relative wealth concerns and entrepreneurship we develop a model of entrepreneurship in which market frictions limit the possibilities for diversifying entrepreneurial risk a concern for relative standing arises even though individuals consume only standard commodities in contrast to complete markets an increase in sector specific aggregate risk increases entrepreneurship due to relative wealth concerns a change in the profile of the economy to include more risk averse people results in an even greater increase in entrepreneurship thus relative wealth concerns mitigate the reduction in entrepreneurship arising from the non diversifiability of entrepreneurial risk we examine the effects of uncertainty about economic policies such as market based reforms on entrepreneurship

temporal aggregation of an estar process some implications for purchasing power parity adjustment nonlinear models of deviations from ppp have recently provided an important theoretically well motivated contribution to the ppp puzzle most of these studies use temporally aggregated data to empirically estimate the nonlinear models as noted by taylor 2001 if the true dgp is nonlinear the temporally aggregated data could exhibit misleading properties regarding the adjustment speeds we examine the effects of different levels of temporal aggregation on estimates of estar models of real exchange rates our monte carlo results show that temporal aggregation does not imply the disappearance of nonlinearity and that adjustment speeds are significantly slower in temporally aggregated data than in the true dgp furthermore the autoregressive structure of some monthly estar estimates found in the literature is suggestive that adjustment speeds are even faster than implied by the monthly estimates

status in markets this project tests for the effect of social status in a laboratory experimental market we consider a special box design market in which a vertical overlap in supply and demand ensure that there are multiple equilibrium prices we manipulate the relative social status of our subjects by awarding high status to a subset of the group based on one of two procedures in the first a subject s score on a trivia quiz determines his or her status in another subjects are assigned randomly to a higher status or lower status group in both treatments we find that average prices are higher in markets where higher status sellers face lowerstatus buyers and lower when buyers have higher status than sellers across all sessions the higher status side of the market captures a greater share of the surplus earning significantly more than their lower status counterparts

one security many markets determining the contributions to price discovery when homogeneous or closely linked securities trade in multiple markets it is often of interest to determine where price discovery the incorporation of new information occurs this article suggests an econometric approach based on an implicit unobservable efficient price common to all markets the information share associated with a particular market is defined as the proportional contribution of that market s innovations to the innovation in the common efficient price applied to quotes for the thirty dow stocks the technique suggests that the preponderance of the price discovery takes place at the new york stock exchange nyse a median 92 7 percent information share although most of the classic paradigms in market microstructure concern a security that trades in a single centralized market such situations are becoming increasingly rare in practice fragmentation the dispersal of trading in a security to multiple sites has emerged as a dominant institutional trend this process is of concern to financial economists and regulators because price information and price discovery the impounding of new information into the security price arguably the most important products of a security market have many attributes of public goods as the process of fragmentation accelerates it may be important to determine where the price information and price discovery are being produced 1 this paper suggests a practical econometric approach to this problem the technique is illustrated with an application to u s equity markets many stocks listed on the new york stock exchange nyse trade concurrently on the regional exchanges and the national association of securities dealers national market system nasd nms since a share of ibm stock is the same security whether purchased on the midwest or pacific exchange this is a particularly clear instance of multiple markets nevertheless the expres

can costs of consumption adjustment explain asset pricing puzzles we investigate grossman and laroque s 1990 conjecture that costs of adjusting consumption can account in part for the empirical failure of the consumptionbased capital asset pricing model ccapm we incorporate small fixed costs of consumption adjustment into a ccapm with heterogeneous agents we find that undetectably small consumption adjustment costs can account for much of the discrepancy between the observed variance of nondurable aggregate consumption growth and the predictions of the ccapm and can partially reconcile nondurable consumption data with the observed equity premium we conclude that the ccapm s implications are nonrobust to extremely small adjustment costs the consumption based capital asset pricing models ccapms 1 of lucas 1978 breeden 1979 and grossman and shiller 1982 have difficulty matching the high volatility of equity returns and the high mean equity premium found in u s data first the variance of the ccapm asset pricing kernel is too low to generate plausible equity return volatility more precisely hansen and jagannathan 1991 and cochrane and hansen 1992 show that for any conjectured pricing kernel mean the variance of the kernel is too low to satisfy the hansen jagannathan bounds without implausibly high risk aversion or substantial habit formation 2 second the covariance between the ccapm asset pricing kernel and excess equity returns is too low to generate a plausible equity premium more precisely let us define ep as follows

foreign competition immigration and structural adjustment abstract the paper uses the ricardo viner r v model to investigate the relationship in a capital abundant economy between trade competition and immigration in doing so it derives new results for the r v model especially on the welfare implications of migration with and without an initial tariff

immigrant specificity and the relationship between trade and immigration theory and evidence studies routinely document that immigrant employment concentrates in non traded goods sectors and that many immigrants have low inter sectoral mobility we consider these observed characteristics of immigrant employment with regard to the question of how immigration affects a nation s pattern of production and trade we model an economy producing three goods one is non traded domestic labor and capital are domestically mobile but internationally immobile allowing that some new immigrants will become specific to the non traded goods sector the model indicates that the effects of immigration on output and trade depend importantly on the sectoral pattern of employment of both new and existing immigrants empirical investigation in a panel data set of oecd countries supports the model s prediction that immigration raises the output of non traded goods consistent with the model we also find that immigration and trade are complements given its empirical support the model s implications for immigration policy are then discussed

is a policy of free movement of workers sustainable this paper studies the costs and benets of the adoption of the policy of free movement for workers for the countries to agree on uncontrolled movement of workers the short run costs must be outweighed by the long term benets that result from better labor market exibility and income smoothing we show that such policies are less likely to be adopted when workers are impatient and less risk averse workers when production technologies display decreasing returns and when countries trade a share of their products

nonlinear purchasing power parity under the gold standard 1 introductionrecent theoretical analysis of purchasing power deviations see e g dumas 1992 sercu uppal and van hull 1995 and o connell and wei 1997 demonstrates how transactions costs or the sunk costs of international arbitrage induce nonlinear adjustment of the real exchange rate to purchasing power parity ppp globally mean reverting this nonlinear process has the important property of exhibiting near unit root behavior for small deviations from ppp since small deviations from ppp are left uncorrected if they are not large enough to cover the transactions costs or the sunk costs of international arbitrage a parametric nonlinear model suggested by the theoretical literature that captures the nonlinear adjustment process in aggregate data is the exponential smooth transition autoregression model estar of ozaki 1985 a smooth rather than discrete adjustment mechanism is motivated by the theoretical analysis of dumas 1992 also as postulated by terasvirta 1994 and demonstrated theoretically by berka 2002 in aggregate data regime changes may be smooth rather than discrete given that heterogeneous agents do not act simultaneously even if they make dichotomous decisions 1 recent empirical work e g michael nobay and peel 1997 taylor peel and sarno 2001 peel and venetis 2002 has reported empirical results that suggest that the estar model provides a parsimonious fit into a variety of data sets particular for monthly data for the interwar and postwar floating period as well as for annual data spanning 200 years as reported in lothian and taylor 1996 in addition nonlinear impulse response functions derived from the estar models show that although the speed of adjustment for small shocks around equilibrium will be highly persistent larger shocks mean revert much faster than the glacial rates previously reported for linear models rogoff 1996 in this respect the estar models provide some solution to the ppp puzzle outlined in rogoff 1996 2the estar model can also provide an explanation of why ppp deviations analyzed from a linear perspective appear to be described by either a nonstationary integrated i 1 process or alternatively described by fractional processes see e g diebold husted and rush 1991 taylor peel and sarno 2001 and pippenger and goering 1993 show that the dickey fuller tests have low power against data simulated from an estar model michael nobay and peel 1997 and byers and peel 2003 show that data that is generated from an estar process can appear to exhibit the fractional property that this would be the case was an early conjecture by acosta and granger 1995 given that the estar model has a theoretical rationale whereas the fractional process is a relatively nonintuitive one the fractional property might reasonably be interpreted as a misleading linear property of ppp deviations granger and terasvirta 1999 whereas the empirical work employing estar models provides some explanation of the glacially slow adjustment speeds obtained in linear models there is one aspect of the empirical work that is worthy of further attention a second way of explaining the rogoff puzzle raised by rogoff himself 3 is to relax the assumption that the equilibrium real exchange rate is a constant see e g canzoneri cumby and diba 1996 and chinn and johnston 1996 theoretical models such as that of balassa 1964 and samuelson 1964 imply a nonconstant equilibrium in the real exchange rate if real productivity growth rates differ between countries 4 nonlinear models that incorporate proxies for these effects are found to parsimoniously fit post bretton woods data for the main real exchange rates see venetis paya and peel 2002 and paya venetis and peel 2003 naturally models that ignore this effect may generate misleading speeds of ppp adjustment to shocks in this regard the empirical results of hegwood and papell 2002 for the gold standard period are particularly interesting

social comparisons and contributions to online communities a field experiment on movielens we design a field experiment to explore the use of social comparison to increase contributions to an online community we find that after receiving behavioral information about the median user s total number of movie ratings users below the median demonstrate a 530 percent increase in the number of monthly movie ratings while those above the median decrease their ratings by 62 percent when given outcome information about the average user s net benefit score above average users mainly engage in activities that help others our findings suggest that effective personalized social information can increase the level of public goods provision

a transactions data test of stock index futures market efficiency and index arbitrage profitability this paper investigates the efficiency of the market for stock index futures and the profitability of index arbitrage for the chicago board of trade s major market index contracts the spot value of the index is computed with transactions prices for the component shares of the index obtained from the fitch database the tests account for transaction costs execution lags and the uptick rule for short sales of stocks results indicate that the size and frequency of boundary violations are substantially smaller than those reported by earlier studies and have declined sharply with time index arbitrage is a strategy whereby institutions brokerage houses or other large investors seek to profit from the spread between prices in the spot and futures markets for stock indices for example an investor might purchase predetermined baskets of stocks on the floor of the new york stock exchange and simultaneously sell a related index futures contract on the floor of the chicago board of trade hoping to profit from the price differences on the two exchanges computer programs constantly monitor stock and futures prices and automatically execute buy and sell orders when it appears that a profit is possible stock index futures can be priced by a simple arbitrage argument if the dividends paid by the underlying basket of shares and interest rates are nonstochastic markets are perfect and there are no taxes the pricing equation is

decision making under uncertainty and the evolution of interdependent preferences abstract this paper finds support for the evolution of interdependent preferences under natural selection from a perhaps surprising source decision making under uncertainty individuals choose from sets of risky alternatives the lotteries may involve either idiosyncratic risk or aggregate uncertainty or both robson j econ theory 68 1996 397 424 gives the evaluation criterion for lotteries that maximizes reproductive value and shows that it does not satisfy the expected utility theorem cooper and kaplan j theoret biol 94 1982 135 151 have demonstrated that when lotteries are aggregate the optimal decision rule involves randomization this paper reexamines robson s evaluation criterion using it to solve for the optimal amount of randomization the solution is characterized and an interpretation is offered that links maximizing reproductive value to maximizing expected relative offspring it is shown that when agents preferences arise from their own offspring relative to the average within the population a game is constructed out of the choice of lotteries and that the unique nash equilibrium distribution of actions maximizes reproductive value journal of economic literature classification numbers c72 d71 d81

merit approbation and the evolution of social structure in this paper we study a society in which individuals gain utility from income and from social approbation income is correlated with class approbation is given to an unobservable trait which must be signalled through the agent s social mobility i e class change mobility is driven by a simple mechanism involving inheritance effort and ability thus social structure class composition is affected by individuals quest for approbation and we study how that affects the emergence and multiplicity of long run social organizations including hybrid forms of dynasties and meritocracies specifically we observe that even though social mobility is driven purely by a meritocratic mechanism pure dynasties can emerge we then introduce a feedback between the size of the upper class and its income value so that effort levels and social structure are jointly endogenous we derive results on equilibrium effort levels and stationary when they exist social structures social organization can converge to a unique steady state multiple long run equilibria or cycles

relativity rank and the utility of income relative utility has become an important concept in several disjoint areas of economics i present a cardinal model of income utility based on the supposition that agents care about their rank in the income distribution and that utility is subject to adaptation over time utility levels correspond to the leyden individual welfare function while utility differences yield a version of the prospect theory value function thereby providing a new and shared derivation of each i offer an explanation of some long standing paradoxes in the wellbeing literature and an insight into the links between relative comparisons and loss aversion

order characteristics and stock price evolution an application to program trading abstract this paper is an econometric analysis of the information content of automated orders arriving at the nyse the model captures the joint behavior of automated orders and also the return on the stock index future and the futures spot basis the results indicate that orders contain information useful in predicting stock returns beyond the information contained in the reported trades furthermore program and index arbitrage orders contain information beyond that available from the futures return and basis suggesting that these orders are not merely passive conveyors of common factor information nonprogram program and index arbitrage orders have roughly similar price impacts

migration unemployment and discrimination abstract this paper uses a dynamic efficiency wage model to analyze the consequences of immigration for a small country when there is discrimination against immigrants in a dual labor market with unemployment discrimination is of the type equal pay for equal work but unequal work which is characteristic of economies with guest worker systems the model exhibits three regimes for rising immigration levels immigration is most beneficial for natives in the intermediate regime an analysis of regime switches shows that changes attributable to globalization and technical progress are consistent with growing opposition to immigration

the dynamics of stock index and stock index futures returns in rational efficiently functioning markets the returns on stock index and stock index futures contracts should be perfectly contemporaneously correlated this study investigates the time series properties of 5 minute intraday returns of stock index and stock index futures contracts and finds that sp however the effect is not completely unidirectional with lagged stock index returns having a mild positive predictive impact on futures returns

ranking games and gambling when to quit when you re ahead it is common for rewards to be given on the basis of a rank ordering so that relative performance amongst a cohort is the criterion in this paper we formulate an equilibrium model in which an agent makes successive decisions on whether or not to gamble and is rewarded on the basis of a rank ordering of the final position amongst competing players one application of this model is to the behavior of mutual fund managers who are paid depending on funds under management which in turn are greatly influenced by annual or quarterly rank orderings our model deals with a situation in which fund managers can elect either to pick stocks or to use a market tracking strategy in equilibrium the distribution of the final position will have a negative skew we explore how this distribution depends on the number of players the probability of success when gambling the structure of the rewards and on information regarding the performance of other players

a threshold error correction model for intraday futures and index returns index futures arbitragers only enter into the market if the deviation from the arbitrage relation is sufficiently large to compensate for transaction costs and associated interest rate and dividend risks we estimate the band around the theoretical futures price within which arbitrage is not profitable for most arbitragers using a threshold autoregression model combining these thresholds with an error correction model we show that the impact of the mispricing error is increasing with the magnitude of that error and that the information effect of lagged futures returns on index returns is significantly larger when the mispricing error is negative 1998 john wiley sons ltd

international labor flows and national wages when income levels of some group in the economy fall behind those of others the blame frequently is cast on the nature of international trading relationships such has been the case recently in the united states with the struggle to maintain real wages for relatively lessskilled workers much of the debate has asked how changes in world prices or in technology at home or abroad have altered wage rates see e g susan collins 1996 jones and engerman 1996 in this note we focus on another potential culprit immigration and probe more widely into past historical experience in the united states and other countries when inflows of labor from abroad disturb wage rates for nationals such international labor flows could serve to enhance rather than to depress the earnings of the country s own laborers if the question addressed concerns the effects of immigration on the welfare of the original inhabitants of a country a disarmingly simple answer was provided some years ago by harry johnson 1967 as long as immigrants bring an accumulated bundle of labor and physical or human capital that is different from that possessed by local residents the latter must gain from immigration this is the basic gains from trade argument appropriate only if the country originally did not engage in any other form of trade and if all residents held balanced portfolios of capital and labor as well it ignores the social costs incurred and extra taxes collected when migrants flow into a country in this note we focus not on aggregate welfare effects but on the effect of immigration on the return to some homogeneous national group of laborers this question is the one that most sharply divides the views of labor economists from those of trade economists on the one hand increases in the supply of labor would seem naturally to depress the return to labor but in the basic heckscher ohlin trade model with two factors and two produced commodities an inflow of labor can be absorbed with absolutely no change in wage rates as long as the terms of trade remain undisturbed we begin by asking what some basic theoretical models tell us about this issue before turning to the historical record simple theory reveals that there are two basic attributes of immigration that affect income distribution relatively how substitutable immigrant labor is for the national labor force and the occupations in which immigrants are allowed to work

international capital mobility shadow prices and the cost of protection this paper studies the welfare losses from tariff protection in a small open economy when some factors are internationally mobile our principal result is that international fictor mobility must raise the cost of protection more specifically the welfare loss resulting from a uniform increase in tariffs in a competitive small open economy is greater when tariff induced international factor movements take place than when factors are internationally immobile by contrast an exogen1ous inflow of factors in the presence of tariffs may increase or reduce the welfare loss associated with protection depending on whether or not the protected commodities use the foreign owned factors intensively relative to domestically owned factors these results are proven for a very general specification of the economy s technology in particular no restrictions are placed on the degree of vertical integration in production on the sectors into which factors are internationally mobile or on the number of goods and factors our main result holds whether or not an increase in tariff rates leads the economy to specialise in addition we show how our results relate to earlier work on immiserising capital inflows and on negative shadow prices for factors of production thus synthesizing a number of recent results within a common framework the paper is organised as follows in section 2 we explain our framework and derive expressions for the welfare effects of tariffs when all factors are domestically owned and when some factors are foreign owned but not internationally

arbitrage nontrading and stale prices october 1987 this article explains a puzzle created by the standard and poor s 500 cash and futures prices during the crash of october 1987 the cash index appears to be a moving average of the futures but nontrading in constituent stocks explains only the initial period of delayed openings however execution of stale limit buy orders given the high volume and nyse market mechanisms at the time resulted in extraordinary levels of stock prices that were not caused by nontrading the model is supported in aggregate s p data and transactions data for individual stocks copyright 1992 by university of chicago press

modeling non linearities in real effective exchange rates abstract the aim of this paper is to test for and model non linearities in the real effective exchange rates of 10 major industrial countries the g 10 to exploit non linear dependencies in exchange rates we apply the star smooth transition autoregressive family of models these non linear models imply the existence of two distinct regimes in exchange rates with potentially different dynamic properties but the transition between the regimes is smooth tests reject linearity for eight exchange rates the real exchange rate process is cyclical in both regimes for almost all countries and there appears to be some evidence of asymmetry star models outperform hamilton s markov regime switching model in an out of sample forecasting contest

a further analysis of the lead lag relationship between the cash market and stock index futures market the intraday lead lag relation between returns of the major market cash index and returns of the major market index futures and s p 500 futures is investigated empirical results show strong evidence that the futures leads the cash index and weak evidence that the cash index leads the futures the asymmetric lead lag relation holds between the futures and all component stocks including those that trade in almost every five minute interval evidence indicates that when more stocks move together market wide information the futures leads the cash index to a greater degree this suggests that the futures market is the main source of market wide information article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the temporal price relationship between s p 500 futures and the s p 500 index this paper empirically examines the intraday price relationship between s p 500 futures and the s p 500 index using minute to minute data three stage least squares regression is used to estimate lead and lag relationships with estimates for expiration days of the s p 500 futures compared with estimates for days prior to expiration the results suggest that futures price movements consistently lead index movements by twenty to forty five minutes while movements in the index rarely affect futures beyond one minute

migration unemployment and skill downgrading in this paper we analyze the labor market impacts of immigration under flexible and rigid labor market regimes a general equilibrium framework is developed accounting for skill heterogeneity and labor market frictions where unemployed medium skilled manufacturing workers are downgraded into low skilled service jobs while low skilled service workers might end up unemployed the analytical analysis shows that medium skill immigration decreases low skilled unemployment under the flexible regime indicating a complementarity effect while the rigid regime induces a substitution effect leading to low skilled unemployment moreover it leads to wage polarization in a numerical analysis the economic effects of different migration scenarios are quantified

stock index futures and index arbitrage in a rational expectations model this article analyzes the role of stock index futures and index arbitrage in a rational expectations economy with competitive stock and futures markets a simple model is developed with three types of agents who besides having different trading motives have unequal access to markets among these agents only index arbitrageurs can trade on both markets and thus engage in arbitrage the article characterizes the impact of index arbitrage on equilibrium prices volatilities and welfare it is shown that index arbitrage is a risk reallocating and price correcting mechanism its impact on price stability is shown to be dependent on the relative variability of aggregate supply in the respective markets index arbitrage also transmits information across markets copyright 1991 by university of chicago press

quotes order flow and price discovery the goal of this article is to examine the impact of 1975 congressional mandate to integrate the trading of nyse listed stocks the conclusions are most of the time the new york stock exchange nyse quote matches or determines the best displayed quote and the nyse is the most frequent initiator of quote changes non nyse markets attract a significant portion of their volume when they are posting inferior bids or offers indicating they obtain order flow for other reasons such as payment for order flow yet when a non nyse market does post a better bid or offer it does attract additional order flow

international factor movements commodity trade and commercial policy in a specific factor model two events in the decade of the 1970s had a major impact on world trade and factor movements the collapse of the bretton woods fixed exchange rate system and opec s success in raising petroleum prices the enormous current account surplus accruing to some of the opec members was successfully recycled by the international capital markets to among others the oil importing developing countries in addition the vastly increased tempo of investment in the capital rich labour poor opec members in west asia attracted migration of labour skilled as well as unskilled to these countries from some of the oil importing developing countries the remittances from these workers in turn eased the problem of the labourexporting countries in adjusting to the increased cost of oil imports thus both borrowing from private capital markets and export of labour became very important elements in cushioning the oil shock for a number of countries the post opec movements of labour and financial capital while dramatic are only the more recent instances of a phenomenon of much greater antiquity the seventeenth and eighteenth centuries saw vast migration of people out of europe though these movements were the result of conquests and colonization rather than movements from one sovereign state into another but the nineteenth century particularly the latter half saw migration of the latter kind from europe to countries of north and south america as well as capital investment by residents of europe in these

index arbitrage with heterogeneous investors a smooth transition error correction analysis abstract the traditional index arbitrage model assumes a constant threshold mispricing between the futures and cash prices for all investors allowing for heterogeneity in investors transaction costs objectives and capital constraints we model the intraday mispricing of djia futures as a smooth transition autoregressive star process with the speed of adjustment toward equilibrium varying directly with the mispricing we show that the observed mean reversion in mispricing changes is induced by heterogeneous arbitrageurs instead of a statistical illusion infrequent trading of index portfolio stocks we further use a star error correction model to describe the nonlinear dynamics between the djia futures and index this model describes not only which market is more informationally efficient than the other but also the legging process the nonsimultaneous establishing of cash and futures positions

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

social status culture and economic performance in analysing the differences in productive capacity among economies it is usual to concentrate on the physical aspects of the population the different attributes of capital including human capital and on the available production technologies societies also differ in culture in ways which are relevant for economic performance the sociological literature recognises that different occupations have different social status and that workers benefit not only from the wage they receive but also from being associated with a particular occupation cultural differences among societies may translate into different status of occupations and can therefore affect the choice of education and occupation and consequently the equilibrium level of output and wages conversely the economic choices of individuals influence the social status of occupations in particular it is well established by sociological research that the social status of an occupation is influenced by economic attributes such as the average wage and the average level of education in the occupation a major objective of our work is to illustrate that sociological and economic approaches can be combined within a unified framework this is in contrast to some social scientists who view the two approaches as competing with each other phelpsbrown i 977 ch 4 in this paper we construct a simple general equilibrium model in which both wages and status are determined endogenously we show that changes in the demand for status triggered by changes in preferences or in income distribution influence the wage structure the level of aggregate output and economic welfare the link between status and aggregate output is created by the fact that differences in occupational status imply occupational wage differences among workers of the same skill the larger is the demand for status the larger is the wage gap and the lower is aggregate output our discussion of status is closely related to the economic analysis of discrimination against ethnic or racial groups becker i 97 i arrow i 973

index arbitrage and nonlinear dynamics between the s p 500 futures and cash we use a cost of carry model with nonzero transaction costs to motivate estimation of a nonlinear dynamic relationship between the s p 500 futures and cash indexes discontinuous arbitrage suggests that a threshold error correction mechanism may characterize many aspects of the relationship between the futures and cash indexes we use minute by minute data on the s p 500 futures and cash indexes the results indicate that nonlinear dynamics are important and related to arbitrage and suggest that arbitrage is associated with more rapid convergence of the basis to the cost of carry than would be indicated by a linear model article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

information and index arbitrage a random cash futures basis is derived in a dynamic multimarket learning game with sequential information shocks and strategic arbitrageurs who trade to exploit gaps in the basis statistical properties of the authors theoretical basis are derived both with and without index arbitrage the authors find that basis volatility a measure of intermarket mispricing may initially increase even as individual prices become more precise and that arbitrage reduces basis volatility the model is also used to analyze regulatory issues such as the possible impact of circuit breakers on the quality of the trading process copyright 1994 by university of chicago press

characterizing nonlinearities in business cycles using smooth transition autoregressive models during the past few years investigators have found evidence indicating that various time series representing business cycles such as production and unemployment may be nonlinear in this paper it is assumed that if the time series is nonlinear then it can be adequately described by a smooth transition autoregressive star model the paper describes the application of these models to quarterly logarithmic production indices for 13 countries and europe tests reject linearity for most of these series and estimated star models indicate that the nonlinearity is needed mainly to describe the responses of production to large negative shocks such as oil price shocks

arbitrage in stock index futures the textbook description of arbitrage suggests that it is a straightforward matter of taking offsetting positions in different securities and realizing the arbitrage profit such descriptions however typically ignore the transaction costs that give rise to the arbitrage opportunity in the first place taking proper account of these transactions costs may considerably complicate the problem particularly when as is usually the case the arbitrage potential is restricted this article is concerned withoptimal arbitrage strategies with transaction costs when the arbitrage potential is restricted by position limits the particular case we shall analyze is the standard and poor s sp the corresponding figure for the s p 500 portfolio for the same period was

hedging performance and basis risk in stock index futures in early 1982 trading began at three different exchanges in futures contracts based on stock indexes stock index futures were an immediate success and quickly led to a proliferation of new futures and options markets tied to various indexes one reason for this success was that index futures greatly extended the range of investment and risk management strategies available to investors by offering them for the first time the possibility of unbundling the market and nonmarket components of risk and return in their portfolios many portfolio management and other hedging applications in investment banking and security trading have been described elsewhere1 ranging from use by a passive fund manager to reduce risk over a long time horizon to use by an underwriter to hedge the market risk exposure in a stock offering for one or two days in considering the potential applications of index futures it is clear that in nearly every case a cross hedge is involved that is the stock position that is being hedged is different from the underlying portfolio for the index contract 2 this means that return and risk for an index futures hedge will depend upon the behavior of the basis i e the difference between the futures price and the cash price hedging a position in stock will necessarily expose it to some measure of basis risk risk that the change in the futures price over time will not track exactly the value of the cash position basis risk can arise from a number of different sources and is a more significant problem for stock index contracts than for other financial futures like treasury bills and bonds 3 the most apparent cause of basis risk is the nonmarket component of return on the cash stock position since the index contract is tied to the behavior of an underlying stock market index nonmarket risk cannot be hedged this is the essential problem of a cross hedge however basis risk can be present even when the hedge involves a position in the index portfolio itself and there is no nonmarket risk for one thing returns to the index portfolio include dividends while the index and the index future only track the capital value of the portfolio any risk associated with dividends on the portfolio will become basis risk in a hedged position still dividends are fairly low and also quite stable so this may not be a terribly important shortcoming

contests for ranks experimental evidence we use experiments to analyze multiple dimensions of the relationship between rank incentives and individual performance in our experiment i rank is defined as subjects relative position in their group based on their performance in a real effort task and ii subjects earnings are independent of their performance we find that any rank incentive improves mean performance than no rank incentive and this result is independent of the group size in the large group the mean performance increases strictly in all except at the highest rank incentive but in the small group the mean performance increases weakly in rank incentives finally the mean performance is significantly higher in the large than in the small group because of a higher prestige effect in additional treatments in which we do not reveal the identity of the statusprize winners we find that average performance is identical to that in the baseline treatment without any status prizes the last result signifies the important role that public revelation plays to enhance the strength of status the results are important for managerial practices

intraday volatility in the stock index and stock index futures markets we examine the intraday relationship between returns and returns volatility in the stock index and stock index futures markets our results indicate a strong intermarket dependence in the volatility of the cash and futures returns price innovations that originate in either the stock or futures markets can predict the future volatility in the other market we show that this relationship persists even during periods in which the dependence in the returns themselves appears to weaken the findings are robust to controlling for potential market frictions such as asynchronous trading in the stock index our results have implications for understanding the pattern of information flows between the two markets article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

index futures arbitrage and the behavior of stock index futures prices this article examines intraday transaction datafor s p 500 stock indexfutures prices and the intraday quotes for the underlying index the data indicate that thefutures price changes are uncorrelated and that the variability of these price changes exceeds the variability ofprice changes in the s p 500 index this excess variability of the futures over the index remains even after controlling for the nonsynchronous prices in the index quotes which induces autocorrelation in the index changes we advance and examine empirically two hypotheses regarding the difference between the futures price and its theoretical value that this mispricing increases on average with maturity and that it is path dependent evidence supporting these hypotheses is presented

international factor mobility minimum wage rates and factor price equalization a synthesis this paper examines the behavior of a small open economy facing perfectly elastic supply curves for some of its productive factors in particular the paper derives some comparative statics properties of such economies compares them with the properties of otherwise identical economies in which all factor prices are determined endogenously and investigates the relationship between factor price rigidities factor price equalization and the pattern of specialization among the new results which are proved it is shown that as more and more factor price rigidities are imposed on an economy it comes closer to a state of factor price equalization

international trade and labor migration a theory of the relationship between international trade and labor mobility is developed that takes into account five characteristics of such migration including its temporary nature differences between migrant and native labor the acceptance of unpredictable conditions of employment by migrant labor the ready availability of further labor resources and international capital mobility particular attention is paid to the role of international labor migration in helping to insulate native populations from the rigors of industrial fluctuations and in helping to preserve import competing industries that would have succumbed without the availability of cheap imported labor

bayesian arbitrage threshold analysis a bayesian estimation procedure is developed for estimating multiple regime multiple threshold error correction models appropriate for deviations from financial arbitrage relationships this approach has clear advantages over classical stepwise threshold autoregressive analysis unlike many other applications of threshold models the knowledge of some costs involved in setting up arbitrage positions allows us to specify an informative prior to illustrate the bayesian procedure we estimate a no arbitrage band within which index futures arbitrage is not profitable despite persistent deviations from parity

meteor showers or heat waves heteroskedastic intra daily volatility in the foreign exchange market this paper seeks to explain the causes of volatility clustering in exchange rates careful examination of intra daily exchange rates provides a test of two hypotheses heat waves and meteor showers the heat wave hypothesis is that the volatility has only country specific autocorrelation alternatively the meteor shower is a phenomenon of intra daily volatility spillovers from one market to the next using the garch model to specify the heteroskedasticity across intra daily market segments we find that the empirical evidence is generally against the null hypothesis of the heat wave using a volatility type of vector autoregression we examine the impact of news in one market on the time path of per hour volatility in other markets

the economics of immigration this literature review concerns the impact of immigration on the economy of the host country focusing on the experience of the united states the emphasis is on the period from the 1970s to the 1990s the author shows that research earlier in this period generally concluded that the economic effects of immigration were positive but that more recent research on later migrations have generally concluded that immigration may be having an adverse effect on the earnings of native unskilled workers and be placing an increased burden on welfare programs the importance of such economic analysis for the formulation of appropriate migration policies is stressed

pure rank preferences and variation in risk taking behavior abstract assuming that an individual s rank in the wealth distribution is the only factor determining the individual s wellbeing we analyze the individual s risk preferences in relation to gaining or losing rank rather than the individual s risk preferences towards gaining or losing absolute wealth we show that in this characterization of preferences a high ranked individual is more willing than a low ranked individual to take risks that can provide him with a rise in rank relative risk aversion with respect to rank in the wealth distribution is a decreasing function of rank this result is robust to incorporating the level of absolute wealth in the individual s utility function

keeping one step ahead of the joneses status the distribution of wealth and long run growth assuming that the utility of each agent depends on its relative wealth position in the society this chapter constructs an endogenous growth model it is shown that even if the subjective discount rates differ across agents there exists a unique balanced growth equilibrium in which each agent owns a positive share of the world wealth it is also shown that if the agents are identical then an increase in savings incentives always raises the long run growth rate but if they are heterogeneous then an increase in savings incentives may lower the long run growth rate

mean reversion of standard poor s 500 index basis changes arbitrage induced or statistical illusion mean reversion in stock index basis changes has been presumed to be driven by the trading activity of stock index arbitragers we propose here instead that the observed negative autocorrelation in basis changes is mainly a statistical illusion arising because many stocks in the index portfolio trade infrequently even without formal arbitrage reported basis changes would appear negatively autocorrelated as lagging stocks eventually trade and get updated the implications of this study go beyond index arbitrage however our analysis suggests that spurious elements may creep in whenever the price change or return series of two securities or portfolios of securities are differenced mean reversion in stock index basis changes has been amply documented mackinlay and ramaswamy 1988 find significant negative first order autocorrelation in normalized intraday basis changes of the s p 500 index futures traded on the chicago mercantile exchange cme yadav and pope 1990 find similar behavior using financial times stock exchange ftse 100 index futures data from the london international financial futures exchange liffe as does lim 1990 using nikkei 225 index futures from the singapore international monetary exchange simex the trading activity of stock index arbitragers has been presumed to be driving this elastic realignment of stock index and index futures prices when the basis widens beyond its theoretical level arbitragers simultaneously sell index futures and buy the index portfolio pulling the difference between the futures and index

conspicuous consumption snobbism and conformism abstract we develop a model in which consumers purchase a conspicuous good in order to signal high income and thereby achieve greater social status in equilibrium the signalling value of conspicuous consumption depends in an identifiable way on the number of consumers and consumer behaviour is characterized by either snobbism or conformism the market demand curve for the conspicuous good may exhibit a positive slope if consumers are conformist we derive some unconventional policy implications concerning the taxation of luxuries and the voluntary provision of public goods

the october 1987 s p 500 stock futures basis five minute changes in the s p 500 index and futures contract are examined over a ten day period surrounding the october 1987 stock market crash since nonsynchronous trading problems are severe in these data new index estimators are derived and used the estimators use the complete transaction history of all 500 stocks nonsynchronous trading explains part of the large absolute futures cash basis observed during the crash the remainder may be due to disintegration of the two markets even after adjustment for nonsynchronous trading the index displays more autocorrelation than does the futures and the futures leads the index

direct tests of index arbitrage models previous tests of stock index arbitrage models have rejected the no arbitrage constraint imposed by these models this paper provides a detailed analysis of actual s p 500 arbitrage trades and directly relates these trades to the predictions of index arbitrage models an analysis of arbitrage trades suggests that i short sale rules are unlikely to affect the cashfutures mispricing ii the opportunity cost of arbitrage funds exceeds the treasury bill rate and iii the average price discrepancy captured by arbitrage trades is small tests of the models provide some support for a version ofthe arbitrage model that incorporates an early liquidation option the ability of these models to explain arbitrage trades however is surprisingly low

transactions costs and nonlinear adjustment in real exchange rates an empirical investigation eolquilibrium models of real exchange rate determination in the presence of transactions costs imply a nonlinear adjustment process toward purchasing power parity ppp conventional cointegration tests which ignore the effect of transactions costs may be biased against the long run ppp hypothesis our results using both monthly data for the interwar period and annual data spanning two centuries clearly reject the linear framework in favor of an exponential smooth transition autoregressive process the systematic pattern in the estimates of the nonlinear models provides strong evidence of mean reverting behavior for ppp deviations and helps explain the mixed results of previous studies

immigration and native welfare we unify two approaches towards identifying native welfare effects of immigration one emphasizing the immigration surplus borjas 1995 1999 the other identifying a welfare loss due to terms of trade effects davis weinstein 2002 we decompose the native welfare effect of immigration into the standard complementarity effect augmented by a stolper samuelson effect and a terms of trade effect using a structural model with three skill classes we derive propositions on the wage and native welfare effects of various immigration scenarios a calibration based simulation reveals that the size of the inflow and immigrant income repatriation are key determinants of the welfare ranking of different immigration scenarios

status the distribution of wealth private and social attitudes to risk this paper supposes an individual cares about his her own wealth not only directly but also via the relative standing that this wealth induces the implications for risk taking are investigated in particular such a model provides a natural explanation of the concave convex concave utility described by friedman and savage however there are a number of key differences between the present model and any model based on own wealth alone for example an equilibrium wealth distribution here may have a middle class further the status interaction involves an externality and an equilibrium wealth distribution may be pareto inefficient but also about the implied relative standing in the distribution of wealth has a long but checkered history an early exponent of such ideas was of course veblen 1899 it is indeed a notion which most economists reject albeit usually without explicit comment a notable and articulate exception however is frank 1985 for example see also the references frank cites on pp 33 34 it is however a notion with substantial intuitive appeal and it seems useful to ascertain its consequences before coming to a final judgement as to its merits the present paper is concerned with deriving the consequences of such valuation of status for risk taking what seems to be the sharpest possible model is adopted here this assumes that what is essentially ordinal rank in the wealth distribution enters von neumann morgenstern utility as an argument in addi tion to wealth itself thus higher wealth increases utility not only directly but also indirectly via higher status in the interests of both simplicity and drama it is typically assumed here that all individuals have identical utility functions which are concave in wealth but convex in status section 2 discusses how the model provides a natural explanation of the fundamental phenomenon addressed by friedman and savage 1948 that individuals may simultaneously purchase insurance and participate in lotteries although each individual here has a utility function which is concave in wealth itself utility can nevertheless be convex in wealth over some range when the indirect effect via status is included this effect is enhanced by the convexity of utility in status but will follow in any case if increasing wealth entails moving up in status much more rapidly than losing wealth entails moving down it is shown

social comparisons status and driving behavior abstract the establishment of desirable social norms is an integral part of a well functioning civil society while recent evidence has demonstrated that social comparison can affect behavior in a variety of contexts it is not clear what type of comparative social information is most effective using a large scale field experiment to study driving practices we sent text messages containing different types of social information to drivers in tsingtao china we find two types of social information to be particularly effective in reducing traffic violations the driving behavior of those similar to oneself and the driving behavior of those with high status cars our results indicate that the combination of descriptive norms with social status is a cost effective yet powerful intervention for establishing better driving behavior in emerging markets

on the choice between capital and labour mobility trade theorists since the pioneering work of kemp 1966 have considered the question of national advantage from international factor mobility by considering only one factor to be so mobile kemp analyzed elegantly the question of optimal policies in 2 x 2 x 2 model and showed that since monopoly power could exist in both the goods and factor markets in consequence of international capital mobility the optimal policy intervention would generally involve two policy instruments tariffs cum subsidies on goods and duties cum subsidies on international capital flows jones 1967 subsequently extended kemp s argument to the secondbest context by examining the optimal level of one of these instruments when the other was arbitrarily set at zero elsewhere in this issue brecher 1983 shows in an elegant and original contribution that the jones policy problem is in fact a third best rather than a second best problem as generally believed and that if only one of the tariff and capital mobility taxes cumsubsidies can be used it is generally possible to improve welfare further by admitting an altogether different domestic policy instrument namely a production or consumption tax cum subsidy as the case may be the research of bhagwati was supported by the german marshall fund grant no l 34015 the problem analyzed in the paper was posed in bhagwati 1979 and an early ingenious and neglected analysis in ramaswami 1968 was noted by bhagwati we have profited greatly from these contributions also from reading webb 1970 ramaswami 1970 and a recent paper of calvo and wellisz 1983 on this problem this result is in consonance with the results of bhagwati ramaswami and srinivasan 1969 for the case without international capital mobility but the consonance is intuitive only after the result was established for the case with international capital mobility