answering the skeptics yes standard volatility models do provide accurate forecasts a voluminous literature has emerged for modeling the temporal dependencies in financial market volatility using arch and stochastic volatility models while most of these studies have documented highly significant in sample parameter estimates and pronounced intertemporal volatility persistence traditional ex post forecast evaluation criteria suggest that the models provide seemingly poor volatility forecasts contrary to this contention we show that volatility models produce strikingly accurate interdaily forecasts for the latent volatility factor that would be of interest in most financial applications new methods for improved ex post interdaily volatility measurements based on high frequency intradaily data are also discussed

eaere award for the best paper published in environmental and resource economics during 2019 we present details of the eaere award for the best paper published in environmental and resource economics during 2019 together with those highly commended papers published during this period

the myth or folly of the 3 deficit gdp maastricht parameter a relation is presented defining the boundary algebraically and geometrically to the sustainability area of public finance the relation and area involve three magnitudes deficit gdp debt gdp and rate of growth it is shown that the parameters stated in the famous annex to the maastricht treaty 60 percent for the debt gdp ratio and 3 percent for the deficit gdp ratio represent only one particular point on the above mentioned boundary relation to the sustainability area there exists an infinite number of other points sharing the same characteristics on the basis of the oecd data referring to the end of 1996 it is shown that all major european countries find themselves outside the sustainability area except belgium and italy i e exactly the opposite of what is widely believed to be the case in current discussions copyright 1998 by oxford university press

a three gap model of foreign transfers and the gdp growth rate in developing countries abstract a simplified macroeconomic framework is developed for the fiscal gap which is considered to be an important stumbling block for adjustment with growth in highly indebted developing countries distinctive characteristics of a fiscally constrained economy are compared with those of economies constrained either by the availability of savings or foreign exchange tentative implications for external conditionality accompanying debt relief measures are derived

the big push industrialization and international trade the role of exports abstract this paper analyzes the late industrializations of south korea and taiwan and how they can be produced by an export promotion policy the paper adopts an open economy version of the well known big push model thus it recovers neoclassical accounts of industrialization through exports complementing previous literature which tends to show the existence of the big push but is scarce on trade mechanisms to produce it the model fits well with some stylized facts of the industrializations in east and southeast asia i also apply it to a comparison of the education policies of east asia and latin america

the case for gdp indexed bonds gds indexed bonds this paper seeks to revive the case for countries to insure against economic growth slowdowns by issuing bonds indexed to the rate of growth of gdp we show that gdp indexed bonds could provide substantial benefits in reducing the likelihood of default crises and allowing countries to avoid pro cyclical fiscal policies we simulate the effects of gdp indexed bonds under different assumptions about fiscal policy reaction functions and their output effects and find that they could substantially reduce the likelihood of debt gdp paths becoming explosive the insurance premium would likely be small because cross country comovement of gdp growth rates is low and cross country gdp growth risk is thus largely diversifiable for an investor holding a portfolio of gdp indexed bonds potential obstacles to the emergence of a market for these bonds include the verifiability of gdp data the trade off between insurance and moral hazard and the need for liquidity theory and past experience suggest that financial innovation often requires official intervention and its timing and form are difficult to predict we discuss institutional fixes and suggest an approach for attempting to start up a market eduardo borensztein and paolo mauro

on the sustainability of external debt is debt relief enough elaborating on pasinetti 1998 the geometry of debt sustainability gds represents an analytical tool for the analysis of the long term sustainability of foreign debt the paper focuses on debt sustainability in low income countries which face several major challenges simultaneously achieving economic growth consolidating human development goals and meeting regular debt service payments the gds reveals how the structural aspect of debt sustainability as indicated by trends in the non interest current account is closely interlinked with sustainability from a financial point of view as indicated by the relationship between the growth and the interest rate the gds shows why both debt cancellation and additional aid are necessary to give indebted low income economies a chance to improve their long term economic viability

the maximum likelihood estimation of security price volatility theory evidence and application to option pricing the market requires efficient estimation of the assuming security price dynamics are governed by a diffusion process and given the publicly most available form of data this paper provides the maximum likelihood estimator of security price volatility a monte carlo simulation compares the small sample properties of this and other proposed security price volatility estimators the resultant maximum likelihood estimator of the black scholes call option price formulation is also derived for small sample sizes a monte carlo simulation study facilitates comparison with other proposed estimation procedures also the statistically most powerful confidence intervals for the blackscholes call option price are constructed we would like to thank the participants of the statistics department seminar and finance department workshop at the university of michigan for their helpful comments we are especially grateful to fred hoppe adrian tschoegl and an anonymous referee for their insightful suggestions any remaining errors are our responsibility

explaining differences in the domestic savings ratio across countries a panel data study this article seeks to analyse the major determinants of differences in the domestic savings ratio between countries using panel data for 62 countries over the period 1967 95 a basic distinction is made between the determinants of the capacity to save and the willingness to save the capacity to save depends primarily on the level of per capita income but non linearly and the growth of income the life cycle hypothesis and the empirics strongly support these hypotheses the willingness to save is assumed to depend on financial variables such as the rate of interest the level of financial deepening and inflation we find no support for a positive interest rate effect but strong support for the level of financial deepening measured by the ratio of quasi liquid liabilities to gdp inflation exerts a mild positive effect on saving but soon turns negative total saving may also depend on tax effort but a surprisingly strong negative relation is found between the ratio of tax revenue to gdp and the domestic savings ratio

an alternative explanation of india s growth transition a demand side hypothesis this paper formalises the balance of payments constrained bpc growth model in a two regime framework to re examine india s growth transition in 1980 from a demand side perspective as an alternative to the supply oriented approaches of previous studies the results provide strong evidence of a demand led growth transition although the government led expenditure strategy of the 1980s fulfilled the role of moving the indian economy out of its slow growing demand regime 1952 79 into a faster growing one it could not sustain demand growth at the natural rate due to a balance of payments constraint consistent with the prediction of the bpc growth model faster export growth in the post 1990 liberalisation period sustained demand growth at its maximum rate by allowing expenditure including government spending to grow at a fast rate the analysis further suggests that india s export surge in the post 1990 liberalisation period has a significant demand side explanation rather than an exclusively supply side interpretation

simulation based estimation of contingent claims prices a new methodology is proposed to estimate theoretical prices of financial contingent claims whose values are dependent on some other underlying financial assets in the literature the preferred choice of estimator is usually maximum likelihood ml ml has strong asymptotic justification but is not necessarily the best method in finite samples this paper proposes a simulation based method when it is used in connection with ml it can improve the finite sample performance of the ml estimator while maintaining its good asymptotic properties the method is implemented and evaluated here in the black scholes option pricing model and in the vasicek bond and bond option pricing model it is especially favored when the bias in ml is large due to strong persistence in the data or strong nonlinearity in pricing functions monte carlo studies show that the proposed procedures achieve bias reductions over ml estimation in pricing contingent claims when ml is biased the bias reductions are sometimes accompanied by reductions in variance empirical applications to u s treasury bills highlight the differences between thebondpricesimpliedbythesimulation basedapproachandthosedeliveredbyml some consequences for the statistical testing of contingent claim pricing models are discussed jel c11 c15 g12

economic reforms in india since 1991 has gradualism worked opinions on the causes of india s growth deceleration vary world economic growth was slower in the second half of the 1990s and that would have had some dampening effect but india s dependence on the world economy is not large enough for this to account for the slowdown critics of liberalization have blamed the slowdown on the effect of trade policy reforms on domestic industry however the opposite view is that the slowdown is due not to the effects of reforms but rather to the failure to implement the reforms effectively this in turn is often attributed to india s gradualist approach to reform which has meant a frustratingly slow pace of implementation however even a gradualist pace should be able to achieve significant policy changes over ten years this paper examines india s experience with gradualist reforms from this perspective

how to evaluate the solvency of an indebted nation reassessing third world debt daniel cohen the conventional measures of the solvency of developing countries usually rely on such indices as debt export or debt gnp ratios the underlying rationale is that to be solvent a country must eventually pay back all its debt this paper starts from two simple but important remarks first solvency need not require the full eventual repayment of all debt continued borrowing may be possible rather what is required is that a country s debt accumulation does not outstrip its capacity to make future repayments and the capacity of lenders to make future loans second solvency therefore cannot be defined independently of the growth rates of lender and borrower countries nor of the interest rate at which past debts accumulate putting these ideas together a new solvency index is proposed and this is computed for all the less developed countries this new index suggests a less gloomy view of the international debt crisis the largest debtors may have already accomplished an adjustment which is more than sufficient to restore their solvency when this is properly computed to investigate this claim there is a detailed analysis of the policies recently adopted in argentina and brazil

policy effectiveness in spatial resource wars a two region model abstract we develop a spatial resource model in continuous time in which two agents strategically exploit a mobile resource in a two region setup to counteract the overexploitation of the resource the tragedy of commons that occurs when players are free to choose where to harvest the regulator can establish a series of spatially structured policies we compare the equilibria in the case of a common resource with those that emerge when the regulator either creates a natural reserve or assigns territorial user rights to the players we show that when technological and preference parameters dictate a low harvesting effort the policies are ineffective in promoting the conservation of the resource and in addition they lead to a lower payoff for at least one of the players conversely in a context of higher harvesting effort the intervention can help to safeguard the resource preventing extinction while also improving the welfare of both players

dynamic spillovers between oil and stock markets in the gulf cooperation council countries this article exploits a new spillover directional measure proposed by diebold and yilmaz 2009 2012 to investigate the dynamic spillover of return and volatility between oil and equities in the gulf cooperation council countries during the period 2004 to 2012 our results indicate that return and volatility transmissions are bi directional albeit asymmetric in particular the oil market gives other markets more than it receives in terms of both returns and volatilities these trends were more pronounced in the aftermath of the global financial crisis in 2008 as the net contribution of oil has intensified after a burst during the crisis the empirical evidence from the sample is consistent with a system in which oil is playing the dominant role in the information transmission mechanism between oil and equities in the gcc countries

diagnostic checking of unobserved components time series models diagnostic checking of the specification of time series models is normally carried out using the innovations that is the one step ahead prediction errors in an unobserved components model other sets of residuals are available these auxiliary residuals are estimators of the disturbances associated with the unobserved components they can often yield information that is less apparent from the innovations but they suffer from the disadvantage that they are serially correlated even in a correctly specified model with known parameters this article shows how the properties of the auxiliary residuals may be obtained how they are related to each other and to the innovations and how they can be used to construct test statistics applications are presented showing how residuals can be used to detect and distinguish between outliers and structural change

improving the parkinson method of estimating security price volatilities the author proposes a new method for estimating the volatility parameters of security prices which is an improvement of the estimation method by m parkinson 1980 the author assumes that the security prices follow the geometric brownian motion however contrary to the setting of parkinson the geometric brownian motion may have nonzero drift terms the author shows that the efficiency of his estimator is about 10 in comparison with the standard sample variance estimator since the efficiency of the estimator by parkinson is about 4 91 his estimation method may considerably improve the estimation methods already known in financial economics copyright 1992 by university of chicago press

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

harvesting the commons we study a socio ecological model in which a continuum of consumers harvest a common property renewable natural resource markov perfect nash equilibria of the corresponding non cooperative game are derived and are compared with collectively optimal harvesting policies the underlying mechanisms that drive open access commons in our model are shaped by population size harvesting costs and the ecosystem s productivity if other things equal population is small relative to harvesting costs unmanaged commons do not face destruction more strikingly they are harvested at the collectively optimal rate property rights do not matter in that parametric regime because the resource has no social scarcity value however if other things equal population is large relative to harvesting costs open access renewable natural resources suffer from the tragedy of the commons property rights matter there because the resource has a social scarcity price the population size relative to harvesting costs at which the socio ecological system bifurcates is an increasing function of the ecosystem s productivity a sudden crash in productivity population overshoot or decline in harvesting costs can tip an unmanaged common into ruin the model provides a way to interpret historical and archaeological findings on the collapse of those societies that have been studied by scholars

the sustainable development consequences of imf debt vs capital control comparing progress in gpi and gdp terms for korea and malaysia abstract the panic wrought by the 1997 asian financial crisis spurred different mitigative measures some states assented to imf bailout and restructuring while others enforced capital control since then despite intense academic and regulatory scrutiny of the nuances of the recession empiric focus on recovery trajectory of affected countries centred chiefly around traditional gdp metrics an approach that disregards economic performance in a manner congruent with sustainable development goals sdg in this paper we adopt a broader sdg compatible approach by tracking two affected countries korea and malaysia recovery via operationalizing an alternative growth indicator gpi genuine progress indicator first we construct a 35 year long gpi index from 1980 to 2014 and employ the solow growth model to measure the impact of the two remedial measures on gdp and gpi of both countries employing an ardl approach we find external debt to impact significantly the gdp and gpi of korea meanwhile for malaysia the controversial capital control failed to register significant impact moreover unemployment rates trade openness fixed capital formation and the history of previous crises are found to be influential determinants of gdp and gpi with credit and exchange rate variables showing ambiguous results

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