time varying smooth transition autoregressive models nonlinear regime switching behavior and structural change are often perceived as competing alternatives to linearity in this article we study the so called time varying smooth transition autoregressive tv star model which can be used both for describing simultaneous nonlinearity and structural change and for distinguishing between these features two modeling strategies for empirical specification of tv star models are developed monte carlo simulations show that neither of the two strategies dominates the other a specific to general to specific procedure is best suited for obtaining a first impression of the importance of nonlinearity and or structural change for a particular time series a specific to general procedure is most useful in careful specification of a model with nonlinear and or time varying properties an empirical application to a large dataset of u s macroeconomic time series illustrates the relative merits of both modeling strategies

evidence on nonlinear error correction in money demand the case of taiwan this paper proposes a nonlinear error correction model based upon smooth transition regression methodology the model is specified such that the short run adjustment toward long run equilibrium is nonlinear and that the error correction is a smooth function of long run deviation empirical results obtained from estimating m2 money demand in taiwan support the hypothesis of a nonlinear error correction process and provide better interpretation of change in the demand for money

investigating m3 money demand in the euro area abstract euro area monetary growth has exceeded its target since 2001 likewise recent empirical studies did not find evidence in favour of a stable long run money demand function in contrast to the bulk of the literature we are able to identify a stable long run money demand relationship this result is obtained when the analysis is done without the short run homogeneity restriction between money and prices the basic equation can be improved by allowing for asymmetric adjustment in a low inflation environment opportunity costs of holding money have decreased thus the apparent monetary overhang is reconciled within standard models

stochastic production and heterogeneous risk preferences commercial fishers gear choices we present a model of fishers gear choice which allows for heterogeneity both in production technology and risk preferences and apply it on a panel of swedish trawlers stochastic revenue functions are estimated and used to predict the mean and standard deviation of revenue for each trip in a random parameters logit model we test if these predicted values explain gear choice a majority of fishers respond positively to increased mean and negatively to increased variability of expected landing values indicating risk aversion but also show a strong tendency to choose the same gear used on the previous trip

endogenous sequential entry in a spatial model in this paper we simulate a sequential entry of firms in a differentiated industry a la hotelling firms select a product location once for all they are aware of the unique price equilibrium that will take place after entry has occurred and take into account the behaviour of subsequent entrants it is found that early entrants will systematically locate around the centre but in such a way as not to induce later competitors to locate in between them location choices are also investigated as an instrument for entry deterrence which is feasible because of a fixed cost we identify several ranges of fixed cost for which entry is innocently deterred corresponding to a natural monopoly duopoly triopoly entry deterrence is then typically used to stretch the range of fixed cost for which a given number of firms can be sustained deterrence strategies are consistently such that firms locate at more regular intervals

currency substitution policy rule and pass through evidence from turkey in this article we analyse empirically currency substitution and exchange rate pass through in the turkish economy where their ongoing presence could undermine the implementation of a successful monetary policy especially in a flexible exchange rate regime even though a considerable time has passed after the implementation of a flexible exchange rate regime in turkey by using vector error correction model for the period from 1987 to 2004 we find that the currency substitution and exchange rate pass through still have importance in the turkish economy and the monetary policy stance has been considerably strong possibly as a response of ongoing presence of them if this is the case to avoid the undesired consequences of this strong monetary policy turkey should consider some policy measures to reduce the degree of pass through and currency substitution

invariant risk attitudes concepts of constant absolute risk aversion and constant relative risk aversion have proved useful in the analysis of choice under uncertainty but are quite restrictive particularly when they are imposed jointly a generalization of constant risk aversion referred to as invariant risk aversion is developed invariant risk aversion is closely related to the possibility of representing preferences over state contingent income vectors in terms of two parameters the mean and a linearly homogeneous translation invariant index of riskiness the best known index with such properties is the standard deviation the properties of the capital asset pricing model usually expressed in terms of the mean and standard deviation may be extended to the case of general invariant preferences c 2003 elsevier inc all rights reserved

a competitive analysis of fail fast shakeout and uncertainty about consumer tastes abstract contemporary business strategy advocates fail fast the practice of launching a product early before the resolution of uncertainty about how product characteristics matter to consumers we consider how uncertainty about consumer preferences can contribute to shakeout when moving from the infant stage of an industry when this uncertainty is large to the mature stage of an industry when this uncertainty is small we find that consistent with the empirical literature due to firms uncertainty about consumers preferences there is excessive entry initially and on average positive shakeout in the number of firms in the market in the mature phase of the industry the paper also presents a new way to model uncertain preferences in product differentiation models that may prove useful in other applications

uncertain spatial demand and price flexibility a state space approach to duopoly abstract sufficient conditions for a unique price equilibrium in terms of the uncertainty distribution and the state contingent consumer distributions are given for spatial duopoly also considered are efficiency and endogenous locations for the symmetric case and comparative statics on price flexibility

investigating m3 money demand in the euro area new evidence based on standard models monetary growth in the euro area has exceeded its target level especially since 2001 likewise recent empirical studies did not find evidence in favour of a stable long run relationship between the variables entering the money demand function instead the equation appears to be increasingly unstable if more recent data are included since the link between money balances and macroeconomic variables seems to has become rather fragile these results put serious doubts concerning the rationale of monetary aggregates in the monetary policy strategy of the ecb however if the analysis is done without imposing a short run homogeneity restriction between money and prices a stable long run money demand relationship can be identified where recursively estimated parameters are almost stable in addition the corresponding error correction model survives a wide array of specification tests including procedures for nonlinearities and parameter instability hence the apparent monetary overhang is in line with standard models of money demand behaviour and is not expected to lead to a rise in inflation

are crop yields normally distributed the evidence for nonnormality of crop yields is reassessed three methodological problems are identified in typical yield distribution analyses i misspecification of the nonrandom components of yield distributions ii missreporting of statistical significance and iii use of aggregate timeseries ats data to represent farm level yield distributions one or more of these problems infect virtually all evidence against normality to date the positive contribution of the article is a set of principles that must be followed in any valid investigation of yield normality

negative moments risk aversion and stochastic dominance a simple moment ordering condition is shown to be necessary for stochastic dominance closely related results on generalizations of the geometric and harmonic means are also provided an ordering of the moment generating functions is shown to be necessary and sufficient for stochastic dominance the results have a straightforward and useful interpretation in terms of constant relative and absolute risk aversion utility functions these results are used to provide necessary and sufficient conditions for optimality of distributions on an important class of utility functions

parimutuel contests with strategic risk sensitive bettors abstractexisting models in the parimutuel betting literature typically explain betting data by either assuming a single representative bettor with certain risk preferences or by assuming that a number of risk neutral bettors compete strategically within a game theoretic framework we construct a theoretical framework of parimutuel markets in which we model both strategic interaction and individual bettor risk preferences distinguishing between sophisticated insiders and recreational outsiders we solve this model analytically for the optimal insider betting amount in a static symmetric nash equilibrium a new data set of 126 million individual horse race bets in new zealand from 2006 to 2014 allows us to calibrate the model we find that insiders those betting 100 or more outperform outsiders by 7 5 in terms of realized returns the best fit of the model to the data is obtained when insiders are assumed to be risk neutral and to have an information advantage of 0 08 in probability terms this findin

product differentiation and location decisions under demand uncertainty we investigate hotelling s duopoly game of location then price choices with quadratic transportation costs and uniformly distributed consumers under the assumption that firms are uncertain about the exact location of demand we characterize the unique equilibrium and the socially optimal locations contrary to the individual level random utility models location uncertainty is a differentiation force in equilibrium increases in the variance of the uncertainty lead to greater differentiation higher expected equilibrium prices and profits and a greater welfare loss

investigating stability and linearity of a german m1 money demand function starting from a linear error correction model ecm the stability and linearity of a german m1 money demand function are investigated applying smooth transition regression techniques using seasonally unadjusted quarterly data from 1961 1 to 1990 2 it is found that the money demand equation considered is both linear and stable after extending the sampling period until 1995 4 a clear structural instability due to the monetary unification on 1 july 1990 is found and subsequently modelled a non linear specification for the extended period is presented and discussed copyright 1999 john wiley sons ltd

the robustness of risk return nonlinearities to the normality assumption in a recent study tinic and west 1986 empirically reexamine the risk return relationship posited by the traditional mean variance capm they find a positive nonlinear relationship between risk and return except during january when the market rewards bearing nonsystematic risk this study examines the hypothesis that nonnormality of re turn distributions may account for some of these anomalous results we compare shalit and yitzhaki s 1984 mean extended gini capm an equilibrium asset pricing relation that is independent of the form of the underlying asset distribution with the traditional capm our results indicate that the nonlinear risk return relationship and the size and january effects are robust to nonnormality of return distributions

two moment decision models and expected utility maximization two moment decision models are consistent with expected utility maximization only if the choice set or the agent s preferences are restricted this paper identifies a restriction which is sufficient to ensure this consistency and confirms that it holds in many economic models the implications for economic analysis are then derived two different approaches to representing an agent s preferences over strategies yielding random payoffs are in wide use under the mean standard deviation ms approach the agent is assumed to rank the alternatives according to the value of some function defined over the first two moments of the random payoff while the expected utility eu criterion assumes that the expected value of some utility function defined over payoffs is used instead the fact that there are these two competing approaches has generated a considerable literature some authors are concerned with the advantages and disadvantages of each while others deal with conditions under which the potentially different approaches would yield the same results or at least approximately so space does not

differentiated products with r d this paper looks to the literature on one dimensional location models and adds to it a simple process of research and development differentiated products models have often included sequential entry in order to add realism but the order entry is known here t he order is not known a priori also interim profits are not ignored allowing the monopoly profits to affect the outcome it is found tha t firms do not necessarily locate at the extrema but often race for t he optimal monopoly variety the midpoint of the interval copyright 1993 by blackwell publishing ltd

contract cheating the market in essays we conduct the first empirical economic investigation of the decision to cheat by university students we investigate student demand for essays using hypothetical discrete choice experiments in conjunction with consequential holt laury gambles to derive subjects risk preferences students stated willingness to participate in the essay market and their valuation of purchased essays vary with the characteristics of student and institutional environment risk preferring students those working in a non native language and those believing they will attain a lower grade are willing to pay more purchase likelihoods and essay valuations decline as the probability of detection and associated penalty increase

risk taking in contests and the role of carrots and sticks i introduction when individuals compete for promotions bonuses or other rewards tied to their relative performance ranking vis a vis other contestants competition is likely to drive not just work effort but where imperfect monitoring permits other choices at the contestants discretion in this article we ask how rank dependent compensation influences attitudes toward risk or the choice of variance of output when contestants have opportunities to influence this aspect of their output distribution unlike previous literature we assume that it is costly for contestants to alter the variance of output and that identical contestants simultaneously choose both the mean of their output distribution i e work effort and its variance our analysis emphasizes the importance of the number of players and symmetry or lack thereof of payoffs on contestants incentives we find that contestants will engage in risk seeking increasing the variance of their output distribution in contests among three or more players when the payoff structure offers a greater prize for ranking first than the penalty for ranking last as happens in winner take all contests if the tournament organizer or sponsor values the aggregate output of the contestants as is typically assumed in labor market tournaments this risk seeking behavior is inefficient because it is costly but does not increase the expected output however we argue that many contests such as the research and development tournaments first modeled by taylor 1995 may be characterized by an organizer who cares only or primarily about the highest output achieved by a single contestant e g the best submission received in such cases the organizer may benefit from costly risk taking among contestants we show that three payoff levels a prize to the contestant ranked first a penalty to the contestant ranked last and a common intermediate payoff to all others are sufficient to achieve any combination of effort and variance of output that the organizer wishes to induce among contestants so long as the desired output variance does not exceed that which results from a winner take all prize structure therefore the sponsor s problem can be characterized as choosing the optimal mean and variance of the output distribution given the contestants costs of influencing the mean and variance of output in this way our model provides an explanation for the importance of both carrots prizes and sticks penalties in competitive settings only through the combined use of both can a contest organizer determine the effort and the variance of output chosen by contestants and doing so is necessary to achieve optimal performance from contests since the pioneering work of lazear and rosen 1981 nalebuff and stiglitz 1983 o keeffe viscusi and zeckhauser 1984 and others rank order tournaments or contests have been used to model incentives in a variety of economic settings in particular executive compensation has frequently been modeled as a tournament in which low level executives are motivated by the prospect of climbing the corporate ladder and obtaining the large salaries attendant to top ranking executives as in rosen 1986 and bognanno 2001 similarly the behavior of investment fund managers who compete for top fund rankings has been modeled as a tournament by brown harlow and starks 1996 taylor 1995 developed a model of research tournaments in which contestants search for an innovation and the best innovation submitted to the sponsor wins a prize the distinguishing feature of a tournament or contest is that contestants are paid based on the rank of their output relative to others rather than the level of output prize levels are set in advance and competition to win generates the incentive to exert effort to increase output lazear and rosen 1981 showed that rank order tournaments can provide an efficient incentive framework in a labor market setting when workers are risk neutral

mean and variance responsive learning decision makers are often described as seeking higher expected payoffs and avoiding higher variance in payoffs we provide some necessary and some sufficient conditions for learning rules that assume the agent has little prior and feedback information about the environment to reflect such preferences we adopt the framework of borgers morales and sarin 2004 econometrica who provide similar results for learning rules that seek higher expected payoffs our analysis reveals that a concern for variance leads to quadratic transformations of payoffs to appear in the learning rule

size distortions of tests of the null hypothesis of stationarity evidence and implications for the ppp debate abstract tests of the null hypothesis of stationarity against the unit root alternative play an increasingly important role in empirical work in macroeconomics and in international finance we show that the use of conventional asymptotic critical values for stationarity tests may cause extreme size distortions if the model under the null hypothesis is highly persistent this fact calls into question the use of these tests in empirical work we illustrate the practical importance of this point for tests of long run purchasing power parity ppp under the recent float we show that the common practice of viewing tests of stationarity as complementary to tests of the unit root null will tend to result in contradictions and in spurious rejections of long run ppp while the size distortions may be overcome by the use of finite sample critical values the resulting tests tend to have low power under economically plausible assumptions about the half life of deviations from ppp thus the fact that stationarity is not rejected cannot be interpreted as convincing evidence in favor of mean reversion only in the rare case that stationarity is rejected do size corrected tests shed light on the question of long run ppp

long run money demand in taiwan revisited evidence from a cointegrating str approach previous studies on the nonlinearity of the money demand function focus only on short run dynamics and assume that the long run cointegrated relationship is linear which according to economic theory need not be the case thus this article focuses on the variables that make up the long run money demand function in taiwan and their determinants by using the cointegrating smoothing transition regression cstr test developed by choi and saikkonen 2004 this model is more general than the previous str model in that it may contain several transition functions and has more than a single transition variable we demonstrate our empirical results for robustness and adopt two models to ascertain whether or not the stock price should be added as a determinant of the demand for money our empirical results show the existence of a stationary long run relationship among real money demand functions for the period from 1976q1 to 2005q1 and the robustness test covers the 1980q1 2005q1 period in taiwan by comparing

modeling the demand for m3 in the unified germany an error correction model for the demand for real m3 money is constructed for the period of 1976 1994 with real gnp the gnp deflator as well as a short term and a long term interest rate as explanatory variables quarterly seasonally unadjusted data are used in estimating the model it is found that there is a clear structural break due to the german unification in 1990 on the other hand once this structural break is accounted for a stable relation is found which resists a series of specification tests these include a number of recent tests of parameter constancy and linearity our specification is at variance with findings reported by some other researchers notably the deutsche bundesbank

nonlinear equilibrium correction in u s real money balances 1869 1997 several theoretical models of money demand imply nonlinear functional forms for the aggregate demand for money characterized by smooth adjustment toward long run equilibrium in this paper we propose a nonlinear equilibrium correction model of u s money demand that is shown to be stable over the sample period from 1869 to 1997

does reducing the capital gains tax rate raise or lower investment abstract the effect of taxation of capital gains on the decision to purchase a risky asset is explored within a theoretical framework similar to that of the capital asset pricing model tax rate reductions have two offsetting effects one is to raise the after tax expected return while the other is to increase the amount of risk borne by private agents conditions for determining which effect dominates are derived

a decision theoretic foundation for reward to risk performance measures abstract in this paper we prove that partial moments based performance measures e g omega kappa upside potential ratio sortino satchell ratio farinelli tibiletti ratio value at risk based performance measures e g var ratio cvar ratio rachev ratio generalized rachev ratio and other admissible performance measures are a strictly increasing function in the sharpe ratio the theoretical basis of this result is the location and scale property and two other plausible and mild conditions our result provides a decision theoretic foundation for all these frequently used performance measures moreover it might explain the empirical finding that all these measures typically lead to very similar rankings

hotelling s competition with demand location uncertainty abstract firms product variety choices are examined in a differentiated products model where the range of consumers preferences is an unknown strict subset of the range of potential innovations it is found that the firms locating sequentially will follow the basic pattern of locations found by neven international journal of industrial organization 1987 5 419 434 the uncertainty however generally causes a greater more symmetric amount of differentiation among varieties as firms gamble on finding a market niche with less fierce competition for a sufficiently large pool of potential entrants some firms will lose this gamble and will fail

evaluating agricultural energy policies under uncertainty the case of electricity in south india abstract farmers attitude towards risk associated with the availability of energy inputs will influence their investment behavior and demand for energy inputs in order to analyze policies that reduce the risk in energy availability some modifications in methods are required this study using a mean variance framework demonstrates how cross sectional data and time series data on crop yields and prices can be used to analyze agricultural energy policies under uncertainty in a developing country context it is argued that the farmers risk attitudes their crop allocation behavior changes in the demand for energy inputs and the stochastic relationship between various forms of energy inputs can be explained by the various energy constraints faced by them furthermore using the same methods the impact of policies which affect these constraints can be analyzed

testing for the cointegrating rank of a var process with structural shifts tests for the cointegrating rank of a vector autoregressive process are considered that allow for possible exogenous shifts in the mean of the data generation process the break points are assumed to be known a priori it is proposed to estimate and remove the deterministic terms such as mean linear trend term and a shift in a first step then systems cointegration tests are applied to the adjusted series the resulting tests are shown to have known limiting null distributions that are free of nuisance parameters and do not depend on the break point the tests are applied for analyzing the number of cointegrating relations in two german money demand systems

efficient gradualism in intertemporal portfolios abstract this paper examines intertemporal portfolio plans under autocorrelation in asset returns and considers whether these plans conform to the common advice that risky assets be bought gradually and then held in decreasing amounts as the investment horizon approaches given elliptical returns optimal portfolio plans with precommitment must be mean variance efficient then for arma 1 1 parameterizations with negative autocorrelation the age effect gradual diminishing of risky holdings as the horizon approaches is confirmed as is dollar cost averaging gradual entry into the risky asset for sufficiently distant horizons for a numerically analyzed alternative bivariate returns process only the age effect is confirmed

m3 money demand and excess liquidity in the euro area recent empirical studies have found evidence of unstable long run money demand functions if recent data are used if the link between money balances and the macroeconomy is fragile the rationale of monetary aggregates in the ecb strategy has to be doubted in contrast we present a stable long run money demand relationship for m3 for the period 1983 2006 to obtain the result the short run homogeneity restriction between money and prices is relaxed and a break in the income elasticity of money demand after 2001 is taken into account measures of excess liquidity do not show significant inflation pressures

product differentiation decisions under ambiguous consumer demand and pessimistic expectations abstract this paper studies product differentiation decisions in a spatial duopoly with limited information on consumer demand in particular a situation is discussed in which the firms do not know the exact distribution of the random location of consumer demand and its responsiveness to price changes measured by the scale of transport costs but resolve the resulting ambiguity using the maxmin or minimax regret criteria when the firms are sufficiently pessimistic is high enough results are in contrast with the existing literature in particular an increase of demand location uncertainty decreases the equilibrium product differentiation intensifying the second stage competition in prices although the effect is dampened by uncertainty about transport costs endogenizing the choice of objective function leads to the dominance of an extreme form of pessimism which turns out to be socially optimal