government deficits the real interest rate and ldc debt on global crowding out abstract the paper uses a three regions model of global saving investment balance to present a global crowding out interpretation of present economic trends the model builds on data which point to a possible shortage of savings explosive growth of social expenditures structural public sector deficit in north and south changes of the age pyramid real wage rigidity in many industrial countries

transition to fully funded pension schemes a non orthodox criticism summary the paper examines the dominant views on the adoption of mandatory fully funded pension schemes ff as a partial or complete substitute for the unfunded payg three obstacles to the ff reform are envisaged to begin with the reform may fail to boost workers marginal propensity to save since workers may contract their voluntary saving to compensate the larger mandatory saving to ff schemes secondly if payg s payroll contributions are reduced and diverted to a ff scheme the larger private saving supply will be balanced by a lower government saving if the government is committed to honour the current pension payments thirdly keynes saving paradox reinforced by the capital theory critique initiated by sraffa suggests that the effect of the rise in the marginal propensity to save is not an increase in capital accumulation but rather a fall of income and employment

it only takes a few moments to hedge options abstract we propose a novel non structural method for hedging european options relying on two model independent results first under suitable regularity conditions an option price can be disentangled into a linear combination of risk neutral moments second there exists an explicit approximate functional form linking the risk neutral moments to the futures price of the underlying asset and the related variance swap contracts we show that s p 500 call prices are mainly explained by two factors that are related to level and volatility of the underlying index we empirically compare the performance of two strategies where the vega exposure is adjusted either by a direct position in a variance swap contract or indirectly through an at the money call while both strategies ensure effective immunization in periods of market turmoil taking direct exposure on variance swaps is not optimal during extended periods of subdued volatility

transforming competitiveness into economic benefits does tourism stimulate economic growth in more competitive destinations abstract this research note investigates the impact of a destination s competitiveness upon tourism s contribution to economic growth using a cross section with 131 countries destination competitiveness is measured with the world economic forum s travel and tourism competitiveness index while tourism s contribution to economic growth is measured with the growth decomposition methodology results reveal that destination competitiveness has no statistically significant impact on tourism s contribution to economic growth tourism policy implications and directions for future research are also discussed

a positive theory of social security based on reputation we construct a general equilibrium model in which a pay as you go social security system can be adopted and sustained as a political and economic equilibrium we alalyze the welfare implictions of this system and compare general equilibrium welfare measure to the commonly used notion of actuarial fairness

cross hedging minimum return guarantees basis and liquidity risks we reveal pitfalls in the hedging of insurance contracts with a minimum return guarantee on the underlying investment e g an external mutual fund we analyze basis risk entailed by hedging the guarantee with a dynamic portfolio of proxy assets for the funds we also take account of liquidity risk which arises since the insurer may need to advance funds for performing the hedge based on a least squares monte carlo simulation we study the economic implications of basis and liquidity risks we demonstrate that both risks may be surprisingly high and show how the design of the contract and the hedging strategy may help to alleviate them

social security in panama a multiperiod analysis of income distribution abstract a unique multiperiod data set is used to look at the income distribution effects of the retirement portion of the social security system of panama while it is clear that the system is an important source of income for workers it is argued that its true redistributive importance is greatly exaggerated using a multiperiod view it is found that previously high wage and urban workers are disproportionately represented among current recipients it is also argued that social security has substantially reduced the work effort of these workers hence the appropriateness of the present social security system is questioned on both equity and efficiency grounds

static hedging of exotic options this paper develops static hedges for several exotic options using standard options the method relies on a relationship between european puts and calls with different strike prices the analysis allows for constant volatility or for volatility smiles or frowns

how stable is the tourism led growth hypothesis in malaysia evidence from disaggregated tourism markets abstract we contribute to the tourism growth literature by applying the newly developed combined cointegration test and the recursive granger causality test to re assess the stability of the tourism led growth hypothesis in malaysia with respect to 12 different tourism markets the cointegration test results suggest that economic growth of malaysia is cointegrated with all the 12 selected tourism markets however the recursive granger causality test shows that the tourism led growth hypothesis in malaysia is valid and stable with respect to tourist arrivals from only 8 out of the 12 tourism markets almost all of them are from developed countries hence not all international visitor arrivals could effectively drive the growth of the malaysian economy in light of this tourism marketing policies should focus more on those tourism markets that could significantly stimulate economic growth however there should not be total neglect of others as they potentially contribute to the economies of scale

interdependency of personal savings and labour force participation of the elderly and social security wealth a time series analysis using japanese annual time series data covering the period 1950 1982 our study shows that social security wealth during this period depressed personal savings as a result there was a reduction of approximately 79000 yen of wealth per capitain real terms from 1960 to 1980 however the declining labour force participation of elderly males brought about for example by earlier retirement stimulated personal savings by an estimated 13000 yen over the same period the results indicate that the benefit effect tends to outweigh the retirement effect furthermore this study has identified a negative interdependency between the level of personal savings and the retirement behaviour of elderly males a typical male worker saves more before retirement if that individual expects to stay a shorter time in the labour market retirement behaviour is less responsive to a change in personal savings behaviour than vice versa

the rise and evolution of public pension systems security crisis basically the crisis manifests itself by the fact that if young participants in the existing public pension plans were allowed to withdraw and invest voluntarily in their own preferred privately marketed insurance plans they would be able to secure a rate of return that is substantially higher than the rate of return under the existing plan of course this would not be the case if public pension plans were financed by a funding system rather than the existing pay as you go payg system given the paygsystem and the actual decline of birth rates in many western countries future pension tax rates can reach levels as high as 40 percent or more it might be suspected that future generations will not be willing to contribute to the system by the necessary amount making declining benefit rates inevitable if not the altogether elimination of the system notice that if the present generations expects this future development to arise they can calculate their rate of return under the present benefit tax structure to be even lower the inevitable conclusion thus seems to be that if the implicit claims build up under the existing system can be expected not to be allowed by future generations the present generation will do likewise with respect to the claims of the now living older generation however the popular support for public pension plans is not detoriating at present in many western countries thus falsifying the foregoing observation

the american put option valued analytically an analytic solution to the american put problem is derived herein the hedge ratio and other derivatives of the solution are presented the formula derived implies an exact duplicating portfolio for the american put consisting of discount bonds and stock sold short the formula is extended to consider put options on stocks paying cash dividends a polynomial expression is developed for evaluating these formulae values and hedge ratios for puts on both dividend and nondividend paying stocks are calculated tabulated and compared with values derived by numerical integration and binomial approximation as with european options evaluating an analytic formula is more efficient than approximating the stock price process or the partial differential equation by binomial or finite difference methods finally applications of this american put solution are discussed

the limits of the equity efficiency tradeoff relatively inefficient transfer programs such as public housing food stamps and direct price regulation rent controls minimum wages are sometimes justified by arguments which say that it is possible in this way to transfer more to the poor than would be possible without such programs conversely it is sometimes argued as in the case of gasoline that prices cannot be allowed to rise to equilibrium levels because such increases will hurt the poor most and direct compensation will not actually be paid the argument advanced in this paper is that given enough time the political process will respond to such policies and those who advocate inefficient programs for increasing the wealth of the poor will succeed only in lowering the incomes of both the wealthy and the poor 13 moreover this argument is based on a simple and direct model of the political process one that only requires a weak form of responsiveness to voters intentions while the pareto criterion provides that every inefficient state is dominated by an efficient one it does not usually imply that every efficient state dominates every inefficient one however in our framework this does hold for policy comparisons so that a policy could be judged solely by its implications for efficiency without regard to equity considerations one policy which raised social income relative to another would be preferred by each and every person and so would dominate by the pareto criterion there was no need for the usual compensation principle arguments since compensation was not something that could occur but something that would occur potential improvements become actual improvements through the action of a responsive political system in comparing policies for income redistribution it is only their efficiency implications which are relevant

voting on pensions a survey abstract the paper presents a nonexhaustive survey of the literature designed to explain emergence size and political sustainability of pay as you go pension systems it proposes a simple framework of analysis a small open two overlapping generation economy model around which some variants are displayed dictatorship of the median voter is assumed the text is organized to answer the following questions i do political equilibria with payg pension schemes exist ii why do they emerge iii what are the conditions for the participation constraint of the pension game to be verified and finally iv what is the size of the pension system chosen by the median voter and how is this size influenced by an exogenous e g demographic shock

hedging using simulation a least squares approach abstract this paper presents a new and flexible computational approach to derivative hedging it is based on the use of least squares regression in order to compute the hedging portfolio this nonparametric methodology can be readily applied to any derivative contract written on a single underlying risky asset in a complete market with continuous markov price paths we illustrate this technique computing sensitivities on plain vanilla and exotic options with both european and american exercise style the achieved numerical accuracy is always comparable with the best simulation and semianalytic techniques presented in the literature

productivity growth and the political economy of social security the present paper provides an analysis of unfunded social securityas the outcome of a public decision making process in an endogenousgrowth economy it employs a model in which there is a non monotonic relationship beween productivity growth and the scale ofpublic intergenerational redistribution the paper shows thatalthough unfunded social security need not harm growth in general it is likely to harm growth in a democracy this effect isreinforced by population aging

social security and private saving new time series evidence in an important article in the journal of political economy martin feldstein 1974 estimated that the introduction of the social security system had reduced personal saving by 50 percent with serious consequences for capital formation and output his conclusion was based on a consumer expenditure function estimated with u s time series data and incorporating a social security wealth variable of his construction this paper presents new evidence that casts considerable doubt on feldstein s conclusion first the social security wealth variable used by feldstein was seriously flawed as a result of a computer programming error simply correcting this error substantially changes the estimated effect of social security on saving second the statistical evidence depends upon assumptions which are embedded in the construction of the social security wealth variable assumptions that are not demonstrably preferable and are in some cases inferior to alternative assumptions these assumptions relate first to how individuals form their expectations about the social security benefits they expect to receive and the social security taxes they expect to pay and second to estimates of the number of workers dependent wives and surviving

destination competitiveness applying different models the case of slovenia abstract a tourism country s competitiveness is important especially when countries strive for bigger market shares tourism managers have to identify and explore competitive advantages and analyse the destination s competitive position the degree to which a country can benefit from its tourism sector depends largely on this sector s competitive position in the international tourist market this paper refers to the de keyser vanhove model of a competitive destination which was applied to slovenia in 1998 it also studies the integrated model of destination competitiveness developed in a collaborative effort of researchers dealing with the cases of korea and australia and examines its determinants and individual competitive indicators as perceived by slovenian tourist stakeholders on the supply side the result shows that slovenia is more competitive in its natural cultural and created resources but less competitive in the management of tourism and according to the integrated model demand conditions with both uncompetitive elements reducing the slovenian tourism industry s ability to add value the end discussion points out weaknesses in the development of tourism competitiveness models and calls for greater unity with the competitiveness factor theory and for more caution when creating the main competitiveness factors and models

the retirement health nexus a new measure of an old puzzle traditional empirical models of retirement which use a self assessed health measure have often found that the wage rate has a surprisingly small effect on retirement using both a self reported health measure and one not based on self report subsequent mortality experience in a more general reduced form joint demand framework we test the importance of the interaction effects of health and retirement our findings are consistent with a joint determination of health and retirement the wage elasticity using either health measure is about equal to that found in a single equation model when a mortality measure is used but all three elasticities are five times greater than one found using self reported health in a traditional single equation model

explaining welfare spending welfare expenditures are difficult to explain within a pure public choice framework in this article i shall argue that the difficulties may be resolved by assuming that the main purpose of welfare schemes is to provide the electorate in their capacity of different risk categories with insurance against various social risks rather than to redistribute economic resources towards weak and destitute groups in society this solution not only explains the scope of existing welfare arrangements but may also hold the key to an explanation as to how public welfare policies change and evolve across time

evaluation of american option prices in a path integral framework using fourier hermite series expansions abstract in this paper we review the path integral technique which has wide applications in statistical physics and relate it to the backward recursion technique which is widely used for the evaluation of derivative securities we formulate the pricing of equity options both european and american using the path integral framework discretising in the time variable and using expansions in fourier hermite series for the continuous representation of the underlying asset price we show how these options can be evaluated in the path integral framework for american options the solution technique facilitates the accurate determination of the early exercise boundary as part of the solution additionally the continuous representation of the state variable allows the relatively accurate and efficient evaluation of the option prices and the delta hedge ratio

the role of pensions in the labor market a survey of the literature because employer sponsored group pension plans entail agreements between workers and their employers explicitly linking future payment and employment they offer an unusual window into long term employment relationships this review of recent research on pensions explores how pensions influence employee compensation retirement turnover and other matters central to the determination of labor s price and quantity over time the authors also outline some unanswered questions and difficult to reconcile findings because the pension promise involves an explicit and relatively well documented set of statements regarding future contingent payment and employment an examination of the design and operation of employersponsored group pension plans can yield important insights into the long term employment relationship specifically pension research illuminates some important labor market questions in two ways it offers insight into an important element of compensation in its own right and it furthers our understanding of labor markets in which long term

welfare and comparative statics implications of fair social security a steady state analysis abstract this paper examines the steady state welfare and comparative statics implications of fair social security in an overlapping generations model with uncertain lifetime the model is designed to capture the effects of lifetime uncertainty extending over the individual s entire lifespan the effects of intentional and unintentional bequests and the effects of the earning profile he shows that the welfare effects depend on the size of the benefits and the structure of the social security tax in particular even fair social security may have negative welfare implications if the underlying tax structure is ill designed some comparative statics implications are analyzed

a closed form garch option valuation model this paper develops a closed form option valuation formula for a spot asset whose variance follows a garch p q process that can be correlated with the returns of the spot asset it provides the first readily computed option formula for a random volatility model that can be estimated and implemented solely on the basis of observables the single lag version of this model contains heston s 1993 stochastic volatility model as a continuous time limit empirical analysis on s p500 index options shows that the out of sample valuation errors from the single lag version of the garch model are substantially lower than the ad hoc black scholes model of dumas fleming and whaley 1998 that uses a separate implied volatility for each option to fit to the smirk smile in implied volatilities the garch model remains superior even though the parameters of the garch model are held constant and volatility is filtered from the history of asset prices while the ad hoc black scholes model is updated every period the improvement is largely due to the ability of the garch model to simultaneously capture the correlation of volatility with spot returns and the path dependence in volatility article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

estimating security price derivatives using simulation simulation has proved to be a valuable tool for estimating security prices for which simple closed form solutions do not exist in this paper we present two direct methods a pathwise method and a likelihood ratio method for estimating derivatives of security prices using simulation with the direct methods the information from a single simulation can be used to estimate multiple derivatives along with a security s price the main advantage of the direct methods over resimulation is increased computational speed another advantage is that the direct methods give unbiased estimates of derivatives whereas the estimates obtained by resimulation are biased computational results are given for both direct methods and comparisons are made to the standard method of resimulation to estimate derivatives the methods are illustrated for a path independent model european options a path dependent model asian options and a model with multiple state variables options with stochastic volatility

freedom and other variables in the choice of public pension systems there are three types of public pension systems popular throughout the world pay as you go defined benefit funded defined contribution and mixed the latter two systems were largely adopted in the 1990s after chile successfully built its funded system in this paper we analyze the choice of these types of pension system identifying factors that affect countries choice several measures of freedom economic and political are associated with these choices the estimated effects of the two freedoms on pension choice and percent elderly are quite interesting and intuitive

the valuation of american barrier options using the decomposition technique in this paper we propose an alternative approach for pricing and hedging american barrier options speci cally we obtain an analytic representation for the value and hedge parameters of barrier options using the decomposition technique of separating the european option value from the early exercise premium this allows us to identify some new put call symmetry relations and the homogeneity in price parameters of the optimal exercise boundary these properties can be utilized to increase the computational e ciency of our method in pricing and hedging american options our implementation of the obtained solution indicates that the proposed approach is both e cient and accurate in computing option values and option hedge parameters our numerical results also demonstrate that the approach dominates the existing lattice methods in both accuracy and e ciency in particular the method is free of the di culty that existing

towards a politico economic theory of social security social security which will be taken here in its wide european sense not only encompassing public pension schemes but also other income transfers such as to unemployed sick and disabled persons and to widows and orphans nowadays figures large among government outlays after its continuous and fast expansion over especially the past two decades see e g saunders and klau 1985 and table 0 1 accordingly social security is receiving increasing attention in the economic profession recent discussions have focused on the effects of social security on capital accumulation and on its ability to achieve a more desirable distribution of income in these studies social security programs are typically treated as exogenously determined little attention has hitherto been paid to the explanation of social security policies

public pensions as optimal social contracts abstract a simple overlapping generations model is modified to allow for an externality experienced by the young from consumption by the elderly this sets up a game between generations in which one generation s strategy may be to save too little and rely on gifts from the young e g public assistance for retirement income social security can therefore be viewed as a pareto optimal contract to restore efficient intertemporal allocation a funded public pension plan corresponds to forced saving but is vulnerable in that the next young generation may stop contributing rely on its children for retirement assistance and meanwhile reap the consumption externality from the current elderly s social security benefits this suggests a forced giving or pay as you go type of compulsory pension plan such as exists in most nations which also has the advantage of aiding the initial old generation and therefore generating an immediate consumption externality for the initial young the approach can also be used to explain other aspects of existing social security

toward explaining earlier retirement after 1970 this study investigates why after 15 years of virtual stability u s labor force participation rates for men aged 55 to 64 fell by approximately 20 from 1970 through 1986 the author s analysis of rule changes in the social security system and pension plans suggests that part of this reduction was caused by an increase in social security benefits by almost 50 during the 1970s half of which is not reflected in legislation which worked to create unexpected wealth effects similar to those that characterized the system during the early 1950s but an equally important cause was a widespread change in private pension plan rules toward encouraging earlier retirement these conclusions challenge the common notion that earlier retirement is largely a supply side phenomenon