black scholes approximations of call option prices with stochastic volatilities a note a piecewise linear weighting function for black scholes implied volatilities is used in conjunction with the black scholes call pricing model to approximate stochastic volatility european call prices a sensitivity analysis is conducted to compare simulated stochastic volatility call prices to the black scholes prices calculated with the weighted implied vo latilities the analysis indicates that a simple model can provide close approximations to the simulated prices with far less computational effort i introduction the volatility of the underlying asset is one of the more difficult parameters to estimate in any option pricing model the stochastic nature of the volatility of most financial assets is responsible for much of the difficulty while the early tests of the black scholes 1973 option pricing model rely upon historical prices for volatility estimates latane and rendleman s 1976 implied volatility technique has become the standard method of estimation unfortunately as beckers 1981 stresses although implied volatilities calculated from a stationary vari ance model may be of practical use it is inconsistent to use the black scholes model with a constant variance to obtain estimates of nonstationary variances l recent work conducted by hull and white 1987 and johnson and shanno 1987 has been directed at solving the problem of pricing european calls on assets with stochastic volatilities while hull and white provide a series solution for the case in which the variance and stock price are uncorrelated convergence is slow unless the variance of the assets volatility is relatively small for more general cases both hull and white and johnson and shanno rely upon monte carlo simulations to estimate option prices although the application of simulation techniques to option pricing first explored by boyle 1977 is often a useful method of estimating option prices the monte carlo method tends to be expensive and is often too time consuming for real time applications this study examines a simple method of approximat

hedging with options under variance uncertainty an illustration of pricing new crop soybeans the behavior of a commodity s price return variance over time is critical to both the theory and practice of commodity option valuation in this paper three models are used to forecast soybean price variance for the period during which a seasonal increase in variance has been found in previous studies a time series model outperforms the ordinary least squares and naive models the significance of the forecast error levels is then examined in terms of expected deviations above and below a price target for a put hedge the resulting trade off between risk and return is shown by strike price and variance expectation

asymmetric information signaling and optimal corporate financial decisions as is shown in the financial literature the assumption of perfect and costless information often leads to the conclusion that corporate financial decisions are inconsequential to the value of the firm e g stiglitz 20 and fama 6 this conclusion seems to be in direct contradiction with the observed behavior of corporations that allocate real resources to implement financial policies the gap between theory and observed behavior is bridged by introducing various frictions and market imperfections a growing number of studies examine the optiraality of financial decisions when the assumption of perfect and costless information is replaced by allowing for informational asymmetry the asymmetry is assumed to exist between corporate insiders who possess superior information about the firm s future earnings prospects and outside investors the emphasis in this literature is on the ability of financial instruments to serve as signaling devices through which the true value of the firm can be revealed to the market without moral hazard or disclosure of confidential information although the signaling process is typically considered to be costly it is advocated that firms may be better off if they employ this mechanism rather than reveal reliable but confidential information or not disclose at all

an empirical test of a valuation model for american options on futures contracts pricing models for american call and put options on futures contracts are derived herein these models are used to investigate the efficiency of the market for options on standard poor 500 and german mark futures the evidence presented here indicates that market prices for these options deviate substantially from their corresponding model prices in addition it is shown that a hedging strategy originated at prices that indicate a deviation of market from model is successful in translating the observed mispricing into excess profits after transactions costs however these net profits are eliminated if the origination of the strategy is delayed by one trade or if bid ask spreads are accounted for

remittances and their macroeconomic impact this paper examines the macroeconomic trends drivers and the impact of remittances in africa first it documents the increasing share of remittances relative to other foreign capital flows to africa the distribution of remittance inflows across countries and some key properties this is followed by an analysis of the macroeconomic drivers of remittances in recipient countries such as the level of income inflation and nominal exchange rate depreciation specifically remittances are positively impacted by higher income but deterred by an unstable macroeconomic environment pointing to the investment motive in remitting to africa the paper also examines the role of remittances in funding africa s external balances finally drawing on the case of egypt the paper shows the positive impact that rising remittances can have on public debt sustainability

pricing and trading european options by combining artificial neural networks and parametric models with implied parameters we compare the ability of the parametric black and scholes corrado and su models and artificial neural networks to price european call options on the s p 500 using daily data for the period january 1998 to august 2001 we use several historical and implied parameter measures beyond the standard neural networks in our analysis we include hybrid networks that incorporate information from the parametric models our results are significant and differ from previous literature we show that the black and scholes based hybrid artificial neural network models outperform the standard neural networks and the parametric ones we also investigate the economic significance of the best models using trading strategies extended with the chen and johnson modified hedging approach we find that there exist profitable opportunities even in the presence of transaction costs

aiding violence or peace the impact of foreign aid on the risk of civil conflict in sub saharan africa abstract this paper considers the impact of foreign aid flows on the risk of civil conflict we improve on earlier studies on this topic by addressing the problem of the endogenous aid allocation using gdp levels of donor countries as instruments a more structural addition to the literature is that we efficiently control for unobserved country specific effects in typical conflict onset and conflict continuation models by first differencing the literature often overlooks the dynamic nature of these types of models thereby forcing unlikely i i d structures on the error terms implicitly 1 as a consequence malfunctioning institutions deep rooted political grievances or any other obvious yet unobserved and time persistent determinants of war are simply assumed away we find a statistically significant and economically important negative effect of foreign aid flows on the probability of ongoing civil conflicts to continue the continuation probability such that increasing aid flows tends to decrease civil conflict duration we do not find a significant relationship between aid flows and the probability of civil conflicts to start the onset probability

arbitrage continuous trading and margin requirements this paper studies the impact that margin requirements have on both the existence of arbitrage opportunities and the valuation of call options in the context of the blackscholes economy margin restrictions are shown to exclude continuous trading arbitrage opportunities and with two additional hypotheses still to allow the black scholes call model to apply the black scholes economy consists of a continuously traded stock with a price process that follows a geometric brownian motion and a continuously traded bond with a price process that is deterministic continuous trading security market models constitute a significant area of continuing reesearch in financial economics these models form the basis of the option pricing methodology see merton 16 for a review and current intertemporal asset pricing models see merton 15 breeden 3 and cox ingersoll and ross 5 given the importance of these models it is of no surprise that there has been significant academic concern see dybvig 9 cox ingersoll and ross 4 p 341 and ingersoll 13 pp 13 25 over the discovery of a continuous trading strategy by harrison and kreps 10 called the doubling strategy that generates a sure dollar from a zero investment the existence of this doubling strategy violates a basic premise of the option pricing methodology the premise of no arbitrage opportunities given this violation the question naturally arises as to whether the option pricing methodology is internally consistent fortunately harrison and pliska 11 showed that the exclusion of arbitrage opportunities and the doubling strategy does not invalidate the familiar derivation of the black scholes call option formula the exogenous exclusion of these doubling strategies is somewhat arbitrary however types of constraints that exclude continuous trading arbitrage opportunities were studied by kreps 14 harrison and kreps 10 and dybvig 9 these papers provide constraints that are unsatisfactory from an institutional point of view since they have no market analogue margin requirements on the other hand have a market analogue one purpose of this paper is to show that margin requirements also exclude continuous trading arbitrage opportunities to make this argument self contained we first provide a unified framework that synthesizes the previously stated results our assertion concerning margin re

the exchange rate and fiscal consolidation episodes in emerging market economies abstract an analysis of fiscal consolidations in emerging market economies during 1970 2004 suggests that exchange rate depreciation raises the probability of a fiscal consolidation being successful including when controlling for debt growth the composition of the consolidation and degree of democracy

implied volatility functions empirical tests derman and kani 1994 dupire 1994 and rubinstein 1994 hypothesize that asset return volatility is a deterministic function of asset price and time and develop a deterministic volatility function dvf option valuation model that has the potential of fitting the observed cross section of option prices exactly using s p 500 options from june 1988 through december 1993 we examine the predictive and hedging performance of the dvf option valuation model and find it is no better than an ad hoc procedure that merely smooths black scholes 1973 implied volatilities across exercise prices and times to expiration

on jumps in common stock prices and their impact on call option pricing the black scholes call option pricing model exhibits systematic empirical biases the merton call option pricing model which explicitly admits jumps in the underlying security return process may potentially eliminate these biases we provide statistical evidence consistent with the existence of lognormally distributed jumps in a majority of the daily returns of a sample of nyse listed common stocks however we find no operationally significant differences between the black scholes and merton model prices of the call options written on the sampled common stocks

factors associated with the year end decline in working capital working capital is an important indicator of firm operational efficiency all else being equal lower levels signal greater efficiency managers are thus likely to be motivated to report lower levels of working capital at times of greater external attention we find that working capital levels decrease in the fourth fiscal quarter significantly more than expected conditional on seasonal changes in economic activity the decrease subsequently reverses in the following first fiscal quarter evidence indicates that firms manage down year end working capital through transactions that increase year end operating cash flow and that firms spread this activity over all working capital accounts finally the temporary decrease in year end working capital is correlated with compensation benchmarks and analysts annual cash flow forecasts the temporary drop is also more pronounced for firms with industry dominance this paper was accepted by mary barth accounting

anticipated development assistance temporary relief aid and consumption behaviour of low income countries much debate about the effectiveness of foreign aid to developing countries focuses on the assumption that aid flows mainly enhance current consumption rather than being channelled into investment this paper seeks to establish what proportion of foreign assistance is used to finance current consumption the principal hypothesis to be tested is that aid transfers include very heterogeneous components with different marginal propensity to raise consumption estimating the average marginal propensity to consume of all the components of aid as is commonly done may lead to erroneous results the flow of foreign aid from high to low income countries can be classified into two types the first includes income transfers of a relief nature such as emergency and distress relief including drought related food transfers medical and refugee relief and balance of payments crisis support these transfers are generally a temporary response to unanticipated events or shocks to the economy they can be perceived as an attempt by the donor community to help finance what is denoted in the permanent income theory as transitory consumption friedman i957 in addition they can be viewed as an attempt to maintain a subsistence level of consumption by absorbing the shocks to income entirely by changes in savings the low level of savings however and the constraints on foreign borrowing lead to dependency on foreign transfers and prevent domestic savings from being the residual that is almost all of

trader rationality in the exercise of futures options abstract we examine the rationality of investor exercise behavior by analyzing two years tendered exercise notices for treasury bond futures options we conclude that exercise behavior is generally rational but document numerous failures to exercise as well as some exercises that should not have occured both at and prior to expiration the most frequent type of error is failing to exercise suggesting that traders do not monitor their positions with sufficient care finally we show that investors use information arriving after trading closes but before exchange imposed exercise deadlines in forming their exercise decisions

pricing hang seng index options around the asian financial crisis a garch approach abstract this paper investigates how well the hang seng index options the most important class of option contracts traded in hong kong are priced using the garch approach we calibrated the garch parameters using the call and put option data and used them to price options in the subsequent weeks we found the garch model performs very well in comparison with the black scholes model even after allowing for a smile smirk adjustment its superior performance was also evident both before and during the recent asian financial turmoil

tales of fiscal adjustment fiscal adjustments why they can be expansionary this paper examines the evidence on fiscal adjustments in oecd countries from the early 1960s to today the results shed light on the recently observed phenomenon of fiscal tightening that produces non keynesian expansionary effects one interpretation is that a serious fiscal tightening increases demand wealth rises when future tax burdens decline and when interest rates decline credibility is restored and inflation or default risks abate both consumption and investment rise for this effect to produce an expansion the tightening must be sizeable and occur after a period of stress when the budget is quickly deteriorating and public debt is building up another interpretation emphasizes the supply side typically a fiscal consolidation based on tax increases is short lived to be long lasting it must include cuts in public employment transfers and government wages to be politically possible such a policy must be supported by trade unions these measures result in more efficient labour markets and boost the supply side based both on statistical evidence and on a detailed analysis of ten cases of major fiscal adjustment this article provides cautious support to the supply side view without denying a more limited role for the demand side channel alberto alesina and silvia ardagna

the effects of transaction costs and different borrowing and lending rates on the option pricing model a note this paper modifies the black scholes option pricing model to include the effects of transaction costs and different borrowing and lending rates the paper demonstrates that these market imperfections tend to offset each other yielding a bounded range of prices for each option the paper also shows that under some conditions the option pricing hedge may be society s lowest cost financial intermediary

the pricing of convexity risk and timedecay in options markets abstract option valuation formulas typically assume all risk can be eliminated in a continuously rebalanced hedge but convexity of the option pricing function and time decay cause risk in real world hedges we find strong evidence in stock options transactions data from periods 10 years apart that the market prices these risks there is a significant price effect associated with convexity that becomes larger immediately following a period of larger stock price movements although time decay is highly correlated with convexity a multiple regression including both factors shows it to have a significant independent effect the results from the two sample periods are highly consistent as are pre and post crash results from the year 1987

the effect of economic uncertainty on inventory and working capital for manufacturing firms abstract this paper develops an empirical model to investigate the impact of macro economic risk on working capital and the various types of inventory our analysis helps manufacturing firms anticipate the implications of high macro economic risk measured through the economic policy uncertainty epu index on their operations using a sample of 6503 us manufacturing firms during the period 1990 2018 we show that epu drives high levels of inventory thus corroborating existing theories about random disruptions raising safety stock levels we also show that increased economic uncertainty yields higher trade credits payables and working capital thus requiring firms to tie more capital to their operations our results are statistically significant yet these effects are small at the firm level the results are robust when applying the monetary policy uncertainty mpu index to the subsample of the data from 1990 to 2007 instead of the epu index to the same data set

the weekend effect on the distribution of stock prices abstract evidence of weekend effects on the distribution of security returns suggests that returns are generated by a process operating closer to trading time rather than calendar time in contrast accumulation of interest over the weekend follows a calendar time process since both the variance of returns and the interest rate are important parameters of the black scholes option pricing model this paper suggests that the model be stated to account for this by utilizing a trading time variance and a calendar time interest rate empirical evidence indicates that this allows the model to better explain market option prices

the information content of dividends a signalling approach the adoption of the incentive signalling framework gives a reasonably good explanation of the corporate dividend decision the equilibrium optimal dividend decision under such a framework is presented and analyzed assuming a reward penalty managerial incentive scheme is used it is shown that the size of the declared dividend is an increasing function of expected cash flow however there exists a trend that points out that the higher the level of expected cash flow the lower the marginal effects of cash flow on dividends a similar relationship is observed with respect to changes in expected cash flows these conclusions are in harmony with real world behavior as reported by several empirical studies the effects of uncertainty and interest rates on dividends are also analyzed it is shown in agreement with observed phenomena that the higher the uncertainty the lower the dividend payout ratio

hedging the risks from writing foreign currency options abstract this paper considers the ways in which banks and other financial institutions can hedge their risks when they write non exchange traded foreign currency options key factors affecting the performance of delta hedging are identified and hedging schemes involving the use of exchange traded options are analyzed the schemes are tested using both simulated data and data from trades on the philadelphia exchange between february 1983 and september 1984

success and failure of fiscal consolidation in the oecd a multivariate analysis this paper tests five hypotheses explaining the success and failure of fiscal consol idation in a multivariate regression framework these hypotheses concern i the composition of the consolidation programme ii its size and persistence iii the gravity of the debt situation iv the influence of the international macroeconomic environment and v the con tribution of a preceding devaluation to test for composition effects we use cyclically adjusted data although many conclusions of the existing empirical literature are confirmed some do not survive a popular hypothesis that to succeed consolidation should rely on cutting the government wage bill is rejected a new empirical result is that the contribution of a devalu ation to the success of fiscal consolidation depends on the composition of the consolidation programme

the measurement of option mispricing abstract different studies have examined the ability of the black scholes option pricing model to estimate accurately market prices of publicly traded options and reached conflicting results this study examines commonly used ex ante measures of option mispricing finds that they can produce differing conclusions about option prices and develops an alternative measure for gauging option mispricing empirical analysis of returns to options selected using the various mispricing measures indicates that this new measure is more likely to detect mispricing and identify options that yield excess returns before commissions

the effect of development aid unpredictability and migrants remittances on fiscal consolidation in developing countries summary we use panel data on 74 developing countries for the period 1980 2007 to examine the effects of aid unpredictability and migrants remittances on fiscal consolidation in these countries using two definitions of fiscal adjustment and a conditional logit model to perform our analysis evidence is shown that except for the case of low income countries especially gradual fiscal retrenchment remittances increase the likelihood of fiscal consolidation be the latter gradual or rapid surprisingly we observe that aid unpredictability does not affect the adoption of fiscal consolidation measures in all the groups considered

comparative performance of the black scholes and roll geske whaley option pricing models the original black scholes bs 2 european call option pricing model does not take account of divided payments on the underlying stock and does not allow for the possibility of early exercise that may be optimal when the stock pays dividends black 1 has suggested that the original bs model can be modified to take account of dividends and sharpe 14 predicts that this modified or pseudo american bs approach while not exact is probably sufficient for many listed options

the risk premium of volatility implicit in currency options this article provides an empirical investigation of the risk neutral variance process and the market price of variance risk implied in the foreign currency options market there are three principal contributions first the parameters of heston s mean reverting square root stochastic volatility model are estimated using dollar mark option prices from 1987 to 1992 second it is shown that these implied parameters can be combined with historical moments of the dollar mark exchange rate to deduce an estimate of the market price of variance risk these estimates are found to be nonzero time varying and of sufficient magnitude to imply that the compensation for variance risk is a significant component of the risk premia in the currency market finally the out of sample test suggests that the historical variance and the hull and white implied variance contain no more information than that imbedded in the heston implied variance

fiscal consolidations quality economic conditions and success recent research has demonstrated theimportance of good quality of fiscaladjustments for the success of governmentbudget consolidations we extend thisapproach to analyze the importance of theeconomic conditions in which fiscalconsolidations are started for theirsuccess the cyclical positions of thedomestic and international economy theinitial debt level and the stance of fiscalpolicy in the oecd are all importantdeterminants of the likelihood of fiscalconsolidations they also affect thegovernment s choice of consolidationstrategy making them importantdeterminants of the success of fiscalconsolidations in contrast the monetarypolicy stance plays only a negligible rolefor fiscal consolidations we use theanalysis to test for any maastricht effectson the performance of european governmentsduring the 1990s such effects are weak atbest and occurred only during the firsthalf of the decade

the voracity effect abstract we analyze an economy that lacks a strong legal political institutional infrastructure and is populated by multiple powerful groups powerful groups dynamically interact via a fiscal process that effectively allows open access to the aggregate capital stock in equilibrium this leads to slow economic growth and a voracity effect by which a shock such as a terms of trade windfall perversely generates a more than proportionate increase in fiscal redistribution and reduces growth we also show that a dilution in the concentration of power leads to faster growth and a less procyclical response to shocks jel f43 o10 o23 o40

focusing the financial flow of supply chains an empirical investigation of financial supply chain management the objective of this paper is to establish a theoretical foundation for financial supply chain management fscm in order to strengthen managerial decisions concerning financial flows in supply chains although such decisions are made frequently and partial aspects of fscm are already understood in business practice empirical knowledge about fscm is in its early stages the study provides fundamental information derived from eight case studies based on 40 interviews the analysis extends previous studies of the interface between operations management and finance by i contributing to a mid range theory of fscm by exploring two distinct but not exclusive fscm categories their antecedents and performance effects ii empirically deriving a testable framework for fscm iii relating fscm to established theories in the field of scm and iv basing the analysis on transaction cost economics managerial insights reveal that weak working capital causes firms to focus on fscm more specifically the study identifies two fscm categories pre shipment fscm before invoice release and post shipment fscm after invoice release managers can improve upstream supply chain working capital with pre shipment fscm whereas post shipment fscm strengthens the buying firm s working capital position based on transaction cost economics we analyze how these improvements stem from risk reductions which are more effective if firms are integrated internally and externally

the relative performance of five alternative warrant pricing models five warrant pricing models are examined in this study a pair based on the black scholes model a pair based on the constant elasticity of variance cev modification and an extendible warrant model a la longstaff based on more than 20 000 warrant price observations the flexible exponent cev model generates the lowest average absolute pricing error in most of the warrants examined the dilution adjusted black scholes model however remains a reasonable economical alternative in many cases

the resurgence of inventory research what have we learned abstract recent empirical and theoretical research on business inventories is surveyed and critically evaluated while most inventory research has had macroeconomic motivations we focus on its microtheoretic basis and on potential conflicts between theory and evidence the paper asks two principal questions first how can inventories which are allegedly used by firms to stabilize production nonetheless be a destabilizing factor at the macroeconomic level second why if firms are following the production smoothing model is production more variable than sales in many industries we suggest that the so called s s model may help answer both questions

do international migration and remittances reduce poverty in developing countries summary few studies have examined the impact of international migration and remittances on poverty in the developing world this paper fills this lacuna by constructing and analyzing a new data set on international migration remittances inequality and poverty from 71 developing countries the results show that both international migration and remittances significantly reduce the level depth and severity of poverty in the developing world after instrumenting for the possible endogeneity of international migration and controlling for various factors results suggest that on average a 10 increase in the share of international migrants in a country s population will lead to a 2 1 decline in the share of people living on less than 1 00 per person per day after instrumenting for the possible endogeneity of international remittances a similar 10 increase in per capita official international remittances will lead to a 3 5 decline in the share of people living in poverty

predicting volatility in the foreign exchange market measures of volatility implied in option prices are widely believed to be the best available volatility forecasts in this article we examine the information content and predictive power of implied standard deviations isds derived from chicago mercantile exchange options on foreign currency futures the article finds that statistical time series models even when given the advantage of ex post parameter estimates are outperformed by isds isds however also appear to be biased volatility forecasts using simulations to investigate the robustness of these results the article finds that measurement errors and statistical problems can substantially distort inferences even accounting for these however isds appear to be too variable relative to future volatility it is widely believed that the volatility implied in option prices is the market s best estimate of future volatility after all if it were not one could devise a trading strategy that could generate profits by identifying mispriced options the purpose of this article is to investigate the information content and predictive power of volatility implied in options on foreign currencies the paper focuses on options on currency futures traded on the chicago mercantile exchange cme because of the depth and liquidity of cme futures and options traded side by side in the same market implied standard deviations isds allow for clean tests of the predictive power of implied volatilities early studies of the information content of isds have generally found that these contain substantial information for future volatility latane and rendleman 1976 chiras and manaster 1978 and beckers 1981 for example regress future volatility on the weighted implied volatility across a broad sample of chicago board options exchange cboe stocks and find that options contain volatility forecasts that are more accurate than historical measures 1 these studies performed shortly after the 1973 beginning of the cboe option market could only use a relatively short time span and therefore focused on cross sections rather than time series predictions

the valuation of american call options and the expected ex dividend stock price decline abstract this study focuses on the ex dividend stock price decline implicit within the valuation of american call options on dividend paying stocks the roll 1977 american call option pricing formula and the observed structure of cboe call option transaction prices are used to infer the expected ex dividend stock price decline as a proportion of the amount of the dividend the relative decline is shown to be not meaningfully different from one confirming some recent evidence from studies which examined stock prices in the days surrounding ex dividend

delayed production and raw materials inventory under uncertainty abstract firms producing seasonal goods often make order and production choices prior to highly uncertain sales thus lending an investment quality to their decisions using specialized inputs imposes a delay in receiving them and linked with a long production period the firm makes its order production and pricing choices under successively reduced uncertainty the model shows that input and production costs have distinctive effects on the firm s order size with implications for the stock of raw materials inventory firms facing relatively low input costs are willing to risk leaving inputs unused as a bet for a good state of nature further we investigate situations of greater uncertainty and find a more nuanced explanation of firm behavior than previous research firms with relatively inexpensive inputs facing equal odds of good and bad states of nature will increase their order size a known result however a firm with a low relative cost of completing production may either raise or reduce its order size depending on the demand elasticity and the relative demand uncertainty intuitively firms with expensive inputs facing highly uncertain demand and with many substitute output goods are inhibited by the high cost of insuring against stock outs

do political variables affect fiscal policy adjustment decisions new empirical evidence we test eight hypotheses on political factors influencing the likelihood that a fiscal policy adjustment occurs we employ a panel discrete choice model for 20 oecd countries for the period 1970 2003 two different definitions of fiscal adjustments are used to capture the differences between rapid and gradual adjustments we find that these types of fiscal adjustment are primarily driven by economic factors and are hardly affected by political variables the likelihood that a rapid adjustment takes place is only influenced by upcoming elections while the likelihood that a gradual adjustment takes place increases in case of broad policy reform

predictability of aid do fickle donors undermine aid effectiveness aid recipients and donors alike frequently voice concerns about the lack of predictability of development aid the existing literature often treats predictability and volatility as closely related but this paper shows that they are conceptually and empirically distinct using two main data sources we demonstrate that contrary to common belief lack of predictability typically involves managing both aid shortfalls and windfalls and hampers aid management even in countries with stable implementation of macroeconomic policies although regression analysis of the sources of low predictability for a large panel picks up two indicators that could be seen as justifying unexpected revisions in aid disbursements a large unexplained residual remains for which we cannot identify a link between low predictability and aid effectiveness concerns by donors using detailed data from imf programmes we demonstrate the significant costs of low predictability of budget aid in relatively well performing recipient countries deviations of disbursed from expected budget aid of more than 1 of gdp on average are absorbed asymmetrically aid shortfalls lead to debt accumulation and cuts in investment spending whereas aid windfalls help reduce debt but also lead to additional government consumption lack of predictability thus shifts government spending from investment to consumption activities oya celasun and jan walliser

remittances institutions and economic growth summary there is considerable debate regarding the relative contribution of international migrants remittances to sustainable economic development while officially recorded remittances to developing countries have increased over the last decade research has not come to a consensus over whether remittances have a positive or negative impact on long run growth this paper argues that contradictory findings have emerged when looking at the remittances growth link because of an omitted variable bias specifically remittances will be more likely to contribute to longer term growth in countries with higher quality political and economic policies and institutions

time varying volatilities and calculation of the weighted implied standard deviation rogalski tinic have reported a monthly pattern in ex post stock return variances that differs between small and large market capitalization firms maloney rogalski find that option prices reflect these monthly patterns ex ante this study extends maloney rogalski s work by devising an expiration specific weighted implied standard deviation wisd it is found that i the monthly patterns in one month wisds are basically similar to the monthly patterns in ex post variances detected by rogalski tinic for both large and small size firms and ii use of expiration specific wisds as opposed to standard composite wisds results in improved performance of option pricing models

analysis of a production inventory system subject to random disruptions in this paper we study an unreliable bottleneck production inventory system with a constant production and demand rate that is subject to random disruptions we assume that the restoration times are constant the time between breakdowns is exponential the production setup cost and or setup time is positive and excess demand is backordered we propose an s s production policy for such systems and develop expressions for the operating characteristics of the system the properties of the policy parameters that minimize the expected total cost rate are investigated and a procedure for finding their optimal values is developed in addition we devise and test a simple heuristic procedure for finding near optimal production policies the results of a numerical experiment suggest that i setup cost reduction is more effective in reducing total operating cost when the production system is more reliable ii setup cost reduction in unreliable production systems results in higher optimal safety stock level and iii proper determination of the safety stock levels is extremely important in just in time systems which are susceptible to disruptions

a simple linear weighting scheme for black scholes implied volatilities a note abstract this study presents a piecewise linear weighting function for implied volatilities calculated from black scholes call and put prices a sensitivity analysis is conducted to compare black scholes prices calculated using the weighted implied volatilities to american model prices the analysis indicates that a relatively simple european model can provide close approximations to american prices

bid ask spreads and volatility estimates the implications for option pricing abstract this paper re examines the variance related mispricing exhibited by the black scholes model by accounting for the effects of bid ask spreads on the estimation of the variance of returns on a security it is shown that volatility estimates based on observed sequences of transaction prices overestimate the true volatility of returns on a security with the magnitude of the overestimation being an increasing function of the level of the volatility the paper then provides empirical tests of the proposition that the variance related bias exhibited by the black scholes model is due to this misestimation of volatility the results indicate that although the misestimation is systematically related to the variance it is not of sufficient magnitude to explain the volatility bias exhibited by black scholes model

a transactions theory of trade credit use this paper derives a transactions theory of trade credit use from the motives of trading partners to economize on the joint costs of exchange in the formal analysis uncertain delivery time is used to generate a demand by firms to hold inventories of both goods and money trade credit is viewed as a mechanism that separates the exchange of money from the uncertainty present in the exchange of goods by forewarning both trading partners of the timing of money flows credit permits a reduction in precautionary money holdings and the more effective management of net money accumulations

stock price volatility mean reverting diffusion and noise abstract using weekly call option prices on twenty five stocks over a ten year period 1975 1985 and calls on the s p 500 stock index futures we find that ex ante market volatility follows a mixed mean reverting diffusion with noise process changes in volatility are correlated across stocks and a marketwide volatility effect is found strong forces pull the volatility back to its long term value the findings suggest the development of new option pricing models

valuation of american options on foreign currency abstract pricing models for american call and put options on foreign currency are derived herein these models are used to investigate the efficiency of the market for foreign currency options the evidence presented here indicates that market prices for these options deviate substantially from their corresponding model prices in addition it is shown that a hedging strategy executed at transaction prices can be used to translate an observed deviation of market from model prices into positive excess profits however these profits are eliminated if the strategy is executed at bid and offer prices

errors in implied volatility estimation estimating implied volatility by inverting the black scholes formula is subject to considerable error when option characteristics are observed with plausible errors especially for options away from the money large changes in volatility produce small changes in option prices conversely small errors in option prices and other option characteristics produce large errors in implied volatilities in the presence of small measurement errors unobserved truncation of option prices that violate lower bounds for absence of arbitrage can also lead to systematic volatility smiles the paper proposes feasible gls estimators that reduce the noise and bias in implied volatility estimates

corporate trade credit and inventories new evidence of a trade off from accounts payable and receivable abstract trade credit is an important source of finance for firms and has been well researched but the focus has been on financial trade offs in this paper we consider the trade offs with inventories and develop a simple model that recognizes the incentives a firm faces to offer and receive trade credit our model identifies the response of accounts payable and accounts receivable to changes in the cost of inventories profitability risk and liquidity and importantly this influence operates through a production channel our results support the model and complement many existing studies focused on explaining the financial terms of trade credit

the efficiency of the finnish market for right issues abstract this paper analyzes the efficiency of the finnish market for right issues the rights traded on the helsinki stock exchange hse are similar instruments to warrants with some special features attached to them the paper first derives appropriate arbitrage conditions for these rights which must be satisfied in informationally efficient markets and then examines these conditions using both ex post and ex ante test procedures the ex post tests which jointly examine market efficiency and synchroneity of the rights and stock market show a staggering amount of violations against the arbitrage bounds however the ex ante tests reveal that high transaction costs prevent normal investors from benefitting from these violations stockbrokers themselves however seem to be able to earn arbitrage profits in the rights market

tests of an american option pricing model on the foreign currency options market this paper tests the ability of the american option pricing model proposed by parkinson 18 or mason 14 to explain the pricing of the foreign currency options traded on the philadelphia stock exchange from february 28 1983 to march 26 1985 we find that the model underprices out of the money options relative to at the money and in the money options this relative underpricing is driven by an underpricing of out of the money call options of short maturity in addition the degree of relative mispricing for most categories of options is shown to be a decreasing function of the time to maturity of the options longer maturity options appear to trade at similar levels of implied volatility whether they are in at or out of the money most of these biases appear consistent with the fact that the underlying spot currency rate follows a mixed jump diffusion process as described in 17

volatility of development aid from the frying pan into the fire summary the paper building on the authors previous analysis examines the relative volatility of aid flows into developing countries and their domestic revenue using new data and three alternative measures of aid instability relative volatility vis a vis fiscal revenue unpredictability of aid disbursement relative to commitments and failure of aid to smooth fluctuations in aggregate income it finds that the volatility of aid flows is still much greater than that of domestic revenue and that this difference is not decreasing especially in very poor aid dependent countries this high volatility of inflows makes the macroeconomy hard to manage further the influence of aid has been procyclical and not countercyclical aid has failed to act either as a stabilizing force or as an insurance mechanism we argue that to counter these unwelcome trends donors need to be able to respond more speedily and effectively to large adverse shocks and their conditionalities need to become more flexible possibilities explicitly discussed elsewhere in this special section

estimation in a class of simultaneous equation limited dependent variable models estimation in a class of simultaneous equation limited dependent variable models is considered the minimum chi squared method is used to compare the asymptotic relative efficiency of marginal and new conditional maximum likelihood estimators for this class of models efficient minimum chi squared estimation procedures are described a two step algorithm based on a conditional maximum likelihood estimator provides a natural framework for both computing a linearized and locating the joint maximum likelihood estimator the unimodality of the simultaneous equation tobit likelihood function is proved and this model is used to illustrate the empirical application of some of the estimators considered in the paper the relative efficiency of these estimators in the simultaneous equation tobit model is examined in a set of monte carlo experiments many applications of microeconomic theory to individual data face the joint problems of censoring and simultaneity in particular the dependent variable under investigation may not be continuously observed and some of the conditioning variables representing the outcome of other decisions by the individual may be simultaneously determined smith and blundell 1986 developed an asymptotically efficient test for exogeneity or simultaneity in the simultaneous equation tobit model as a byproduct a conditional maximum likelihood estimator was obtained which is consistent under the alternative hypothesis of simultaneity nelson and olsen 1978 amemiya 1978 1979 and heckman 1978 consider a number of consistent marginal maximum likelihood estimators based on marginal maximum likelihood estimators of the reduced form parameters for the probit and tobit models in contrast the estimator derived from smith and blundell 1986 is based on the corresponding conditional maximum likelihood estimators this paper is concerned with estimation in a class of simultaneous limited dependent variable regression models which includes the simultaneous probit and tobit models as special cases analogous marginal and conditional maximum likelihood estimators to those of nelson and olsen 1978 amemiya 1978 1979 heckman 1978 and smith and blundell 1986 are derived and other new estimators are suggested the minimum chi squared approach discussed by ferguson 1958 malinvaud 1970 and rothenberg 1973 is used to compare the asymptotic relative efficiency of various estimators considered a simple two step algorithm based on the conditional maximum likelihood

working capital and fixed investment new evidence on financing constraints this article presents new tests for finance constraints on investment by emphasizing the often neglected role of working capital as both a use and a source of funds the coefficient of endogenous working capital investment is negative in a fixed investment regression as expected if working capital competes with fixed investment for a limited pool of finance this finding addresses a criticism of previous research on finance constraints that cash flows may simply proxy shifts in investment demand in addition previous studies may have underestimated the impact of finance constraints on growth and investment because firms smooth fixed investment in the short run with working capital

on the valuation of american call options on stocks with known dividends both the roll and the geske equations for the valuation of the american call option on a stock with known dividends are incorrectly specified this note presents the corrected valuation formula explains the misspecifications and provides a numerical example

an optimal financial response to variable demand this paper develops a positive theory of trade credit based on its use as a financial response to deterministic variations in demand the operating alternatives to trade credit which include the use of storage or additional capacity are modeled using results from the peak load pricing literature the paper shows that the extension of credit partitions the buyer s inventory cost and permits specialization at incurring the components of this cost this specialization is economical when the seller has an advantage at incurring the financial cost and does not have an advantage at incurring the operating cost of accommodating variable demand conditions that provide these necessary and sufficient cost relationships are described the paper also shows that a reduction in costs rather than an increase in revenues is the source of both the buyer s and seller s increase in wealth

dynamic product portfolio management with life cycle considerations we consider a portfolio of products in which each product probabilistically transitions through various life cycle stages the evolution through these life cycle stages is impacted by both marketing support and product launch decisions which are bound by a financial constraint in the form of restricted working capital in the model the joint working capital level serves to finance the portfolio expenditures and is decided a priori by the company we use an infinite horizon markov decision process mdp to find the optimal decisions to coordinate the operations and finance depending on the composition of the portfolio we find that the policy optimizing the product launch marketing support and inventory decisions under a working capital constraint is independent of the correlation between demand levels of the products in the portfolio we numerically demonstrate that the joint management of the products has a significant positive effect on the total profit reducing the amount of working capital used per product we also show that the optimal policy smooths aggregated demand levels as well as cash flows

unbiased estimation of the black scholes formula abstract the black scholes model gives the price of an option as a function of the true variance rate of the underlying stock and other parameters because the true variance rate is unobservable an estimate of the variance rate is used in empirical tests but because the black scholes formula is non linear in the variance option price estimates using an estimated variance are biased even if the variance estimate itself is unbiased this paper develops an unbiased estimator of the black scholes formula from a taylor series expansion of the formula and the properties of the pdf of the estimated variance

dividend surprises inferred from option and stock prices this paper introduces a new method to measure the unexpected component of dividend announcements while measures used previously were based on various arbitrary models of dividend expectations our suggested method compares the reaction of stock and option prices to dividend announcements our measure is compared to commonly used model based measures to a box jenkins time seriesbased measure and to a value line investor survey based measure of dividend surprises the new measure is more highly correlated with the market s reaction to the announcements than are alternative measures of dividend surprises the new measure is also shown to be insensitive to the extent to which the options used to identify unexpected dividend announcements are in or out of the money theoretical analysis of dividend policy has focused on the effect of dividends on stock prices and on optimal portfolio holdings 1 empirical tests of the theories are predicated upon their ability to identify the unexpected component of dividend announcements or dividend surprises since the market s dividend expectations are not directly observable dividend surprises have been measured so far in relation to various ad hoc models of dividend expectations such as the naive model which assumes that investors expect dividend levels to remain the same from one quarter to the next we propose to measure directly the magnitude of dividend surprises by using stock and option prices we will show that our price based method is superior to model based methods used in prior studies for example the stock market reaction to dividend announcements is more highly correlated with dividend surprises measured by our method than with dividend surprises measured by several model based methods including a method based on a box jenkins estimation and on value line s forecast of dividends additionally the suggested pricebased measure is shown to be insensitive to the choice of options used the paper is organized as follows section i examines a method suggested by cox and rubinstein 1985 and by garman 1983 for inferring dividend

anticipation of quarterly earnings announcements a test of option market efficiency abstract this study tests chicago board options exchange efficiency by examining option price behavior in the weeks surrounding a firm s quarterly earnings announcement the evidence presented here suggests that a first order autoregressive seasonal process describes quarterly earnings behavior and demonstrates that the information content of an earnings announcement is fully incorporated in option prices by the end of the announcement week

cash flow management and manufacturing firm financial performance a longitudinal perspective abstract a firm s cash flow policies which manage working capital in the form of cash receivables from customers inventory holdings and cash payments to suppliers are inexorably linked to the firm s operations building on earlier research this study i extends prior studies by examining the relationships between changes in cash flow measures and changes in firm financial performance using a longitudinal sample of firm data and ii investigates the direction of the relationship between quarterly changes in cash flow positions and firm financial performance this study is conducted using the generalized estimating equations gee methodology to analyze a longitudinal sample of eight quarters of cash flow and financial performance data from 1233 manufacturing firms the analyses find that changes in the widely used cash conversion cycle ccc metric do not relate to changes in firm performance however changes in the less used operating cash cycle occ metric are found to be significantly associated with changes in tobin s q this examination of how changes in specific cash flow measures relate to changes in tobin s q shows that both reductions in accounts receivables measured as days of sales outstanding dso and reductions in inventory measured as days of inventory outstanding dio relate to firm financial performance improvements that persist for several quarters endogeneity tests of whether a firm s cash flow management strategy leads to changes in firm performance or if the cash flow strategy is a byproduct of firm performance suggest that reductions in dso lead to improved firm financial performance

on valuing american call options with the black scholes european formula empirical papers on option pricing have uncovered systematic differences between market prices and values produced by the black scholes european formula such biases have been found related to the exercise price the time to maturity and the variance we argue here that the american option variant of the black scholes formula has the potential to explain the first two biases and may partly explain the third it can also be used to understand the empirical finding that the striking price bias reverses itself in different sample periods the expected form of the striking price bias is explained in detail and is shown to be closely related to past empirical findings the black scholes european option pricing model tends to exhibit systematic empirical biases when used to value american call options the reported biases

the political economy of fiscal consolidations in the context of recent research in political economy this paper addresses the policy problem of fiscal consolidation in terms of three types of issues i the macroeconomic effects of alternative strategies to consolidate ii the institutional setups conducive to a consolidation and iii the best strategy for implementing a consolidation in order to maximize its political feasibility one methodological feature of this survey is an emphasis on policy feasibility one methodological feature of this survey is an emphasis on policy issues in order to bridge the gap between the level of abstraction of politico economic models of fiscal policy and the issues faced by a policymaker when attempting a fiscal consolidation

aid instability as a measure of uncertainty and the positive impact of aid on growth this article contributes to the literature on aid and economic growth we posit that uncertainty measured as the instability of aid receipts will influence the relationship between aid and investment how recipient governments respond to aid and will capture the fact that some countries are especially vulnerable to shocks when we account for uncertainty which is negative and significant we find that aid has a significant positive effect on growth largely due to its effect on the volume of investment the finding that uncertainty of aid receipts reduces the effectiveness of aid is robust when the regression is estimated for the sub sample of african countries these findings hold although the effectiveness of aid appears weaker than for the full sample

the italian market for premium contracts an application of option pricing theory abstract despite their growing importance on italian stock exchanges premium contracts have not received very much attention in analytical studies this paper starts with a description of the working of the market for premium contracts with the aim of highlighting its institutional peculiarities compared with foreign markets for stock options and then develops a formula for the determination of premia based on arbitrage methods similar to those used in option pricing theory the empirical test of the correspondence between actual market premia and the theoretical values obtained provides some indication of the scope for arbitrage between premium and forward contracts and hence of the efficiency of italian stock exchange markets

the stochastic behaviour of market variance implied in the prices of index options the purpose of this paper is to examine the time series properties of volatilities and to consider various financial and real variables that may be correlated with innovations in expected volatility the measure used in this study is the black scholes volatility implied in weekly call option prices written on the spot price of the ftse index a u k market equity index first the authors determine if capital structure can explain the relation between changes in the volatility of equity and structure can explain the relation between changes in the volatility of equity and changes in the level of the index second they analyze whether innovations in the volatilities of prices of real variables could also explain changes in equity volatility including the volume of transactions in equities oil prices exchange rates nominal and real interest rates and inflation copyright 1991 by royal economic society

intraday price change and trading volume relations in the stock and stock option markets this study investigates intraday relations between price changes and trading volume of options and stocks for a sample of firms whose options traded on the cboe during the first quarter of 1986 after purging the price change series of the effects of bid ask spreads multivariate time series analysis is used to estimate the lead lag relation between the price changes in the option and stock markets the results indicate that price changes in the stock market lead the option market by as much as fifteen minutes the analysis of trading volume indicates that the stock market lead may be even longer the intense trading activity in and in fact the very existence of organized stock option markets attest to the economic benefits that these financial contracts provide reduced transaction costs and increased financial leverage are two reasons why trading in the stock option market may be more attractive than trading in the market for the underlying stock in addition these cheaper and more flexible trading opportunities attract new and differently informed investors to the marketplace the resulting increase in trading activity together with the inextricable arbitrage linkage between stock and option prices imply an increase in market efficiency this study investigates empirically the intraday price change and trading volume relations between stocks and options for a sample of firms whose options were actively traded on the chicago board options exchange during the first quarter of 1986 in particular intraday call option price changes are translated into implied stock price changes using the american call option pricing model these intraday implied stock price changes are then compared with the actual stock price changes to identify which if either market leads the other in perfectly functioning capital markets there should be complete simultaneity between the series that is new information disseminating into the marketplace should be reflected in the prices and the trading activity of both securities simultaneously institutional factors however may make the stock option market more attractive to information traders this may cause price changes and trading activity due to new information to be observed in the option market first followed by price

option pricing and implicit volatilities abstract this paper demonstrates that black scholes implied volatilities can be used to value options in many situations where the assumptions of the black scholes model are violated including i alternative stock processes ii stochastic interest rates and iii market frictions given its computational simplicity this procedure provides an attractive alternative to the more complex models with a direct estimation procedure

valuation of american futures options theory and empirical tests this paper reviews the theory of futures option pricing and tests the valuation principles on transaction prices from the s p 500 equity futures option market the american futures option valuation equations are shown to generate mispricing errors which are systematically related to the degree the option is in the money and to the option s time to expiration the models are also shown to generate abnormal risk adjusted rates of return after transaction costs the joint hypothesis that the american futures option pricing models are correctly specified and that the s p 500 futures option market is efficient is refuted at least for the sample period january 28 1983 through december 30 1983 futures option contracts now trade on every major futures exchange and on a wide variety of underlying futures contracts the chicago mercantile exchange the chicago board of trade the new york futures exchange and the commodity exchange now collectively have more than twenty options written on futures contracts where the underlying spot commodities are financial assets such as stock portfolios bonds notes and eurodollars foreign currencies such as west german marks swiss francs and british pounds precious metals such as gold and silver livestock commodities such as cattle and hogs and agricultural commodities such as corn and soybeans moreover new contract applications are before the commodity futures trading commission and should be actively trading in the near future with the markets for these new contingent claims becoming increasingly active it is appropriate that the fundamentals of futures option valuation be reviewed and tested black 5 provides a framework for the analysis of commodity futures options although his work is explicitly directed at pricing european options on forward contracts it applies to european futures contracts as well if the riskless rate of interest is constant during the futures option life 1 the options currently

investment cash flow sensitivities are useful a comment on kaplan and zingales arecent paper in this journal by kaplan and zingales reexamines a subset of erms from work of fazzari hubbard and petersen and criticizes the usefulness of investment cash eow sensitivities for detecting enancing constraints we show that the kaplan and zingales theoretical model fails to capture the approach employed in the literature and thus does not provide an effective critique moreover we describe why their empirical classiecation system is eawed in identifying both whether erms are constrained and the relative degree of constraints across erm groups we conclude that their results do not support their conclusions about the usefulness of investment cash eow sensitivities in a recent paper in this journal kaplan and zingales 1997 hereinafter kz argue that investment cash eow sensitivities do not provide useful evidence about the presence of enancing constraints because kz use a subset of the same erms and the same regressions as fazzari hubbard and petersen 1988 hereinafter fhp and claim page 176 that fhp can legitimately be considered the parent of all papers in this literature it is appropriate that we respond based on a simple theoretical model kz reach the provocative conclusion page 211 that the investment cash eow sensitivity criterion as a measure of enancial constraints is not well grounded in theory in section i we show that the kz model does not capture the theoretical approach employed in fhp and many subsequent studies most of the kz paper attempts to show that empirical investment cash eow sensitivities do not increase monotonically with the degree of enancing constraints within the 49 low dividend erms from the fhp sample in section ii we explain why the kz classiecation of the degree of constraints is eawed in identifying both whether or not erms are constrained absolute constraints as well as the relative degree of constraints across erms as a result we argue in section iii that there is no expected ex ante pattern for the

a bayesian approach to modeling stock return volatility for option valuation new measures of stock return volatility are developed to increase the precision of stock option price estimates with bayesian statistical methods volatility estimates for a given stock are developed using prior information on the cross sectional patterns in return volatil ities for groups of stocks sorted on size financial leverage and trading volume call option values computed with the bayesian procedure generally improve prediction accuracy for market prices of call options relative to those computed using implied volatility standard historical volatility or even the actual ex post volatility that occurred during each option s life although the bayesian methods produce biased call price estimators they do reduce the systematic tendency of standard pricing approaches to overprice underprice options on high low volatility stocks little bias improvement is observed with respect to the time to maturity and moneyness of the call options

effect of remittances on poverty and financial development in sub saharan africa summary this paper assesses the effect of the steadily growing remittance flows to sub saharan africa though the region receives only a small portion of the total recorded remittances to developing countries and the volume of aid flows to sub saharan africa swamps remittances this paper finds that remittances which are a stable private transfer have a direct poverty mitigating effect and promote financial development these findings hold even after factoring in the reverse causality between remittances poverty and financial development the paper posits that formalizing such flows can serve as an effective access point for unbanked individuals and households

valuation of american call options on dividend paying stocks empirical tests abstract this paper examines the pricing performance of the valuation equation for american call options on stocks with known dividends and compares it with two suggested approximation methods the approximation obtained by substituting the stock price net of the present value of the escrowed dividends into the black scholes model is shown to induce spurious correlation between prediction error and 1 the standard deviation of stock return 2 the degree to which the option is in the money or out of the money 3 the probability of early exercise 4 the time to expiration of the option and 5 the dividend yield of the stock a new method of examining option market efficiency is developed and tested

the systematic risk of discretely rebalanced option hedges this paper demonstrates that black scholes option pricing model hedge positions that are risk free when rebalanced continuously will frequently exhibit substantial systematic risk when rebalanced at finite intervals this systematic risk may have biased important empir ical tests of the option pricing model moreover this systematic risk means that the blackscholes option pricing model is inherently inconsistent with the discrete time version of the capital asset pricing model capm