order flow transaction clock and normality of asset returns the goal of this paper is to show that normality of asset returns can be recovered through a stochastic time change clark 1973 addressed this issue by representing the price process as a subordinated process with volume as the lognormally distributed subordinator we extend clark s results and find the following i stochastic time changes are mathematically much less constraining than subordinators ii the cumulative number of trades is a better stochastic clock than the volume for generating virtually perfect normality in returns iii this clock can be modeled nonparametrically allowing both the time change and price processes to take the form of jump diffusions the relations among trading volume stock prices and price volatility the subject of empirical and theoretical studies over many years have lately received renewed attention with the increased availability of high frequency data a vast amount of research has focused on issues such as news arrivals volume and price changes or volatility moves usually outside any framework of general or even partial equilibrium is the normality of returns a key issue for example in the mean variance paradigm for portfolio choice or the recent study of the problems of risk management e g in value at risk verified at any time horizon the evidence accumulated from a number of studies that document the presence of leptokurtosis and skewness in the distribution of returns of a wide variety of financial assets suggests that the answer is no studies as early as for example fama 1965 showed that daily returns are more long tailed than the normal density with the distribution of returns approaching normality as the holding period is extended to one month in the same manner volatility smiles and other observed

dynamic jump intensities and risk premiums evidence from s p500 returns and options we build a new class of discrete time models that are relatively easy to estimate using returns and or options the distribution of returns is driven by two factors dynamic volatility and dynamic jump intensity each factor has its own risk premium the models significantly outperform standard models without jumps when estimated on s p500 returns we find very strong support for time varying jump intensities compared to the risk premium on dynamic volatility the risk premium on the dynamic jump intensity has a much larger impact on option prices we confirm these findings using joint estimation on returns and large option samples

understanding heterogeneous preferences in random utility models a latent class approach a finite mixture approach toconditional logit models is developed in whichlatent classes are used to promoteunderstanding of systematic heterogeneity the model is applied to wilderness recreationin which a branded choice experiment involvingchoice of one park from a demand system wasadministered to a sample of recreationists the basis of membership in the classes orsegments in the sample involved attitudinalmeasures of motivations for taking a trip aswell as their stated preferences overwilderness park attributes the econometricanalysis suggested that four classes of peopleexist in the sample using the model toexamine welfare measures of some hypotheticalpolicy changes identified markedly differentwelfare effects than the standard singlesegment model and provided insight into thedifferential impact of alternative policies

equilibruim approach of asset pricing under levy process abstract this work considers the equilibrium approach of asset pricing for levy process it derives the equity premium and pricing kernel analytically for the stock price process obtains an equilibrium option pricing formula and explains some empirical evidence such as the negative variance risk premium implied volatility smirk and negative skewness risk premium by comparing the physical and risk neutral distributions of the log return different from most of the current studies in equilibrium pricing under jump diffusion models this work models the underlying asset price as the exponential of a levy process and thus allows nearly an arbitrage distribution of the jump component

parents discount rates for child quality contemporary discussions of economic growth make human capital or knowledge accumulation its primary engine 25 human capital as the lead component of the stock of wealth defines a developed economy becker and murphy 4 show that human capital both increases and is increased by the scope of the market its rate of return rises with the size of its stock 5 human capital also plays significant roles in models of human fertility choice 40 population and environmental degradation 11 34 capital mobility 3 and endogenous technological progress 33 a substantial portion of an adult s human capital is accumulated during childhood children as children however cannot independently contract for the resources required to support investments in this human capital though nearly every society grants parents wide discretion about the nurture they provide their children little is understood about what motivates investment by one generation in another the relative importance of different investment modes or the discount rates which parents apply whatever the motivation and the mode because of the long time span between birth and adulthood parents discount rates potentially exert great leverage upon the investment decisions they make for their children knowledge of these discount rates is a prerequisite to acquiring an improved understanding of the internal decision processes of the household a collective decision unit which economics mostly treats as a black box 1 important policy questions as well as scientific accuracy and logical consistency demand knowledge of the discount rates parents apply to investments in their children healthier better educated and wealthier children have a better chance in life but there is no evident reason to suppose that intrafamily discount rates are socially optimal 2 many of the private reactions and behaviors which reinforce or temper the intended effects of public policies are internal to the household when these intended effects have a substantial temporal dimension parental discount rates will be influential for example increased public investments in children can be neutralized

the behavior of risk and market prices of risk over the nasdaq bubble period we exploit the information in the options market to study the variations of return risk and market prices of different sources of risk during the rise and fall of the nasdaq market we specify a model that accommodates fluctuations in both risk levels and market prices of different sources of risk and we estimate the model using the time series returns and option prices on the nasdaq 100 tracking stock our analysis reveals three key variations during the period from march 1999 to march 2001 first return volatility increased together with the rising nasdaq index level even though the two tend to move in opposite directions second although the market price of diffusion return risk averages around 1 82 over the whole sample the estimates reached negative territory at the end of 1999 the estimates reverted back to highly positive values after the collapse of the nasdaq market third the market price of jump risk increased with the rising nasdaq valuation and this increase in market price coincided with an increased imbalance in open interest between put and call options

the variance gamma v g model for share market returns a new stochastic process termed the variance gamma process is proposed as a model for the uncertainty underlying security prices the unit period distribution is normal conditional on a variance that is distributed as a gamma variate its advantages include long tailedness continuous time specification finite moments of all orders elliptical multivariate unit period distributions and good empirical fit the process is pure jump approximable by a compound poisson process with high jump frequency and low jump magnitudes applications to option pricing show differential effects for options on the money compared to in or out of the money copyright 1990 by the university of chicago

what type of process underlies options a simple robust test we develop a simple robust method to distinguish the presence of continuous and discontinuous components in the price of an asset underlying options our method examines the prices of at the money and out of the money options as the option s time to maturity approaches zero we show that these prices converge to zero at speeds that depend upon whether the underlying asset price process is purely continuous purely discontinuous or a combination of both we apply the method to s p 500 index options and nd the existence of both a continuous component and a jump component in the index to effectively price or hedge derivative securities or to understand the behavior of nancial asset prices in general it is important to know if they are best modeled using a purely continuous process pc a pure jump process pj or a combination of both cj we develop a method to distinguish between these possibilities using options written on the asset in question speci cally we examine the market prices of at the money atm and out of the money otm options as the option s maturity date approaches the valuation date while the prices of all atm and otm options converge to zero as the time to maturity approaches zero our theoretical work shows that the speed of convergence diiers across the three possibilities pc pj or cj we can thus identify the type of an asset price process by examining the convergence speeds of these option prices the simplest approach for determining the type of process governing an asset price is to examine the time series of asset prices directly however the discretely sampled paths from the three types of processes look very similar unless the sampling frequency is extremely high furthermore increasing the sampling frequency introduces market microstructure eiects since our method does not examine the sample path of the underlying asset directly it circumvents these di culties our method is able to distinguish the type of process governing the price of an asset because diierent types of processes have dramatically diierent implications

the pricing of options on assets with stochastic volatilities one option pricing problem that has hitherto been unsolved is the pricing of a european call on an asset that has a stochastic volatility this paper examines this problem the option price is determined in series form for the case in which the stochastic volatility is independent of the stock price numerical solutions are also produced for the case in which the volatility is correlated with the stock price it is found that the black scholes price frequently overprices options and that the degree of overpricing increases with the time to maturity one option pricing problem that has hitherto remained unsolved is the pricing of a european call on a stock that has a stochastic volatility from the work of merton 12 garman 6 and cox ingersoll and ross 3 the differential equation that the option must satisfy is known the solution of this differential equation is independent of risk preferences if a the volatility is a traded asset or b the volatility is uncorrelated with aggregate consumption if either of these conditions holds the risk neutral valuation arguments of cox and ross 4 can be used in a straightfoward way this paper produces a solution in series form for the situation in which the stock price is instantaneously uncorrelated with the volatility we do not assume that the volatility is a traded asset also a constant correlation between the instantaneous rate of change of the volatility and the rate of change of aggregate consumption can be accommodated the option price is lower than the blackscholes b s 1 price when the option is close to being at the money and higher when it is deep in or deep out of the money the exercise prices for which overpricing by b s takes place are within about ten percent of the security price this is the range of exercise prices over which most option trading takes place so we may in general expect the b s price to overprice options this effect is exaggerated as the time to maturity increases one of the most surprising implications of this is that if the b s equation is used to determine the implied volatility of a near the money option the longer the time to maturity the lower the implied volatility numerical solutions for the case in which the volatility is correlated with the stock price are also examined the stochastic volatility problem has been examined by merton 13 geske 7 johnson 10 johnson and shanno 11 eisenberg 5 wiggins 16 and

environmentalizing economic development a south asian perspective south asia s pursuit of economic development has entailed considerable damage to and exposed the fragility of the physical environment of the region this paper provides an analytical overview of the of the environmental problem that manifest themselves in south asia in a comparative perspective with east and southeast asian countries as well as selected developed market economics to date south asian development process has been environment intensive and environment depleting it is argued that environmental problems are likely to set serious constraints to sustain growth in production to support a growing population by exploring the relationship between indices of human welfare and bio diversity conservation the paper exposes the dichotomy of the development process finally the study underscores the need for a range of policy options that rely both based and non market based instruments in an integrated setting to enviromnentalize south asian economic development c 2004 elsevier b v all rights reserved

valuation of ecosystem goods and services part 1 an integrated dynamic approach abstract this is the first part of a two part paper which offers a new approach to the valuation of ecosystem goods and services the existing literature on environmental valuation is based on two distinct foundations the ecological valuation methods derive values by a cost of production approach their common characteristic is the neglect of consumer preferences the economic valuation methods focus on the exchange value of ecosystem services their common characteristic is that they are finally based on consumer preferences and do not adequately take account of the complex internal structure of ecosystems as the existing methods for the valuation of ecosystem services emphasize either the economic system or the ecosystem the main objective of part 1 is to provide the conceptual foundations for a new method of valuation of ecosystem services which deals simultaneously with the ecosystem the economic system and society in a balanced way within a simple pre industrial model it is shown how the interdependencies between the three subsystems influence values and how values change over time

the takeover deterrent effect of open market share repurchases this paper examines whether open market share repurchases deter takeovers we model pre repurchase takeover probability as a latent variable and examine its impact on the firm s decision to repurchase shares given specification tests reject the tobit model we turn to the censored quantile regression method of powell 1986 journal of econometrics 32 143 155 we find a significantly positive relation between open market share repurchases and takeover probability and we reconcile empirical findings in previous studies that contradict predictions repurchase activity is inversely related to firm size consistent with smaller firms having greater information asymmetry and is related to temporary but not permanent cash flows

pricing american options under stochastic volatility and stochastic interest rates we introduce a new analytical approach to price american options using an explicit and intuitive proxy for the exercise rule we derive tractable pricing formulas using a short maturity asymptotic expansion depending on model parameters this method can accurately price options with time to maturity up to several years the main advantage of our approach over existing methods lies in its straightforward extension to models with stochastic volatility and stochastic interest rates we exploit this advantage by providing an analysis of the impact of volatility mean reversion volatility of volatility and correlations on the american put price

leverage effect volatility feedback and self exciting market disruptions equity index volatility variation and its interaction with the index return can come from three distinct channels first index volatility increases with the market s aggregate financial leverage second positive shocks to systematic risk increase the cost of capital and reduce the valuation of future cash flows generating a negative correlation between the index return and its volatility regardless of financial leverage finally large negative market disruptions show self exciting behaviors this article proposes a model that incorporates all three channels and examines their relative contribution to index option pricing and stock option pricing for different types of companies

option implied volatility factors and the cross section of market risk premia abstract the main goal of this paper is to study the cross sectional pricing of market volatility the paper proposes that the market return diffusion volatility and jump volatility are fundamental factors that change the investors investment opportunity set based on estimates of diffusion and jump volatility factors using an enriched dataset including s p 500 index returns index options and vix the paper finds negative market prices for volatility factors in the cross section of stock returns the findings are consistent with risk based interpretations of value and size premia and indicate that the value effect is mainly related to the persistent diffusion volatility factor whereas the size effect is associated with both the diffusion volatility factor and the jump volatility factor the paper also finds that the use of market index data alone may yield counter intuitive results

factors determining participation of the elderly in supplemental security the same low participation rates which plague many welfare programs have been observed among the elderly eligible for supplemental security income ssi a number of hypotheses have been offered to explain the low enrollment but none has attracted universal acceptance in this paper i use the survey of income and program participation sipp to examine the participation of the elderly in ssi because of the high quality of the data i am able to determine eligibility more accurately than in most previous studies in this sample only 56 percent of those whom i determine to be eligible for ssi are presently receiving benefits i model the decision to participate as a probit equation but modify the likelihood function to account for measurement error in the expected benefit the results indicate that participation is primarily determined by the financial situation of the eligible individuals although all those eligible for ssi are poor those with little in the way of other resources are significantly more likely to participate this finding differs from widespread beliefs that eligible individuals are discouraged by the difficulty of the application process or that many are uninformed about the program

a two tiered earnings frontier estimation of employer and employee information in the labor market this pap er develops a two tiered frontier estimation procedure to decompose the residual of an earnings function into three components the first component can be interpreted as being purely random search theory is used to show that the other two components represent employee and employer ignorance of offer and reservation wages respectively relative employee and employer ignorance estimates are presented for various population strata copyright 1987 by mit press

the estimation of a joint wage hours labor supply model in this paper the standard cross sectional static model of labor supply is modified to make the wage endogenous and a joint wage hours model is estimated the econometric technique addresses the non linearity of the budget constraint by approximating the constraint by a series of discrete points the results show that the budget constraint is indeed nonlinear that hours affect the wage quadratically that true wage elasticities are lower as a result and that the model fits the hours distribution much better than the standard tobit model

information power and war ultimatum bargaining models of international interactions suggest that when conflict is costly and the actors are fully informed the probability of conflict goes to zero however conflict occurs with some positive probability when the challenger is uncertain about the defender s reservation value i employ a simple ultimatum game of bargaining to evaluate two traditional power centric theories of world politics balance of power and power transition theory the formal and empirical analyses demonstrate that as states approach power parity information asymmetries are greatest thus enhancing the probability of militarized conflict uncertainty is a central cause of conflict emergence and is correlated with the distribution of observable capabilities recognizing the relationship between the distribution of power and the uncertainty offers a more sophisticated interpretation of power centric explanations of world politics

new insights into smile mispricing and value at risk the hyperbolic model the authors investigate a new basic model for asset pricing the hyperbolic model which allows an almost perfect statistical fit of stock return data after a detailed introduction into the theory they use secondary market data to compare the hyperbolic model to the classical black scholes model the authors study implicit volatilities the smile effect and pricing performance exploiting the full power of the hyperbolic model they construct an option value process from a statistical point of view by estimating the implicit risk neutral density function from option data finally the authors present some new value at risk calculations leading to new perspectives to cope with model risk copyright 1998 by university of chicago press

simulation methods for levy driven continuous time autoregressive moving average carma stochastic volatility models we develop simulation schemes for the new classes of non gaussian pure jump levy processes for stochastic volatility we write the price and volatility processes as integrals against a vector levy process which makes series approximation methods directly applicable these methods entail simulation of the levy increments and formation of weighted sums of the increments they do not require a closed form expression for a tail mass function or specification of a copula function we also present a new and apparently quite flexible bivariate mixture of gammas model for the driving levy process within this setup it is quite straightforward to generate simulations from a levy driven continuous time autoregressive moving average stochastic volatility model augmented by a pure jump price component simulations reveal the wide range of different types of financial price processes that can be generated in this manner including processes with persistent stochastic volatility dynamic leverage and jumps

a comparison of pricing and hedging performances of equity derivatives models abstractthis article investigates the pricing hedging conundrum i e the observation of a mismatch between derivatives models pricing and hedging performances that has so far been under emphasized as the literature tends to focus on increasingly complicated option pricing models without adequately addressing hedging performance hence we analyse the ability of the black scholes practitioner black scholes heston nandi and heston models to delta hedge a set of call options on the s p500 index and apple stock we extend earlier studies in that we consider the impact of asset dynamics apply a stringent payoff replication strategy look at the impact of moneyness at maturity and test for the robustness to the parameters calibration frequency and delta vega hedging the study shows that adding risk factors to a model as stochastic volatility should only be considered in light of the data dynamics even then however more complicated models generally fare poorly for hedging purposes hence a better

the impact of collective bargaining legislation on disputes in the u s public sector no legislation may be the worst legislation this article estimates the impact of collective bargaining legislation on disputes during labor negotiations in the u s public sector we use a large national sample of u s state and local government contracts to compare the incidence and intensity of disputes by similar workers under different forms of collective bargaining legislation the breadth of our data allows us to examine the impact of five different forms of legislation our principal finding is that dispute costs are highest in jurisdictions that provide no explicit framework for bargaining or dispute resolution strikes are as frequent and as long when they are illegal and employers are not required to bargain with employees as when they are legal but employers are required to bargain arbitration is most frequently used when formal institutions for arbitration have been provided

changes of numeraire for pricing futures forwards and options a change of numeraire argument is used to derive a general option parity or equivalence result relating american call and put prices and to obtain new expressions for futures and forward prices the general parity result unifies and extends a number of existing results the new futures and forward pricing formulas are often simpler to compute in multifactor models than existing alternatives we also extend previous work by deriving a general formula relating exchange options to ordinary call options a number of applications to diffusion models including stochastic volatility stochastic interest rate and stochastic dividend rate models and jump diffusion models are examined a self financing portfolio is called a numeraire if security prices measured in units of this portfolio admit an equivalent martingale measure the most commonly used numeraire is the reinvested short rate process the corresponding equivalent martingale measure is the risk neutral measure geman el karoui and rochet 1995 show that other numeraires can simplify many asset pricing problems in this article we build on their results and using the reinvested asset price as the numeraire unify and extend the literature on option parity or equivalence results relating american call and put prices for asset and futures options the same numeraire change is used to obtain new pricing formulas for futures and forwards that are often simpler to compute in multifactor models finally we use a numeraire change to simplify exchange option pricing extending a similar result in geman el karoui and rochet to dividend paying assets the change of numeraire method is most intuitive in the context of foreign currency derivative securities as discussed by grabbe 1983 an american call option to buy 1 dm with dollar price process s for k dollars is equivalent to an american put option to sell k dollars with dm price process k s for a strike price of 1 dm the dollar price of the call must therefore equal the product of the current exchange rate s0 and the dm price of the put the call price is computed using the dollar value of a u s i am grateful to kerry back the editor and costis skiadas for their many helpful suggestions thanks also to peter demarzo matt jackson naveen khanna david marshall robert mcdonald jim moser phyllis payette and an anonymous referee for their comments this article subsumes schroder 1992

the impact of attribute preferences on adoption timing the case of photo voltaic pv solar cells for household electricity generation we are concerned with micro generation individual households generating electricity using a renewable technology we focus on modeling the adoption probability of photo voltaic solar panels by households using data from ontario canada where a generous feed in tariff is available to households generating electricity from solar panels we measure household level preferences for panels and use these preferences along with household characteristics to predict adoption time intentions we use discrete choice experiments to measure household level preferences and establish a causal link between the attributes of the technology and adoption time intentions using discrete time survival mixture analysis significant preferences included lower cost greater energy savings and lower fossil fuel inflation the conditional hazard probability of adoption at a particular time given no previous adoption showed that the attribute preferences had intuitively reasonable effects the hazard probabilities allow us to compute the cumulative probability of adoption over a 10 year period per household technology awareness has a significant effect on the adoption probability reinforcing the need for effective education our approach indicates the level of heterogeneity in preferences particularly high for investment criteria and co2 emissions these findings suggest that education campaigns should explain more about investment criteria feed in tariffs and environmental effects

selectivity and distributional assumptions in static labor supply models the technique of estimating labor supply models has drastically changed since the early 1970s while early studies 28 23 estimated a single labor supply equation the occurrence of nonworkers soon became an issue of concern that complicated both the model estimated and the estimation technique people choose to work or not to work based on their opportunity set workers are therefore special they have poorer than average alternatives or better than average wage offers 15 the sample of workers is not random anymore but rather self selected ols estimators are biased and inconsistent and new estimation techniques are needed to correct that deficiency this realization led to an expansion of the labor supply model with a wage equation as wage offers of non workers are generally unobservable 9 while at the same time an array of new econometric techniques came forth to deal with problems of self selection and dichotomous endogenous variables two step and maximum likelihood are standard estimation methods nowadays stimulated by work of heckman and others 18 19 in turn these improved techniques allowed for more sophisticated labor supply models involving tax and transfer schedules 8 cost of labor force entry and institutional constraints 12 16 29 and wage rates interactively determined by labor hours 30 all of these new studies have one assumption in common the random disturbances are assumed to be generated by the normal distribution in an appeal to the familiar central limit theorem this theorem states roughly that the combined influence of numerous independent neglected factors may be represented by a single disturbance term that is approximately normally distributed

oil price dynamics 2002 2006 abstract oil price dynamics during 2002 2006 have been characterized by high volatility high intensity jumps and strong upward drift and were concomitant with underlying fundamentals of oil markets and world economy namely pressure on oil prices resulting from rigid crude oil supply and expanding world demand for crude oil a change in the oil price process parameters would require a change in underlying fundamentals market expectations extracted from call and put option prices anticipated no change in underlying fundamentals in the short term markets expected oil prices to remain volatile and jumpy and with higher probabilities to rise rather than fall above the expected mean

takeover activity among financial mutuals an analysis of target characteristics abstract this paper presents an empirical investigation of the merger process among mutuals using a large pooled cross section time series sample of uk building societies between 1981 and 1993 the financial services industry is probably unique in having a substantial mutual sector coexisting with and competing against joint stock firms however given the severely attenuated system of ownership claims in the financial mutual it has been widely predicted that this form will exhibit strong behavioural differences from the stock sector it is surprising therefore that despite the important governance role accorded to mergers in the corporate literature the merger process among financial mutuals has been almost totally ignored this paper explores the mutual merger process via an examination of the targets characteristics it finds little support for the natural selection view of mutual acquisitions but it does reveal the importance of the regulatory process above all the results show a surprising similarity to those from studies of the merger process in joint stock firms

time changed levy processes and option pricing abstract the classic black scholes option pricing model assumes that returns follow brownian motion but return processes differ from this benchmark in at least three important ways first asset prices jump leading to non normal return innovations second return volatilities vary stochastically over time third returns and their volatilities are correlated often negatively for equities time changed levy processes can simultaneously address these three issues we show that our framework encompasses almost all of the models proposed in the option pricing literature and it is straightforward to select and test a particular option pricing model through the use of characteristic function technology

the finite moment log stable process and option pricing we document a surprising pattern in s p 500 option prices when implied volatilities are graphed against a standard measure of moneyness the implied volatility smirk does not flatten out as maturity increases up to the observable horizon of two years this behavior contrasts sharply with the implications of many pricing models and with the asymptotic behavior implied by the central limit theorem clt we develop a parsimonious model which deliberately violates the clt assumptions and thus captures the observed behavior of the volatility smirk over the maturity horizon calibration exercises demonstrate its superior performance against several widely used alternatives

a laboratory study of auctions for reducing non point source pollution abstract non point source pollution such as nutrient runoff to waterways from agricultural production is an environmental problem that typically involves asymmetric information land use changes to reduce pollution incur opportunity costs that are privately known to landholders but these changes provide environmental benefits that may be more accurately estimated by regulators this paper reports a testbed laboratory experiment in which landholder sellers in sealed offer auctions compete to obtain part of a fixed budget allocated by the regulator to subsidize abatement in one treatment the regulator reveals to landholders the environmental benefits estimated for their projects and in another treatment the regulator conceals the potential projects environmental quality the results show that sellers offers misrepresent their costs more for high quality projects when quality is revealed so total abatement is lower and seller profits are higher when landholders know their projects environmental benefits this suggests that concealing this information may improve regulatory efficiency

willingness to pay for agricultural land preservation and policy process attributes does the method matter this article examines relationships between willingness to pay for land preservation and policy process attributes the approach departs from traditional welfare assessments in that it does not constrain attributes of the policy process to be utility neutral results indicate policy process attributes may influence utility in some circumstances even after controlling for the influence of land use outcomes often correlated with specific policy techniques results further imply that in some cases even comprehensive specification of land use outcomes by stated preference instruments may be insufficient to prevent systematic shifts in willingness to pay related to unspecified yet assumed policy process attributes

taxes and the timing of births because the tax savings of having a child are a realized only if the birth takes place before midnight january 1 the incentives for the marginal birth are substantial using a sample of children from the national longitudinal survey of youth we find that the probability that a child is born in the last week of december rather than the first week of january is positively correlated with tax benefits we estimate that increasing the tax benefit of having a child by 500 raises the probability of having the child in the last week of december by 26 9 percent

pricing and hedging in incomplete markets abstract we present a new approach for positioning pricing and hedging in incomplete markets that bridges standard arbitrage pricing and expected utility maximization our approach for determining whether an investor should undertake a particular position involves specifying a set of probability measures and associated floors which expected payoffs must exceed in order for the investor to consider the hedged and financed investment to be acceptable by assuming that the liquid assets are priced so that each portfolio of assets has negative expected return under at least one measure we derive a counterpart to the first fundamental theorem of asset pricing we also derive a counterpart to the second fundamental theorem which leads to unique derivative security pricing and hedging even though markets are incomplete for products that are not spanned by the liquid assets of the economy we show how our methodology provides more realistic bid ask spreads

extracting market information from equity options with exponential levy processes levy processes have been successfully applied in the modeling of financial assets useful information such as implied volatility skewness and risk preferences can be derived from market option prices in this paper we advocate using esscher conjugate levy processes to estimate risk neutral and empirical densities more specifically we employ the exponential meixner and nig processes to calculate in closed form the pricing kernel in the equity market and then study the evolution of equity market behavior between 2002 and 2010 our empirical analysis using s p 500 options shows that the risk preferences of equity investors were signalling an anomaly in the market well before the subprime prime mortgage crisis august 2007 and the crisis of confidence that followed anticipating the downfall in equity markets in 2008 but then returning to normal levels in 2009

the factor structure in equity options principal component analysis of equity options on dow jones rms reveals a strong factor structure the rst principal component explains 77 of the variation in the equity volatility level 77 of the variation in the equity option skew and 60 of the implied volatility term structure across equities furthermore the rst principal component has a 92 correlation with sp g12 g13

targeting conservation efforts in the presence of threshold effects and ecosystem linkages abstract the prevailing federal policy of targeting conservation programs on the basis of physical criteria tends to ignore the threshold effect of conservation efforts and the correlation between alternative environmental benefits in this article we examine the extent to which conservation funds will be misallocated when threshold effects and correlated benefits are ignored we show that targeting conservation efforts based on physical criteria or political equity concerns may actually lead to the lowest possible benefits to society from conservation expenditure ignoring correlated benefits may lead not only to misallocation of conservation funds among watersheds but also to incorrect resources e g land streams being targeted for conservation the empirical analysis focuses on riparian habitat investments for salmon restoration in the pacific northwest we show that a large portion of conservation benefits would be lost when threshold effects and correlated benefits are ignored and argue that funds should be allocated so that the total value of environmental benefits is maximized not the total amount of resources protected

u s stock market crash risk 1926 2010 abstract this paper examines how well alternate time changed levy processes capture stochastic volatility and the substantial outliers observed in u s stock market returns over the past 85 years the autocorrelation of daily stock market returns varies substantially over time necessitating an additional state variable when analyzing historical data i estimate various one and two factor stochastic volatility levy models with time varying autocorrelation via extensions of the bates 2006 methodology that provide filtered daily estimates of volatility and autocorrelation the paper explores option pricing implications including for the volatility index vix during the recent financial crisis

time changed levy libor market model pricing and joint estimation of the cap surface and swaption cube we propose a novel time changed levy libor london interbank offered rate market model for jointly pricing of caps and swaptions the time changes are split into three components the first component allows matching the volatility term structure the second generates stochastic volatility and the third accommodates for stochastic skew the parsimonious model is flexible enough to accommodate the behavior of both caps and swaptions for the joint estimation we use a comprehensive data set spanning the financial crisis of 2007 2010 we find that even during this period neither market is as fragmented as suggested by the previous literature

the distribution of income shocks during crises an application of quantile analysis to mexico 1992 95 moving beyond the simple comparisons of averages typical of most analyses of household income shocks this article employs quantile analysis to generate a complete distribution of such shocks by type of household during the 1995 crisis in mexico it compares the distributions across normal and crisis periods to see whether observed differences were due to the crisis or are intrinsic to the household types alternatively it asks whether the distribution of shocks during normal periods was a reasonable predictor of vulnerability to income shocks during crises it finds large differences in the distribution of shocks by household types both before and during the crisis but little change in their relative positions during the crisis the impact appears to have been spread fairly evenly households headed by people with less education poor single mothers or people working in the informal sector do not appear to experience disproportionate income drops either in normal times or during crises

the sensitivity of an empirical model of married women s hours of work to economic and statistical assumptions this study undertakes a systematic analysis of several theoretic and statistical assumption s used in many empirical models of female labor supply using a singl e data set psid 1975 labor supply data the author is able to replic ate most of the range of estimated income and substitution effects fo und in previous studies in this field he undertakes extensive specif ication tests and finds that most of this range should be rejected du e to statistical and model misspecifications the two most important assumptions appear to be the tobit assumption used to control for sel f selection into the labor force and exogeneity assumptions on the wi fe s wage rate and her labor market experience copyright 1987 by the econometric society

the fine structure of asset returns an empirical investigation we investigate the importance of diffusion and jumps in a new model for asset returns in contrast to standard models we allow for jump components displaying finite or infinite activity and variation empirical investigations of time series indicate that index dynamics are devoid of a diffusion component which may be present in the dynamics of individual stocks this leads to the conjecture confirmed on options data that the risk neutral process should be free of a diffusion component we conclude that the statistical and risk neutral processes for equity prices are pure jump processes of infinite activity and finite variation

time changed birth processes and multiname credit derivatives a credit investor such as a bank granting loans to firms or an asset manager buying corporate bonds is exposed to correlated corporate default risk a multiname credit derivative is a financial security that allows the investor to transfer this risk to the credit market in this paper we study the valuation and risk analysis of multiname derivatives to capture the complex economic phenomena that drive the pricing of these securities we introduce a time changed birth process as a probabilistic model of correlated event timing the self exciting property of a time changed birth process captures the feedback from events that is often observed in credit markets the stochastic variation of arrival rates between events captures the exposure of firms to common economic risk factors we derive a closed form expression for the distribution of a time changed birth process and develop analytically tractable pricing relations for a range of multiname derivatives valuation problems we illustrate our results by calibrating a tranche forward and option pricer to market rates of index and tranche swaps

numerical approximations of optimal portfolios in mispriced asymmetric levy markets abstract we present numerical approximations of optimal portfolios in mispriced levy markets under asymmetric information for informed and uninformed investors having logarithmic preference we apply our numerical scheme to kou 2002 jump diffusion markets by deriving analytic formulas for the first two derivatives of the underlying portfolio objective function which depend only on the levy measure of the jump generating process optimal portfolios are then simulated using the box muller algorithm newton s method and incomplete beta functions convergence dynamics and trajectories of sample paths of optimal portfolios for both investors are presented at different levels of information asymmetry mispricing horizon asymmetry in the kou density jump intensity volatility mean reversion speed and sharpe ratios we also apply the proposed newton s algorithm to compute optimal portfolios for investors in variance gamma markets via instantaneous centralized moments of returns

taxes and transfers their effects on the decision to end a marriage abstract the transfer system typically has large marriage disincentives while the income tax system is likely to subsidize marriage for many low income families in other words the tax system may offset an increase in transfer benefits associated with marital separation the interaction of the transfer system with the income tax system has largely been overlooked the income tax system has become more relevant for low income families with the recent expansion of the earned income tax credit which filers may be eligible for even if their tax liability is zero this paper uses family level measures of the change in transfer benefits and tax liability associated with a change in family structure to consider the effect of these financial incentives on separation decisions

sequential bayesian analysis of time changed infinite activity derivatives pricing models this article investigates time changed infinite activity derivatives pricing models from the sequential bayesian perspective it proposes a sequential monte carlo method with the proposal density generated by the unscented kalman filter this approach overcomes to a large extent the particle impoverishment problem inherent to the conventional particle filter simulation study and real applications indicate that 1 using the underlying alone cannot capture the dynamics of states and by including options the precision of state filtering is dramatically improved 2 the proposed method performs better and is more robust than the conventional one and 3 joint identification of the diffusion stochastic volatility and jumps can be achieved using both the underlying data and the options data

forest biodiversity and timber extraction an analysis of the interaction of market and non market mechanisms abstract forest ecosystems provide a range of products and services for human use primarily due to the biodiversity inherent in them from the ecological viewpoint this diversity is of different kinds and has the potential to cater to human well being in multifarious ways however the mix of services that is available to any economy from forests depends in addition to their biological characteristics on the nature of the economic regime within which they are exploited some commodities such as timber are extracted in a regime driven in the main by market forces others such as non timber forest products may be extracted under a variety of arrangements the range varying from open access to common property regimes services such as those of water cycle augmentation and micro climate regulation are typically available to communities as free goods it is hypothesized that this difference in institutional regimes has implications for the mix of products and services that are extracted in different ways through its effect on the extraction efforts for the marketed product because of policies such as plantation which are intended to increase the supply of the marketed product typically timber through a change in biodiversity of the forest stock which in turn results in a decreased availability of the non marketed products the present paper studies conditions under which timber has been extracted from forests of the north indian state of uttar pradesh up during the 1975 2000 period to examine this proposition it is postulated that extraction of timber at any point of time depends on the stock the effort involved in extraction as represented by the per unit cost of extraction the biodiversity index defined as a product biodiversity index and a variable depicting ecological characteristics of the forests using a modified gordon schaefer production function and the assumption that forests are managed for sustainable timber extraction the reduced form equations are derived and estimated using data from uttar pradesh forests for the 1975 2000 period the results suggest that in the absence of variables representing the plantation area and biodiversity corrected stocks the explanatory power of the model is low even though extraction is seen to be significantly impacted by effort if however the ratio of plantation area and biodiversity adjusted extraction are introduced as explanatory variables interesting results with respect to the trend of extraction over time are obtained as stocks of woody biomass increase extraction increases a decrease in biodiversity of the stock may be accompanied under a certain set of circumstances with a rising trend in extraction and at a rising rate as explained above however an increased biodiversity may imply a decreasing trend in the extraction in the future provided that present extraction y does not rise at a rate faster than the rate of increase in the biodiversity these two results seen together are we believe significant they point to the fact that policies aimed at increasing plantation increase short run timber extraction further if biodiversity increases the impact on future extraction of timber depends on relative rates of change in biodiversity and extraction per unit effort it is clear that trade offs between timber extraction and existence of biodiverse forests providing a variety of goods and services

deducing the implications of jump models for the structure of stock market crashes rallies jump arrival rates and extremes this article studies the structure of stock market crashes rallies their jump arrival rates and extremes large market moves are characterized in a pure jump modeling framework based on both raw and devolatized returns it is shown empirically that crashes are more severe in intensity than rallies and have higher arrival rates at the same time both left tail and right tail extreme events conform with frechet limit laws pure jump models which describe well the tail properties of market returns are identified via their levy measures the distribution of extreme events implied by our model s levy measure is closer to the actual realization of extremes than those of competing models finally there is information content in the levy measure of pure jump models for forward arrival rate of jumps

a jump diffusion model for option pricing brownian motion and normal distribution have been widely used in the black scholes option pricing framework to model the return of assets however two puzzles emerge from many empirical investigations the leptokurtic feature that the return distribution of assets may have a higher peak and two asymmetric heavier tails than those of the normal distribution and an empirical phenomenon called volatility smile in option markets to incorporate both of them and to strike a balance between reality and tractability this paper proposes for the purpose of option pricing a double exponential jump diffusion model in particular the model is simple enough to produce analytical solutions for a variety of option pricing problems including call and put options interest rate derivatives and path dependent options equilibrium analysis and a psychological interpretation of the model are also presented

properties of realized variance under alternative sampling schemes this article investigates the statistical properties of the realized variance estimator in the presence of market microstructure noise different from the existing literature the analysis relies on a pure jump process for high frequency security prices and explicitly distinguishes among alternative sampling schemes including calendar time sampling business time sampling and transaction time sampling the main finding in this article is that transaction time sampling is generally superior to the common practice of calendar time sampling in that it leads to a lower mean squared error mse of the realized variance the benefits of sampling in transaction time are particularly pronounced when the trade intensity pattern is volatile based on ibm transaction data over the period 2000 2004 the empirical analysis finds an average optimal sampling frequency of about 3 minutes with a steady downward trend and significant day to day variation related to market liquidity and a consistent reduction in mse of th

bringing biophysical models into the economic laboratory an experimental analysis of sediment trading in australia abstract experimental economics has emerged and matured as a formal method for questioning and testing economic theory and assumptions concerning individual behavior more recently experimental methods have been used successfully in an economic laboratory to test alternative environmental policy options the data underpinning these experiments is often stylized or hypothetical in nature ecologists and experimental economists have much to gain by exploring ways to underpin economic experiments with data generated from biophysical models the study makes a contribution by demonstrating how underpinning experiments with regionally modeled biophysical data may give insights which would not necessarily arise from stylized data in this study sediment data generated from an environmental management support system emss a software model of sediment runoff in catchments was used to populate the players decision space the study investigated the relative performance of four different instruments closed first and second price call tenders cap and trade and command and control regulation these market instruments will be compared with the aim of promoting riparian management and reducing total suspended solids exiting a catchment the study finds that the cost of meeting regulatory requirement of sediment reduction through command and control is less than either first or second price auction however cap and trade produced high levels of convergence and production which moved towards minimizing the cost of achieving the cap reduction level

the optimal allocation of conservation funds abstract this paper presents a framework to evaluate alternative designs of conservation programs and their implications for the allocation of conservation funds we show that the efficient allocation of conservation funds must consider two important pooling effects cumulative effects and interrelationships among alternative environmental benefits ignoring the cumulative effects of environmental benefits may cause conservation funds to be overly dispersed geographically and as a result may result in minimum environmental benefits when the budget is small ignoring the interrelationships among alternative environmental benefits may result in not only misallocation of conservation funds among geographical areas but also incorrect resources being targeted for conservation practices implications of these results for the design of conservation programs are discussed

dampened power law reconciling the tail behavior of financial security returns this article proposes a stylized model that reconciles several seemingly conflicting findings on financial security returns and option prices the model is based on a pure jump levy process wherein the jump arrival rate obeys a power law dampened by an exponential function the model allows for different degrees of dampening for positive and negative jumps and also for different pricing for upside and downside market risks calibration of the model to the s p 500 index shows that the market charges only a moderate premium on upward index movements but the maximally allowable premium on downward index movements

optimal trading strategies for levy driven ornstein uhlenbeck processes this study derives an optimal pairs trading strategy based on a levy driven ornstein uhlenbeck process and applies it to high frequency data of the s p 500 constituents from 1998 to 2015 our model

heteroskedastic sample selection and developing country wage equations many researchers have dealt with potential selectivity bias in developing country wage equations by employing heckman s 1979 two step method or related techniques despite the potential for such methods to produce misleading results if the assumptions on which they are based are incorrect this paper argues that the results produced even by parametric easy to implement selectivity bias correction methods can inspire more confidence than the typical applications to date when model selection testing is used to select from a specified diverse set assumptions for which there is support in the data and when sensitivity analysis is used to identify parameters whose estimates are robust across a wide range of assumptions in particular it highlights the importance of allowing for the nonlinearities implied by selection rule heteroskedasticity there is economic reason to suspect heteroskedasticity and econometric reason to believe that the nonlinearities it introduces into the first stage will improve

a science driven market based instrument for determining the cost of environmental services a comparison of two catchments in australia abstract an auction based approach or mbi for market based instrument was used to purchase environmental services from landowners and to establish a long term economic resource forest plantations in two catchments in the state of victoria australia the policy goal of the mbi was to encourage the conversion of cleared land to forest plantations it was desired to achieve this while also reducing the amount of land affected by dryland salinity with minimum impact on water available for irrigation operationally interested landowners identified areas on which they would be willing to establish forest plantations and stated the amount of money they would require from the government to undertake plantation establishment this constituted a landowner bid the proposed planting area associated with each bid was processed through a quantitative hydrological model to estimate off site impacts on dryland salinity and the change in water yield resulting from the conversion of individual non forested areas to forest plantations landowner bids were then accepted or not based on the economic trade offs among dollars requested by a landowner reduction in water yield and decrease in dryland salinity to enable a comparison of costs the mbi was independently trialled in two catchments for both the cost to government of a hectare of plantation and or a hectare of salinity benefit was calculated a number of ways assuming the existence of a calibrated hydrological model costs associated with distributing money via such an mbi were publicity fieldwork processing the bids through the model probity legal and administration in the gippsland catchment the total cost to establish forest plantations was 5340 per ha whereas it was 1635 per ha in the corangamite catchment no salinity benefit was obtained in gippsland but in corangamite if considered in isolation of the economic forest plantation benefit the cost per hectare of salinity benefit was 5020 operational aspects of the mbi are presented and discussed and a comparison is made to the expected costs of a conventional non science driven approach to landowner incentives

asymmetry in the jump size distribution of the s p 500 evidence from equity and option markets this paper studies alternative distributions for the size of price jumps in the s p 500 index we introduce a range of new jump diffusion models and extend popular double jump specifications that have become ubiquitous in the finance literature the dynamic properties of these models are tested on both a long time series of s p 500 returns and a large sample of european vanilla option prices we discuss the in and out of sample option pricing performance and provide detailed evidence of jump risk premia models with double gamma jump size distributions are found to outperform benchmark models with normally distributed jump sizes

dynamic incentives by environmental policy instruments a survey abstract in this paper i survey and discuss recent developments on the incentives provided by environmental policy instruments for both adoption and development of advanced abatement technology a main conclusion to be drawn from the literature is that under competitive conditions market based instruments usually perform better than command and control moreover taxes may provide stronger long term incentives than tradable permits if the regulator is myopic if the government can anticipate new technology or is able to react on it optimally regulatory policies by virtue of administered prices taxes and policies by setting quantities issuing tradable permits are almost equivalent the literature also shows that under competitive conditions there is no difference between auctioning permits and grandfathering moreover timing and commitment of environmental policy is not crucial for adoption under competitive conditions commitment has positive incentive effects however if an r d sector has market power in the presence of market imperfections the ranking of the different policy instruments is ambiguous

asset pricing under the quadratic class we identify and characterize a class of term structure models where bond yields are quadratic functions of the state vector we label this class the quadratic class and aim to lay a solid theoretical foundation for its future empirical application we consider asset pricing in general and derivative pricing in particular under the quadratic class we provide two general transform methods in pricing a wide variety of fixed income derivatives in closed or semi closed form we further illustrate how the quadratic model and the transform methods can be applied to more general settings i introduction we identify and characterize a class of term structure models where bond yields are quadratic functions of the markov process we label this class the quadratic class and aim to lay a solid theoretical foundation for its future empirical application we identify the necessary and sufficient conditions for the quadratic class and consider the general asset pricing problem under the quadratic framework in particular we propose two transform methods to price a wide variety of interest rate derivatives in closed or semi closed form we further illustrate how the pricing methods can be applied to more general settings examples include option pricing for currencies or stocks with quadratic stochastic volatilities our interests in the quadratic class come mainly from concerns on empirical application recent empirical research within the affine framework of duffie and kan 1996 indicates an inherent tension between i delivering good empirical performance in matching salient features of the interest rate data and ii excluding positive probabilities of having negative interest rates for example backus telmer and wu 1999 and dai and singleton 2000 find that incorporating gaussian state variables in the affine framework significantly increases the flexibility for model design and greatly improves its empirical performance in capturing the conditional dynamics of interest rates dai and singleton 2001

supersized votes ballot length uncertainty and choice in direct legislation elections voters in polities that make heavy use of direct democracy are frequently confronted with ballots that contain a multitude of propositions claims that direct legislation elections overwhelm voters with choices they are not competent to make should particularly apply to such demanding settings yet evidence on the effects of lengthy ballots on voting behavior is scant this study reviews theories of decision making under uncertainty and tests their predictions in a mixed heteroscedastic model of vote choice that is fitted to a unique collection of survey and contextual data on swiss referendums increasing ballot length is demonstrated to interfere with the voters ability to translate their political preferences into consistent policy choices

jumps in financial markets a new nonparametric test and jump dynamics this paper introduces a new nonparametric test to detect jump arrival times and realized jump sizes in asset prices up to the intra day level we demonstrate that the likelihood of misclassiflcation of jumps becomes negligible when we use high frequency returns using our test we examine jump dynamics and their distributions in the u s equity markets the results show that individual stock jumps are associated with prescheduled earnings announcements and other company speciflc news events additionally s p 500 index jumps are associated with general market news announcements this suggests difierent pricing models for individual equity options versus index op

stochastic risk premiums stochastic skewness in currency options and stochastic discount factors in international economies abstract we develop models of stochastic discount factors in international economies that produce stochastic risk premiums and stochastic skewness in currency options we estimate the models using time series returns and option prices on three currency pairs that form a triangular relation estimation shows that the average risk premium in japan is larger than that in the us or the uk the global risk premium is more persistent and volatile than the country specific risk premiums and investors respond differently to different shocks we also identify high frequency jumps in each economy but find that only downside jumps are priced finally our analysis shows that the risk premiums are economically compatible with movements in stock and bond market fundamentals

factors influencing the privatisation of urban solid waste collection in spain this paper analyses some of the organisational aspects of urban solid waste collection it starts by discussing some of the theoretical issues of contracting out then an explanatory model is spec

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