the relative valuation of caps and swaptions theory and empirical evidence although traded as distinct products caps and swaptions are linked by noarbitrage relations through the correlation structure of interest rates using a string market model we solve for the correlation matrix implied by swaptions and examine the relative valuation of caps and swaptions we find that swaption prices are generated by four factors and that implied correlations are lower than historical correlations long dated swaptions appear mispriced and there were major pricing distortions during the 1998 hedge fund crisis cap prices periodically deviate significantly from the no arbitrage values implied by the swaptions market the growth in interest rate swaps during the past decade has led to the creation and rapid expansion of markets for two important types of swap related derivatives interest rate caps and swaptions these over the counter derivatives are widely used by many firms to manage their interest rate risk exposure and collectively represent the largest class of fixed income options in the financial markets the international swaps and derivatives association isda estimates that the total notional amount of caps and swaptions outstanding at the end of 1997 was over 4 9 trillion which was more than 300 times the 15 billion notional of all chicago board of trade treasury note and bond futures options combined caps and swaptions are generally traded as separate products in the financial markets and the models used to value caps are typically different from those used to value swaptions furthermore most wall street firms use a piecemeal approach in calibrating their models for caps and swaptions making it difficult to evaluate whether these derivatives are fairly priced

can credit spreads help predict a yield curve in this paper we investigate whether information in credit spreads helps improve the forecasts of government bond yields to do this we propose and estimate a joint dynamic nelson siegel dns model of the u s treasury yield curve and the credit spread curve the model accounts for the possibility of regime changes in yield curve dynamics and incorporates a zero lower bound constraint on yields we show that our joint model produces more accurate out of sample density forecasts of bond yields than does the yield only dns model in addition we demonstrate that incorporating regime changes and a zero lower bound constraint is essential for forecast improvements

no arbitrage near cointegrated var p term structure models term premia and gdp growth abstract the recent macro finance literature does not agree either about the empirical properties of the expectation part and of the term premium on long term bonds or about the importance or even the direction of the relationship between the term premium and future economic activity this paper proposes a two step approach to handle both problems first in a var setting we extract a reliable measure of the term premium by means of averaging estimator techniques aiming at optimally solving prediction problems when highly persistent processes are present and thus providing a so called near cointegrated var p approach second we analyze the dynamic response of gdp to shocks to the term premium by using the new information response function concept as far as the first problem is concerned we find that the ncvar based term premium measure is rather stable and counter cyclical as suggested by interest rates survey based estimation of yield curve models and by its risk compensation role regarding the second problem we find that an increase in the long term spread caused by the term premium induces two effects on future economic activity the impact is negative for short horizons less than 1 year whereas it is positive for longer ones

dynamic asset allocation with event risk major events often trigger abrupt changes in stock prices and volatility we study the implications of jumps in prices and volatility on investment strategies using the event risk framework of duffie pan and singleton 2000 we provide analytical solutions to the optimal portfolio problem event risk dramatically affects the optimal strategy an investor facing event risk is less willing to take leveraged or short positions the investor acts as if some portion of his wealth may become illiquid and the optimal strategy blends both dynamic and buy and hold strategies jumps in prices and volatility both have important effects

no arbitrage taylor rules with switching regimes we study the time varying nature of u s monetary policies summarized by the taylor rule based on a continuous time regime switching term structure model in this model the spot rate follows the taylor rule and government bonds at different maturities are priced by no arbitrage we allow the coefficients of the taylor rule and the dynamics of inflation and output gap to be regime dependent and estimate the model using government bond yields we find that the fed is proactive in controlling inflation in one regime and accommodative for growth in another moreover proactive monetary policies are associated with more stable inflation and output gap and therefore could have contributed to the great moderation our analysis also highlights the importance of switching regimes for term structure modeling without the regimes inflation and output can explain less than 50 of the variations of bond yields with the regimes the two variables can explain more than 80 of the variations of bond yields

negative interest rate policy and the yield curve we evaluate the implications of the ecb s negative interest rate policy nirp on the yield curve to capture various shapes of the short end of the yield curve induced by the nirp we introduce two policy indicators which summarize the immediate and longer horizon future monetary policy stances we find the four nirp events lowered the short term interest rate by the same amount the impact is dampened at longer maturities for the first two event dates due to lack of forward guidance in contrast in the last two dates forward guidance drives the largest effects in two years

long term spread option valuation and hedging this paper investigates the valuation and hedging of spread options on two commodity prices which in the long run are in dynamic equilibrium i e cointegrated the spread exhibits properties different from its two underlying commodity prices and should therefore be modelled directly this approach offers significant advantages relative to the traditional two price methods since the correlation between two asset returns is notoriously hard to model in this paper we propose a two factor model for the spot spread and develop pricing and hedging formulae for options on spot and futures spreads two examples of spreads in energy markets the crack spread between heating oil and wti crude oil and the location spread between brent blend and wti crude oil are analyzed to illustrate the results

risk self protection and ex ante economic value abstract we develop three propositions about the ex ante value of reduced risk if there is a continuous outcome distribution and if self protection influences outcome probability and severity then 1 unobservable utility terms cannot be eliminated from the ex ante value expressions 2 knowledge of the convexity or the nonconvexity of dose response functions is insufficient to sign changes in these expressions and 3 self protection expenditures need not be a lower bound measure of these expressions therefore many restrictions applied in recent empirical work on the economic value of risk changes are not immediately transferable to settings where endogenous risks prevail

the impact of the bird flu on public willingness to pay for the protection of migratory birds abstract in this paper we present the results of a unique time series analysis of contingent values and models for migratory bird protection based on an identical contingent valuation cv survey carried out over a three year time period since the first bird flu outbreak in 2003 although there exists no scientific evidence for a direct relationship migratory birds are believed to play an important role in spreading the bird flu virus worldwide the time series analysis allows us to test the temporal stability of stated preferences for migratory bird protection and at the same time examine indirectly the possible impact of increased media attention and public awareness levels regarding the bird flu we test the impact of the bird flu on public willingness to pay wtp for migratory bird protection in the final 2005 survey whilst accounting for procedural variance introduced by sequencing and question ordering effects but we are unable to demonstrate a direct negative relationship a novelty of the study presented here is that respondents in the cv surveys are given the opportunity to pay an annual money amount or a one time off lump sum annual wtp values appear to be significantly higher than one time off wtp values suggesting a negative implicit discount rate self selection bias is an important reason for the observed differences we find that respondents who agree to pay annually differ significantly from respondents who wish to pay a lump sum in terms of their underlying preferences and motivations towards migratory bird protection

waiting or acting now the effect on willingness to pay of delivering inherent uncertainty information in choice experiments abstract this paper analyzes the effect of inherent uncertainty on the willingness to pay wtp for a policy aimed at reducing expected climate change impacts to do this it relates outcome uncertainty to the probability of occurrence of one of these impacts within a given time horizon unlike the existing studies this paper links outcome uncertainty to the uncontrollable component of environmental uncertainty derived from the stochastic nature of an ecosystem s behavior results show that the wtp for the policy in the presence of uncertainty does not decrease compared to the scenario where climate change impacts are assumed to occur with certainty this suggests individuals are adopting a precautionary attitude when stating their wtp thus the paper provides economic justification for preventive measures in highly uncertain contexts however findings are not conclusive with respect to the influence of the degree of uncertainty on the support for such measures

likelihood ratio based tests for markov regime switching markov regime switching models are widely considered in economics and nance although there have been persistent interests see e g hansen 1992 garcia 1998 and cho and white 2007 the asymptotic distributions of likelihood ratio based tests have remained unknown this paper considers such tests and establishes their asymptotic distributions in the context of nonlinear models allowing for multiple switching parameters the analysis simultaneously addresses three di culties i some nuisance parameters are unidenti ed under the null hypothesis ii the null hypothesis yields a local optimum and iii the conditional regime probabilities follow stochastic processes that can only be represented recursively addressing these issues permits substantial power gains in empirically relevant situations besides obtaining the tests asymptotic distributions this paper also obtains four sets of results that can be of independent interest 1 a characterization of conditional regime probabilities and their high order derivatives with respect to the model s parameters 2 a high order approximation to the log likelihood ratio permitting multiple switching parameters 3 a re nement to the asymptotic distribution and 4 a uni ed algorithm for simulating the critical values for models that are linear under the null hypothesis the elements needed for the algorithm can all be computed analytically the above results also shed light on why some bootstrap procedures can be inconsistent and why standard information criteria such as the bayesian information criterion bic can be sensitive to the hypothesis and the model s structure when applied to the us quarterly real gdp growth rates the methods suggest fairly strong evidence favoring the regime switching speci cation consistently over a range of sample periods

is hypothetical bias a universal phenomenon a multinational investigation a concern with the contingent valuation method cvm is the finding that hypothetical and real statements of value often differ we test whether hypothetical bias broadly defined is independent of location by comparing real and hypothetical votes on a dichotomous choice referendum in china france indiana kansas and niger we find significant differences in hypothetical bias across locations and reject the hypothesis that hypothetical bias is independent of location as opposed to the typical finding reported in the literature subjects in niger significantly understated their willingness to pay in the hypothetical referendum

evaluating an alternative risk preference in affine term structure models dai and singleton 2002 and duffee 2002 show that there is a tension in affine term structure models between matching the mean and the volatility of interest rates this article examines whether this tension can be solved by an alternative parametrization of the price of risk the empirical evidence suggests that first the examined parametrization is not sufficient to solve the mean volatility tension second the usual result in the estimation of affine models indicating that some of the state variables are extremely persistent may have been caused by the lack of flexibility in the parametrization of the price of risk term structure models have several uses including pricing fixed income derivatives managing the risk of fixed income portfolios and detecting relationships between the term structure of interest rates and macrovariables such as inflation and consumption to perform well in these tasks term structure models must be numerically and econometrically tractable while matching the empirical properties of the term structure movements at least two empirical properties of the term structure of interest rates have been well established by financial economists over the years see dai and singleton 2003 for a survey first the term premium or the expected excess return of treasury bonds has a high time variability second the volatility of interest rates is time varying these two properties are so prominent in the data that they will be referred to as stylized facts while these two stylized facts are very well established in the empirical literature affine term structure models are thoroughly discussed in the theoretical literature affine models are those in which the yield of zero coupon bonds are affine functions of the model state variables classic

optimal filtering of jump diffusions extracting latent states from asset prices this paper provides an optimal filtering methodology in discretely observed continuoustime jump diffusion models although the filtering problem has received little attention it is useful for estimating latent states forecasting volatility and returns computing model diagnostics such as likelihood ratios and parameter estimation our approach combines time discretization schemes with monte carlo methods it is quite general applying in nonlinear and multivariate jump diffusion models and models with nonanalytic observation equations we provide a detailed analysis of the filter s performance and analyze four applications disentangling jumps from stochastic volatility forecasting volatility comparing models via likelihood ratios and filtering using option prices and returns jel c11 c13 c15 c51 c52 g11 g12 g17 this paper develops a filtering approach for learning about unobserved shocks and states from discretely observed prices generated by continuous time jumpdiffusion models the optimal filtering problem which has received little attention is the natural companion to the parameter estimation problem as filters allow researchers to analyze and use their models for practical applications 1 despite its usefulness there is currently no general method for solving the filtering problem in continuous time models

modeling the loss distribution in this paper we focus on modeling and predicting the loss distribution for credit risky assets such as bonds and loans we model the probability of default and the recovery rate given default based on shared covariates we develop a new class of default models that explicitly accounts for sector specific and regime dependent unobservable heterogeneity in firm characteristics based on the analysis of a large default and recovery data set over the horizon 1980 2008 we document that the specification of the default model has a major impact on the predicted loss distribution whereas the specification of the recovery model is less important in particular we find evidence that industry factors and regime dynamics affect the performance of default models implying that the appropriate choice of default models for loss prediction will depend on the credit cycle and on portfolio characteristics finally we show that default probabilities and recovery rates predicted out of sample are negatively correlated and that the magnitude of the correlation varies with seniority class industry and credit cycle this paper was accepted by wei xiong finance

oil and revolutionary governments fuel for international conflict oil exporting states or petrostates engage in militarized interstate disputes mids at a much higher rate on average than nonpetrostates why is this so further what explains the variation among the petrostates in adopting aggressive foreign policies and engaging in mids on that basis this article develops a theory that proposes that revolutionary petrostates have a higher propensity to launch mids than comparable nonpetrostates this theory is tested with statistical analysis using a new quantitative data set that identifies revolutionary governments in the period 1945 2001 the results show that petro revolutionary governments constitute a special threat to international peace and security this evidence of resource backed aggression challenges the conventional view of petrostates as the targets of international competition for resources

confidence building on euro convergence evidence from currency options we study the evolution of investor confidence in 1992 1998 over the chance of individual currencies to converge to the euro using data on currency option prices convergence risk which may reflect uncertainty over policy commitment as well as exogenous fundamentals induces a level of implied volatility in excess of actual volatility this volatility wedge should gradually decrease as confidence grows over time as convergence policy is maintained and the risk of a reversal is progressively resolved empirically we indeed find a positive volatility wedge which declines over time only for currencies involved in the euro convergence process the wedge and other convergence risk measures are correlated with both exogenous fundamentals and proxies for policy commitment uncertainty we also find that the wedge responds to policy shocks in an asymmetric fashion suggesting that policy risk is resolved at different rates after negative and positive shocks finally we estimate a regime switching model of convergence uncertainty using data on interest rates currency rates and currency option prices the results confirm the time varying and asymmetric nature of convergence risk and indicate that investors demand a risk premium for convergence risk

aid effectiveness and the politics of personalism this article examines how political institutions that provide an incentive to cultivate a personal vote condition the relationship between foreign aid and economic growth in developing country democracies politicians in aid recipient countries with high levels of personalism are more likely to pursue corruption and target government spending to narrow constituencies because personalism affects these outcomes it provides incentives to use foreign aid for politically motivated spending at the expense of investing foreign aid in growth promoting public goods using panel data from 61 aid recipient democracies from 1961 to 2001 the author finds that aid increases growth in democracies with less personalist institutions but decreases growth in countries with high personalism the author also shows that personalism conditions the relationship between aid and the composition of government spending aid increases spending on public goods relative to narrow particularistic goods in countries with low person

convenience yield in commodity price modeling a regime switching approach this paper attempts to model the futures term structures of crude oil and natural gas using the notion of convenience yield in a regime switching framework unlike the existing studies which assume the convenience yield to have either a constant value or to have a stochastic behavior with mean reversion to one equilibrium level the model of this paper extends the gibson and schwartz 1990 model to allow for regime switching in the convenience yield along with the other parameters a closed form solution for the futures price is derived and the model parameters are estimated using the maximum likelihood method the results show that the estimated regimes are very close to the contango and backwardation regimes commonly seen in futures markets the results also show that the transitional probabilities play an important role in shaping the futures term structure implied by the model

a natural experiment approach to contingent valuation of private and public uv health risk reduction strategies in low and high risk countries we present the results of a natural experiment to test how variations in exogenous risk levels affect resultant willingness to pay wtp for risk reduction the case study presented considers wtp for reductions in the skin cancer risks associated with exposure to solar uv radiation a common design contingent valuation survey is conducted in four countries across which variation in geographical latitude and genetic mix mean that exogenous risks differ substantially survey respondents were presented with both a private and public good route for affecting risk reduction in both cases results confirm that once adjustment had been made for expected relationships with other covariates such as income and risk averting behaviour valuation responses for both goods conformed to expectations with the ordering of values across countries reflecting the ordering of scientifically established health risks this suggests that links between values and objective health risks may be observed within such situations and provides a justification for continuing research into more natural representations of risk and risk reductions in order to yield consistent and robust measures of associated values

the effects of conventional and unconventional monetary policy on forecasting the yield curve abstract we investigate how conventional and unconventional monetary policies affect the dynamics of the yield curve by assessing the performance of individual yield curve models and their mixtures out of sample forecasts for u s bond yields show that the arbitrage free nelson siegel model and its mixtures with other models perform well in the period of conventional monetary policy whereas the random walk model outperforms all the other models in the period of unconventional monetary policy the diminished role of the no arbitrage restriction in forecasting the yield curve since 2009 can be attributed to unconventional monetary policy which resulted in low correlations between short and long term bond yields and little variation in the short term rates during the period of the maturity extension program in 2011 2012 the superiority of the random walk forecasts is more pronounced reinforcing our finding that the monetary policy framework affects yield curve forecast accuracy

stress testing interest rate risk exposure abstract in the current low interest rate environment the possibility of a sudden increase in rates is a potentially serious threat to financial stability as a result analyzing interest rate risk irr is critical for financial institutions and supervisory agencies we propose a new method for generating yield curve scenarios for stress testing banks exposure to irr based on the nelson siegel 1987 yield curve model we show that our method produces yield curve scenarios with a wider variety of slopes and shapes than scenarios generated by the historical and hypothetical methods typically used in the banking industry and proposed in the literature we stress test the economic value of equity of a bank balance sheet based on call report data from a large u s bank we show that our method provides more information about the bank s exposure to irr using fewer yield curve scenarios than the alternative historical and hypothetical methods

are economic time series asymmetric over the business cycle it has long been argued that major cyclical variables such as the unemployment rate display an asymmetric behavior over various phases of the business cycle the paper provides a statistical test for this hypothesis using the framework of finite state markov processes i implement a test to see if the behavior of the unemployment rate is characterized by sudden jumps and slower drops it is argued that the framework provided in the paper can also be used to test other sample path properties of economic time series

exploiting the conditional density in estimating the term structure an application to the cox ingersoll and ross model we propose an empirical method that utilizes the conditional density of the state variables to estimate and test a term structure model with known price formulae using data on both discount and coupon bonds the method is applied to an extension of a two factor model due to cox ingersoll and ross 1985 cir our results show that estimates based on only bills imply unreasonably large price errors for longer maturities we reject the original cir model using a likelihood ratio test and conclude that the extended cir model also fails to provide a good description of the treasury market

buying war not peace the influence of corruption on the risk of ethnic war this article presents robust findings for the positive effect of corruption on the risk of ethnic civil war using binary time series cross section data that cover 87 to 121 countries per year between 1984 and 2007 following a grievance based explanation of violent intrastate conflict we argue that corruption increases the risk of large scale ethnic violence as it creates distortions in the political decision making process which lead to a deepening of political and economic inequalities between different ethnic groups the positive effect of corruption on the risk of ethnic civil war is robust to various model specifications including the interaction between corruption and natural resource wealth

core and crust consumer prices and the term structure of interest rates we propose a model for nominal and real term structures of interest rates that includes dynamics for the three main components of total inflation core food and energy these dynamics combine together to produce a measure of expected total inflation that investors use to price nominal treasuries this framework captures different frequencies in inflation fluctuations shocks to core are more persistent and less volatile than shocks to food and especially energy the crust we find that a common structure of latent factors determines and predicts the term structure of yields and inflation our model outperforms popular benchmarks e g arma var and random walk specifications and it is at par with the survey of professional forecasters in forecasting inflation moreover we estimate real rates that agree with inflationindexed bond yields after adjusting for the liquidity premium in these bonds finally inflation and real rate risk premia show a declining pattern consistent with the changing nature of inflation and real rate risks

short rate nonlinearities and regime switches abstract using non parametric estimation methods various authors have shown distinct non linearities in the drift and volatility function of the us short rate which are inconsistent with standard affine term structure models we document how a regime switching model with state dependent transition probabilities between regimes can replicate the patterns found by the non parametric studies to do so we use data from the uk and germany in addition to us data and include term spreads in some of our models we also examine the drift and volatility function of the term spread

regime shifts in a dynamic term structure model of u s treasury bond yields this article develops and empirically implements an arbitrage free dynamic term structure model with priced factor and regime shift risks the risk factors are assumed to follow a discrete time gaussian process and regime shifts are governed by a discrete time markov process with state dependent transition probabilities this model gives closed form solutions for zero coupon bond prices an analytic representation of the likelihood function for bond yields and a natural decomposition of expected excess returns to components corresponding to regime shift and factor risks using monthly data on u s treasury zero coupon bond yields we show a critical role of priced state dependent regime shift risks in capturing the time variations in expected excess returns and document notable differences in the behaviors of the factor risk component of the expected returns across high and low volatility regimes additionally the state dependence of the regime switching probabilities is shown to capture an interesting asymmetry in the cyclical behavior of interest rates the shapes of the term structure of volatility of bond yield changes are also very different across regimes with the well known hump being largely a low volatility regime phenomenon jel g12 this article develops and empirically implements an arbitrage free dynamic term structure model dtsm with priced factor and regimeshift risks the risk factors are assumed to follow a discrete time gaussian process and regime shifts are governed by a discrete time markov process with state dependent transition probabilities agents are assumed to know both the current state of the economy and the regime they are currently in this leads to regime dependent risk neutral pricing and an equilibrium term structure that reflects the risks of both changes in the state and shifts in regimes

legislative institutions and corruption in developing country democracies this article extends the research on institutional sources of corruption by investigating whether legislative institutions play a significant role in driving corruption in developing country democracies the author argues that when legislative rules a give parties control over agenda setting and b allow parties to strip legislators who vote against the party line of their legislative mandates parties can exercise valuable influence over the legislative policy process which allows them to engage in practices leading to higher corruption the author derives two testable hypotheses linking higher party influence over agenda setting and voting in the legislature to higher corruption and test them by using a new data set on legislative rules for 64 developing country democracies from 1984 to 2004 the empirical results corroborate the hypotheses and remain robust when controlling for alternative explanations employing different estimation techniques and using different measures of corruption

expectation puzzles time varying risk premia and dynamic models of the term structure abstract linear projections of returns on the slope of the yield curve have contradicted the implications of the traditional expectations theory this paper shows that these findings are not puzzling relative to a large class of richer dynamic term structure models specifically we match all the key empirical findings reported by fama and bliss 1987 american economic review 77 4 680 692 and campbell and shiller 1991 review of economic studies 58 495 514 among others within large subclasses of affine and quadratic gaussian term structure models additionally we show that certain risk premium adjusted projections of changes in yields on the slope of the yield curve recover the coefficients of unity predicted by the models key to this matching are parameterizations of the market prices of risk that let the risk factors affect the market prices of risk directly and not only through factor volatilities the risk premiums have a simple form consistent with fama s findings on the predictability of forward rates and are also shown to be consistent with interest rate feedback rules used by a monetary authority in setting monetary policy

monetary policy regimes implications for the yield curve and bond pricing abstract we develop a multivariate dynamic term structure model which takes into account the nonlinear time varying relation between interest rates and the state of the economy in contrast to the classical term structure literature in which nonlinearities are captured by increasing the number of latent state variables or by latent regime shifts in our no arbitrage framework the regimes are governed by thresholds and are directly linked to economic fundamentals specifically starting from a simple monetary policy model for the short rate we introduce a parsimonious and tractable model for the yield curve which takes into account the possibility of regime shifts in the behavior of the federal reserve in our empirical analysis we show the merit of our approach three dimensions interpretable bond dynamics accurate short end yield curve pricing and yield curve implications

bond yields and the federal reserve bond yields respond to policy decisions by the federal reserve and vice versa to learn about these responses i model a high frequency policy rule based on yield curve information and an arbitrage free bond market in continuous time the fed s target is a pure jump process jump intensities depend on the state of the economy and the meeting calendar of the federal open market committee the model has closed form solutions for yields as functions of a few state variables introducing monetary policy helps to match the whole yield curve because the target is an observable state variable that pins down its short end and introduces important seasonalities around fomc meetings the volatility of yields is snake shaped which the model explains with policy inertia the policy rule crucially depends on the two year yield and describes fed policy better than taylor rules

yield factor volatility models the term structure of interest rates is often summarized using a handful of yield factors that capture shifts in the shape of the yield curve in this paper we develop a comprehensive model for volatility dynamics in the level slope and curvature of the yield curve that simultaneously includes level and garch effects along with regime shifts we show that the level of the short rate is useful in modeling the volatility of the three yield factors and that there are significant garch effects present even after including a level effect further we find that allowing for regime shifts in the factor volatilities dramatically improves the model s fit and strengthens the level effect we also show that a regime switching model with level and garch effects provides the best out of sample forecasting performance of yield volatility we argue that the auxiliary models often used to estimate term structure models with simulation based estimation techniques should be consistent with the main features of the yield curve that are identified by our model

the relationship between the income elasticities of demand and willingness to pay abstract the relationship between income and willingness to pay for collectively provided public environmental goods is investigated we show that while the income elasticity of willingness to pay and the ordinary income elasticity of demand are related knowledge of one is insufficient to determine the magnitude or even the sign of the other the income elasticity of willingness to pay is influenced by additional factors which are generally unobservable examples are provided to illustrate the degree to which the two income elasticities may diverge our results indicate that even when goods are demand luxuries they may or may not have income elasticities of willingness to pay which are greater than one

bias in discrete response contingent valuation abstract the empirical literature on discrete response contingent valuation has found that seemingly innocuous changes in the statistical models estimated result in significantly different point estimates of willingness to pay this paper hypothesizes and tests several potential explanations for these results first it investigates and compares the biases inherent in single bounded and double bounded maximum likelihood estimation procedures and examines how they react to various bid designs and sample sizes then it examines the presence and identification of outliers in binary choice data and how these outliers influence estimation finally it presents an alternative approach to addressing the issue of outliers which explicitly acknowledges the possibility of upwardly biased response probabilities

an international examination of affine term structure models and the expectations hypothesis we examine the yield curve behavior and the relative performance of affine term structure models atsms using government bond yield data from canada germany japan the u k and the u s we find strong predictability of forward rates for excess bond returns and reject the expectations hypothesis in all five countries a three factor model is sufficient to capture movements in the yield curve of canada japan the u k and the u s but may not be enough for germany an exhaustive comparison among atsms with no more than three factors reveals that the three factor essential affine model a 1 3 e with only one factor affecting the volatility of the short rate but with all three factors affecting the price of risk performs best in all five countries simulations provide inconclusive evidence on whether this best affine model can successfully generate the rich yield curve behavior observed in the data

accounting for a shift in term structure behavior with no arbitrage and macro finance models this paper examines a shift in the dynamics of the term structure of interest rates in the u s during the mid 1980s we document this shift using standard interest rate regressions and using dynamic a ne no arbitrage models estimated for the pre and post shift subsamples the term structure shift largely appears to be the result of changes in the pricing of risk associated with a level factor using a macro nance model we suggest a link between this shift in term structure behavior and changes in the dynamics and risk pricing of the federal reserve s in ation target as perceived by investors

natural natural experiments in economics the recent literature exploiting natural events as natural experiment instruments is reviewed to assess to what extent it has advanced empirical knowledge a weakness of the studies that adopt this approach is that the necessary set of behavioral market and technological assumptions made by the authors in justifying their interpretations of the estimates is often absent the methodology and findings from twenty studies are summarized and simple economic models are used to elucidate the implicit assumptions made by the authors and to demonstrate the sensitivity of the interpretations of the findings to the relaxation of some of these assumptions