an analysis of bilateral intra industry trade in the food processing sector this paper analyses determinants of intra industry trade in food processing for a 30 country sample over the period 1964 85 previous studies have tested the hypothesis that imperfect competition is a major determinant of intra industry trade iit in the durable goods manufacturing sectors this study is distinguised from the earlier studies of iit by the examination of the processed food sector sic 20 the use of a panel data set for 22 years and 30 countries available at the four digit sic level the use of purchasing power parity measures of gdp and the use of a weighted tobit model with fixed effects to account for the censored cross section time series nature of the date the results indicate that iti in food processing is a positive function of a country s gdp per capita and equality if gdp per capita between countries in addition it is also found that such trade is strongly influenced by distance between trading partners membership in customs unions and free trade blocs and also exchange r

a new and robust subgame perfect equilibrium in a model of triadic power relations abstract this note presents a new subgame perfect equilibrium in an infinitely repeated game which has basu s triadic model as the stage game oxford econ pap 38 1986 259 the payoff for the laborer is the same as in basu s model the equilibrium is more robust than the naqvi and wemhoner s solution j dev econ 47 1995 191 in the sense that the equilibrium does not require the same high degree of rationality simple well known strategies are applied and both the landlord and the merchant are better off than in the stage game in the equilibrium outcome the merchant receives a share of the extra profit from the extortionary labor contract

a note on the local expectations hypothesis a discrete time exposition cox ingersoll and ross 1 distinguished various forms of the expectations hypothesis of the term structure of interest rates they proved that with one exception these are consistent with general equilibrium only in the trivial case in which interest rates are nonrandom the exception is the local expectations hypothesis because of this nonexistence result those who regard the expectations hypothesis as a natural starting point in investigating the term structure of interest rates are motivated to understand under what restrictions the local expectations hypothesis is valid in our experience many readers of cox ingersoll and ross s paper particularly those not conversant with stochastic calculus have difficulty following the discussion such readers may find it easier to work through an analysis of the local expectations hypothesis in a more familiar discrete time framework this paper provides such an exposition in continuous time the local expectations hypothesis states that the conditional expected rates of return on bonds of all maturities over the next instant are equal to each other and to the instantaneous spot interest rate cox ingersoll and ross proved p 783 ff that the local expectations hypothesis is valid in an exchange economy if the dynamics of consumption are locally certain in a stochastic constant returns to scale production economy they showed that the local expectations hypothesis will be valid under locally certain production dynamics if in addition agents have logarithmic utility the analogous definition of the local expectations hypothesis in discrete time is that the conditionally expected one period rates of return on bonds of all maturities are equal to each other and to the one period interest rate two examples below illustrate that the local expectations hypothesis is valid in discrete time economies under the same conditions as in continuous time economies these examples work because a sufficient condition for the validity of the local expectations hypothesis is that the marginal utility of consumption be locally certain this might happen either because consumption itself is locally certain as in both of the above mentioned examples or because the utility function exhibits risk neutrality and there is strictly positive consumption in every period a third example shows that risk neutrality alone does not imply the local expectations hypothesis if zero consumption can occur the reason is that the implication of risk neutrality that rates of interest are nonrandom requires the exclusion of corner solutions a restriction which is violated if zero consumption can occur

term structure inflation and real activity this paper estimates an internally consistent structural model that imposes cross sectional restrictions on the dynamics of the term structure of interest rates inflation and output growth distinct from previous term structure settings this model introduces both time varying central tendencies and a stochastic conditional mean of output growth the estimation of the model which is based on u s data over a 1960 to 2005 sample period provides reliable estimates for the implicit term structures of real interest rates expected inflation rates and inflation risk premia as well as for expectations of macroeconomic variables the model has better out of sample forecasting properties than a number of alternative models and it contradicts the puzzling evidence that during the great moderation in inflation subsequent to the mid 1980s the forecasting ability of structural models deteriorated with respect to atheoretic statistical models

intra industry trade and business cycles in asean a new resolve for both increased economic integration and monetary and exchange rate cooperation has started to emerge in the association of southeast asian nations asean especially since the 1997 1998 asian financial crisis according to the optimum currency area theory the degree of trade integration is one of the most important criteria for joining a currency union the large increase in intra asean trade in recent years raises the question of whether the asean countries are becoming better prepared to form a currency union this article sets to test whether the recorded increase in intra asean trade is leading the asean members to closer economic integration and thus to better satisfy the criteria for a common currency two separate models are estimated for that purpose first a variation of the model of frankel and rose 1997 was estimated for the asean members next a new panel data methodology was conducted the results with our own model were very significant and robust when four of the ase

power coercion and the games landlords play abstract if an agent introduces triadic relationships through a threat when relations are dyadic without this threat and if by such a threat this agent reduces the welfare of others then this agent may be said to exercise power we construct a minimal model with three agents landlord laborer and merchant and three commodities and demonstrate that in the subgame perfect equilibrium of a finite move extensive form game of complete and perfect information there is no powerful individual we show next that in the infinitely repeated game there exists a subgame perfect equilibrium in which the landlord wields power

inflation real interest rates and the bond market a study of uk nominal and index linked government bond prices this paper estimates expected future real interest rates and inflation rates from observed prices of uk government nominal and index linked bonds the estimation method takes account of imperfections in the indexation of uk index linked bonds it assumes that expected log returns on all bonds are equal and that expected real interest rates and inflation follow simple time series processes whose parameters can be estimated from the cross section of bond prices the extracted inflation expectations forecast actual future inflation more accurately than nominal yields do the estimated real interest rate is highly variable at short horizons but comparatively stable at long horizons changes in real rates and expected inflation are strongly negatively correlated at short horizons but not at long horizons

who should buy long term bonds according to conventional wisdom long term bonds are appropriate for conservative long term investors this paper develops a model of optimal consumption and portfolio choice for infinite lived investors with recursive utility who face stochastic interest rates solves the model using an approximate analytical method and evaluates conventional wisdom as risk aversion increases the myopic component of risky asset demand disappears but the intertemporal hedging component does not conservative investors hold assets to hedge the risk that real interest rates will decline long term inflation indexed bonds are most suitable for this purpose but nominal bonds may also be used if inflation risk is low

horizontal and vertical intra industry trade in australian manufacturing does trade liberalization have any impact this paper contributes to the literature on intra industry trade iit by disentangling such trade into horizontally and vertically differentiated products and investigating their determinants in the context of trade liberalization in australia iit in australian manufacturing has increased following trade liberalization in 1980s and is increasingly dominated by vertically differentiated products industry level evidence confirms that the failure to segregate iit into horizontally and vertically differentiated products produces misleading results as their determinants differ also structural changes brought about by the policy liberalization appear to have an impact on total as well vertical iit

an alternative valuation model for contingent claims abstract this paper studies contingent claim valuation in a lucas type exchange economy the derived fundamental valuation equation differs from its cox ingersoll ross production economy counterpart in that it is expressed in terms of the direct utility function and an exogenous output process thus offering superior tractability we apply our approach to derive closed form solutions for bond bond option individual stock and stock option prices under a more general setting than allowable in the cox ingersoll ross framework the resulting interest rate and stock price dynamics are empirically plausible moreover our stock option pricing formula with stochastic volatility and interest rates can reconcile certain puzzling empirical regularities including the volatility smile

bond and stock returns in a simple exchange model this paper studies asset pricing in a general equilibrium representative agent exchange model the assumptions of isoelastic period utility and lognormal endowment allow the derivation of closed form solutions for asset returns without restricting the serial correlation of the log endowment risk premiums on stocks and real bonds are found to be simple functions of relative risk aversion the variance of the log endowment innovation and the weights in the moving average representation of the log endowment the paper analyzes the sign of term premiums the size of the equity premium and the effect of taste shocks on asset prices

country size income level and intra industry trade this study investigates three testable hypotheses of intra industry trade it begins by developing a theoretical two country model the model explicitly includes two goods differentiated products and homogeneous goods then three empirical hypotheses are derived as follows the share of intra industry trade will be large a if the two economies are of similar size b if the capital labour endowment ratio of both countries is similar and c if the total size of the two economies is large from the cross sectional analysis using 1970 1994 data results are obtained that support the model furthermore the results are confirmed using panel analysis on the pooled data

insecurity and the pattern of trade an empirical investigation corruption and imperfect contract enforcement dramatically reduce international trade this paper estimates the reduction using a structural model of import demand in which insecurity acts as a hidden tax on trade we find that inadequate institutions constrain trade as much as tariffs do we also find that omission of indices of institutional quality biases the estimates of typical gravity models obscuring a negative relationship between per capita income and the share of total expenditure devoted to traded goods finally we argue that cross country variation in the effectiveness of institutions and the consequent variation in the prices of traded goods offer a simple explanation for the stylized fact that high income capital abundant countries trade disproportionately with each other

convergence from discrete to continuous time contingent claims prices this article generalizes the cox ross and rubinstein 1979 binomial option pricing model and establishes a convergence from discrete time multivariate multinomial models to continuous time multidimensional diffusion models for contigent claims prices the key to the approach is to approximate the n dimensional diffusion price process by a sequence of n variate n 1 nomial processes it is shown that contingent claims prices and dynamic replicating portfolio strategies derived from the discrete time models converge to their corresponding continuous time limits article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

simple binomial processes as diffusion approximations in financial models a binomial approximation to a diffusion is defined as computationally simple if the number of nodes grows at most linearly in the number of time intervals it is shown how to construct computationally simple binomial processes that converge weakly to commonly employed diffusions in financial models the convergence of the sequence of bond and european option prices from these processes to the corresponding values in the diffusion limit is also demonstrated numerical examples from the constant elasticity of variance stock price and the cox ingersoll and ross 1985 discount bond price are provided article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

vertical and horizontal intra industry trade a cross industry analysis for the united kingdom a large theoretical literature has emerged directed at explaining the presence of intra industry trade iit one of the distinctions which comes out of these models is that between horizontal iit where goods are differentiated by attributes and vertical iit where goods are differentiated by quality in this paper horizontal and vertical iit in u k trade are disentangled using a unit value dispersion criterion and a range of industry characteristics the paper not only points up the relative importance of vertical and horizontal iit in the united kingdom it also demonstrates how a failure to separate them out can impact on the interpretation of empirical results copyright 1995 by royal economic society

a simple approach to interest rate option pricing a simple introduction to contingent claim valuation of risky assets in a discrete time stochastic interest rate economy is provided taking the term structure of interest rates as exogenous closed form solutions are derived for european options written on 1 treasury bills 2 interest rate forward contracts 3 interest rate futures contracts 4 treasury bonds 5 interest rate caps 6 stock options 7 equity forward contracts 8 equity futures contracts 9 eurodollar liabilities and 10 foreign exchange contracts article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

triadic power relations in rural nepal abstract we generalise basu s model of triadic power for one landlord and multiple merchants the landlord s threat towards a labourer becomes credible in the original stage game for multiple landlords and merchants we generalise more recent solutions we estimate a reduced form of the model where equilibrium rural wages are a function of the number of landlords distance to merchants characteristics of the labourers and the distance to external markets we apply living standards measurement study data from nepal and find support for the triadic model in particular the influence via the merchants depends on the number of landlords

trade barriers multinational involvement and intra industry trade panel data evidence from india the article analyses the effects of trade barriers and multinationals on the intensity of intra industry trade iit in a panel of indian manufacturing industries from 1988 to 1999 we find that the intensity of iit increases with the reduction of trade barriers this is expected as greater competition from imports leads individual plants in the domestic industry to specialize in the manufacturing of unique varieties the analysis suggests that horizontal market seeking multinational activities in the domestic industries exert a negative influence on iit this is consistent with the view that horizontal multinationals displace exports to the host country at the same time our results indicate that iit will be stimulated to the extent that the entry of multinationals induces intra industry specialization we also analyse the role of product differentiation and plant level scale economies in determining iit

multinationals multi plant economies and the gains from trade a general equilibrium model of a multinational enterprise based on economies of multi plant operation is developed these economies are modelled as arising from the existence of a joint input whose productivity in each production facility is independent of the number of facilities maintained by a firm the multinational thus offers the world increased technical efficiency by eliminating the duplication of the joint input that would occur with independent national firms since this technical efficiency may come at the expense of increased market power the full determinants of home country host country and world welfare are considered

a comparative evaluation of alternative models of the term structure of interest rates abstract in the paper alternative models of the term structure of interest rates are classified in two different approaches the no arbitrage and the general equilibrium approach it is maintained that the general equilibrium approach is superior on a theoretical ground for two main reasons first relevant variables such as the spot interest rate and the interest risk premium are endogenous second the relationship between the real and the financial side of the economy becomes a clear and important element in the understanding of the term structure as regards the applications however the advantages of the general equilibrium over the no arbitrage approach are not so clear the major role in the empiricil performance of alternative models is played by their ability to capture volatility at the current state of the literature there is no model that outperforms others in particular on the empirical side

evaluation of callable bonds finite difference methods stability and accuracy the purpose of this paper is to evaluate numerically the semi american callable bond by means of finite difference methods this study implies three results first the numerical error is greater for the callable bond price than for the straight bond price and too large for real applications secondly the numerical accuracy of the callable bond price computed for the relevant range of interest rates depends entirely on the finite difference scheme which is chosen for the boundary points thirdly the boundary scheme which yields the smallest numerical error with respect to the straight bond does not perform best with respect to the callable bond the callable bond is a straight coupon bond with the provision that allows the debtor to buy back or to call the bond for a specified amount the call price plus the accrued interest since the last coupon date at some time the call date s during the life of the bond three types of callable bonds can be observed in financial markets the american callable bond may be repurchased at any time on or before the final redemption day in contrast to the european or semi american counterparts which may only be called at one or several specific dates respectively in the case of semi american bonds the debtor gives the bondholder two months notice the callable bond can be viewed as a compound security which consists of an otherwise identical straight bond and of an embedded call option which is not traded and the price of which is therefore not observable the embedded call option which is written on the underlying straight bond can be viewed as being sold by the initial

a test of the cox ingersoll and ross model of the term structure we test the theory of the term structure of indexed bond prices due to cox ingersoll and ross cir the econometric method uses hansen s generalized method of moments and exploits the probability distribution of the single state variable in cir s model thus avoiding the use of aggregate consumption data it enables us to estimate a continuous time model based on discretely sampled data the tests indicate that cir s model for index bonds performs reasonably well when confronted with short term treasury bill returns the estimates indicate that term premiums are positive and that yield curves can take several shapes however the fitted model does poorly in explaining the serial correlation in real treasury bill returns article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

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

poverty dynamics in rural orissa transitions in assets and occupations over generations abstractwe investigate whether historic land distribution determines stagnation or development of indian villages the empirical analysis is motivated by the banerjee and newman 1993 model of occupational choice and economic development family histories are collected for a random sample of 800 households households are classified into economic categories according to the assets occupations mix at present and at grandfather s time transitions are described and for a remote district explained by the historic village land distribution we also investigate the role of social identity and find that scheduled tribes are more likely trapped in poverty than scheduled castes

monopolistic competition and international trade reconsidering the evidence we test some propositions about international trade flows that are derived from models of monopolistic competition developed by elhanan helpman and paul krugman we investigate whether the volume of trade between oecd countries is consistent with the predictions of a model in which all trade is intraindustry trade in differentiated products we then repeat the test with non oecd countries we also investigate whether the share of intraindustry trade is consistent with a more general theoretical model in which some but not all trade is intraindustry trade our results lead us to question the apparent empirical success of these models

company interests and foreign aid policy playing donors off against one another abstract the evidence on conditionality indicates that this instrument sometimes works and sometimes does not work we suggest that third parties to the donor recipient relationship influence the aid disbursement the halt in aid that should follow non compliance could trigger the recipient to cancel contracts with companies from donor countries which creates incentives for the companies to put pressure towards aid disbursement we use a multi agent triadic model of the relationships between a recipient and two donors and two companies to illustrate that recipients may act strategically to make third parties like companies and others influence the disbursement decision failing to take account of third parties role yields the opposite result conditionality becomes successful

does the quality of political institutions affect intra industry trade within trade blocs the asean perspective there has been a renewed resolve for deeper integration and cooperation within asean intra industry trade iit is often viewed as a way of achieving economic as well as political integration thi

stochastic volatility in a macro finance model of the u s term structure of interest rates 1961 2004 this paper generalizes the standard homoscedastic macro finance model by allowing for stochastic volatility using the square root specification of the mainstream finance literature empirically this specification dominates the standard model because it is consistent with the square root volatility found in macroeconomic time series thus it establishes an important connection between the stochastic volatility of the mainstream finance model and macro economic volatility of the okun friedman type this research opens the way to a richer specification of both macro economic and term structure models incorporating the best features of both macro finance and mainstream finance models

macro factors and the affine term structure of interest rates this paper formulates an affine term structure model of bond yields from a dynamic stochastic general equilibrium model with observable macro state variables as the term structure factors model implications for the joint macro term structure dynamics are consistent with the empirical patterns from the var estimation model calibration and simulation exercises also provide clear macroeconomic interpretations of the latent term structure factors as found in the finance literature most of the slope factor movement can be explained by exogenous monetary policy shocks and the level factor movement is closely related to the technology shocks

general equilibrium properties of the term structure of interest rates abstract the paper examines the allocation of consumption and investment in a three date binomial model in order to determine the sign of the real term structure premium in general equilibrium when production functions are concave markets are complete and future production possibilities are the same irrespective of which state of the world occurs the term structure premium will be positive in incomplete markets constant or increasing absolute risk aversion is sufficient to guarantee a positive term structure premium although in the more likely case of decreasing absolute risk aversion a negative premium cannot be ruled out

optimal control of heteroscedastic macroeconomic models summary this paper analyses the implications of heteroscedasticity for optimal macroeconomic policy and welfare we find that changes in the variance structure driven by exogenous processes like generalized autoregressive conditional heteroscedasticity garch affect welfare but not the optimal feedback rule however changes in the variance structure driven by state dependent processes affect both we also derive certainty equivalent transformations of state dependent volatility models that allow standard quadratic dynamic programming algorithms to be employed to study optimal policy these results are illustrated numerically using a reduced form model of the us economy in which changes in volatility are driven by a garch process and the rate of inflation copyright 2015 john wiley sons ltd

real risk inflation risk and the term structure i present a model for the term structures of nominal and real interest rates in the uk that incorporates markov switching and allows for non neutralities nonlinear dynamics and flexibility in the dynamics of the risk premia the model is used to assess how accurately the term structure reflects changing expectations of future yields and inflation i find that variations in inflation expected over the next two to three years are very accurately reflected by current yields over longer horizons the term structures closely track changing expectations regarding future nominal and real yields but not future inflation

real and nominal interest rates a discrete time model and its continuous time limit i provide a general equilibrium theory of the term structure of real interest rates in a discrete time economy i derive the prices for one period and two period real bonds and a simple recursive formula for general k period bonds and prove that the price formula with appropriately specified parameters converges to that of the cox ingersoll and ross model 1985 in addition i consider the behavior of nominal bond prices in a partial equilibrium setting in which an exogenous price level process is correlated with the real economy finally i provide an illustrative empirical investigation of the model the results indicate a significant correlation between the price level and the growth rate of consumption which does not support the money nuetrality assumption underlying cox ingersoll and ross s nominal bond prices and related empirical studies such as gibbons and ramaswamyu 1992 heston 1991 and pearson and sun 1991 article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies