is described by the standard optimal job search model one can use these data to deduce structural parameters rather than estimate them and we report our deductions from two surveys 1 of british unemployed people

minimum wages in an equilibrium search model with diminishing returns to labor in production this article analyzes a minimum wage in a market with imperfect information and job search it establishes that employment effects of a minimum wage do not generally indicate welfare effects it shows that researchers interested in welfare consequences should ask two questions first is the existing minimum wage binding second do some firms that would be bound by a new minimum wage presently experience labor shortages if the answers to these questions are no and yes respectively this article supports the conclusion that a higher minimum wage is welfare improving regardless of its effect on the unemployment rate

an empirical equilibrium model of a decentralized asset market i estimate a search and bargaining model of a decentralized market to quantify the effects of trading frictions on asset allocations and asset prices and to quantify the effects of intermediaries that facilitate trade using business aircraft data i find that relative to the walrasian benchmark 12 4 percent of the assets are misallocated and prices are approximately 27 3 percent lower dealers play an important role in reducing frictions in a market with no dealers 15 7 percent of the assets would be misallocated perhaps surprisingly in a market with no dealers prices would increase by 2 8 percent because sellers outside options improve relative to buyers thus counteracting the effects of higher search costs and slower trade on asset prices

the emergence of chaos from classical economic growth this paper shows how fluctuations of an erratic and unstable nature can emerge from the classical deterministic economic growth process implications of the analysis would appear to be at least two first pronounced changes in the way an economy behaves need not cause us to reject our understanding of how it works second we need not seek in exogenous forces an explanation as to why behavioral patterns change and why it may be so difficult to anticipate future events from the profile of past experience

irregular growth cycles this paper uses the familiar neoclassical theory of capital accumulation to show how complex behavior can emerge from quite simple economic structures indeed when sufficient nonlinearities and a production lag are present the interaction alone of the propensity to save and the productivity of capital can lead to growth cycles that exhibit a wandering sawtooth pattern not unlike those observed in reality these fluctuations need not converge to a cycle of any regular periodicity so they are not quasi periodic because such chaotic trajectories are unstable errors of estimation in parameters or initial conditions however tiny will accumulate rapidly into substantial errors of forecast moreover periods of erratic cycling can be interspersed with periods of more or less stable growth evidently the future behavior of a model solution cannot be anticipated from its patterns in the past a situation that seems to mimic experience apparent structural change and unpredictability is explained in the present theory by a deterministic single equation model random shocks play no role so the reader can visualize just what it is we are are talking about a noteworthy simulation is presented in figure 1 for gnp in a growth model that is described below in section iii a period of relatively rapid growth is followed by a period of cycles then remarkably for a considerable time about twenty periods apparently steady state growth occurs wandering cycles however emerge another brief period close to the steady state appears again toward the end of the series i establish conditions of savings and productivity that lead to results of this kind this analysis makes use of the mathematical theory of chaos which in the form exploited here originated in the work of edward lorenz a formal definition of chaos and sufficient conditions for chaotic trajectories were provided in a seminal paper by t y li and james yorke a survey of these related contributions is found in yorke and evelyn yorke this theory was introduced into economics by jess benhabib and myself 1981 where we showed that sequences of rational choices can be erratic when preferences depend on experience in a certain way by michael stutzer who provides a detailed analysis of trygve haavelmo s growth model by benhabib and myself 1980 in an application of the overlapping generations model and in my forthcoming study of the classical growth model

estimating a structural search model the transition from school to work this paper presents a finite horizon search model that is econometrically implemented using all of the restrictions impli ed by the theory following a sample of male high school graduates fr om the youth cohort of the national longitudinal surveys from graduat ion to employment search parameters are estimated reservation wages and offer probabilities are estimated to be quite low simulations a re performed of the impact of changing the parameters on the expected duration of unemployment copyright 1987 by the econometric society

estimating the effect of racial discrimination on first job wage offers in this paper we develop and implement a method for bounding the extent to which labor market discrimination can account for racial wage differentials the method is based on a two sided search matching model that formally accounts for unobserved heterogeneity and unobserved offered wages we find that racial differences in offered wages are proportionately twice three times as large as racial differences in accepted wages for high school dropouts high school graduates the results indicate that discrimination could account for the entire racial wage offer differential for high school dropouts and for high school graduates i e the bound on the extent of discrimination is not informative

job and wage mobility with minimum wages and imperfect compliance we propose a job search model with minimum wage regulations and imperfect compliance to explain the doubling of the mean and variance of hourly earnings of white males during the first 18 years of labor market experience the model encompasses job mobility and on the job wage growth as sources of wage dynamics and is estimated by simulated generalized method of moments using data from the national longitudinal survey of youths 1979 our estimates provide a good fit for the observed levels and trends of the main job and wage mobility data and for the increase in the mean and variance of wages over the life cycle as well as for the fall in the fraction of workers paid below the minimum wage job mobility explains 40 50 of the observed wage growth increases in the minimum wage and or compliance deliver small effects on the wage distribution and the nonemployment rate

misperception driven chaos theory and policy implications abstract in a large economy it is extremely difficult if not impossible to immediately grasp the state of our surrounding environment with precision since we normally have access only to a subset of relevant information in this paper we introduce this information imperfection into an ordinary model of endogenous business cycles and examine how it would affect the dynamic nature of the model we in particular present a mechanism by which observation errors result in chaotic fluctuations in a model that would behave regularly otherwise thereby indicating the importance of potential misperception about the current state in a qualitative sense also our model is tractable enough to explicitly derive a policy index of chaotic fluctuations under some conditions this feature of the model allows us to draw some policy implications regarding the observability of macroeconomic state variables

unemployment insurance eligibility and the scholl to work transition in canada and the united states to study how the design of unemployment insurance ui affects people leaving school to find jobs a model of job search in the presence of ui is developed and estimated for the united states and canada the level of ui benefits depends on previous earnings which creates opposing incentives for unemployed people not receiving benefits which of these opposing incentives dominates the other is found to differ across demographic groups within each country changes in ui policy therefore can have very different effects on different individuals the major differences found in the transition from school to work in canada and the united states are a lower rate of job offer arrivals and a lower rate of offer rejections in canada within each country offer arrival rates differ across individuals much more than offer rejection rates

high performance computing for asset liability management financial institutions require sophisticated tools for risk management for companywide risk management both sides of the balance sheet should be considered resulting in an integrated asset liability management approach stochastic programming models suit these needs well and have already been applied in the field of asset liability management to improve financial operations and risk management the dynamic aspect of the financial planning problems inevitably leads to multiple decision stages trading dates in the stochastic program and results in an explosion of dimensionality in this paper we show that dedicated model generation specialized solution techniques based on decomposition and high performance computing are the essential elements to tackle these large scale financial planning problems it turns out that memory management is a major bottleneck when solving very large problems given an efficient solution approach and a parallel computing facility we report on the solution of an asset liability management model for an actual dutch pension fund with 4 826 809 scenarios 12 469 250 constraints and 24 938 502 variables which is the largest stochastic linear program ever solved a closer look at the optimal decisions reveals that the initial asset mix is more stable for larger models demonstrating the potential benefits of the high performance computing approach for alm

equilibrium price distributions equilibrium price distributions for a homogeneous product consistent with individual incentives are investigated they arise in informationally imperfect markets in which the only primitive datum is the distribution of search costs it is shown that single multi and continuous price distributions are all viable long run phenomena depending on the nature of search costs a method for computing equilibrium price distributions is also provided jevons law of one price has long been an accepted dictum in economic theory in a classroom presentation it still serves sometimes implicitly as a major premise in many micro models of market interaction much of the descriptive theory as well as welfare analysis hinges on this assumption yet one s day to day experience reveals that price differentials are a viable phenomenon and that looking for lower prices may very well be a rewarding activity the prospects of eventually hitting a bargain and the resulting price reduction would more than compensate for the cost incurred during the search process moreover the existence of price dispersions appear to be an empirically stable phenomenon snapshots of markets for relatively homogeneous products reveal substantial and recurring price differentials stigler 1961 and pratt wise and zeckhauser 1979 for example report some evidence supporting this claim an important article by stigler 1961 focused economists attention on the crucial role played by the informational structure of markets it gave rise to the study of the

discretized reality and spurious profits in stochastic programming models for asset liability management in the literature on stochastic programming models for practical portfolio investment problems relatively little attention has been devoted to the question how the necessarily approximate description of the asset price uncertainty in these models influences the optimal solution in this paper we will show that it is important that asset prices in such a description are arbitrage free descriptions which have been suggested in the literature are often inconsistent with observed market prices and or use sampling to obtain a set of scenarios about the future we will show that this effectively introduces arbitrage opportunities in the optimization model for an investor who cannot exploit arbitrage opportunities directly because of market imperfections and trading restrictions we will illustrate that the presence of such arbitrage opportunities may cause substantial biases in the optimal investment strategy

estimation of equilibrium wage distributions with heterogeneity summary equilibrium search models generalize the one sided models used earlier by endogenizing the wage offer distribution attempts to estimate versions of these equilibrium n search models have been unsuccessful ironically because the predicted wage distribution did not fit the wage data in this paper we extend the applicability of search models by introducing firm heterogeneity to account for the shape of the wage density the resulting estimation problem is difficult but we propose a solution and illustrate its feasibility and performance with a monte carlo study and an application to us labour market data

an estimable dynamic stochastic model of fertility and child mortality this paper develops a finite horizon dynamic stochastic model of discrete choice with respect to life cycle fertility within an environment where infant survival is uncertain the model yields implications for the number timing and spacing of children a tractable estimation method is developed for the linear constraint quadratic utility case that is intimately tied to the dynamic optimization problem and the method is applied to malaysian household data estimation is based on integrating the numerical solution of the dynamic programming model of behavior with a maximum likelihood procedure

multiple equilibria and minimum wages in labor markets with informational frictions and heterogeneous production technologies it is often argued that a mandatory minimum wage is binding only if the wage density displays a spike at it in this article we analyze a model with search frictions and heterogeneous production technologies in which imposition of a minimum wage affects wages even though after imposition the lowest wage in the market exceeds the minimum wage the model has multiple equilibria as a result of the fact that the reservation wage of the unemployed and the lowest production technology in use affect each other imposition of a minimum wage may improve social welfare

perfectly competitive models of endogenous business fluctuations the endogenous hypothesis is not new at a pre analytic level it is based on the simple intuition that market mechanisms are inherently dynamically unstable at least around their stationary positions in this note i want to stress the theoretical point that there is nothing in the working of a perfectly competitive market system that prevents it from displaying persistent and endogenous fluctuations and that moreover such fluctuations may have their origins in market fundamentals such as factor intensities factor substitutability degree of impatience and so forth nevertheless macroeconomic models of endogenous fluctuations still have to prove that apart from being very beautiful they can also be useful to understand the so called heal world hit sunt leones this article is not intended to be a survey of all that has been written in this area in the last decade i have no title whatsoever to talk about empirical studies chera sayers contribution in this same volume addresses that guestion scheinkman 1990 is a readily available survey of nonlinear statistical methods that are relevant to this debate as for the theory incompetence recommends that i avoid touching on sunspot equilibria olg models and more generally expectations driven cycles they are instead discussed in jean michel grandmont s article finally marketing awareness implies recommending boldrin and woodford 1990 as a reasonably complete survey of what the endogenous cycle research program has recently produced at a theoretical level

rational choice and erratic behaviour in this paper we show that rational choice in a stationary environment can lead to erratic behaviour when preferences depend on experience we mean by erratic behaviour choice sequences that do not converge to a long run stationary value or to any periodic pattern early investigations of the effects of experience on choice goes back to pareto see also benhabib 1979 some keynesian theories of the consumption function incorporate the effects of experience and habit formation on current levels of consumption duesenberry 1949 modigliani 1949 and brown 1952 a general model of experience dependent choice was described in day 1970 and investigated in day and kennedy 1971 while the specific issue of the existence of stable representable long run consumer demand when tastes vary endogenously has been treated by gorman 1967 pollak 1970 1976 weizsaicker 1971 mccarthy 1974 and hammond 1976 pollak gave conditions for the representability of long run choice when the equations of preference dependence are linear and utility additive hammond in a generalization of these findings provides conditions for stable representable long run choice when preferences are acyclic a condition which in essence assures convergence to a long run choice

measuring the equilibrium effects of unemployment benefits dispersion we analyze the impact of unemployment benefits and minimum wagesusing an equilibrium search model which allows for dispersion ofbenefits and productivity levels job to job transitions andstructural and frictional unemployment the estimation method usesreadily available aggregate data on marginal distributions ofunemployment durations as well as wages and benefit levels different causes of structural and frictional unemployment areinvestigated we investigate the efficiency of the imposition of asingle benefit level for all household types and the introductionof an earned income tax credit

an equilibrium search model when firms observe workers employment status this article considers an equilibrium search model where firms post wages using information on workers employment status earnings differentials between workers of different employment statuses are driven by firms ability to discriminate workers reservation wages i study how these wage policies depend on firms and workers characteristics and how these policies affect the wage distribution the model delivers new predictions for the amount of wage dispersion that can be generated with search models and provides a better representation of the left tail of the wage distribution in the presence of a legal minimum wage than standard equilibrium search models

competitive equilibrium cycles recently there has been a surge of interest in endogenous business cycles that arise in competitive laissez faire economies in the context of standard overlapping generations economies conditions for the existence of equilibrium cycles have been given by grandmont 1983 and by benhabib and day 1982 models of the economy with extrinsic uncertainty or sunspots that have been developed by shell 1977 and by cass and shell 1983 see also balasko 1983 can also lead to equilibrium cycles

dynamic labour force participation of married women and endogenous work experience this paper presents and estimates a dynamic model of married women s labour force participation and fertility in which the effect of work experience on wages is explicitly taken into account because current participation alters future potential earnings the investment return to work will be an important factor in the current work decision in any forward looking behavioural model the model is estimated using the national longitudinal surveys mature women s cohort we use the estimates of our model to predict changes in the lifecycle patterns of employment due to changes in schooling fertility husband s income and the magnitude of the experience effect on wages we find that although work experience increases the disutility of further work the effect is overwhelmed by the positive effect of experience on wages leading to persistence in the employment patterns of these women in addition we find that an increase in young children and in husband s income substantially reduces participation while increased schooling has a powerful positive impact on participation this paper presents an estimable structural dynamic model of married women s labour force participation and fertility in which wages are stochastic and work experience or cumulative participation is endogeneous the model is structural in the sense that the parameters which are estimated are contained in the fundamental relationships governing behaviour namely the utility function and the constraints the model is contained in the class of models which describe the life cycle capital accumulation process with endogeneous labour supply such as weiss 1972 and heckman 1976 it is closest in spirit to that of weiss and gronau 1981 1 the basic feature of their model and ours is that labour market participation affects future wages which then affects future participation the investment return to current work will necessarily be taken into account in any forward looking optimizing model as weiss and gronau note estimates of labour supply models have ignored the inherent behavioural dynamics associated with a positive wageexperience profile there is no adequate empirical treatment of the human capital investment dimension of the labour force participation decision in the literature heckman and willis 1977 have studied a sequential discrete choice model of the labour force participation of married women in a reduced form framework their work

on the complicated price dynamics of a simple one dimensional discontinuous financial market model with heterogeneous interacting traders abstract we develop a financial market model with heterogeneous interacting agents market makers adjust prices with respect to excess demand chartists believe in the persistence of bull and bear markets and fundamentalists bet on mean reversion moreover speculators trade asymmetrically in over and undervalued markets and while some of them determine the size of their orders via linear trading rules others always trade the same amount of assets the dynamics of our model is driven by a one dimensional discontinuous map despite the simplicity of our model analytical graphical and numerical analysis reveals a surprisingly rich set of interesting dynamical behaviors

an empirical stationary equilibrium search model of the housing market this article specifies and estimates a computationally tractable stationary equilibrium model of the housing market the model is rich and incorporates many of its unique features buyers and sellers simultaneous search behavior heterogeneity in their motivation to trade transaction costs a trading mechanism with posting prices and bargaining and the availability of an exogenous advertising technology that induces endogenous matching estimation uses maximum likelihood methods and multiple listing services data the estimated model is used to simulate housing market outcomes when a the amount of information displayed on housing listings increases and b real estate agent s commission rates change

hedging options under transaction costs and stochastic volatility in this paper we consider the problem of hedging contingent claims on a stock under transaction costs and stochastic volatility extensive research has clearly demonstrated that the volatility of most stocks is not constant over time as small changes of the volatility can have a major impact on the value of contingent claims hedging strategies should try to eliminate this volatility risk we propose a stochastic optimization model for hedging contingent claims that takes into account the effects of stochastic volatility transaction costs and trading restrictions simulation results show that our approach could improve performance considerably compared to traditional hedging strategies

structural and frictional unemployment in an equilibrium search model with heterogeneous agents we specify and estimate an equilibrium search model with between market heterogeneity in the productivity levels the model allows for two types of unemployment unemployment due to search frictions and unemployment due to wage floors wage floors may exist because of large unemployment benefits or a binding mandatory minimum wage using data on labour market histories for a sample of dutch workers we decompose the total unemployment rate in a structural and frictional unemployment rate we also discuss the effect of changes in the minimum wage

wage tenure contracts with heterogeneous firms abstract this paper investigates equilibria where firms post wage tenure contracts and risk averse workers search for new job opportunities whether employed or unemployed we generalize previous work by assuming firms have different productivities equilibrium implies more productive firms always offer more desirable contracts thus workers never quit from more productive firms for less productive firms nevertheless turnover is inefficient as employees with long tenures at low productivity firms may reject outside job offers from more productive firms a worker who quits to a more productive firm may accept a wage cut such wage cuts are compensated by faster promotion rates to higher wage levels in the future we also generalize previous arguments by showing equilibria exist where the distribution of offers contains interior mass points and find equilibrium wage tenure contracts need not be smooth

option pricing and replication with transactions costs transactions costs invalidate the black scholes arbitrage argument for option pricing since continuous revision implies infinite trading discrete revision using black scholes deltas generates errors which are correlated with the market and do not approach zero with more frequent revision when transactions costs are included this paper develops a modified option replicating strategy which depends on the size of transactions costs and the frequency of revision hedging errors are uncorrelated with the market and approach zero with more frequent revision the technique permits calculation of the transactions costs of option replication and provides bounds on option prices

differential savings factor shares and endogenous growth cycles abstract the paper analyzes the dynamic properties of the neoclassical one sector growth model with differential savings in the sense of kaldor pasinetti the economy exhibits unstable steady states and fluctuations if the income distribution varies sufficiently and if shareholders save more than workers the paper analyzes in detail the dynamics for the case with a fixed proportions technology as well as with a smooth approximation if the savings propensities differ by an arbitrarily small amount the system exhibits topological chaos in the sense of li and yorke for an open set of production functions the analytical results are supplemented by numerical experiments

option values under stochastic volatility theory and empirical estimates abstract this paper numerically solves the call option valuation problem given a fairly general continuous stochastic process for return volatility statistical estimators for volatility process parameters are derived and parameter estimates are calculated for several individual stocks and indices the resulting estimated option values do not differ dramatically from black scholes values in most cases although there is some evidence that for longer maturity index options black scholes overvalues out of the money calls in relation to in the money calls

optimal replication of options with transactions costs and trading restrictions this paper analyzes the strategy that minimizes the initial cost of replicating a contingent claim in a market with transactions costs and trading constraints the linear programming and two stage backward recursive models developed are applicable to the replication of convex as well as nonconvex payoffs and to a portfolio of options with different maturities the paper s formulation conveniently accounts for fixed and variable transactions costs lot size constraints and position limits on trading the article shows that in the presence of trading frictions it is no longer optimal to revise one s portfolio in each period at the optimum cash flows in excess of the desired ones may be generated the optimal policy trades off the curvature of the payoff that is generated against the terminal slack

patents as options some estimates of the value of holding european patent stocks in many countries holders of patents must pay an annual renewal fee in order to keep their patents in force this paper uses data on the proportion of patents renewed and the renewal fees faced by post world war ii cohorts of patents in france the united kingdom and germany in conjunction with a model of patent holders renewal decisions to estimate the returns earned from holding patents in these countries since patents are often applied for at a nearly stage in the innovation process the model allows agents to be uncertain about the sequence of returns that will be earned if the patent is kept inforce formally then the paper presents and solves a discrete choice optimal stochastic control model derives the implications of the model on aggregate behaviour and then estimates the parameters of the model from aggregate data the estimates enable a detailed description of the evolution of the distribution of returns earned from holding patents over their life spans and calculations of both the annual returns earned from holding the patents still in force or the patent stocks in the alternative countries and the distribution of the discounted value of returns earned from holding the patents in a cohort this abstract was borrowed from another version of this item

back testing the performance of an actively managed option portfolio at the swedish stock market 1990 1999 we build an investment model based on stochastic programming in the model we buy at the ask price and sell at the bid price we apply the model to a case where we can invest in a swedish stock index call options on the index and the risk free asset by reoptimizing the portfolio on a daily basis over a ten year period it is shown that options can be used to create a portfolio that outperforms the index with ex post analysis it is furthermore shown that we can create a portfolio that dominates the index in terms of mean and variance i e at given level of risk we could have achieved a higher return using options

labor market search and schooling investment we generalize a search matching and bargaining model to allow individuals to acquire productivity enhancing schooling prior to labor market entry in general search frictions and weakness in bargaining position contribute to underinvestment in schooling from an efficiency perspective using estimates of a general equilibrium version of the model in which firm vacancy creation decisions are included we find that minimum wages and schooling subsidies improve aggregate welfare but have very different welfare impacts across the ability distribution in particular policies that maximize the average welfare of workers have strongly negative effects on the welfare of the least able

product differentiation search costs and competition in the mutual fund industry a case study of s p 500 index funds we investigate the role that non portfolio fund differentiation and information search frictions play in creating two salient features of the mutual fund industry the large number of funds and the sizeable dispersion in fund fees in a case study we find that despite the financial homogeneity of s p 500 index funds this sector exhibits the fund proliferation and fee dispersion observed in the broader industry we show how extra portfolio mechanisms explain these features these mechanisms also suggest an explanation for the puzzling late 1990s shift in sector assets to more expensive and often newly entered funds an influx of highinformation cost novice investors

monopsony in the labor market this paper surveys recent theoretical and empirical research on monopsony in labor markets broadly defined as upward sloping labor supply to an employer we compare older monopsony models based on small numbers of employers with newer models based on labor market frictions such as moving costs and search we also compare older econometric approaches that focus on static wage concentration relationships with newer approaches that focus on dynamics our review of empirical estimates suggests that monopsony power based on small numbers of employers is probably rare but occasionally large while monopsony power based on frictions is probably widespread but small on average

equilibrium search and tax credit reform an empirical equilibrium job search model with wage posting is developed to analyze the labor market impact of uk tax reforms the model allows for a rich characterization of the labor market with hours responses accurate representations of the tax and transfer system and both worker and firm heterogeneity the model is estimated with pre reform longitudinal survey data using a semi parametric estimation technique and the impact of actual tax reform policies is simulated the model predicts that the british working families tax credit and contemporaneous reforms increased employment with equilibrium effects found to play a relatively minor role

alternative theories of wage dispersion abstract we analyze labor market models where the law of one price fails i e models with equilibrium wage dispersion we begin considering ex ante heterogeneous workers but highlight a problem with this approach if search is costly the market shuts down we then assume homogeneous workers but ex post heterogeneous matches this model is robust to search costs and delivers equilibrium wage dispersion however we prove that the law of two prices holds equilibrium implies at most two wages we explore other models including one combining ex ante and ex post heterogeneity which is robust and delivers more realistic wage dispersion

duration to first job and the return to schooling estimates from a search matching model this paper investigates the properties of the joint distribution of the duration to the first post schooling full time job and of the accepted wage for that job within a search matchingbargaining theoretic model the model provides an interpretation of the observations on duration to first job and accepted wages that differentiates between behavioural influences and market fundamentals in determining the accepted wage schooling relationship the return to schooling is appropriately measured by differences in the wage offer distribution which depends only on market fundamentals we use data from the 1979 youth cohort of the national longitudinal surveys of labor market experience to follow several school leaving cohorts of young males a model which allows for five types of heterogeneous workers within schooling race groups fits the duration and wage data well for all such groups offer probabilities for all groups are estimated to be close to one mean offered wages are about 1000 less than mean accepted wages and the internal annual rate of return for attending college relative to graduating from high school is 32 for blacks and 17 for whites this paper investigates the properties of the joint distribution of the duration to the first post schooling full time job and of the accepted wage for that job within a search matching bargaining model it is a well established empirical regularity that hazard rates are decreasing with the duration of search unemployment it is also true for the data we use that the sample mean of the accepted wage associated with the first job is not increasing with duration these findings hold for both black and white male youth at all levels of schooling conditional on schooling however the time between leaving school and working at the first full time job is longer for blacks and their accepted mean wage is lower conditional on race the time between leaving school and working at the first full time job is shorter for those with higher levels of schooling and their accepted mean wage is higher interestingly blacks display a similar pattern of duration and accepted wages to whites who are one level of schooling below e g black high school graduates and white high school dropouts

an empirical equilibrium search model of the labor market in structural empirical models of labor market search the distribution of wage offers is usually assumed to be exogenous however because in setting their wages profit maximizing firms should consider the reservation wages of job seekers the wage offer distribution is essentially endogenous we investigate whether a proposed equilibrium search model in which the wage offer distribution is endogenous is able to describe observed labor market histories we find that the distributions of job and unemployment spells are consistent with the data and that the qualitative predictions of the model for the wages set by employers are confirmed by wage regressions the model is estimated using panel data on unemployed and employed individuals we distinguish between separate segments of the labor market and we show that productivity heterogeneity is important to obtain an acceptable fit to the data the results are used to estimate the degree of monopsony power of firms further the effects of changes in the mandatory minimum wage are examined

equilibrium wage tenure contracts in this study we consider a labor market matching model where firms post wage tenure contracts and workers both employed and unemployed search for new job opportunities given workers are risk averse we establish there is a unique equilibrium in the environment considered although firms in the market make different offers in equilibrium all post a wage tenure contract that implies a worker s wage increases smoothly with tenure at the firm as firms make different offers there is job turnover as employed workers move jobs as the opportunity arises this implies the increase in a worker s wage can be due to job to job movements as well as wage tenure effects further there is a nondegenerate equilibrium distribution of initial wage offers that is differentiable on its support except for a mass point at the lowest initial wage we also show that relevant characteristics of the equilibrium can be written as explicit functions of preferences and the other market parameters

the distributional impacts of minimum wage increases when both labor supply and labor demand are endogenous we develop and estimate a one shot search model with endogenous firm entry and therefore zero expected profits and endogenous labor supply positive employment effects from a minimum wage increase can result as the employment level depends upon both the numbers of searching firms and workers welfare implications are similar to the classical analysis workers who most want the minimum wage jobs are hurt by the minimum wage hike with workers marginally interested in minimum wage jobs benefiting we estimate the model using cps data on teenagers and show that small changes in the employment level are masking large changes in labor supply and demand teenagers from well educated families see increases in their employment probabilities and push out their less privileged counterparts from the labor market this article has supplementary material online

search for nonwage job characteristics a test of the reservation wage hypothesis previous structural models of job search behavior have been based upon the reservation wage property this article provides estimates of a more general search model that nests models with the reservation wage property the estimates lead to rejection of the reservation wage property the model includes hours of work in the utility function but other nonwage job characteristics can be included as well an experiment based on the estimated parameters indicates that a significant proportion of job offers would be mistakenly predicted to be accepted or rejected under the restrictions implied by the reservation wage property

the dynamics of inequalities and unequal exchange of labor in intertemporal linear economies abstract introducing a concept of fairness of economic allocations namely exploitation as the unequal exchange of labor henceforth ue exploitation by generalizing roemer s 1981 1982a seminal models this paper aims to answer the following two questions in the context of an intertemporal economy with linear technology how is income and wealth inequality related or unrelated to the existence and persistence of ue exploitation what are the mechanisms driving the persistent existence of ue exploitation in growing economies agents are ue exploited resp exploiters if the amount of labor that they contribute to the economy is bigger resp smaller than the amount of labor received by them via their income it is proved first that ue exploitation is monotonically correlated to functional income inequality second it is shown that unless agents discount the future asset inequalities are necessary but not sufficient for the persistence of ue exploitation and capital accumulation leading to the disappearance of ue exploitation cannot be ruled out in equilibrium third it is shown that regardless of whether agents discount the future labor saving technical progress may yield sustained growth with persistent ue exploitation by keeping labor abundant relative to capital which restrains wages from rising unlike in models with differentiable production functions this mechanism does not rely on changes in the marginal productivity of inputs and it is entirely driven by the interaction between innovation and labor markets