inferring future volatility from the information in implied volatility in eurodollar options a new approach we study the information content of implied volatility from several volatility specifications of the heath jarrow morton 1992 hjm models relative to popular historical volatility models in the eurodollar options market the implied volatility from the hjm models explains much of the variation of realized interest rate volatility over both daily and monthly horizons the implied volatility dominates the garch terms the glosten et al 1993 type asymmetric volatility terms and the interest rate level however it cannot explain that the impact of interest rate shocks on the volatility is lower when interest rates are low than when they are high article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

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

the informational content of implied volatility implied volatility is widely believed to be informationally superior to historical volatility because it is the markets forecast of future volatility but for s p 100 index options the most actively traded contract in the united states we find implied volatility in aggregate and across subsamples separated by maturity and strike price implied volatility has virtually no correlation with future volatility and it does not incorporate the information contained in recent observed volatility article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

bond pricing and the term structure of interest rates a new methodology for contingent claims valuation this paper presents a unifying theory for valuing contingent claims under a stochastic term structure of interest rates the methodology based on the equivalent martingale measure technique takes as given an initial forward rate curve and a family of potential stochastic processee for its subsequent movements a no arbitrage condition restricts this family of processes yielding valuation formulae for interest rate sensitive contingent claims which do not explicitly depend on the market prices of risk examples are provided to illustrate the key results in relation to the term structure of interest rates arbitrage pricing theory has two purposes the first is to price all zero coupon default free bonds of varying maturities from a finite number of economic fundamentals called state variables the second is to price all interest rate sensitive contingent claims taking as given the prices of the zero coupon bonds this paper presents a general theory and a unifying framework for understanding arbitrage pricing theory in this context of which all existing arbitrage pricing models are special cases in particular vasicek 1977 brennan and schwartz 1979 langetieg 1980 ball and torous 1983 ho and lee 1986 schaefer and schwartz 1987 and artzner and delbaen 1988 the primary contribution of this paper however is a new methodology for solving the second problem i e the pricing of interest rate sensitive contingent claims given the prices of all zero coupon bonds the methodology is new because i it imposes its stochastic structure directly on the evolution of the forward rate curve ii it does not require an inversion of the term structure to eliminate the market prices of risk from contingent claim values and iii it has a stochastic spot rate process with multiple stochastic factors influencing the term structure the model can be used to consistently price and hedge all contingent claims american or european on the term structure and it is derived from necessary and more importantly sufficient conditions for the absence of arbitrage the arbitrage pricing models of vasicek 1977 brennan and schwartz 1979 langetieg 1980 and artzner and delbaen 1988 all require an iformerly titled bond pricing and the term structure of interest rates a new methodology

do call prices and the underlying stock always move in the same direction this article empirically analyzes some properties shared by all one dimensional diffusion option models using sp options are not redundant securities nor ideal hedging instruments puts and the underlying asset prices may go down together much of the extant knowledge about option pricing is based on the assumption that the underlying asset price follows a one dimensional diffusion process examples of such option pricing models include the classic black scholes 1973 merton 1973 the cox ross 1976 constant elasticity of variance the ones studied in derman and kani 1994 rubinstein 1994 bergman grundy and wiener 1996 bakshi cao and chen 1997 2000 and dumas fleming and whaley 1998 all models in the one dimensional diffusion class share three basic properties first call prices are monotonically increasing and put prices are monotonically decreasing in the underlying asset price the monotonicity property second as the underlying asset price is the sole source of uncertainty for all of its options option prices must be perfectly correlated with each other and with the underlying asset the perfect

effective control policies for stochastic inventory systems with a minimum order quantity and linear costs abstract we consider a model of single item periodic review inventory system with stochastic demand linear ordering cost where in each time period the system must order either none or at least as much as a minimum order quantity moq optimal inventory policies for such a system are typically too complicated to implement in practice in fact the s s type of policies are often utilized in the real world we study the performance of a simple heuristic policy that is easily implementable because it is specified by only two parameters s t we develop an algorithm to compute the optimal values for these parameters in the infinite time horizon under the average cost criterion through an extensive numerical study we demonstrate that the best s t heuristic policy has performance close to that of the optimal policies when the coefficient of variation of the demand distribution is not very small furthermore the best s t policy always outperforms the best feasible s s policies and on average the percentage differences are significant finally we study the impact of moq on system performance

excusing selfishness in charitable giving the role of risk decisions involving charitable giving often occur under the shadow of risk a common finding is that potential donors give less when there is greater risk that their donation will have less impact while this behaviour could be fully rationalized by standard economic models this article shows that an additional mechanism is relevant the use of risk as an excuse not to give in a laboratory study participants evaluate risky payoffs for themselves and risky payoffs for a charity when their decisions do not involve tradeoffs between money for themselves and the charity they respond very similarly to self risk and charity risk by contrast when their decisions force tradeoffs between money for themselves and the charity participants act more averse to charity risk and less averse to self risk these altered responses to risk bias participants towards choosing payoffs for themselves more often consistent with excuse driven responses to risk additional results support the existence of excuse driven types

effective inventory control policies with a minimum order quantity and batch ordering abstract in this paper we consider a single item periodic review stochastic inventory system with both minimum order quantity moq and batch ordering requirements in each time period the firm can order either none or at least as much as the moq at the same time if an order is placed the order quantity is required to be an integral multiple of a given specific batch size we first adopt a heuristic policy which is specified by two parameters s t applying a discrete time markov chain approach we compute the system cost and optimize this s t policy under the long run average cost criterion we also consider a simpler one parameter policy the so called s policy which is a special case of the s t policy in an intensive numerical study we find that 1 both policies perform well in comparison with other policies and 2 the s policy also performs well and is compatible with the s t policy only in a few cases where demand variation is small the latter outperforms the former significantly we also evaluate the effects of some important parameters on system performance

the causal effect of mortgage refinancing on interest rate volatility empirical evidence and theoretical implications this article investigates the effects of mortgage backed security mbs hedging activity on interest rate volatility and proposes a model that takes these effects into account an empirical examination suggests that the inclusion of information about mbss considerably improves model performance in pricing interest rate options and in forecasting future interest rate volatility the empirical results are consistent with the hypothesis that mbs hedging affects the interest rate volatility implied by both options and the actual interest rate volatility the results also indicate that the inclusion of information about the mbs universe may result in models that better describe the price of fixed income securities

forecasting stock return variance toward an understanding of stochastic implied volatilities we examine the behavior of measured variances from the options market and the underlying stock market under the joint hypotheses that markets are informationally efficient and that option prices are explained by a particular asset pricing model forecasts from time series models of the stockreturn process should not have predictive content given the market forecast as embodied in option prices both in sample and out of sample tests suggest that this hypothesis can be rejected using simulations we show that biases inherent in the procedure we use to imply variances cannot explain this result thus we provide evidence inconsistent with the orthogonality restrictions of option pricing models that assume that variance risk is unpriced these results also have implicationsfor optimal variance forecast rules

moral hypocrisy power and social preferences abstract we study how individuals adjust their judgment of fairness and unfairness when they are in the position of spectators before and after making real decisions and how this adjustment depends on the actions they take in the game we find that norms that appear universal instead take into account the players bargaining power also individuals adjust their judgments after playing the game for real money when they behaved more selfishly and only in games where choices have no strategic consequence we interpret this possibly self deceptive adjustment of judgments to actions as moral hypocrisy this behavior appears produced by the attempt to strike a compromise between self image and payoffs so as to release oneself of one s responsibility for selfish behavior

term structure movements and pricing interest rate contingent claims this paper derives an arbitrage free interest rate movements model ar model this model takes the complete term structure as given and derives the subsequent stochastic movement of the term structure such that the movement is arbitrage free we then show that the ar model can be used to price interest rate contingent claims relative to the observed complete term structure of interest rates this paper also studies the behavior and the economics of the model our approach can be used to price a broad range of interest rate contingent claims including bond options and callable bonds

single item inventory control under periodic review and a minimum order quantity in this paper we study a periodic review single item single stage inventory system with stochastic demand in each time period the system must order none or at least as much as a minimum order quantity qmin since the optimal structure of an ordering policy with a minimum order quantity is complicated we propose an easy to use policy which we call r s qmin policy assuming linear holding and backorder costs we determine the optimal numerical value of the level s using a markov chain approach in addition we derive simple news vendor type inequalities for near optimal policy parameters which can easily be implemented within spreadsheet applications in a numerical study we compare our policy with others and test the performance of the approximation for three different demand distributions poisson negative binomial and a discretized version of the gamma distribution given the simplicity of the policy and its cost performance as well as the excellent performance of the approximation we advocate the application of the r s qmin policy in practice

does willful ignorance deflect punishment an experimental study abstract this paper studies whether people can avoid punishment by remaining willfully ignorant about possible negative consequences of their actions for others we employ a laboratory experiment using modified dictator games in which a dictator can remain willfully ignorant about the payoff consequences of his decision for a receiver a third party can punish the dictator after observing the dictator s decision and the resulting payoffs on the one hand willfully ignorant dictators are punished less if their actions lead to unfair outcomes than dictators who reveal the consequences before implementing the same outcome on the other hand willfully ignorant dictators are punished more than revealing dictators if their actions lead to fair outcomes we conclude that willful ignorance can circumvent blame when unfair outcomes result but that the act of remaining willfully ignorant is itself punished regardless of the outcome models of procedural fairness combining ex ante and ex post fairness qualitatively predict the observed punishment pattern

the pricing of options on default free bonds recent developments in the finance literature dealing with the valuation of contingent claims have been triggered by black and scholes 2 with their valuation of european options on corporate stocks the type of valuation model derived by black and scholes is attractive because it is independent of preferences this independence is possible due to the fact that the contingent claims are usually assumed to be contingent on traded assets or traded state variables for example a european call option is a claim contingent on the value of the corresponding stock to maintain the independence of the claim from preferences however some variables have to be discarded and considered as constants for example the rate of interest which is not a traded state variable is considered a constant in most of the literature see black and scholes 2 merton 11 and ingersoll 9 though this approximation might not cause important discrepancies in the case of corporate liabilities and options on corporate liabilities the effect of such an approximation on the value of default free bonds and options on default free bonds is more important since these liabilities depend only on the rate of interest

honesty on the streets a field study on newspaper purchasing many publishers use an honor system for selling newspapers in the street we conducted a field experiment to study honesty in this market finding that a moral reminder increases the level of honesty in payments whereas the same message has no effect on whether one is honest reminding customers of the legal norm has no effect we argue that these results are consistent with a preference for honesty based on an internalized social norm auxiliary evidence suggests that the moral message remains effective when it is posted for longer periods and even when it is removed again authors abstract

strategic ignorance and the robustness of social preferences participants in dictator games frequently avoid learning whether their choice to maximize their own earnings will help or hurt the recipient and then choose selfishly exploiting the moral wiggle room provided by their ignorance however this is found in an environment in which the dictator must actively learn the true payoffs so inaction means ignorance does this effect persist when one must actively choose either to be ignorant or to be informed or when one must actively choose to remain ignorant in fact whereas 45 of dictators remain ignorant when one must click to become informed this drops to 25 when one must click in either case and to 3 when one must click to remain ignorant although the exploitation of moral wiggle room is not merely an artifact it is much like social behavior itself subject to environmental and psychological factors that may reinforce or undermine its impact data as supplemental material are available at http dx doi org 10 1287 mnsc 2014 1989 this paper was accepted by uri gneezy behavioral economics

forward contracts and futures contracts abstract this paper provides a detailed discussion of the similarities and differences between forward contracts and futures contracts under frictionless markets and continuous trading simple arbitrage arguments are invoked to value forward contracts to relate forward prices and spot prices and to relate forward prices and futures prices we also argue that forward prices need not equal futures prices unless default free interest rates are deterministic

stock prices and volume the authors undertake a comprehensive investigation of price and volume co movement using daily new york stock exchange data from 1928 to 1987 they adjust the data to take into account well known calendar effects and long run trends to describe the process they use a seminonparametric estimate of the joint density of current price change and volume conditional on past price changes and volume four empirical regularities are found 1 positive correlation between conditional volatility and volume 2 large price movements are followed by high volume 3 conditioning on lagged volume substantially attenuates the leverage effect and 4 after conditioning on lagged volume there is a positive risk return relation article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

why do people keep their promises an experimental test of two explanations numerous psychological and economic experiments have shown that the exchange of promises greatly enhances cooperative behavior in experimental games this paper seeks to test two theories to explain this effect the first posits that individuals have a preference for keeping their word the second assumes that people dislike letting down others payoff expectations according to the latter account promises affect behavior only indirectly because they lead to changes in the payoff expectations attributed to others i conduct an experiment designed to distinguish between and test these alternative explanations the results demonstrate that the effects of promises cannot be accounted for by changes in payoff expectations this suggests that people have a preference for promise keeping per se

optimal policies for multi echelon inventory problems with batch ordering in many production distribution systems materials flow from one stage to another in fixed lot sizes for example a retailer orders a full truckload from a manufacturer to qualify for a quantity discount a factory has a material handling system that moves full containers of parts from one production stage to the next in this paper we derive optimal policies for multi stage serial and assembly systems where materials flow in fixed batches the optimal policies have a simple structure and their parameters can be easily determined this research extends the multi echelon inventory theory in several ways it generalizes the clark scarf model by allowing batch transfers of inventories rosling 1989 shows that assembly systems can be interpreted as serial systems under the assumption that there are no setup costs we show that the series interpretation still holds when materials flow in fixed batches which satisfy a certain regularity condition finally veinott 1965 identifies an optimal policy for a single location inventory system with batch ordering this paper generalizes his result to multi echelon settings

the limitation of monotonicity property of option prices an empirical evidence many option pricing models are based on the assumption that the underlying asset price follows one dimensional diffusion process an alternative approach is to test the properties that should hold for all models based on a given stochastic process for the underlying asset following perignon 2006 we test the empirical validity of the monotonicity property for option prices by collecting all transaction data from 1 july 2006 to 31 december 2006 for option contracts traded on the taiwan futures exchange taifex we find that sampled intraday option prices violate the monotonicity property between 29 97 and 57 of the time and that call and put prices often increase or decrease together we also find evidence to show that the frequent violations of the monotonicity property are to a large extent attributable to microstructure effects and that they arise from rational trading tactics

forecasting the comovements of spot interest rates abstract time varying covariance models are compared in the french and german interest rate markets of the pre euro period a bivariate asymmetric dynamic covariance model with level effect best characterizes the in sample variance covariance dynamics model comparison using economic loss functions raises some doubts with alternative models performing similarly out of sample results show that the variance covariance matrix is best forecasted using a vech model with level effect but no volatility spillover not entirely confirming the in sample evidence simple models using exponentially weighted moving averages of past observations perform similarly to the best bivariate model thus some features required to obtain a good in sample fit do not have additional out of sample forecasting power due to overfitting

dynamics of realized volatilities and correlations an empirical study abstract this study examines two important issues underlying realized volatility and correlation estimators first an empirical inquiry is conducted to assess whether bax and eurodollar futures tick by tick data can be characterized as marked point processes second arma neural network garch bekk and naive volatility and correlation forecasts are compared in an out of sample context when a trader prices an interest rate spread option based on those forecasts and simultaneously delta hedges her position other loss functions are also considered competing volatility forecasts are also compared to implied volatilities

does where you stand depend on where you sit tithing donations and self serving beliefs economists and psychologists argue that individuals skew personal beliefs to accord with their own interests to test for the presence of self serving beliefs we surveyed 1 200 members of the mormon church about tithing a tithe is a voluntary contribution equal to 10 percent of income since respondents must decide privately what income items to tithe we observe how the income definition depends on an individual s religious and financial incentives we find surprisingly little evidence that an individual s financial situation influences beliefs about what counts as income for the tithe however ambiguity increases the role for self serving biases jel a12 d63

no excuses for good behavior volunteering and the social environment abstract we study the effect of the social environment on the quantity and quality of voluntary labor contributions by extending benabou and tirole s 2006 image signaling framework we derive theoretical predictions on time volunteered given 1 the availability of excuses to stop volunteering and 2 the presence of an authority figure we test these predictions in an experiment where laboratory subjects are directly involved in a local nonprofit operation we find that in the absence of excuses to stop volunteering subjects volunteer longer without working less productively this increase is partially driven by subjects reluctance to be the first to stop volunteering the presence of an authority figure has little impact but the presence of peers has a positive and significant impact

option pricing where the underlying assets follow a gram charlier density of arbitrary order abstract if a probability distribution is sufficiently close to a normal distribution its density can be approximated by a gram charlier series a expansion in option pricing this has been used to fit risk neutral asset price distributions to the implied volatility smile ensuring an arbitrage free interpolation of implied volatilities across exercise prices however the existing literature is restricted to truncating the series expansion after the fourth moment this paper presents an option pricing formula in terms of the full untruncated series and discusses a fitting algorithm which ensures that a series truncated at a moment of arbitrary order represents a valid probability density while it is well known that valid densities resulting from truncated gram charlier series a expansions do not always have sufficient flexibility to fit all market observed option prices perfectly this paper demonstrates that option pricing in a model based on these densities is as tractable as the far less flexible original model of black and scholes 1973 allowing non trivial higher moments such as skewness excess kurtosis and so on to be incorporated into the pricing of exotic options generalising the gram charlier series a approach to the multiperiod multivariate case a model calibrated to standard option prices is developed in which a large class of exotic payoffs can be priced in closed form furthermore this approach when applied to a foreign exchange option market involving several currencies can be used to ensure that the volatility smiles for options on the cross exchange rate are constructed in a consistent arbitrage free manner

the performance of alternative interest rate risk measures and immunization strategies under a heath jarrow morton framework using a monte carlo simulation this study addresses the question of how traditional risk measures and immunization strategies perform when the term structure evolves in a heath jarrow morton 1992 manner the results suggest that for immunization purposes im munization strategies and portfolio formation strategies are more important than interest rate risk measures the performance of immunization strategies depends more on the transaction costs and the holding period than on the risk measures moreover the immu nization performance of bullet and barbell portfolios is not very sensitive to interest rate risk measures

deception the role of uncertain consequences abstract we study how decisions to lie extend to risky environments we provide experimental evidence from a sender receiver game where there is uncertainty over the amount by which a sender s lie reduces its receiver s payoff which is known only to potential liar even though all reduction amounts are equiprobable ex post beliefs elicited from senders suggest that unlike truth tellers most liars underestimate the extent of the actual reduction in the receiver s payoff and appear to exploit this self serving bias resulting in substantially more lying relative to a baseline treatment without the uncertainty subsequent treatments confirm the bias by either providing additional evidence or by removing possible confounds an intervention treatment nudging senders toward correcting the bias reduces lying

implied volatility functions in arbitrage free term structure models abstract we test six term structure models in the heath jarrow and morton 1992 class using eurodollar futures and options data from 1987 1992 we study the time series of implied interest rate volatilities from these models using one day lagged implied volatilities our one and two parameter models simultaneously price an average of 18 5 options each day with an average absolute error of one and a half to two basis points although the models fit well we document systematic strike price and time to maturity biases for all models we also implement simple trading strategies to test whether the models identify genuine biases

modeling asymmetric comovements of asset returns existing time varying covariance models usually impose strong restrictions on how past shocks affect the forecasted covariance matrix in this article we compare the restrictions imposed by the four most popular multivariate garch models and introduce a set of robust conditional moment tests to detect misspecification we demonstrate that the choice of a multivariate volatility model can lead to substantially different conclusions in any application that involves forecasting dynamic covariance matrices like estimating the optimal hedge ratio or deriving the risk minimizing portfolio we therefore introduce a general model which nests these four models and their natural asymmetric extensions the new model is applied to study the dynamic relation between large and small firm returns article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the aversion to lying abstract we experimentally investigate the effect of cheap talk in a bargaining game with one sided asymmetric information a seller has private information about her skill and is provided an opportunity to communicate this information to a buyer through a written message four different treatments are compared one without communication one with free form communication and two treatments with pre specified communication in the form of promises of varying strength our results suggest that individuals have an aversion towards lying about private information and that the aversion to lying increases with the size of the lie and the strength of the promise freely formulated messages lead to the fewest lies and the most efficient outcomes