make to order or make to stock model and application some firms make all their products to order while others make them to stock there are a number of firms that maintain a middle ground where some items are made to stock and others are made to order this paper was motivated by a consumer product company faced with the decision about which items to make to stock and which ones to make to order and the inventory and production policy for the make to stock items the production environment is characterized by multiple items setup times between the production of consecutive items limited capacity and congestion effects in such an environment making an item to order reduces inventory costs for that item but might increase the lot size and inventory costs for the items made to stock also lead times increase because of congestion effects resulting in higher safety stocks for make to stock items and lower service levels for make to order items thus leading to a complex trade off we develop a nonlinear integer programming formulation of the problem we present an efficient heuristic to solve the problem which was motivated by key results for a special case of the problem without congestion effects that can be solved optimally we also develop a lower bound to evaluate the performance of the heuristic a computational study indicates that the heuristic performs well we discuss the application of the model in a large firm and the resulting insights we also provide insights into the impact of various problem parameters on the make to order versus make to stock decisions using a computational study in particular we find that the average number of setups of an item selected for make to stock production is always less than half the average number of setups of the item if it were to be made to order also factors other than an item s demand such as its setup time processing time and unit holding cost impact the make to order versus make to stock decision

explaining the early years of the euro exchange rate an episode of learning about a new central bank abstract many observers were surprised by the depreciation of the euro after its launch in 1999 handicapped by a short sample explanations tended to appeal to anecdotes and lessons learned from the experiences of other currencies now sample sizes are just becoming large enough to permit reasonable empirical analyses the model of this paper provides empirical support for the euro exchange rate to be affected by learning by focusing on euro area inflation as the key fundamental the model is structured toward the dynamics of learning about ecb policy with regard to inflation while a stated target inflation rate of 2 percent existed it may be that market participants had to be convinced that the ecb would indeed generate low and stable inflation with a prior distribution drawn from the pre euro ems experience and updating based upon the realized experience each month following the introduction of the euro the evidence suggests that it was not until december of 1999 that the market assessed a greater than 50 percent probability that the inflation process had changed to a new regime from this point on trend depreciation of the euro ends and further increases in the probability of the new inflation process are associated with euro appreciation versus the us dollar the british pound and the japanese yen

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

market trading structures and asset pricing evidence from the treasury bill markets earlier studies report signfficant price disparities betweenfutures andforward or spot markets examining the treasury bill markets this article demonstrates that differences in market trading structures explain these disparities treasury billfutures rates contain significantly lower liquidity and default premia than do syntheticforward rates this reflects the functioning of a futures clearing association and differences between an open outcry auction futures market and an over the counter dealer spot market the same factors that make futures contracts nonredundant securities also explain the existence in equilibrium of price disparities

the valuation of options on yields abstract many contingent claims incorporate options on yield levels i derive closed form expressions for european yield option prices using a general equilibrium model in which the underlying yield is the relevant state variable the properties of these options differ markedly from those of conventional options on traded assets for example yield call values can be less than their intrinsic value and can be decreasing functions of the underlying yield these features have important hedging implications i examine the empirical implications of the model using price data for the 13 week t bill options traded on the chicago board options exchange

exchange rates inflation and the sterilization problem germany 1975 1981 when the goals of internal and external macroeconomic equilibrium are in conflict sterilized intervention in the foreign exchange market may provide an independent policy instrument through which the central bank can resolve its dilemma in the short run this paper is concerned with the west german bundesbank s use of sterilization during the recent years of exchange rate flexibility the paper asks whether the bundesbank pursued sterilization during the years 1995 1981 and whether sterilized foreign exchange intervention exerts a significant influence on the exchange rate in the german case estimation of a stylized bundesbank reaction function suggests an affirmative answer to the first of these questions to assess the efficacy of sterilized intervention a structural portfolio balance model of german asset markets and prices is estimated dynamic perfect foresight simulations of the empirical model are used to ascertain whether imperfect substitutability between foreign and domestic bonds is sufficient to allow the bundesbank to attain independent internal and external goals over the short run of about a month the model s verdict is that the bundesbank has little if any power to influence the exchange rate over that time span without altering current or expected future money market conditions this abstract was borrowed from another version of this item

interest rate volatility and the term structure a two factor general equilibrium model we develop a two factor general equilibrium model of the term structure the factors are the short term interest rate and the volatility of the short term interest rate we derive closed form expressions for discount bonds and study the properties of the term structure implied by the model the dependence of yields on volatility allows the model to capture many observed properties of the term structure we also derive closed form expressions for discount bond options we use hansen s generalized method of moments framework to test the cross sectional restrictions imposed by the model the tests support the two factor model there are essentially two approaches to the modeling of the term structure of interest rates in continuous time the equilibrium approach pioneered by

option valuation with systematic stochastic volatility we use an extension of the equilibrium framework of rubinstein 1976 and brennan 1979 to derive an option valuation formula when the stock return volatility is both stochastic and systematic our formula incorporates a stochastic volatility process as well as a stochastic interest rate process in the valuation of options if the mean volatility and covariance processes for the stock return and the consumption growth are predictable our option valuation formula can be written in preference free form further many popular option valuation formulae in the literature can be written as special cases of our general formula in this paper we investigate the valuation of individual stock options when the volatility of the underlying stock return is stochastic and has a systematic component which is related to the stochastic volatility of the consumption growth or the market return such an investigation is timely and of significant interest because there is now a considerable amount of evidence that the volatility of stock prices is not only stochastic but that it is also highly correlated with the volatility of the market as a whole for example see black 1975 conrad kaul and gultekin 1991 jarrow and rosenfeld 1984 jorion 1988 and ng engle and rothschild 1992 furthermore empirical work by black and scholes 1972 gultekin rogalski and tinic 1982 and whaley 1982 has shown that the empirical biases inherent in the black scholes option prices are different for options on high and low risk stocks because low risk stocks are mainly large firm stocks with stochastic return volatilities that are highly correlated with the return volatility of the market and high risk stocks are mainly small firm stocks with a lessimportant systematic volatility component incorporating systematic volatility effects in option valuation models has the potential to reduce the empirical biases exhibited by prices computed from the black scholes formula we use equilibrium arguments that extend the consumption based representative agent framework of rubinstein 1976 brennan 1979 and stapleton and subrahmanyam 1984 to allow individual asset returns and the consumption growth to exhibit stochastic volatility in particular we permit the volatility of individual asset returns to consist of a systematic component that is related to the consumption or market volatility in addi

testing the efficiency of the canadian u s exchange market under the assumption of no risk premium the efficiency of the canadian u s exchange market for the current float is examined more extensively than previously semi strong form tests which admit the lagged spot rate as a predictor are considered in addition to the standard weak form test these stronger tests reject the joint null hypothesis of an efficient exchange market and no risk premium for the period ending in october 1976 although not for the entire period for almost every year the current spot rate provided a better forecast of the future spot rate than did the current forward rate there is now an extensive empirical literature on testing the efficiency of various foreign exchange markets see 16 for a survey yet almost all of these tests are weak form tests or tests of the bias of the forward exchange rate as a predictor of the future spot rate such tests in the canadian u s exchange market can be found in the work of porter 20 eastman 5 kaserman 10 kohihagen 11 cornell 3 and levich 14 for the canadian float of the 1950s porter 20 and kaserman 10 found that one could not reject the unbiasedness of the forward rate eastman 5 and kohlhagen 11 rejected the unbiasedness of the forward rate for the floating period although not for the subsequent fixed period but their use of overlapping contracts means that their standard errors are biased cornell 3 and levich 14 found that in terms of the root meansquared error criterion the lagged spot rate and the lagged forward rate predicted the current spot rate equally well for more recent periods this paper examines the efficiency of the canadian u s exchange market for the current float july 1970 to december 1978 in a more extensive way than it has been previously examined from the weak form test the paper proceeds to two semi strong form tests which admit the lagged spot rate as a possible predictor throughout the paper various subperiods are considered in addition to the period as a whole

intervention and sterilisation under floating exchange rates the uk 1973 1983 in this paper a small portfolio balance model in the spirit of obstfeld 1983 is estimated for the sterling pound us dollar exchange rate over the period 1973 quarter 2 to 1983 quarter 4 it is demonstrated inter alia that pure or sterilised foreign exchange market intervention can be effective even when agents form expectations rationally

relationships among exchange rates intervention and interest rates an empirical investigation abstract this study uses herefore unavailable daily data on official intervention to test the joint hypotheses of perfect asset substitutability and exchange market efficiency this joint hypothesis is generally soundly rejected for six exchange rates over various sample periods in contrast to evidence elsewhere from weekly or monthly data lagged intervention is a significant determinant of realized profits in about half the cases this evidence is consistent with existence of a portfolio balance channel at least in the short run other evidence indicates that coordinated intervention sometimes may have an impact significantly different from intervention by one central bank alone

target zones and exchange rates an empirical investigation this paper develops an empirical model of exchange rates in a target zone the distribution of exchange rate changes is conditioned on a latent jump variable where the probability and size of a jump vary over time as a function of financial and macroeconomic variables when there is no jump the target zone is credible and exchange rate changes are constrained to remain within the target zone band the paper revisits the empirical evidence from the european monetary system regarding the conditional distribution of exchange rate changes the credibility of the system and the size of the foreign exchange risk premia in contrast to some previous findings we conclude that the french franc deutschmark rate exhibits considerable nonlinearities realignments are somewhat predictable and the credibility of the system did not increase substantially after 1987 moreover our model implies that the foreign exchange risk premium becomes large during speculative crises

in search of the exchange risk premium a six currency test assuming mean variance optimization abstract a number of authors examining deviations of actual rates of currency depreciation from forward discounts have claimed to find evidence of risk premiums if these deviations are indeed partly due to risk premiums rather than being entirely due to expectational errors then they should be systematically related to those variables on which risk premiums are thought to depend finance theory tells us that if investors optimize with respect to mean and variance the risk premium depends in a specific way on 1 the supplies of assets denominated in the various currencies 2 the variance covariance matrix of the rates of return and 3 the coefficient of risk aversion the null hypothesis of this paper is that the coefficient of risk aversion is zero countries assets are perfect substitutes and risk premiums are nonexistent the alternative hypothesis is that rates of return are systematically related to asset supplies by a macroeconomic portfolio balance function the maximum likelihood technique used dominates previous attempts to find such a relationship in that the parameters of the portfolio balance function are constrained to depend on the variance covariance matrix as the finance theory says they should on the other hand the technique also dominates previous applications of the finance theory in that the expected returns are allowed to vary over time as the macroeconomic portfolio balance theory says they should the paper s finding is a statistical inability to reject the null hypothesis for a portfolio of six currencies although this could be due to low power in the test

flexible lot sizing in hybrid make to order make to stock production planning abstract hybrid make to order make to stock production systems are difficult to control batch production of make to stock products allows for efficient capacity usage but fixed batch sizes can make the system less responsive to make to order customers using markov decision process modeling we show that the optimal policy for such hybrid systems varies the lot size in response to make to order backlogs as well as stock levels we evaluate the performance of this flexible lot sizing policy for a two product hybrid system we find that it leads to savings of up to 23 compared to policies that use either completely or partly fixed lot sizes we also find that flexible lot sizing is especially beneficial for systems with a low load and where make to stock is important in terms of production capacity usage and cost

high frequency analysis of foreign exchange interventions what do we learn abstract the high frequency analysis of foreign exchange dynamics is helpful in order to better identify the impact of central bank interventions evidence robustly shows that interventions do indeed move the exchange rate level in the desired direction interventions increase volatility in the short run as they are regarded as information but they can reduce volatility overall ways of transmission may reach beyond the signalling channel and also include the portfolio balance and a damping channel finally interventions are more successful if they obey certain conditions such as being coordinated among central banks and going with the market and fundamentals

the implications of mean variance optimization for four questions in international macroeconomics abstract the hypothesis of mean variance optimization has powerful implications transcending particular methods used for variance covariance estimation 1 for conventional estimates of risk aversion substitutability between domestic and foreign securities is close to perfect in the sense that risk premiums are small in magnitude a few basic points and thus cannot explain much bias in forward rates 2 nevertheless as long as risk aversion is not zero foreign exchange intervention still affects the level of the exchange rate proportionately at least to asset supply changes 3 current account deficits also have effects 4 finally dollar depreciation should not be accompanied by appreciation of the mark against the franc

determinants of the implied shadow exchange rates from a target zone abstract the paper provides a continuous time model of the dynamic behavior of exchange rates and interest rates when exchange rates are managed within a target zone with the possibility of realignments in the case of a realignment the exchange rate jumps to a shadow exchange rate the timing of realignments is modelled by a cox process with an intensity that depends on the location of the exchange rate in the target zone band as well as the distance to the shadow exchange rate we set up an approximate maximum likelihood estimation approach and provide parameter estimates for six erm target zones moreover in the empirical analysis we filter out the shadow exchange rates and investigate which fundamental macroeconomic factors are able to explain the short run and long run behavior of the filtered shadow exchange rates

a note on exchange rate expectations and nominal interest differentials a test of the fisher hypothesis this note tests the hypothesis that nominal interest differentials between similar assets denominated in different currencies can be explained entirely by the expected change in the exchange rate over the holding period this proposition often called the fisher open hypothesis or the hypothesis of perfect asset substitutability has been a major component of recent theories of exchange rate determination and has important implications for monetary policy 1 the fisher hypothesis differs from the covered interest parity theorem enunciated by keynes 11 while covered interest parity equates the nominal interest differential between financial centers to a known premium or discount on forward foreign exchange and is thus in principle riskless fisher parity involves risk in an essential way the two conditions are equivalent only when forward exchange rates equal expected future spot rates recent theoretical work for example that of grauer litzenberger and stehle 8 kouri 12 and frankel 6 shows that this need not be the case when market participants are risk averse thus while covered interest parity must always hold exactly in an informationally efficient asset market with no transactions costs fisher parity need not nominal interest differentials may reflect risk premia in addition to expected exchange rate movements 2 it should be emphasized at the outset that the tests conducted in this paper are really joint tests of the fisher hypothesis and a weak form of foreign exchange market informational efficiency levich 14 has argued that tests of market efficiency are always joint tests involving some hypothesized structure of normal equilibrium returns below we assume informational efficiency and instead test fisher s hypothesized arbitrage condition that nominal interest differentials equal expected percentage changes in exchange rates

comparison of dynamic scheduling policies for hybrid make to order and make to stock production systems with stochastic demand we examine the previously under researched problem of scheduling a single stage capacitated hybrid make to order mto and make to stock mts production system with stochastic demand we build on the economic lot scheduling problem elsp literature and make some modifications to incorporate mto products at the tactical level target cycles kept long enough to trade off changeover and inventory costs are calculated while at the operational level the general idea is to try and follow these target cycles and make adjustments to them in order to a avoid stock outs for nits products and b have short lead time for mto products while keeping the overall costs as low as possible through an extensive simulation study we evaluate various run out time scheduling and sequencing heuristics and provide a more complete understanding and managerial insights in the case of hybrid mto mts environment with stochastic demand it is clear that the methods that perform well for pure mts situations do not necessarily perform well for hybrid mto mts situation c 2004 elsevier b v all rights reserved

a portfolio balance rational expectations model of the dollar mark exchange rate abstract a model is developed in which current account imbalances can be financed through transfers of bonds denominated in either currency the reduced form links the current spot rate to the expected future spot rate via a risk premium which depends on the global currency mix of outside assets that governments impose on private portfolios through budget deficits and interventions and on the global distribution of private wealth among regions with different portfolio preferences an iterative procedure generates rational expectations forecasts of the dollar mark rate which perform somewhat better than forward rates in predicting monthly changes in the spot rate

conditional variance and the risk premium in the foreign exchange market abstract we investigate the existence of a risk premium in the foreign exchange market based on the conditional variance of market forecast errors the forecast errors are assumed to follow the arch process introduced by engle 1982 estimation and diagnostic testing of the model are discussed and results are presented for the currencies of the united kingdom france germany japan and switzerland

money bonds and foreign exchange in the theory of finance capital markets provide securities which allow the ownership of productive assets to be allocated among investors according to their willingness to bear risk in exchange for return and independently of their tastes for the productive services provided by the assets this paper uses the theory of finance to study the role of money as a productive asset and the transformation of money into a portfolio asset true to its purpose the capital market provides securities nominal bonds that allow an allocation of the current services of the money supply according to its current productivity and without regard for its future purchasing power risk and an allocation of the future purchasing power risk of the money supply according to the willingness of investors to bear this risk in exchange for return and without regard for investor needs for the future transactions services of money in open

identifying the efficacy of central bank interventions evidence from australia and japan abstract using a model incorporating the endogenous relationship between exchange rates and intervention we show how a change in central bank policy can be used as an identification assumption estimating this model with simulated gmm for daily data from australia and japan we find that a us 100 million purchase appreciates the australian dollar by 1 3 1 8 but the yen by just 0 2 almost all of the impact of an intervention occurs during the day it is conducted and we confirm that central banks typically lean against the wind

an alternative valuation model for contingent claims abstract this paper studies contingent claim valuation in a lucas type exchange economy the derived fundamental valuation equation differs from its cox ingersoll ross production economy counterpart in that it is expressed in terms of the direct utility function and an exogenous output process thus offering superior tractability we apply our approach to derive closed form solutions for bond bond option individual stock and stock option prices under a more general setting than allowable in the cox ingersoll ross framework the resulting interest rate and stock price dynamics are empirically plausible moreover our stock option pricing formula with stochastic volatility and interest rates can reconcile certain puzzling empirical regularities including the volatility smile

quality investment and price decision in a risk averse supply chain abstract in this paper we investigate quality investment and price decision of a make to order mto supply chain with uncertain demand in international trade due to volatility of orders from buyers the supplier and the manufacturer in the supply chain are subject to financial risk in contrast to the general assumption that players in a supply chain are risk neutral in quality investment and price decision we consider the risk averse behavior of the players in three different supply chain strategies vertical integration vi manufacturer s stackelberg ms and supplier s stackelberg ss the study shows that both supply chain strategy and risk averse behavior have significant impacts on quality investment and pricing compared to a risk neutral supply chain a risk averse supply chain has lower same and higher quality of products in vi ms and ss respectively also we derive the conditions under which the supply chain strategy is implemented in a decentralized setting a numerical study is used to illustrate some related issues

integrated lot sizing and safety stock placement in a network of production facilities abstract in a network of production facilities safety stock placement is determined at the network level to hedge against uncertainty in demand while considering the production cycle time pct of each stage as an exogenous parameter the lot sizing policy at each stage affects setup time capacity and is a major determinant of queuing behavior and pct this paper integrates strategic safety stock placement and tactical lot sizing which are typically optimized independently we model the integrated problem to minimize system wide production and inventory costs subject to meeting service level requirements of external customers we establish bounds for optimal lot sizes and extend existing safety stock placement dynamic programming algorithm to solve the integrated problem based on numerical experiments we assess the value of integrating the two decisions and find that integration leads to smaller lot sizes shorter lead times and favors pooling of safety stocks the setup cost setup time and the added value at a production stage are the most significant factors in determining the amount of savings generated through integration in addition simulation studies show that integration reduces pct variability and decreases the fraction of delayed items

stock price distributions with stochastic volatility an analytic approach we study the stock price distributions that arise when prices follow a diffusion process with a stochastically varying volatility parameter we use analytic techniques to derive an explicit closed form solution for the case where volatility is driven by an arithmetic ornstein ublenbeck or ar1 process we then apply our results to two related problems in the finance literature 1 options pricing in a world of stochastic volatility and 2 the relationship between stochastic volatility and the nature of fat tailes in stock price distributions article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

budget deficit external official borrowing and sterilized invertion policy in foreign exchange markets abstract i study the effect of a temporary budget deficit which is financed in the international capital market on the exchange rate first i show that the exchange rate depreciates both in the short and in the long run if the government finances the deficit by selling debt denominated in foreign currencies to nonresidents secondaly i show that the government can prevent an immediate depreciation of the exchange rate adopting a policy of sterilized intervation however the achievement of this short run exchange rate target implies a long run depreciation of the real exchange rate

the pricing of stock index options in a general equilibrium model this paper analyzes the pricing of stock index options in a simple general equilibrium model in this model the volatility of the stock index and the spot rate of interest are functions of a stochastic variable the paper investigates the biases that arise when using the black scholes model with the assumed volatility and interest rate dynamics it is shown that the model can in principle explain the biases observed in empirical work on stock index options

bid ask spreads in the interbank foreign exchange markets abstract this study provides evidence on quotations and bid ask spreads in the wholesale foreign exchange market and introduces a method to document variation in the placement of quotes relative to asset value i find that spreads widen with proxies for inventory carrying costs including forecasts of price risk and a measure of liquidity costs increases in spreads before nontrading periods can also be attributed to inventory costs the location of currency quotes in relation to value is not constant and the outcome of hypothesis tests regarding changes in currency value can be sensitive to allowances for variation in quote location

modeling time series information into option prices an empirical evaluation of statistical projection and garch option pricing model abstract this paper compares the empirical performances of statistical projection models with those of the black scholes adapted to account for skew and the garch option pricing models empirical analysis on s p500 index options shows that the out of sample pricing and projected trading performances of the semi parametric and nonparametric projection models are substantially better than more traditional models results further indicate that econometric models based on nonlinear projections of observable inputs perform better than models based on ols projections consistent with the notion that the true unobservable option pricing model is inherently a nonlinear function of its inputs the econometric option models presented in this paper should prove useful and complement mainstream mathematical modeling methods in both research and practice

real and nominal interest rates a discrete time model and its continuous time limit i provide a general equilibrium theory of the term structure of real interest rates in a discrete time economy i derive the prices for one period and two period real bonds and a simple recursive formula for general k period bonds and prove that the price formula with appropriately specified parameters converges to that of the cox ingersoll and ross model 1985 in addition i consider the behavior of nominal bond prices in a partial equilibrium setting in which an exogenous price level process is correlated with the real economy finally i provide an illustrative empirical investigation of the model the results indicate a significant correlation between the price level and the growth rate of consumption which does not support the money nuetrality assumption underlying cox ingersoll and ross s nominal bond prices and related empirical studies such as gibbons and ramaswamyu 1992 heston 1991 and pearson and sun 1991 article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the covariation of risk premiums and expected future spot exchange rates abstract eugene fama 1984 analyzed the variability and the covariation of risk premiums and expected rates of depreciation we employ three statistical techniques that do not suffer from a potential bias in fama s analysis but we nevertheless conffirms his findings in contrast to his interpretation the results are not necessarily at variance with the predictions of a theoretical model of the risk premium increases in expected rates of depreciation of the dollar relative to five foreign currencies are positively correlated with increases in the expected profitability of purchasing these currencies in the forward market and risk premiums have larger variancies than expected rates of depreciation

government intervention and strategic trading in the u s treasury market we study the impact of permanent open market operations pomos by the federal reserve on u s treasury market liquidity using a parsimonious model of speculative trading we conjecture that i this form of government intervention improves market liquidity contrary to conclusions drawn by existing literature and ii the extent of this improvement depends on the market s information environment evidence from a novel sample of federal reserve pomos during the 2000s indicates that bid ask spreads of on the run treasury securities decline when pomos are executed by an amount increasing in proxies for information heterogeneity among speculators fundamental volatility and pomo policy uncertainty consistent with our model

a simple approach to interest rate option pricing a simple introduction to contingent claim valuation of risky assets in a discrete time stochastic interest rate economy is provided taking the term structure of interest rates as exogenous closed form solutions are derived for european options written on 1 treasury bills 2 interest rate forward contracts 3 interest rate futures contracts 4 treasury bonds 5 interest rate caps 6 stock options 7 equity forward contracts 8 equity futures contracts 9 eurodollar liabilities and 10 foreign exchange contracts article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

evidence of risk premiums in foreign currency futures markets benchmark portfolios for con sumption and wealth when the parameters rep resenting the prices of the covariance risks areheld constant no risk premiums are detected however when these prices are allowed to varywith the conditional expected returns and vari ances of the benchmark portfolios possibly reflect ing changing investment opportunities strong evi dence of risk premiums is obtained recent examinations of foreign currency futures datahave tested the hypothesis that today s futures priceis an unbiased predictor of tomorrow s price againstan unspecified alternative hypothesis the accumu lated evidence against the unbiasedness hypothesishas not been accompanied by evidence consistentwith a particular equilibrium risk premium model

exchange rate dynamics an empirical investigation this paper estimates a reduced form exchange rate equation whose estimates are used to address questions on exchange rate overshooting intermediate run exchange rate dynamics and long run proportionality relationships between relative money supplies and exchange rates based on swiss u s data from the period 1973 79 the major findings are that following a monetary shock there is short run exchange rate overshooting by a factor of about two and that subsequent exchange rate adjustments to a new long run equilibrium take longer than 2 years and exhibit nonmonotonic patterns

does the federal reserve care about the rest of the world many economists are accustomed to thinking about federal reserve policy any economists are accustomed to thinking about federal reserve policy in terms of the institution s dual mandate which refers to price stability in terms of the institution s dual mandate which refers to price stability and high employment and in which the exchange rate and other interand high employment and in which the exchange rate and other international variables matter only insofar as they infl uence infl ation and the output national variables matter only insofar as they infl uence infl ation and the output gap which is to say not very much gap which is to say not very much in fact this conventional view is heavily shaped by the distinctive and pecuin fact this conventional view is heavily shaped by the distinctive and peculiar circumstances of the last three decades when the infl uence of international liar circumstances of the last three decades when the infl uence of international considerations on fed policy has been limited in this paper i will discuss how the considerations on fed policy has been limited in this paper i will discuss how the federal reserve paid signifi cant attention to international considerations in its fi rst federal reserve paid signifi cant attention to international considerations in its fi rst two decades followed by relative inattention to such factors in the two plus decades two decades followed by relative inattention to such factors in the two plus decades that followed then back to renewed attention to international aspects of monetary that followed then back to renewed attention to international aspects of monetary policy in the 1960s before the recent period of benign neglect of the international policy in the 1960s before the recent period of benign neglect of the international dimension this longer perspective is a reminder that just because the fed has not dimension this longer perspective is a reminder that just because the fed has not attached priority to international aspects of monetary policy in the recent past we attached priority to international aspects of monetary policy in the recent past we have no guarantee that it will not do so in the future indeed i will argue in the have no guarantee that it will not do so in the future indeed i will argue in the conclusion that in the next few decades international aspects are likely to play a conclusion that in the next few decades international aspects are likely to play a larger role in federal reserve policy making larger role in federal reserve policy making 1

market structure and inefficiency in the foreign exchange market abstract this paper investigates the intradaily operational efficiency of the us foreign exchange market by conducting computer simulation experiments with market structure the numbers of market makers brokers and customers the results indicate significant operational inefficiencies which can be explained by temporary inventory imbalances inherent in a decentralized market the results also suggest that much of this inefficiency could be alleviated through a centralization of price information jel f31 g15

do asset demand functions optimize over the mean and variance of real returns a six currency test abstract international asset demands are functions of expected returns optimal portfolio theory tells us that the coefficients in this relationship depend on the variance covariance matrix of real returns but previous estimates of the optimal portfolio 1 assume expected returns constant and 2 are not set up to test the hypothesis of mean variance optimization we use maximum likelihood estimation to impose a constraint between the coefficients and the error variance covariance matrix for a portfolio of six currencies we are able statistically to reject the constraint evidently investors are either not sophisticated enough to maximize a function of the mean and variance of end of period wealth or else are too sophisticated to do so

equilibrium valuation of foreign exchange claims this article studies the equilibrium valuation of foreign exchange contingent claims within a continuous time lucas 1982 two country model exchange rates interest rates and in particular factor risk prices are all endogenously and jointly determined this guarantees the internal consistency of these price processes with a general equilibrium in the same model closed form valuation formulas are presented for currency options and currency futures options common to these formulas is that stochastic volatility and stochastic interest rates are admitted hedge ratios and other comparative statics are also provided analytically it is shown that most existing currency option models are included as special cases this article studies the equilibrium valuation and hedging of foreign exchange contingent claims the framework for analysis is the continuous time counterpart of the well known two country monetary model of lucas 1982 1 that is we use the modeling structure of lucas 1982 and adopt his representativeagent perfect pooling equilibrium notion rather than extending the lucas setup to a cox ingersoll and ross 1985a henceforth cir production economy as is done in nielsen and saa requejo 1993 for our purpose the lucas framework offers the desired simplicity and tractability we assume a stochastic structure for the international economy such that the resulting nominal interest rates and exchange rate dynamics exhibit similar empirically plausible features as the corresponding ones in nielsen and saa requejo 1993 for example the endogenous interest rates are positively correlated across national borders campbell and clarida 1987 and ilmanen 1995 as a predictor of future spot exchange rates the equilibrium forward exchange rate is biased in a direction consistent with the forward premium puzzle

the capitalization of income streams and the effects of open market policy under fixed exchange rates abstract this paper investigates the long and short run neutrality of open market monetary policy in a world of fixed exchange rates and imperfect substitutability between bonds denominated in different currencies using an illustrative portfolio balance model it shows that when the public discounts the future tax liabilities associated with the national debt and the central bank supports the exchange rate by trading non interest bearing foreign assets open market policy has a short run effect but no long run effect on the domestic price level and interest rate when the foreign exchange intervention assets earn interest that is rebated to and capitalized by the public open market policy loses even its short run efficacy the capital account offset to monetary policy is complete

accounting for forward rates in markets for foreign currency absteract forward and spot exchange rates between major currencies imply large standard deviations of both predictable returns from currency speculation and of the equilibrium price measure the intertemporal marginal rate of substitution representative agent theory with time additive preferences cannot account for either of these properties we show that the theory does considerably better along these dimensions when the representative agent s preferences exhibit habit persistence but that the theory fails to reproduce some of the other properties of the data in particular the strong autocorrelation of forward premiums since the advent of flexible exchange rates in the early 1970s a large body of statistical work has established that forward rates for major currencies are not optimal predictors of future spot rates relevant evidence is reported in studies by baillie lippens and mcmahon 1983 bekaert 1991 bilson 1981 boothe and longworth 1984 cumby 1988 cumby and obstfeld 1984 fama 1984 gregory and mccurdy 1984 hansen and hodrick 1983 hodrick and srivastava 1984 and korajczyk and viallet 1990 a more complete list of references is provided by hodrick 1987 these papers indicate that returns from speculation in forward and spot currency markets are predictable and that the predictable components vary considerably over time a number of alternative explanations have been offered for the predictable variation in foreign currency market excess returns kaminsky 1988 korajczyk 1985 and krasker 1980 suggest that infrequent extreme events may make returns appear predictable in small samples the so called peso problem lewis 1989 argues that rational learning following infrequent changes in the process governing equilibrium prices can explain part of the ex post predictability of currency returns froot and frankel 1989 and froot and thaler 1990 examine the hypothesis that market forecasts of future spot

market microstructure effects of government intervention in the foreign exchange market as asymmetric information model of the bid ask spread is developed for a foreign exchange market subject to occasional government interventions traditional tests of the unbiasedness of the forward rate as a predictor of the future spot rate are shown to be inconsistent when the rates are measured as the average of their respective bid and ask quotes larger bid ask spreads on fridays are documented reliable evidence of asymmetric bid ask spreads for all days of the week albeit more pronounced on fridays are presented the null hypothesis that the forward rate is an unbiased predictor of the future spot rate continues to be rejected the regression slope coefficients increase toward unity however indicating a less variable risk premium

the spirit of capitalism asset pricing and growth in a small open economy abstract conventional models of economic behavior have failed to account for a number of observed empirical regularities in macroeconomics and international economics this may be due to preference specifications in conventional models in this paper we consider preferences with the spirit of capitalism the desire to accumulate wealth as a way of acquiring status we analyze a number of potential effects of international catching up and the spirit of capitalism on savings growth portfolio allocation and asset pricing moreover we obtain a multi factor capital asset pricing model capm our results show that status concerns have non trivial effects on savings growth portfolio allocation asset prices and the foreign exchange risk premium

testing the portfolio balance model a multi lateral approach abstract this paper estimates outside bond demand equations from the portfolio balance model of exchange rate determination for five currencies the approach used in this paper differs from other structural studies of the portfolio balance model in two fundamental ways first while previous studies limit the portfolio choice to domestic assets relative to a composite foreign asset the model analyzed in this paper decomposes the foreign asset by currency second exploiting the cross equation correlation that arises from this decomposition provides more efficient estimates of the asset market parameters

scandinavian forward discount bias risk premia abstract in this article we investigate expectations concerning scandinavian exchange rates with the aid of a survey dataset containing market participants forecasts of the exchange rates our findings indicate that formal tests of forward discount bias do not always result in statistically significant rejections this contrasts with most of the results reported in the literature which typically demonstrate sound rejections of unbiasedness our tests of rational expectations demonstrate significant irrationality in many but not all cases alternative explanations of the rejections focus on peso problems and learning about policy changes tests of perfect substitutability indicate the significant presence of time varying risk premia for all pairs of currencies studied and almost all horizons

on equilibrium asset price processes in this article we derive necessary and sufficient conditions that must be satisfied by equilibrium asset price processes in apure exchange economy we examine a world in which asset prices follow a diffusion process asset markets are dynamically complete all investors maximize their state independent expected utility of consumption at some future date and investors have nonrandom exogenous income we show that it is necessary and suffcient that the coefficients of an equilibrium diffusion price process satisfy a partial differential equation and a boundary condition we also examine how the dynamics of asset prices are related to the shape of the representative investor s utility function through the boundary condition for example in a constant volatility economy the expected instantaneous return of the market portfolio is mean reverting if and only if the relative risk aversion of the representative investor is decreasing in terminal wealth

the rules of the game international money in historical perspective no world central bank issues a separate currency for commerce across national boundaries instead a system of national monies works more or less well in providing a medium of exchange and unit of account for current international transactions as well as a store of value and standard of deferred payment for longer term borrowing and lending how do national governments and banking institutions interact to provide international money for merchants and investors by necessity this monetary interaction changes with time place political circumstances and financial technology to better understand its historical evolution let us follow robert mundell and distinguish between a monetary system and a monetary order

a theory of the nominal term structure of interest rates a model of the nominal term structure of interest rates is developed that has a positive and stationary process for the interest rate and delivers closed form expressions for the prices of discount bonds and european options on bonds unlike the one state variable version of the cox ingersoll and ross 1985 model this model even in its one state variable version allows the term premium to change sign as a function of the state and the term to maturity and also allows for shapes of the yield curve that are observed in the u s data but that are disallowed in the cox ingersoll and ross model article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the role of inventory in delivery time competition the paper operationalizes the notion of shortage cost by considering the behavior of customers and competing firms and examines the role of inventory in response time competition we start with a single firm production control model in which customers are characterized by their preferences of price quality and delivery time the optimal production inventory policy and the optimal choice between make to order and make to stock operations are determined in simple newsboy like formulas the basic model is then extended to an n firm market game in which firms compete for orders from the aspect of early delivery one could think of this setting as an oligopoly racing market the analysis shows that competition can breed a demand for produce to stock just as other economic phenomena such as economies of scale uncertainty or seasonality can induce make to stock and that delivery time competition increases the buyer s welfare while decreasing the producer s welfare

the cost of a central bank leaning against a random walk abstract using a stochastic model we show that a central bank is expected to suffer a loss when it temporarily affects the exchange rate by sterilized intervention against a random walk we also demonstrate that the methodology used in several studies of the profitability of official central bank intervention biases their results towards finding positive profits this bias created by only observing periods where cumulative intervention sums to zero accounts for the seemingly contradictory empirical results of several intervention profitability studies

valuation of american call options on dividend paying stocks empirical tests abstract this paper examines the pricing performance of the valuation equation for american call options on stocks with known dividends and compares it with two suggested approximation methods the approximation obtained by substituting the stock price net of the present value of the escrowed dividends into the black scholes model is shown to induce spurious correlation between prediction error and 1 the standard deviation of stock return 2 the degree to which the option is in the money or out of the money 3 the probability of early exercise 4 the time to expiration of the option and 5 the dividend yield of the stock a new method of examining option market efficiency is developed and tested

on biases in the measurement of foreign exchange risk premiums abstract the hypothesis that the forward rate is an unbiased predictor of the future spot rate has been consistently rejected in recent empirical studies this paper examines several sources of measurement error and misspecification that might induce biases in such studies although previous inferences are shown to be robust to a failure to construct true returns and to omitted variable bias arising from conditional heteroskedasticity in spot rates we show that the parameters were not stable over the 1975 89 sample period estimation that allows for endogenous regime shifts in the parameters demonstrates that deviations from unbiasedness were more severe in the 1980s jel f31

lot size effects on process lead time lead time demand and safety stock abstract a comprehensive process lot sizing order point model is developed in which queuing relationships are used to endogenously model the effects of lot size on the lead time demand distribution the model is used to examine the effect of shortage penalty on the optimal lot size when the model reflects job queuing dynamics arising from the lot size decision a coordinated policy of safety stock adjustment and lead time reduction through lot size adjustment is shown be more efficient than responding to changes in the shortage penalty parameter solely through adjustment of safety stock

central bank intervention and trading rule profits in foreign exchange markets abstract moving average trading rules are utilized in both futures and spot foreign currency markets to show that significant positive profits can be earned in four of five currencies examined the results are consistent for both in sample and forward simulation tests regression results demonstrate that central bank intervention is strongly associated with the profitability of trading returns for the three major currencies dm yen and pound and partially explains returns for the sf and cd consistent with conjectures in previous studies that news concerning intervention tends to be revealed over weekends we find that moving average trading rule returns are significantly positive on fridays and mondays and not significantly different from zero in the middle of the week

a general equilibrium model of changing risk premia theory and tests keywords asset pricing theory reference sfi pb article 1989 001doi 10 1093 rfs 2 4 467 record created on 2008 03 12 modified on 2017 05 12

monetary targets real exchange rates and macroeconomic stability abstract in this paper i develop a model to determine the optimal degree of flexibility in attaining monetary targets in an economy that is affected by shocks in the labor and financial markets i then simulate the model to assess the optimal degree of monetary policy flexibility in spain a country that has adopted monetary targets rigidly since 1978 i show that the model supports the policy choice of that country i also show that the monetary authorities should attribute more importance to real exchange rate movements in choosing their policies if the spanish economy becomes more open to international trade or if the labor market becomes more flexible

a test of perfect substitutability in the foreign exchange market i motivations for the test the question of whether or not domestic bonds are perfect substitutes for foreign bonds in investors portfolios implying that the expected rates of returns must be equalized across currencies is an important one for two reasons the question is crucial first for choosing among various asset market models of exchange rate determination and second for evaluating tests of efficiency in the forward exchange market to illuminate the first motivation a brief discussion of models of exchange rate determination is necessary all asset market models share the assumption that there are no significant transactions costs capital controls or other impediments to the international flow of capital thus actual portfolios adjust instantaneously to equal desired portfolios this implies for example covered interest parity the domestic interest rate should differ from the foreign interest rate by an amount exactly equal to the forward discount rate perfect substitutability between domestic and foreign bonds is the stronger assumption that market participants are indifferent as to the currency composition of their portfolio it implies uncovered interest parity the domestic interest rate must differ from the foreign interest rate by an amount exactly equal to the expected rate of depreciation the perfect substitutability assumption is far from standard in fact exchange rate models within the asset market view can be classified into those that belong to the monetary approach defined by the assumption of perfect substitutability and those that belong to the portfolio balance approach defined by the assumption of imperfect substitutability in the portfolio balance approach investors hold well defined proportions of their wealth in the form of each country s assets with the proportions depending on the expected rates of return as in equation 1

stabilization of the canadian dollar 1975 1986 the authors extend their earlier work on canadian intervention in the foreign exchange market in three ways 1 use daily data from 1975 to 1986 to see if results for the 1950s hold during the current float 2 extend their original model to include both stock and flow versions of the foreign exchange market and 3 compare estimates using published canadian holdings of u s dollars to estimates using actual intervention which is confidential canadian authorities continue to lean against the wind but their lagged response is longer and more variable published data effectively reflect intervention

integrated management of inventory and production systems based on floating decoupling point and real time information a simulation based analysis abstract globalisation has transformed market conditions reducing lead times and increasing both the degree of product differentiation and price competition to cope with this issue new hybrid order fulfilment strategies have emerged which integrate the make to stock mts and build to order bto strategies and whose aim is to simultaneously improve opposite objectives such as the stock level and the lead time furthermore companies face frequent challenges of sharing updated information and avoiding the lack of coordination between the different company subsystems this work focuses on relatively recent fulfilment strategies based on the floating decoupling point fdp which uses real time information to operate the main objectives of this work are the study of the influence of different sources of real time information about the available products and select the most suitable configuration of these systems regarding the inventory control policy and the source of real time information the stochastic nature of the process makes simulation an appropriate tool to achieve valuable results the simulation studies have been carried out following a full factorial design of experiments doe experimental results show that the strategies based on the fdp are very sensitive to the real time information these systems achieve the best performance when the inventory control policy uses simultaneously demand forecasting and real time information of available products corresponding to the work in process wip and finished goods inventory fgi in contrast system performance deteriorates significantly when real time information of available products in the wip has not been taken into account

on the effects of sterilized intervention an analysis of weekly data abstract as the recent empirical studies surveyed here illustrate it is very difficult to demonstrate that the exchange rate risk premium depends through a portfolio balance channel on the currency composition of outside assets the existence of a portfolio balance effect is a necessary condition for sterilized intervention to be a genuinely independent tool of monetary policy this paper studies u s canadian data and attempts to improve on earlier studies by using higher frequency weekly data and by implementing an appropriate instrumental variables technique 2s2sls however we still fail to detect evidence of a portfolio balance effect

an exact bond option formula this paper derives a closed form solution for european options on pure discount bonds assuming a mean reverting gaussian interest rate model as in vasicek 8 the formula is extended to european options on discount bond portfolios

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

fed intervention dollar appreciation and systematic risk abstract in a four factor asset pricing model estimated on daily data fed intervention significantly affects betas of surprises in the market return expected inflation rate yield curve and corporate bond risk premium fed foreign currency sales cause economically and statistically significant increases in the systematic risk premium in appreciation and thus in the dollar s expected appreciation rate the direction the fed desires and consistent with the signaling but not the portfolio balance channel intervention s effects on actual appreciation are less reliable they depend on unpredictable risk factor realizations even successful intervention to strengthen the dollar may be costly by increasing the dollar s systematic risk intervention reduces the attractiveness of u s relative to foreign investments further uncertainty about future fed interventions may induce resource misallocation ceteris paribus investors find it harder to estimate risk adjusted discount rates and forecast the home currency value of cash flows

positive prices in capm some equilibrium prices in capm may be negative because of nonmonotonicity of preferences we identify several sets of sufficient conditions for prices to be positive the central conditions impose bounds on the investors risk aversion these bounds do not need to hold globally but only in a relevant range of portfolios or combinations of mean and standard deviation the relevant range is specified on the basis of exogenous parameters and variables and it must contain any endogenously determined equilibrium the bounds on risk aversion ensure that the preferences for assets are sufficiently well behaved within the relevant range the two period mean variance capital asset pricing model capm has the peculiar property that preferences may not be monotone the expected return to an investor s portfolio increases as he holds more and more shares of the assets but so does the variance of return it may be that at some point the additional expected return gained from adding more shares to the portfolio is not sufficient to compensate for the increase in variance if so then the induced preferences for assets are not monotone nonmonotonicity of preferences in the mean variance model is analyzed in nielsen 1987 because portfolio preferences are not necessarily monotone equilibrium asset prices may be negative or zero in fact it is possible that the value of the market portfolio of risky assets is negative this is demonstrated in nielsen 1985 1990a and in two examples in the present paper when the capm is used as a model of the prices of stocks which in reality have limited liability it is of course disturbing that it may predict negative prices it can be seen as a symptom of the fact that mean variance preferences are not always a good approximation to reality this paper analyzes various conditions on the exogenous parameters which ensure that the preferences are sufficiently realistic to yield positive prices the exogenous parameters in question are the expectations variances and covariances of total returns the initial allocations of the assets endowments and the investors utility functions for mean and variance of return the analysis applies to the classical version of the capm with a riskless asset as developed by sharpe 1964 lintner 1965 and mossin 1966 as well as the capm with risky assets only which was introduced by black 1972 and has been much used in empirical work under the name the zero beta or two factor capm

do demand curves for currencies slope down evidence from the msci global index change traditional portfolio balance theory derives a downward sloping currency demand function from limited international asset substitutability historically this theory enjoyed little empirical support we provide direct evidence by examining the exchange rate effect of a major redefinition of the msci international equity index in 2001 and 2002 the index changes implied large changes in the representation of different countries in the msci world index and therefore produced strong exogenous equity flows by index funds our event study shows a strong announcement effect in which countries with a decreasing equity representation vis a vis the u s depreciated against the dollar

product line competition customization vs proliferation we study a market with customers who have heterogeneous preferences for product attributes we consider two types of firms that compete on price and product variety a traditional firm which chooses a limited set of product configurations and a customizing firm which can produce any configuration to order the traditional firm carries product inventories and experiences a lead time delay the customizing firm does not carry inventory and its customers incur waiting costs until they receive their orders we assume that the customizing firm has limited capacity in the short run e g when it does not outsource production to high volume manufacturers we derive the equilibrium for a duopoly competition between the customizing firm and the traditional firm study its characteristics and compare it to a monopoly we characterize conditions that favor customization under competition we find that the customizing firm s profit is not monotone in the market size and its ease of customization similarly a

are forign exchange intervention and monetary policy related and does it really matter the relationship between foreign exchange intervention and monetary policy underlies the question of whether sterilized interventions can affect the exchange rate in this article the author examines this relationship using data on u s foreign exchange interventions from 1985 to 1990 recently made publicly available she examines whether interventions could be viewed as signaling changes in future monetary policy variables the author also considers whether changes in monetary policy may induce interventions in an effort by central bankers to lean against the wind of exchange rate movements interestingly she finds evidence both that interventions help predict monetary policy variables and that monetary variables help predict interventions copyright 1995 by university of chicago press

pricing interest rate options in a two factor cox ingersoll ross model of the term structure solutions are presented for prices on interest rate options in a two factor version of the cox ingersoll ross model of the term structure specific solutions are developed for caps on floating interest rates and for european options on discount bonds coupon bonds coupon bond futures and euro dollar futures the solutions for the options are expressed as multivariate integrals and we show how to reduce the calculations to univariate numerical integrations which can be calculated very quickly the two factor model provides more flexibility in fitting observed term structures and the fixed parameters of the model can be set to capture the variability of the term structure over time article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

real business cycles in this paper we demonstrate how certain very ordinary economic principles lead maximizing individuals to choose consumption production plans that display many of the characteristics commonly associated with business cycles our explanation is entirely consistent with i rational expectations ii complete current information iii stable preferences iv no technological change v no long lived commodities vi no frictions or adjustment costs vii no government viii no money and ix no serial dependence in the stochastic elements of the environment we also provide a completely worked out example of the type of artificial economy we have in mind the time series properties of the example exhibit some major features of observed business cycles although this type of model may not be capable of explaining all of the regularities in actual business cycles we believe that it provides a useful well defined benchmark for assessing the relative importance of factors e g monetary disturbances

is it signalling exchange intervention and the dollar deutschemark rate abstract the portfolio balance channel for sterilised intervention is tested by examining the effects of changes in relative asset supplies on the dollar deutschemark rate during the 1980s in contrast to previous studies we control for any signalling effects of central bank intervention and find a weak but statistically significant portfolio balance influence on the exchange rate

risk aversion market liquidity and price efficiency a model of a noncompetitive speculative market is analyzed in which privately informed traders and market makers are risk averse market liquidity is found to be nonmonotonic in the number of informed traders their degree of risk aversion and the precision of their information it is also shown that increased liquidity trading leads to reduced price efficiency and that under endogenous information acquisition market liquidity may also be nonmonotonic in the variance of liquidity trades article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the bitcoin options market a first look at pricing and risk this paper offers the first ever look at bitcoin options by investigating the wedge between optimum bitcoin option prices based on classical option valuation models black scholes merton and the he