the relative valuation of caps and swaptions theory and empirical evidence although traded as distinct products caps and swaptions are linked by noarbitrage relations through the correlation structure of interest rates using a string market model we solve for the correlation matrix implied by swaptions and examine the relative valuation of caps and swaptions we find that swaption prices are generated by four factors and that implied correlations are lower than historical correlations long dated swaptions appear mispriced and there were major pricing distortions during the 1998 hedge fund crisis cap prices periodically deviate significantly from the no arbitrage values implied by the swaptions market the growth in interest rate swaps during the past decade has led to the creation and rapid expansion of markets for two important types of swap related derivatives interest rate caps and swaptions these over the counter derivatives are widely used by many firms to manage their interest rate risk exposure and collectively represent the largest class of fixed income options in the financial markets the international swaps and derivatives association isda estimates that the total notional amount of caps and swaptions outstanding at the end of 1997 was over 4 9 trillion which was more than 300 times the 15 billion notional of all chicago board of trade treasury note and bond futures options combined caps and swaptions are generally traded as separate products in the financial markets and the models used to value caps are typically different from those used to value swaptions furthermore most wall street firms use a piecemeal approach in calibrating their models for caps and swaptions making it difficult to evaluate whether these derivatives are fairly priced

interest rate caps smile too but can the libor market models capture the smile using 3 years of interest rate caps price data we provide a comprehensive documentation of volatility smiles in the caps market to capture the volatility smiles we develop a multifactor term structure model with stochastic volatility and jumps that yields a closed form formula for cap prices we show that although a three factor stochastic volatility model can price at the money caps well significant negative jumps in interest rates are needed to capture the smile the volatility smile contains information

uncertainties and extreme risk spillover in the energy markets a time varying copula based covar approach abstract in this paper we explore the impact of uncertainties on energy prices by measuring four types of delta conditional value at risk covar using six time varying copulas three different measures of uncertainty economic policy financial markets and energy markets are considered and the magnitude and asymmetric effects of their influence are investigated our results suggest that there generally exists negative dependence between energy returns and changes in uncertainty the risks of clean energy and crude oil returns are more sensitive to uncertainties in the financial and energy markets while the impact of economic policy uncertainty is relatively weak the upside and downside covars and covars demonstrate significant asymmetric effects in response to extreme uncertainty movement our findings therefore have important implications for energy portfolio investment

can unspanned stochastic volatility models explain the cross section of bond volatilities in fixed income markets volatility is unspanned if volatility risk cannot be hedged with bonds we first show that all affine term structure models with state space m n m can be drift normalized and show when the standard variance normalization can be obtained using this normalization we find conditions for a wide class of affine term structure models to exhibit unspanned stochastic volatility usv we show that the usv conditions restrict both the mean reversions of risk factors and the cross section of conditional yield volatilities the restrictions imply that previously studied affine usv models are unlikely to be able to generate the observed cross section of yield volatilities however more general usv models can match the cross section of bond volatilities this paper was accepted by wei xiong finance

macroeconomic uncertainty through the lens of professional forecasters abstractwe analyze the evolution of macroeconomic uncertainty in the united states based on the forecast errors of consensus survey forecasts of various economic indicators comprehensive information contained in the survey forecasts enables us to capture a real time measure of uncertainty surrounding subjective forecasts in a simple framework we jointly model and estimate macroeconomic common and indicator specific uncertainties of four indicators using a factor stochastic volatility model our macroeconomic uncertainty estimates have three major spikes has three major spikes aligned with the 1973 1975 1980 and 2007 2009 recessions while other recessions were characterized by increases in indicator specific uncertainties we also show that the selection of data vintages affects the estimates and relative size of jumps in estimated uncertainty series finally our macroeconomic uncertainty has a persistent negative impact on real economic activity rather than producing wait and see dynamics

interest rate volatility and the term structure a two factor general equilibrium model we develop a two factor general equilibrium model of the term structure the factors are the short term interest rate and the volatility of the short term interest rate we derive closed form expressions for discount bonds and study the properties of the term structure implied by the model the dependence of yields on volatility allows the model to capture many observed properties of the term structure we also derive closed form expressions for discount bond options we use hansen s generalized method of moments framework to test the cross sectional restrictions imposed by the model the tests support the two factor model there are essentially two approaches to the modeling of the term structure of interest rates in continuous time the equilibrium approach pioneered by

accounting technologies and sustainability assessment models abstract within ecological economics there is recognition of the need for new approaches to decision making to support sustainable development initiatives there is an increasing acknowledgement of the limitations of cost benefit analysis approaches as a measure of the un sustainability of organizational activities these are viewed as particularly inappropriate within the participatory settings that sustainable development proponents seek to foster they also fail to deal with the highly contested nature of sustainable development discourse in contemporary pluralist democracies while advances have been made in the field of multi criteria decision making there is still a relative dearth of versatile models that accommodate monetization in a way that recognizes the limits of calculative technologies this article introduces readers to developments within the accounting discipline designed to support sustainable development decision making and evaluation in particular it proposes sustainability assessment models as a viable alternative to cost benefit analysis sustainability assessment models are based on an inter disciplinary approach that recognizes the need for accountings that facilitate more participatory forms of decision making and accountability as such they address many of the weaknesses in current approaches to cost benefit analysis the authors first experiences with sustainability assessment models were with bp and the united kingdom oil and gas sector where models were developed as a means of making previously external costs more central to organizational decision making later work has included exploration of a range of decision making situations in private and public sector organizations in both the united kingdom and new zealand this has involved more explicit attention to plural values and issues of participation dialogue and democracy

bond pricing and the term structure of interest rates a new methodology for contingent claims valuation this paper presents a unifying theory for valuing contingent claims under a stochastic term structure of interest rates the methodology based on the equivalent martingale measure technique takes as given an initial forward rate curve and a family of potential stochastic processee for its subsequent movements a no arbitrage condition restricts this family of processes yielding valuation formulae for interest rate sensitive contingent claims which do not explicitly depend on the market prices of risk examples are provided to illustrate the key results in relation to the term structure of interest rates arbitrage pricing theory has two purposes the first is to price all zero coupon default free bonds of varying maturities from a finite number of economic fundamentals called state variables the second is to price all interest rate sensitive contingent claims taking as given the prices of the zero coupon bonds this paper presents a general theory and a unifying framework for understanding arbitrage pricing theory in this context of which all existing arbitrage pricing models are special cases in particular vasicek 1977 brennan and schwartz 1979 langetieg 1980 ball and torous 1983 ho and lee 1986 schaefer and schwartz 1987 and artzner and delbaen 1988 the primary contribution of this paper however is a new methodology for solving the second problem i e the pricing of interest rate sensitive contingent claims given the prices of all zero coupon bonds the methodology is new because i it imposes its stochastic structure directly on the evolution of the forward rate curve ii it does not require an inversion of the term structure to eliminate the market prices of risk from contingent claim values and iii it has a stochastic spot rate process with multiple stochastic factors influencing the term structure the model can be used to consistently price and hedge all contingent claims american or european on the term structure and it is derived from necessary and more importantly sufficient conditions for the absence of arbitrage the arbitrage pricing models of vasicek 1977 brennan and schwartz 1979 langetieg 1980 and artzner and delbaen 1988 all require an iformerly titled bond pricing and the term structure of interest rates a new methodology

macroeconomics and the term structure this paper provides an overview of the analysis of the term structure of interest rates with a special emphasis on recent developments at the intersection of macroeconomics and finance the topic is important to investors and also to policymakers who wish to extract macroeconomic expectations from longer term interest rates and take actions to influence those rates the simplest model of the term structure is the expectations hypothesis which posits that long term interest rates are expectations of future aver age short term rates in this paper we show that many features of the configuration of interest rates are puzzling from the perspective of the expectations hypothesis we review models that explain these anomalies using time varying risk premia although the quest for the fundamental macroeconomic explanations of these risk premia is ongoing inflation uncertainty seems to play a large role finally while modern finance theory prices bonds and other assets in a single unified framework we also consider an earlier approach based on segmented markets market segmentation seems important to understand the term structure of interest rates during the recent financial crisis jel e31 e43 e52 e58

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

identifying volatility risk premia from fixed income asian options abstract fixed income options are frequently adopted by companies to hedge interest rate risk their payoff dependence on the cumulative short term rate makes them particularly informative about interest rate volatility risk based on a joint dataset of bonds and asian interest rate options we study the interrelations between bond and volatility risk premia in a major emerging fixed income market we propose a dynamic term structure model that generates an incomplete market compatible with a preliminary empirical analysis of the dataset approximation formulas for at the money asian option prices avoid the use of computationally intensive fourier transform methods allowing for an efficient implementation of the model the model generates a bond risk premium strongly correlated with a widely accepted emerging market benchmark index embi global and a negative volatility risk premium consistent with the use of asian options as insurance in this market

valuation by conflict abstract nonmarket valuation remains a central issue in ecological and environmental economics this paper examines the properties of an ex post revealed preference approach to value nonmarket goods valuation through observed effort expended in an environmental conflict we consider the strategic interaction between players in a conflict address the implied nash equilibrium and report a benchmark 4x rule as an ex post valuation estimate for a symmetric player conflict we then illustrate the degree of bias that exists once one allows for asymmetries in delegation ability and valuation the benchmark tends to overestimate value if a firm hires a powerful delegate who receives a large contingency fee

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

macroeconomic determinants of stock volatility and volatility premiums how does stock market volatility relate to the business cycle we develop and estimate a no arbitrage model and find that i the level and fluctuations of stock volatility are largely explained by business cycle factors and ii some unobserved factor contributes to nearly 20 to the overall variation in volatility although not to its ups and downs instead this volatility of volatility relates to the business cycle finally volatility risk premiums are strongly countercyclical even more than stock volatility and partially explain the large swings of the vix index during the 2007 2009 subprime crisis which our model captures in out of sample experiments

the expectation hypothesis of the term structure of very short term rates statistical tests and economic value this paper re examines the validity of the expectation hypothesis eh of the term structure of us repo rates ranging in maturity from overnight to three months we extend the work of longstaff 2000a in two directions i we implement statistical tests designed to increase test power in this context ii more importantly we assess the economic value of departures from the eh based on criteria of profitability and economic significance in the context of a simple trading strategy the eh is rejected throughout the term structure examined on the basis of the statistical tests however the results of our economic analysis are favorable to the eh suggesting that the statistical rejections of the eh in the repo market are economically insignificant

pricing mortgage backed securities in a multifactor interest rate environment a multivariate density estimation approach multivariate density estimation mde suggests that mortgage backed security mbs prices can be well described as a function of the level and slope of the term structure we analyze bow this function varies across mbss with different coupons an important finding is that the interest rate level proxies for the moneyness of the option the expected level of prepayments and the average life of the cash flows while the term structure slope controls for the average rate at which these cash flows should be discounted though the origination and prepayment behavior of mortgages differ substantially across coupons there remains an unexplained common factor in mbs prices this factor does not seem to be related to the usual suspects and therefore presents a puzzle to financial economists coauthors are robert f whitelaw matthew richardson and richard stanton article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

unspanned stochastic volatility and fixed income derivatives pricing we propose a parsimonious unspanned stochastic volatility model of the term structure and study its implications for fixed income option prices the drift and quadratic variation of the short rate are affine in three state variables the short rate its long term mean and variance which follow a joint markov vector process yet bond prices are exponential affine functions of only two state variables independent of the current interest rate volatility level because this result holds for an arbitrary volatility process such a process can be calibrated to match fixed income derivative prices furthermore this model can be extended by relaxing the time homogeneity to fit any arbitrary term structure in its hjm form this model nests the analogous stochastic equity volatility model of heston 190 heston s l 1993 a closed form solution for options with stochastic volatility review of financial studies 6 327 343 in particular if the volatility process is specified to be affine closed form solutions for interest rate options obtain we propose an efficient algorithm to compute these prices an application using data on caps and floors shows that the model can capture very well the implied black spot volatility surface while simultaneously fitting the observed term structure c 2005 elsevier b v all rights reserved

the dynamics of the forward interest rate curve a formulation with state variables the objective of this paper is twofold first the paper develops a class of models of the term structure of interest rates in the heath jarrow and morton 1992 framework with dynamics characterized by the evolution of a small set of state variables second the paper exploits this characterization of the dynamics of the term structure in an estimation exercise that makes use of both the time series and cross section of bond prices in this way our class of models bridges the gap between traditional models such as cox ingersoll and ross 1985 and vasicek 1977 that emphasize the dynamics of interest rates and the models of heath jarrow and morton 1992 that stress fitting the cross section of bond prices

pricing and hedging interest rate options evidence from cap floor markets we examine the pricing and hedging performance of interest rate option pricing models using dailydata on us dollar cap and floor prices across both strike rates and maturities our results show that fitting the skew of the underlying interest rate probability distribution provides accurate pricing results within a one factor framework however for hedging performance introducing a second stochastic factor is more important than fitting the skew of the underlying distribution this constitutes evidence against claims in the literature that correctly specified and calibrated one factor models could replace multi factor models for consistent pricing and hedging of interest rate contingent claims 2004 elsevier b v all rights reserved

the price of a smile hedging and spanning in option markets the volatility smile changed drastically around the crash of 1987 and new option pricing models have been proposed to accommodate that change deterministic volatility models allow for more flexible volatility surfaces but refrain from introducing additional risk factors thus options are still redundant securities alternatively stochastic models introduce additional risk factors and options are then needed for spanning of the pricing kernel we develop a statistical test based on this difference in spanning using daily s p 500 index options data from 1986 95 our tests suggest that both in and out of the money options are needed for spanning the findings are inconsistent with deterministic volatility models but are consistent with stochastic models that incorporate additional priced risk factors such as stochastic volatility interest rates or jumps article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

throwing away a billion dollars the cost of suboptimal exercise strategies in the swaptions market abstract this paper studies the costs of applying single factor exercise strategies to american swap options when the term structure is actually driven by multiple factors using a multifactor string market model of the term structure we find that even when single factor models are recalibrated to match the market at every exercise date the exercise strategies they imply can be suboptimal based on estimates of notional amounts outstanding the total present value costs of following single factor strategies could be several billion dollars these results illustrate the importance of using well specified term structure models

interest rate volatility the yield curve and the macroeconomy abstract this paper provides theory and evidence that a low dimensional term structure model can simultaneously price bonds and related options it shows that a component of volatility risk largely unrelated to the shape of the yield curve is a determinant of expected excess returns for holding long maturity bonds it also finds evidence for this return relationship both in the model and directly in the data through regression analysis the paper also identifies a link between corporate earnings performance and interest rate volatility providing a channel driving interest rate volatility the structure of risk in the model that gives rise to these features of volatility is distinct from that inherent in recent models with unspanned stochastic volatility

can interest rate volatility be extracted from the cross section of bond yields most affine models of the term structure with stochastic volatility predict that the variance of the short rate should play a dual role in that it should also equal a linear combination of yields however we find that estimation of a standard affine three factor model results in a variance state variable that while instrumental in explaining the shape of the yield curve is essentially unrelated to garch estimates of the quadratic variation of the spot rate process or to implied variances from options we then investigate four factor affine models of the models tested only the model that exhibits unspanned stochastic volatility usv generates both realistic short rate volatility estimates and a good cross sectional fit our findings suggest that short rate volatility cannot be extracted from the cross section of bond prices in particular short rate volatility and convexity are only weakly correlated c 2009 elsevier b v all rights reserved

a new data set measuring income inequality this article presents a new data set on inequality in the distribution of income the authors explain the criteria they applied in selecting data on gini coefficients and on individual quintile groups income shares comparison of the new data set with existing compilations reveals that the data assembled here represent an improvement in quality and a significant expansion in coverage although differences in the definition of the underlying data might still affect inter temporal and international comparability based on this new data set the authors do not find a systematic link between growth and changes in aggregate inequality they do find a strong positive relationship between growth and reduction of poverty

fundamental properties of bond prices in models of the short term rate this article develops restrictions that arbitrage constrained bond prices impose on the short term rate process in order to be consistent with given dynamic properties of the term structure of interest rates the central focus is the relationship between bond prices and the short term rate volatility in both scalar and multidimensional diffusion settings typical relationships between bond prices and volatility are generated by joint restrictions on the risk neutralized drift functions of the state variables and convexity of bond prices with respect to the short term rate the theory is illustrated by several examples and is partially extended to accommodate the occurrence of jumps and default a standard approach to modeling the term structure of interest rates is to derive sets of arbitrage free bond prices using as an input an exogenously given short term rate process see e g vasicek 1977 and cox ingersoll and ross 1985 while this approach is widely used there is no theoretically sound work establishing systematic answers to such fundamental questions as when are bond prices a decreasing function of the shortterm rate when are bond prices a convex function of the short term rate are bond prices a decreasing function of the short term rate volatility this article demonstrates that it is possible to develop results addressing these questions in relation to all sets of economically admissible i e noarbitrage bond prices

narrative valuation in a policy judgment context much natural resource policy work stresses the importance of involving lay and expert stakeholders in a dialogue about environmental values pertaining to decisions about land management to this end there is growing interest in value elicitation techniques that a provide alternatives to values expressed as willingness to pay formulas and b do a good job of representing the many social ethical scientific or economic value dimensions of a problem and linking those dimensions to the evaluation of a specific policy toward these objectives this paper explores the technique of narrati6e 6aluation that is the act of situating a valuation and decision problem in the context of a narrated story it reports on an experiment that tested a narrative based representation of a problem against a utilitarian one didactic text to see which representation better served the decision process the relative proficiency of both formats was tested in the context of a policy decision about the impact of hydroelectric power production on a river s salmon population the narrative technique appeared better able to help participants consider relevant value information such that they could apply that information to a complex policy judgment some reasons for the success of the narrative condition are discussed including the technique s capacity for engaging participants and rendering technical information salient the paper closes with some recommendations for further tests of narrative based valuation tools 2000 elsevier science b v all rights reserved

hedging in the possible presence of unspanned stochastic volatility evidence from swaption markets this paper examines whether higher order multifactor models with state variables linked solely to underlying libor swap rates are by themselves capable of explaining and hedging interest rate derivatives or whether models explicitly exhibiting features such as unspanned stochastic volatility are necessary our research shows that swaptions and even swaption straddles can be well hedged with libor bonds alone we examine the potential benefits of looking outside the libor market for factors that might impact swaption prices without impacting swap rates and find them to be minor indicating that the swaption market is well integrated with the libor swap market

do bonds span the fixed income markets theory and evidence for unspanned stochastic volatility most term structure models assume bond markets are complete that is that all fixed income derivatives can be perfectly replicated using solely bonds however we find that in practice swap rates have limited explanatory power for returns on at the money straddles portfolios mainly exposed to volatility risk we term this empirical feature unspanned stochastic volatility usv while usv can be captured within an hjm framework we demonstrate that bivariate models cannot exhibit usv we determine necessary and sufficient conditions for trivariate markov affine systems to exhibit usv for such usv models bonds alone may not be sufficient to identify all parameters rather derivatives are needed

humps in the volatility structure of the crude oil futures market new evidence abstract this paper analyses the volatility structure of commodity derivatives markets the model encompasses hump shaped unspanned stochastic volatility which entails a finite dimensional affine model for the commodity futures curve and quasi analytical prices for options on commodity futures using an extensive database of crude oil futures and futures options spanning 21 years we find the presence of hump shaped partially spanned stochastic volatility in the crude oil market the hump shaped feature is more pronounced when the market is more volatile and delivers better pricing as well as hedging performance under various dynamic factor hedging schemes

on the suboptimality of single factor exercise strategies for bermudan swaptions abstract this paper resolves the disagreement between longstaff et al 2001 journal of finance economics 62 39 66 and andersen and andreasen 2001 journal of financial economics 62 3 37 over the effectiveness of the common business practice of using best fit single factor term structure models to deduce exercise strategies of bermudan swaptions i examine the cost of using recalibrated single factor models to determine the exercise strategy for bermudan swaptions in a multifactor world i show that single factor exercise strategies applied in a multifactor world only give rise to economically insignificant losses furthermore i find that the conditional model risk as defined in longstaff et al 2001 journal of finance economics 62 39 66 is statistically insignificant given the number of observations additional tests using the primal dual algorithm of andersen and broadie 2004 management science 50 9 indicate that losses found in longstaff et al 2001 journal of finance economics 62 39 66 cannot as claimed be ascribed to the number of factors

option prices implied price processes and stochastic volatility this paper characterizes all continuous price processes that are consistent with current option prices this extends derman and kani 1994 dupire 1994 1997 and rubinstein 1994 who only consider processes with deterministic volatility our characterization implies a volatility forecast that does not require a specific model only current option prices we show how arbitrary volatility processes can be adjusted to fit current option prices exactly just as interest rate processes can be adjusted to fit bond prices exactly the procedure works with many volatility models is fast to calibrate and can price exotic options efficiently using familiar lattice techniques

rate fears gauges and the dynamics of fixed income and equity volatilities abstract while cboe s vix index is widely acknowledged as a broad based investor fear gauge for its strong inverse relationship with major equity indexes one cannot necessarily expect it to translate to the level of future turbulence or investor risk aversion in fixed income markets indeed expected volatilities in equity and interest rate markets as measured respectively by cboe s vix and their newly launched swap rate volatility index the srvx exhibit significantly distinct behavior the two indexes react to different events and risk factors thereby providing investors with complementary diversification hedging and risk taking tools

modeling the term structure of interest rates a new approach abstract the term structure of interest rates is modeled as a random field with conditional volatility random field models allow consistency with the current shape of the term structure without the need for recalibration however most such models are gaussian with no conditional volatility state dependent volatility is introduced while a key property of gaussian random field models is retained each forward rate is part of a low dimensional diffusion process simplifying estimation and derivatives pricing the modeling approach also implies that in general the set of zero coupon bonds does not complete the market and term structure derivatives cannot always be priced by arbitrage

incommensurability and monetary valuation at the very heart of environmental cost benefit analysis cba is the claim that benefits and costs can be expressed in terms of money and hence made comparable in particular cba puts all benefits and costs on a cardinal monetary scale it assumes monetary commensurability a significant literature in ethics and political philosophy has arisen which doubts this assumption but has so far had little impact on the theory or practice of cba in light of this the paper assesses the defense of monetary commensurability offered by cost benefit analysts and the wider economics literature

single factor heath jarrow morton term structure models based on markov spot interest rate dynamics this paper considers the class of heath jarrow morton term structure models where the spot interest rate is markov and the term structure at time t is a function of time maturity and the spot interest rate at time t a representation for this class of models is derived and i show that the functional forms of the forward rate volatility structure and the initial forward rate curve cannot be arbitrarily chosen i provide necessary and sufficient conditions indicating which combinations of these functional forms are allowable i also derive a partial differential equation representation of the term structure dynamics that does not require explicit modeling of both the market price of risk and the drift term for the spot interest rate process using the analysis presented in this paper a class of intertemporal term structure models is derived

information in the term structure of yield curve volatility using a novel no arbitrage model and extensive second moment data we decompose conditional volatility of u s treasury yields into volatilities of short rate expectations and term premia short rate expectations become more volatile than premia before recessions and during asset market distress correlation between shocks to premia and shocks to short rate expectations is close to zero on average and varies with the monetary policy stance while treasuries are nearly unexposed to variance shocks investors pay a premium for hedging variance risk with derivatives we illustrate the dynamics of the yield volatility components during and after the financial crisis

dynamic models of the term structure in the past 25 years tremendous progress has been made in modeling the dynamics of the term structure of interest rates which play an instrumental role in determining prices and hedging portfolios of fixed income derivative securities this article reviews the theoretical development of the dynamic models of the default free term structure and their applications in pricing interest rate options classic models sometimes termed equilibrium models and their multifactor extensions are outlined these models provide clear economic intuitions connecting the term structure with economic fundamentals they also lay a foundation for the framework of the arbitrage models that price interest rate derivatives on the basis of the market prices of bonds this framework has been expanded and enriched by recent advances in directly modeling observable market rates through the market models and in incorporating an internally consistent correlation structure through the infinite dimensional models

volatility risk premia and future commodity returns abstract this paper extends the empirical literature on volatility risk premium vrp and future returns by analyzing the predictive ability of commodity currency vrp and commodity vrp the empirical evidence throughout this paper provides support for a positive relationship of commodity currencies vrp and future commodity returns but only for the period after the 2008 global financial crisis this predictability survives the inclusion of control variables like equity vrp and past currency returns furthermore gold vrp also has the ability to predict future commodity returns however this predictability is restricted to precious metals when control variables are considered

unspanned stochastic volatility in affine models evidence from eurodollar futures and options unspanned stochastic volatility usv refers to the inability of bonds to replicate volatility sensitive derivative securities affine term structure models require special restrictions on the parameters to exhibit usv we use a joint eurodollar futures and options data set to estimate affine three factor models with and without usv restrictions the unrestricted model captures prices of futures and options well option pricing errors are much larger in the usv model the usv model is rejected in favor of the unrestricted model based on the likelihood ratio and wald tests we use the implications of the unrestricted model as a benchmark for understanding the extant evidence that favors usv specifically we replicate extant tests in samples simulated from the unrestricted model we show that none of the existing findings contradict the model without usv restrictions

the paradox of growth critique narrative analysis of the finnish sustainable consumption and production debate abstract academic discussion on economic growth and the environment has made a comeback under the auspices of the degrowth debate to date however literature on the topic has been mainly theoretical and empirical studies of actual policy discussions have received less attention this article contributes to the debate with a narrative policy analysis of interviews with members of finland s committee on sustainable consumption and production narrative policy analysis is suitable for complex policy cases by tracing and comparing the different stories non stories and counterstories in the debate the analysis clarifies the issue and paves the way for solutions we found that it is common even among business and ministry representatives to criticize the current growth bound economic system from the perspective of narrative policy analysis however this critique only increases uncertainty and complexity in the policy field which paradoxically leads to a strengthening of the dominant growth stories we suggest that constructing a complete degrowth story is essential for supporting democratic deliberation on sustainability robust institutional support for degrowth work together with research and experimentation are important milestones on the way

distributive politics and economic growth a crude distinction between economics and politics would be that economics is concerned with expanding the pie while politics is about distributing it in this paper we analyze the relationship between the two we focus on how an economy s initial configuration of resources shapes the political struggle for income and wealth distribution and how that in turn affects long run growth our main conclusion is that inequality is conducive to the adoption of growth retarding policies we derive this result from a simple political economy model of growth and present cross country evidence consistent with it the key feature of our model is that individuals differ in their relative factor endowments we distinguish between two types of factors an accumulated factor called capital and a nonaccumulated factor called labor growth is driven by the expansion of the capital stock which is in turn determined by individual saving decisions long run growth is endogenous as the aggregate production function is taken to be linearly homogeneous in capital and productive government services taken together the provision of government services is financed by a tax on capital because government services are productive a small tax on

identification of maximal affine term structure models building on duffie and kan 1996 we propose a new representation of affine models in which the state vector comprises infinitesimal maturity yields and their quadratic covariations because these variables possess unambiguous economic interpretations they generate a representation that is globally identifiable further this representation has more identifiable parameters than the maximal model of dai and singleton 2000 we implement this new representation for select three factor models and find that model independent estimates for the state vector can be estimated directly from yield curve data which present advantages for the estimation and interpretation of multifactor models

explorations into factors explaining money market returns in this article we measure and interpret the common factors that describe money market returns results are presented for both three and four factor models we find that the three factor model explains on average 86 percent of the total variation in most money market returns while the four factor model explains on average 90 percent of this variation using mimicking portfolios we provide an interpretation of the systematic risks represented by these factors in this article we attempt to measure and interpret the common factors that describe money market returns the factor approach we employ assumes that the covariance matrix of a set of random variables in this case excess returns can be decomposed into common or systematic components and idiosyncratic or nonsystematic components this decomposition into systematic and nonsystematic components is based on an assumption of a linear relationship between the returns of each security and a set of common factors this is the assumption of linear return generating models which form an integral part of the structure of many asset pricing theories for example arbitrage pricing theory apt as developed by ross 1976 the interpretation is that the common factors represent sources of systematic or nondiversifiable risk and the idiosyncratic component of returns represents diversifiable risks our focus here is not on testing a particular asset pricing model per se but on developing empirical evidence for the existence of stylized facts regarding money market returns the stylized facts take the form of the existence measurement and interpretation of the common factors that are found in money markets our attempt to measure and interpret these sources of systematic risk may eventually lead to the construction of observable eco

valuing environmental policy options a case study comparison of multiattribute and contingent valuation survey methods this paper describes a promising new evaluation approach called a value integration survey that uses the objectives and tradeoffs expressed by participants to value environmental policy options this constructive technique which builds on the interactive elicitation process of decision analysts assists stakeholders in clarifying their values and in agreeing on a policy alternative the paper compares this multi attribute valuation method to contingent valuation surveys describes the sequence of respondents tasks and presents results from a case study comparison of contingent valuation and value integration survey methods in the context of valuing options for fire control in oregon s oldgrowth forests

another look at models of the short term interest rate the short term rate of interest is fundamental to much of theoretical and empirical finance yet no consensus has emerged on the dynamics of its volatility we show that models which parameterize volatility only as a function of interest rate levels tend to over emphasize the sensitivity of volatility to levels and fail to model adequately the serial correlation in condi tional variances on the other hand serial correlation based models like garch models fail to capture adequately the relationship between interest rate levels and volatility we introduce and test a new class of models for the dynamics of short term interest rate volatility which allows volatility to depend on both interest rate levels and information shocks two important conclusions emerge first the sensitivity of interest rate volatility to interest rate levels has been overstated in the literature while this relationship is important adequately modeling volatility as a function of unexpected information shocks is also important sec ond we conclude that the volatility processes in many existing theoretical models of interest rates are misspecified and suggest new paths toward improving the theory

ecosystem service arguments enhance public support for environmental protection but beware of the numbers abstract the trend in the discourse around environmental protection towards arguments based on ecosystem services and monetary valuation has prompted considerable controversy among academics and practitioners concerned with conservation this paper informs the debate by exploring which arguments are most effective in garnering support for environmental protection in a survey based online experiment participants stated their level of dis approval of a large scale hydropower dam project after being presented with various kinds of arguments and information about the environmental impacts the results show that ecosystem service arguments reduced levels of approval of the dam significantly i e they increased support for environmental protection however moral ecological arguments for protecting the environment proved even more effective while a combination of both types of arguments reduced the dam approval ratings the most including a cost benefit analysis cba with monetary valuation of the costs of losing ecosystem services altered dam approval upwards or downwards depending on the outcome of the cba the approval rates of males of older participants and of politically right wing participants were particularly sensitive to the outcomes of monetary valuation more research is needed to understand the short and long term influence of different environmental discourses on peoples judgments and levels of environmental concern

pricing interest rate derivative securities this article shows that the one state variableinterest rate models of vasicek 1977 and cox ingersoll and ross 1985b can be extended sothat they are consistent with both the current termstructure of interest rates and either the currentvolatilities of all spot interest rates or the currentvolatilities of all forward interest rates theextended vasicek model is shown to be very tracta ble analytically the article compares option pricesobtained using the extended vasicek model withthose obtained using a number of other models