the pricing of currency risk in japan abstract previous work on the pricing of exchange rate risk has primarily focused on us firms and surprisingly found stock returns were not significantly affected by exchange rate fluctuations in this paper we conduct an in depth investigation that examines whether exchange rate risk is priced in the equity market of japan using an intertemporal asset pricing testing procedure that allows risk premia to change through time in response to changes in macroeconomic conditions our multiperiod asset pricing tests show that the foreign exchange rate risk premium is a significant component of japanese stock returns specifically the results suggest that currency risk exposure commands a significant risk premium for multinationals and high exporting japanese firms the currency risk factor is found to be less influential in explaining the behavior of average returns for low exporting and domestic firms however it is shown to exhibit large return volatility that is likely to be perceived by investors who wish to control portfolio risk as an important underlying source of risk furthermore japanese stock returns are found to be related to the relative distress and size factors above and beyond the covariation explained by the currency risk factor

the role of benefit transfer in ecosystem service valuation the demand for timely monetary estimates of the economic value of nonmarket ecosystem goods and services has steadily increased over the last few decades this article describes the use of benefit transfer to generate monetary value estimates of ecosystem services specifically the article provides guidance for conducting such benefit transfers and summarizes advancements in benefit transfer methods databases and analysis tools designed to facilitate its application

approximate factor structures interpretations and implications for empirical tests this paper provides some new insights about approximate factor structures as defined by chamberlain and rothschild 2 and their implications for empirical tests first we show that any economy that satisfies an approximate factor structure can be transformed in a manner that does not alter the characteristics of investor portfolios into an economy that satisfies an exact factor structure as defined by ross 9 second we show that principal components analysis represents just one of many methods of forming groups of well diversified portfolios with no idiosyncratic risk in large samples correct factor loadings will be obtained by regressing security returns on any group of these portfolios our interpretations of the chamberlain and rothschild results also provide additional insights into the testability of the arbitrage pricing theory we show that securities cannot be repackaged to hide factors in the manner suggested by shanken 10 without the variance of some of the repackaged securities approaching infinity in large economies

study on benefit transfer in an international setting how to improve welfare estimates in the case of the countries income heterogeneity abstract the paper aims at investigating the validity of benefit transfer in the case of transfers between countries highly heterogeneous in income and demonstrates relative performance of different benefit transfer methods under these conditions lake water quality valuation studies were conducted in two countries in transition poland and the czech republic they reflected two earlier studies carried out in norway we examine how income elasticity of wtp varies with the levels of income and find support for applying the income elasticity of 1 to adjust transferred welfare estimates in case of high differences in income between countries in addition we show that using site specific measures of income outperforms transfers based on gpd per capita the accuracy of benefit transfer is compared using equivalence testing following the tosc two one sided convolutions test a new more informative way of reporting equivalence is proposed based on computing minimum tolerance level rather than specifying it a priori

cross context benefit transfer a bayesian search for information pools commodity equivalence and population similarity are two widely accepted paradigms for the valid transfer of welfare estimates across resource valuation contexts we argue that strict adherence to these rules may leave relevant information untapped and propose a bayesian model search algorithm that examines the probabilities with which two or more sub sets of meta data each corresponding to a different combination of commodity and population share common value distributions using a large meta data set of willingness to pay for diverse outdoor activities across various regions of the united states as an example we find strong potential for contexts that would not traditionally be considered as transfer candidates to form information pools exploiting these commonalities leads to substantial efficiency gains for benefit estimates

multivariate tests of the zero beta capm abstract a cross sectional regression test csrt of the capm is developed and its connection to the hotelling t2 test of multivariate statistical analysis is explored algebraic relations between the csrt the likehood ratio test and the langrange multiplier test are derived and a useful small sample bound on the distribution function of the csrt is obtained an application of the csrt suggests that the crsp equally weighted index is inefficient but that the inefficiency is not explained by a firm size effect from february to december

yes in my backyard spatial differences in the valuation of forest services and local co benefits for carbon markets in mexico forests provide many and large benefits including cost efficient climate change mitigation however international carbon markets have not stimulated the demand for forestry offsets domestic market mechanisms are emerging in many countries and forests could be highly valued through these policies as most of the benefits produced by forests are enjoyed locally here a choice experiment explores drivers of valuation and willingness to pay for forest carbon services in voluntary markets in mexico by comparing the valuation of citizens from four regions to test geographical preference for projects n 645 findings from multinomial logit models show valuation of forest carbon services is transferable and citizens would pay more for offsets from projects closer to their homes proximate forests provide a range of co benefits to local users including environmental services and opportunities for recreation factors related to valuation include sense of responsibility previous knowledge of carbon emissions previous visits to the sites regional identification and the valuation of local environmental services e g improvements in local air quality knowledge of spatial heterogeneity in valuation of the use of forest services can help to design market based instruments by identifying highly valued areas for environmental services programs and carbon markets

foreign exchange risk pricing and equity market segmentation in africa abstract this work is the first to investigate simultaneously the occurrence of unconditional currency risk pricing and equity market segmentation in africa s major stock markets the multi factor asset pricing theory provides the theoretical framework for our model we find strong evidence suggesting that africa s equity markets are partially segmented however we find insufficient evidence to reject the hypothesis that foreign exchange risk is not unconditionally priced in africa s stock markets this result is robust to alternative foreign exchange rate adjusted return measures these findings suggest that international investors can diversify into africa s equity markets without worrying about unconditional risks associated with foreign exchange rate fluctuations

some results in the theory of arbitrage pricing this paper derives a stronger version of huberman s recent preference free pricing theorem this pricing result relates the expected return on an asset to its factor responses and the covariance structure of the residuals from a linear factor model it must characterize any infinite asset economy in which no arbitrage opportunities are present whether or not the factor model has uncorrelated residuals this result provides the intuition for the role of residual risk in the pricing model and eliminates some classes of arbitrage opportunities still present under huberman s bound some applications to empirical tests and performance measurement are also discussed the arbitrage pricing theory is one of several financial pricing models which attempts to explain the cross sectional variation in expected returns on assets in certain respects it is similar to the capital asset pricing model but there are both substantive and subtle differences one of the key advantages of the apt is that it derives a simple linear pricing relation approximating that in the capm without some of the latter s objectionable assumptions perhaps the key disadvantage of the apt is that it provides no clues as to what might be important factors nor as to how to interpret the factor premiums which appear in the pricing equation this paper serves several purposes after reviewing the linear factor model formulation in section i it derives in section ii a stronger version of huberman s 9 recent preference free pricing theorem this pricing result relates the expected return on an asset to its factor responses and the covariance structure of the residuals this relation must characterize any infinite asset economy in which no arbitrage opportunities are present whether or not a linear factor model with uncorrelated residuals is the appropriate returns generating mechanism section iii specializes this result by eliminating the effects of residual covariances and compares the results here to those of previous apt models when applied to the standard linear factor model with uncorrelated residuals this new pricing bound eliminates arbitrage opportunities which remain under huberman s bound this result also provides for the first time the intuition for the role of residual risk in the approximate pricing relation section v provides an interpretation of the factor premiums and gives a valid asset pricing model interpretation to the apt which is consistent with merton s

the impact of the euro on risk exposure of the world s major banking industries abstract in this paper we examine if the introduction of the euro impacted the risk exposures risk premiums and hence the cost of equity of the banking industry of 11 eurozone countries five non eurozone european countries and three non european countries using a multi factor asset pricing model that allows time variation in the risk exposures we find a statistically significant and economically large decline in the cost of equity of the banking industry across the three groups of countries following the introduction of the euro though we find an increase in the market and currency exposures after the euro consistent with increased competition among banks the fall in the cost of equity arises from an economically large decline in the currency premium as expected the eurozone banking industry experienced the largest decrease our results are inconsistent with the argument that increased banking competition arising from the legislative changes accompanying the introduction of the euro would result in an increase in the overall risk premium of the banking sector

valuing non market valuation studies using meta analysis a demonstration using estimates of willingness to pay for water quality improvements abstract a common refrain in the environmental economics literature is the need for additional estimates of environmental and natural resource values yet economists have paid little formal attention to the value of information voi provided by non market valuation studies and whether this value justifies the cost we develop a novel voi model to quantify the benefit of non market valuation studies conducted to expand the body of value estimates in the literature and hence available for use in policy analyses the approach is designed to capitalize on information available through preexisting valuation meta data and can be applied to any valuation meta regression that is suitable to inform policy decisions we illustrate the approach for a prototype nationwide water quality improvement policy in the united states assuming that policy benefits are evaluated using benefit transfer based on a meta regression model of willingness to pay our results suggest that when evaluating nationwide water quality regulations with uncertain net benefits the voi from a typical water quality valuation study will almost certainly exceed the cost we also examine how voi varies with study design features and information gaps in the literature thereby illustrating how the approach can inform research priorities

stable factors in security returns identification using cross validation recent papers in financial research focus on identifying a stable factor structure for security returns the likelihood ratio test typically is used to determine the number of factors from exploratory factor analysis models in this article we consider the use of cross validation to identify a stable factor structure in security returns when applied to actual stock return data cross validation identifies a smaller number of stable factors than the likelihood ratio test in groups of 30 60 randomly selected securities cross validation suggests one dominant factor whereas the likelihood ratio test identifies from four to six factors furthermore when groups are designed to highlight industry or size effects the discovery of more than one dominant factor is problematic even if there are multiple economic factors generating stock returns they may be difficult to disentangle if the underlying factors tend to be correlated

joint estimation of factor sensitivities and risk premia for the arbitrage pricing theory the apt is represented as a multivariate regression model with across equations restrictions both observed and unobserved latent macroeconomic factors are included thus generalizing and unifying two previous strands of literature large portfolios representing unobserved factors are treated as endogenous and nonlinear 3sls estimates are shown to differ sharply from estimates that ignore this endogeneity using monthly stock returns and six factors we cannot reject january effects the following results are invariant with respect to the inclusioh of january effects we reject the capm in favor of the apt however we cannot reject the apt restrictions on the linear factor model most empirical work on the arbitrage pricing theory apt has followed a factor analysis approach papers by burmeister and wall 5 chan chen and hsieh 7 chen roll and ross 9 and mcelroy and burmeister 22 represent some exceptions in which measured macroeconomic factors such as unexpected inflation are used to explain asset prices in an apt or multifactor model both the factor analysis approach and the measured macroeconomic factor approach have their merits the primary advantages of using measured economic factors are 1 the factors and their apt prices in principle can be given economic interpretations while with a factor analysis approach it is unknown what factors are being priced and 2 rather than using only asset prices to explain asset prices measured macroeconomic factors introduce additional information linking asset price behavior to macroeconomic events in this exploratory paper we investigate an apt or multifactor model in which there are both measured macroeconomic factors and other nonobserved factors we impose the nonlinear across equation apt pricing restrictions exactly by using three multivariate estimation methods iterated nonlinear weighted least squares itnlwls iterated nonlinear seemingly unrelated regressions itnlsur and iterated nonlinear three stage least squares itnl3sls see gallant 13 and discussion below the appropriate estimation method depends upon alternative assumptions about the error terms nonsystematic risk in the asset returns equations the primary objective of this work is to investigate whether or not certain apt tests are sensitive to these alternative error assumptions the details of which are given in the text our focus is on the interrelation

reducing barriers in future benefit transfers needed improvements in primary study design and reporting abstract original research provides many social benefits including additions to our stock of knowledge benefit transfer is a formal process whereby our stock of knowledge rather than original research is used to inform decisions any shortcoming in this stock directly affects our ability to conduct valid and reliable benefit transfers this paper discusses three general criteria that are necessary for valid benefit transfers and how original research designs and reporting of results unnecessarily constrain the potential of benefit transfers we make several suggestions regarding how original research through improved design and reporting might increase the validity and reliability of benefit transfers we also recommend that repositories for original research surveys and data be developed to insure long term availability of study information

context sensitive benefit transfer using stated choice models specification and convergent validity for policy analysis benefit transfer has been an important practical policy tool appealing to government agencies especially when time or budget is constrained however the literature fails to support convergent validity of benefit transfer using the stated preference method this empirical study conducts four convergent validity assessments of benefit transfer using the choice modeling method and data from rhode island and massachusetts regarding coastal land management the comparisons evaluate how individual characteristics improve benefit transfer and yield insights relevant to research specifications to produce studies adaptable for transfer applications empirical tests show benefit transfer using choice modeling may be acceptable and even empirically valid depending on the policy objectives and the context

signals or noise explaining the variation in recreation benefit estimates this paper uses meta analysis to summarize the benefit estimates derived from travel cost recreation demand models after reviewing approximately 200 published and unpublished studies prepared from 1970 to 1986 77 were found to report either consumer surplus estimates or sufficient information to derive them using these estimates of the consumer surplus per unit of use from each study it was possible to evaluate the influence of variables describing the site characteristics the activities undertaken at each site the behavioral assumptions and the specification decisions the findings provide clear support for using econometric methods to summarize results from diverse empirical studies they highlight the important research issues in model development and offer a consistency check to the procedures used in benefit transfer analyses for policy evaluations

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 deficits inflation risk and asset prices abstract kitchen examines how us budget deficit news affects asset prices and concludes that news of lower deficits reduces the inflation risk premium this paper constructs narrative histories of several deficit reduction laws to identify when markets learned that deficits would fall it then estimates a multi factor model that allows the inflation risk premium to vary following news of deficit reductions the results indicate that there is a large and statistically significant drop in the factor price associated with inflation following news that budget deficits would decline

meta analysis and benefit transfer for resource valuation addressing classical challenges with bayesian modeling abstract the use of meta regression models based on existing studies to estimate the value of resources at a new policy site has become a popular alternative to collecting original data in recent years there are two prevalent dilemmas associated with classical meta regression models the difference in the available set of regressors across source studies and the treatment of methodological explanatory variables in the construction of benefit transfer functions in this study we illustrate how these issues can be addressed efficiently within a bayesian meta regression framework we find that the bayesian model in contrast to its classical counterpart can estimate a relatively large set of parameters including indicators of unobserved study heterogeneity with reasonable accuracy even when the underlying meta sample is small the incorporation of information from regressor deficient source data in the specification of bayesian priors leads to a better model fit and tighter welfare estimates for benefit transfer in our application of freshwater angling

multi beta capm or equilibrium apt a reply in their influential empirical paper roll and ross 11 state we think that in many discussions of the capm scholars were actually thinking of the apt and of process 1 the factor model with just a single factor in light of recent developments in the asset pricing literature i think it can now meaningfully be suggested that in many discussions of the apt scholars may have actually been thinking of a multi beta interpretation of the capm indeed much can be said in support of each of these perspectives for a single paradigm is emerging which integrates fundamental aspects of both the capm and the apt broadly speaking the equilibrium capm paradigm emphasizes the role of covariance between asset returns and an endogenous preference based aggregate while the arbitrage apt paradigm focuses on the covariance between asset returns and factors in the return generating process the emerging equilibrium factor paradigm encompasses each of these relations as well as a third covariance between the factors and the equilibrium aggregate my thesis in shanken 17 was that i the arbitrage paradigm has not produced a refutable hypothesis and that ii recognition of the role of the factor aggregate covariance relation appears to be essential if positive economic significance is to be attributed to asset pricing empirical work dybvig and ross d r attempt to resolve the empirical indeterminacy of the arbitrage paradigm by appealing to the condition that residual variance should not be too large i explain in section ii that this condition is inherently ambiguous from an empirical perspective and does not permit the formulation of a precise testable implication the equilibrium factor models which d r discuss do yield testable restrictions on parameters in the return generating process however consistent with my second point above these restrictions involve joint hypotheses that cannot be verified without observing the entire universe of assets thus contrary to their claim considerations similar to those in roll s 10 critique are indeed relevant to the testing of these models this and other similarities between the equilibrium apt and the capm are discussed in section iii i begin by clarifying some basic terminology

integration or segmentation of the canadian stock market evidence based on the apt the domestic and international arbitrage pricing theories are modified to encom pass the hypotheses that the canadian and global north american equity markets are com pletely or partly integrated segmented the exchange rate determination literature is used to identify potentially priced binational factors and the sensitivities and factor prices are es timated using non linear sur the two equity markets are only partly integrated segmented canadian stock returns are influenced by the pure domestic components of the term structure and lagged industrial production and by the pure international components of the differential

the effect of the fed s large scale asset purchases on inflationary expectations in 2008 u s demand collapsed and triggered deflation the fed employed large scale asset purchases lsap to fight deflation how did news of lsap affect inflationary expectations if investors believed that lsap would raise inflation they would sell assets exposed to inflation and purchase inflation hedges this would lower the prices of assets that are harmed by inflation and raise the prices of assets that benefit from inflation examining the relationship between asset price changes and inflation sensitivities can thus shed light on how financial markets process lsap news results across 60 assets indicate that initially lsap announcements lowered expected inflation only as inflation approached its target did news of lsap raise expected inflation

prioritizing payment for environmental services using nonmarket benefits and costs for optimal selection abstract this article provides a practical applied analysis of optimal targeting in agricultural land preservation comparing the performance of four alternative targeting strategies nonmarket benefit data and hedonic cost estimates are used for parcels in sussex county delaware the results show that branch and bound optimization opt does not significantly outperform the much simpler benefit cost ratio targeting bcrt however significant losses of potential net benefits occur when applied methods overlook either benefits or costs in this application benefit targeting bt and cost targeting ct significantly underperform both opt and bcrt with bt underperforming all other methods

enhanced geospatial validity for meta analysis and environmental benefit transfer an application to water quality improvements meta regression models are commonly used within benefit transfer to estimate willingness to pay wtp for environmental quality improvements theory suggests that these estimates should be sensitive to geospatial factors including resource scale market extent and the availability of substitutes and complements valuation meta regression models addressing the quantity of non market commodities sometimes incorporate spatial variables that proxy for a subset of these effects however meta analyses of wtp for environmental quality generally omit geospatial factors such as these leading to benefit transfers that are invariant to these factors this paper reports on a meta regression model for water quality benefit transfer that incorporates spatially explicit factors predicted by theory to influence wtp the metadata are drawn from stated preference studies that estimate per household wtp for water quality changes in united states water bodies and combine primary study information with extensive geospatial data from external sources results find that geospatial variables are associated with significant wtp variations as predicted by theory and that inclusion of these variables reduces transfer errors

perceptions versus objective measures of environmental quality in combined revealed and stated preference models of environmental valuation abstract this study examines perceptions and objective attribute measures in discrete choice models of recreation site choice behavior these forms of attribute measurement are examined in individual and combined revealed preference stated preference models our results suggest that the model based on perceptions slightly outperforms the models based on objective attribute measures however issues such as the definition of the choice set and the measurement of welfare present significant challenges when using perceptions data

a critical reexamination of the empirical evidence on the arbitrage pricing theory this paper demonstrates that the roll and ross rr and other previously published tests of the apt are subject to several basic limitations there is a general nonequivalence of factor analyzing small groups of securities and factor analyzing a group of securities sufficiently large for the apt model to hold it is found that as one increases the number of securities the number of factors determined increases this increase in the number of factors with larger groups of securities cannot readily be explained by a distinction between priced and nonpriced risk factors as it is impermissible to carry out tests on whether a given risk factor is priced using factor analytic procedures the apt model as exposited by ross 17 18 and extended by huberman 9 has provided the basis of an extensive literature as for example brown and weinstein 1 chen 3 hughes 10 ingersoll 11 jobson 12 reinganum 15 roll and ross rr 16 and shanken 17 to mention but a few it has also been treated in a more general context by chamberlain and rothschild 2 our purpose here is not to comment on this collection of papers many of which are unpublished but to reexamine the evidence presented by rr and point out major pitfalls involved in the empirical methodology employed by them and others who have followed their lead rr claim that on theoretical and more importantly on empirical grounds arbitrage pricing theory apt is an attractive alternative to the capital asset pricing model capm the apt it is argued requires less stringent and presumably more plausible assumptions is more readily testable since it does not require the measurement of the market portfolio and may be better able to explain the anomalies found in the application of the capm to asset returns the acceptability of the apt like that of the capm or any other theory ultimately depends on its ability to explain the relevant empirical evidence our subsequent discussion will show that many of the prqblems associated with the capm are also present in the apt context and that its ability to explain the relevant empirical evidence is not markedly superior moreover it raises questions not only about the rr and related empirical investigations of the apt but also about the testability of that theory in the present state of the art a major part of the problem results from the necessity to break down the universe being analyzed through the apt model this is forced upon the investigator by the fact

on the robustness of the roll and ross arbitrage pricing theory roll and ross 6 have written what has quickly become the classic article on testing the arbitrage pricing theory apt originally proposed by ross 8 they presented methods both for estimating the return generating process and for testing whether particular elements factors in the return generating process were priced in equilibrium they found that more factors are priced than one would expect to be priced if the capital asset pricing model capm were held

calibrating benefit function transfer to assess the conservation reserve program benefit transfer offers an inexpensive alternative to conducting an original study to determine economic value unfortunately benefit transfers can also result in biased welfare estimates in this paper we suggest a method of calibrating the benefit transfer to reduce this bias an empirical example to determine the benefits of the conservation reserve program on water based recreation illustrates the potentially large biases that can result if the transfer is not calibrated

a new approach to testing asset pricing models the bilinear paradigm we propose a new approach to estimating and testing asset pricing models in the context of a bilinear paradigm introduced by kruskal 18 this approach is both simple and at the same time quite general as an illustration we apply it to the special case of the arbitrage pricing model where the number of factors is pre specified the data appear to be generally in conflict with a five or seven factor representation of the model used by roll and ross 30 when we consider the number of replications of our test and the large number of observations on which it is performed the frequency with which we reject the three factor apm does not lead us to conclude that this model is unrepresentative of security returns further the rejection of the five and seven factor versions is to be expected if the three factor version is correct the paradigm gives insight into the appropriate specification of the model and suggests that there may be a small number of economy wide factors that affect security returns tests of asset pricing models on the basis of observed stock market data have represented a staple of the financial economics literature of the past twenty years the early work is reviewed in the famous paper by jensen 12 and papers by fama and macbeth 6 rosenberg and marathe 31 and roll and ross 30 there has been a great deal of confusion regarding what testable propositions are implied by these models see discussion in roll 29 in this paper we show that at a minimum all asset pricing models yet proposed imply a simple easily testable hypothesis which we refer to as the bilinear hypothesis while specific models may imply further testable propositions if the bilinear hypothesis is rejected the model is inconsistent with the data and should be rejected our test exploits the fact that the economic content of any equilibrium asset pricing model can be expressed in the form of a potentially refutable constraint on the set of parameters of the process generating security returns this constraint specifies that given a set of security specific characteristics there exists a linear relationship common across securities relating expected returns to these

factor pricing in a finite economy abstract prior theoretical derivations of the arbitrage pricing theory apt bound an aggregate measure of the deviation of mean asset returns from that predicted by a linear pricing equation it is conceivable given this bound that some assets might be badly mispriced by the model in this paper a more intuitive derivation of the factor pricing equation is presented which describes the deviation on an asset by asset basis the deviation is shown to be small for assets in a realistic finite economy and is arbitrarily close to zero for those assets with arbitrarily small size relative to aggregate wealth it follows that the linear pricing equation provides a good approximation for the mean returns of all traded assets

exchange rate regimes and the price of exchange rate risk abstract we investigate the price of exchange rate risk in the us stock market across exchange rate regimes we find that exchange rate risk is a priced factor and that the sign of the price of risk is affected by the exchange rate regime the results have important implications for risk management policies

analysis of hospital production an output index approach in this study a new model of hospital costs is developed and estimated utilizing an output index this theoretically appropriate output index is constructed to accurately reflect the differentiated nature of hospital care by employing both patient and diagnosis characteristics in its construction using this output index we estimate a long run translog cost function with a dataset of 321 california hospitals for the year 2003 we find evidence of economies of scope across specialties within primary care and evidence of scope diseconomies within secondary and tertiary care point estimates of scale economies using the output index indicate that minimum efficient scale is reached at a larger level than when using less refined output measurement techniques that have often been used in similar studies our estimates indicate the importance of accounting for specialty specific scope economies when analyzing the production properties of firms producing differentiated products

estimation of unobserved expected monthly inflation using kalman filtering hamilton developed a technique for estimating financial market expectations of inflation based on the observed time series properties of interest rates and inflation the technique is based on a state space representation derived from an underlying vector autoregressive process of the expected real interest rate and the expected inflation rate on lagged expectations and lagged values of the observed treasury bill rate and the actual inflation rate this article extends this work in two ways first we use monthly data since the quarterly data used by hamilton may obscure many interesting movements especially for determining the role of inflationary expectations in stock price movements and this is one of our primary interests second we employ an alternative method developed by burmeister and wall for estimating the parameters of the model and this method leads to a different identification proof both approaches share the use of the kalman filter to estimate the unobserved variables in this case e

experimental design in tests of linear factor models for various reasons cross sectional tests of linear factor models have employed the returns on portfolios of assets as opposed to individual securities there is a good deal of flexibility in how one goes about choosing which portfolios to examine the experimental design this article points out that some choices can lead to collinearity among factor loadings with potentially harmful consequences for power a diagnostic procedure for detecting collinearity is discussed and several illustrations of the procedure on existing tests of linear factor models are used to illustrate their value to the researcher finally a series of experiments is carried out to validate the diagnostics and to confirm their assessment of the experimental design in the models examined

environmental value transfer state of the art and future prospects abstract the main objectives of the paper are to 1 give an overview of the state of the art of environmental value transfer 2 discuss its prospects and potential role in cba as a decision support tool and 3 provide further guidelines for proper use and application environmental value or benefit transfer is a technique in which the results of studies on monetary environmental valuation are applied to new policy contexts the technique is controversial not least because of academic and political reservations over the usefulness and technical feasibility of economic valuation tools to demonstrate the importance of environmental values in project or programme appraisals testing of environmental value transfer so far has been unable to validate the practice taking into account the conditions set out in the literature for valid and reliable value transfer most transfers appear to result in substantial transfer errors this paper discusses why and addresses the question of which factors may have been overlooked it is argued that the problem is much more fundamental than previously acknowledged strict guidelines in terms of quantitative adjustment mechanisms to valid value transfer are meaningless if the more fundamental issue of differences in the very nature of the values elicited is not addressed at the same time

are sovereign debt secondary market returns sensitive to macroeconomic fundamentals evidence from the contemporary and interwar markets abstract the insensitivity of sovereign loan secondary market returns to macroeconomic fundamentals has been attributed to market illiquidity and the absence of publicly reported transactional prices during the 1920s and 1930s sovereign bonds were traded in an active market and weekly transactional prices were publicly available this paper shows that price changes from both eras are insensitive to unexpected changes in key external and country specific macroeconomic aggregates but that returns are moved by individual agent announcements that presage changes in future lending the results which contrast with studies of us equities indicate that the sovereignty of the issuer matters more than the type of debt contract

some empirical tests of the theory of arbitrage pricing we estimate the parameters of ross s arbitrage pricing theory apt using daily return data during the 1963 78 period we compare the evidence on the apt and the capital asset pricing model capm as implemented by market indices and find that the apt performs well the theory is further supported in that estimated expected returns depend on estimated factor loadings and variables such as own variance and firm size do not contribute additional explanatory power to that of the factor loadings

a simple approach to arbitrage pricing theory the following sections are included introductionarbitrage pricingdiscussionreferencesdiscussion notes on the arbitrage pricing theorypure arbitrage pricing theoryapproximate arbitrage and the aptapproximate factor modelsthe competitive equilibrium version of the aptconclusionnotereferences this abstract was borrowed from another version of this item

a unified beta pricing theory abstract this paper derives ross s mutual fund separation theory and a new equilibrium version of ross s arbitrage pricing theory as special cases of a general theory the paper also reveals that the two theories are identical in their predictions of asset prices and portfolio returns the capital asset pricing model a restricted case of the mutual fund separation theory receives special treatment

the effect of common sources of regression error on benefit estimates discussions of the sources of error in recreation demand analysis are common in the existing literature the most traditional line of thought e g gum and martin considers the error component in predicting the individual s recreation behavior to arise from unmeasured socioeconomic factors others e g hanemann attribute at least some of this error to fundamental randomness in human behavior applied statisticians e g hiett and worrall on the other hand suggest that recall of annual number of recreational trips i e the quantity demanded is subject to substantial error still others e g brown et al have argued that recall of explanatory variables such as travel expenses contains error despite the discussion of potential error sources there is no work which relates the sources of error in the demand relationship with benefit measurement 1 of practical importance in recreational demand estimation is whether error assumptions have an influence on welfare measures since it is for public policy decision purposes that recreational demand estimation is usually undertaken will the estimated consumer surplus derived from demand analysis be independent of the assumed source of the error in the regression the purpose of this paper is to explore how the assumptions about sources of error influence estimates of recreation benefits a discussion of the various sources of error in de

arbitrage pricing theory as a restricted nonlinear multivariate regression model iterated nonlinear seemingly unrelated regression estimates by replacing the unknown random factors of factor analysis with observed macroeconomic variables the arbitrage pricing theory apt is recast as a multivariate nonlinear regression model with across equation restrictions an explicit theoretical justification for the inclusion of an arbitrary well diversified market index is given using monthly returns on 70 stocks iterated nonlinear seemingly unrelated regression techniques are employed to obtain joint estimates of asset sensitivities and their associated apt risk prices without the assumption of normally distributed errors these estimators are strongly consistent and asymptotically normal with the additional assumption of normal errors they are also full information maximum likelihood estimators classical asymptotic nonlinear nested hypothesis tests are supportive of the apt with measured macroeconomic factors

an explicit bound on individual assets deviations from apt pricing in a finite economy abstract ross s arbitrage pricing theory apt is a tractible and reasonable alternative to the mean variance model nonetheless understanding of the theory has been obscured by the complexity of the sequence economy models used for motivation by contrast we give a simple and direct derivation of the apt in a finite economy using an explicit bound on the deviations from apt prices across assets a coarse calculation shows that theoretical deviations from apt pricing are negligible in our economy

benefit transfer in europe how reliable are transfers between countries the benefits for specific health impacts related to air and water quality were measured in simultaneous contingent valuation surveys conducted in five different european countries consistent inter country differences in willingness to pay to avoid ill health episodes could not be explained by measurable differences in individual characteristics international transfer of unit values resulted in an average transfer error of 38 accounting for measurable differences among countries in health status income and other demographic measures either through ad hoc adjustments to the transferred values or through value function transfer did not improve transfer performance

yes the apt is testable the arbitrage pricing theory apt has been proposed as an alternative to the meanvariance capital asset pricing model capm this paper considers the testability of the apt and points out the irrelevance for testing of the approximation error we refute shanken s objections including his assertion that roll s critique of the capm is applicable to the apt we also explain the testability of the apt on subsets and we explore the relationship between the apt and the capm the arbitrage pricing theory apt has been the subject of extensive research efforts since it was introduced by ross 36 37 the research has included theoretical papers and a growing empirical literature 2 nonetheless there seems to be some confusion in the literature about the relation between the theoretical underpinnings of the apt and its empirical tests this paper is an attempt to alleviate the confusion to illustrate the issues and to provide a focus section i of this paper is devoted to examining and refuting some points raised in shanken 40 which considers the testability of the apt the underlying premise of the apt is that asset returns ri are generated by a factor model of the form

general factor models and the structure of security returns based on markowitz s pioneering study 40 sharpe 56 and lintner 38 advanced the first positivist formulations of the capital asset pricing model capm their models were subsequently refined by mossin 45 fama 15 black 1 and others even though the capm has been studied extensively it has not been empirically validated according to roll 48 the capm cannot be tested in an unambiguous fashion because of a number of intractable measurement and computational difficulties and the joint nature of the hypotheses to be tested

pre grant patent publication and cumulative innovation abstract we examine the implications of pre grant publication pp of patent applications in the context of a cumulative innovation model we show that pp leads to fewer applications and fewer inventions but it may raise the probability that new technologies will reach the product market and thereby enhances consumer surplus and possibly total welfare as well

calculating the equity cost of capital using the apt the impact of the erm abstract one of the expected benefits of membership of the exchange rate mechanism erm was a reduction in risk which should lead to a lower cost of capital and foster investment and growth using the apt we investigate the behavior of the equity market risk premium for the london stock exchange prior to and during sterling s membership of the erm we find that prior to and during the first year of membership the equity market risk premium fell quite dramatically however when conflict between domestic and erm policy requirements arose at the turn of 1991 the equity risk premium increased and continued to do so until sterling s exit partially wiping out the benefits of membership of the erm

using spatial microsimulation to account for demographic and spatial factors in environmental benefit transfer abstract this paper presents a simulation based modelling approach for estimating total visitor numbers and amenity values for prospective non priced open access outdoor recreation sites to begin the geographic extent of the market for recreation at a policy site is estimated using data from a similar study site the population residing within this geographic area is simulated using a spatial microsimulation model and gis techniques and an individual level visitor arrival function is then transferred across this simulated population this allows the latent demand for visits to the policy site by each simulated individual to be predicted and summed providing an estimate of the total potential demand for recreation at the site combining this with an economic value measure of a visit provides an estimate of the potential amenity value of the policy site the approach is applied to moyode wood a small scale forest in the west of ireland and estimates the potential total economic value of recreation at 0 4 million for the site the research represents the first time that spatial microsimulation has been used in environmental benefit transfer and shows how it can be used to control for differences in demographic and spatial factors between study and policy sites it also demonstrates how individual level single site travel cost models estimated using on site survey data can be used to predict demand at alternative policy sites