business groups entry barrier innovation debate revisited abstract we argue that in the presence of market imperfections business groups market share in a sector acts as a proxy for barriers to enter that sector recognition of group share as a proxy for entry barriers allows us to revisit the entry barrier innovation debate in the context of emerging economies evidence presented in this paper note innovative performance is at its peak when groups market share is at an intermediate level suggesting that either too many or too few entry barriers could be harmful for innovation this result appears robust across a variety of non parametric and parametric regression techniques

dynamic jump intensities and risk premiums evidence from s p500 returns and options we build a new class of discrete time models that are relatively easy to estimate using returns and or options the distribution of returns is driven by two factors dynamic volatility and dynamic jump intensity each factor has its own risk premium the models significantly outperform standard models without jumps when estimated on s p500 returns we find very strong support for time varying jump intensities compared to the risk premium on dynamic volatility the risk premium on the dynamic jump intensity has a much larger impact on option prices we confirm these findings using joint estimation on returns and large option samples

are shocks to real effective exchange rates permanent or transitory evidence from pacific island countries in this article we consider the stability of the real effective exchange rates for four pacific island countries using the lee and strazicich 2003a b unit root test which allows one to incorporate at most two structural breaks in the data series our main finding is that for papua new guinea and samoa exchange rates are stable implying that shocks will have a transitory effect on real effective exchange rates while for fiji and the solomon islands we find exchange rates to be unstable implying that shocks will have a permanent effect on real effective exchange rates

a reexamination of purchasing power parity a multicountry and multiperiod study abstract this paper re examines the purchasing power parity ppp theory in a multiple exchange rate world owing to a lack of precision in estimating the parameters many authors concluded that ppp did not hold very well in the 1970s using a time series cross sectional estimation procedure we are unable to reject the hypothesis that ppp holds in several currencies simultaneously in addition the parameters are precisely estimated this result follows from the estimation procedure which allows us to exploit the cross sectional variation in the data and the contemporaneous correlation in the deviations from ppp

deviations from purchasing power parity in the long run this paper demonstrates that deviations from purchasing power parity reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible rate periods for a wide variety of countries and in both monthly and annual data since this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper proposes an alternative explanation which instead relies on financial arbitrage in bonds as the underlying mechanism this paper will demonstrate that deviations from purchasing power parity ppp reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible exchange rate periods for a wide variety of countries and in both monthly and annual data this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper therefore proposes an alternative explanation which does not presuppose free trade in goods but which instead relies on financial arbitrage in bonds as the underlying mechanism the major implication of the theory and the results is that ppp is as likely to be violated in the long as in the short run as an empirical matter deviations from ppp can be observed for most currencies at any instant see kravis et al 21 stockman 37 and genberg 15 among others these deviations are typically both cumulative and persistent the real exchange rate can remain on either side of parity for lengthy but variable time intervals of a year or more as a consequence the current consensus shared

volume and skewness in international equity markets abstract we examine the relation between trading volume and skewness in 11 international stock markets using daily and monthly data from january 1980 to august 2004 we construct single equation and var models of the relation between the first three moments of market returns and trading volumes our results show hitherto unrecognised channels of influence and support the investor heterogeneity approach to explaining return asymmetries

estimating dynamic demand for cigarettes using panel data the effects of bootlegging taxation and advertising reconsidered abstracct a dynamic demand for cigarette consumption is estimated using pooled data of 46 states over the period 1963 to 1980 a price elasticity of 0 2 and an insignificant income elasticity is found using pooled estimation techniques the bootlegging effect is modeled explicitly using neighboring price the effect is found to be significant two major policy issues are analyzed in light of these new estimates 1 cigarette taxation is found to be an effective tool for generating revenues even though there may be spillover effects to neighboring states where bootlegging is significant 2 the effects of the fairness doctrine act and the advertising ban on cigarette consumption are re examined we find mild support for the effectiveness of subsidized anti smoking messages in reducing cigarette consumption and no support for the thesis that the ban on advertising helps to increase per capita consumption

risk return and the three moment capital asset pricing model another look abstract most studies on three moment capital asset pricing models have found a strong and consistent relationship between an asset s returns and its higher statistical moments other studies report results which are opposite to what the theory would suggest this paper re examines the empirical evidence of the three moment capital asset pricing model on 43 randomly selected mutual funds from 1970 1986 the results indicate that trade offs of risks for returns on the selected mutual funds are less than predicted and inconsistent

improved estimates of higher order comoments and implications for portfolio selection in the presence of nonnormally distributed asset returns optimal portfolio selection techniques require estimates for variance covariance parameters along with estimates for higher order moments and comoments of the return distribution this is a formidable challenge that severely exacerbates the dimensionality problem already present with mean variance analysis this article extends the existing literature which has mostly focused on the covariance matrix by introducing improved estimators for the coskewness and cokurtosis parameters we find that the use of these enhanced estimates generates a significant improvement in investors welfare we also find that it is only when improved estimators are used that portfolio selection with higher order moments dominates mean variance analysis from an out of sample perspective the author 2009 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please email journals permissions oxfordjournals org oxford university press

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

empirical studies of gasoline retailing a guide to the literature abstract this paper surveys the empirical literature on gasoline retailing which has been growing rapidly over the last three decades possibly in response to antitrust and regulatory concerns and increased availability of pricing data studies of both pricing and non price decision variables are considered in general it is found that crude oil prices are the primary driver of national price movements over time however market structure has been identified as playing a role in price dynamics equilibrium selection and price differentials across markets and stations the economic literature emphasizes the importance of heterogeneity across stations and coordination problems faced by retailers several directions for future work are suggested including the development of theory and demand estimation using high frequency station level data

the collapse of purchasing power parities during the 1970 s one of the striking facts concerning the relationship beiveen prices and exchange rates during the 1970 s has been the dismal performance of the predictions of the simple versions of the purchasing power parity doctrine ppp that doctrine in its absolute version states that the equilibrium exchange rate between domestic and foreign currencies equals the ratio of domestic to foreign price levels the relative version of the doctrine relates equilibrium changes in exchange rates to changes in the ratio of domestic to foreign prices during the 1970 s short run changes in exchange rates bore little relationship to short run differentials in national inflation rates and frequently divergences from purchasing power parities have been cumulative this paper reviews and analyzes the empirical record of exchange rates and prices during the 1970 s and the analysis is based on the experience of the dollar pound the dollar frecch franc and the dollar dm exchange rates section 2 presents the evidence on ppp during the 1970 s and contrasts it with the evidence from the 1920 s a period during which the doctrine held up reasonably well this analysis is relevant for assessing whether the flexible exchange rate system was successful in providing national economies with an added degree of insulation from foreign shocks and whether it provided policymakers with an added instrument for the conduct of macroeconomic policy the evidence regarding devia tions from purchasing power parities is also relevant for determining whether there is a case for managed float section 3 attempts to explain what went wrong with

dynamics of credit spread moments of european corporate bond indexes abstract traditional quantitative credit risk models assume that changes in credit spreads are normally distributed but empirical evidence shows that they are likely to be skewed fat tailed and change behaviour over time not taking into account such characteristics can compromise calculation of loss probabilities pricing of credit derivatives and profitability of trading strategies therefore the aim of this study is to investigate the dynamics of higher moments of changes in credit spreads of european corporate bond indexes using extensions of garch type models that allow for time varying volatility skewness and kurtosis of changes in credit spreads as well as a regime switching garch model which allows for regime shifts in the volatility of changes in credit spreads performance evaluation methods are used to assess which model captures the dynamics of observed distribution of the changes in credit spreads produces superior volatility forecasts and value at risk estimates and yields profitable trading strategies the results presented can have significant implications for risk management trading activities and pricing of credit derivatives

purchasing power parity and unit root tests using panel data abstract this paper reports the results of unit root tests for real exchange rates using a panel framework this panel approach provides greatly improved power compared to conventional univariate time series unit root tests we obtain evidence supporting ppp over the recent flexible exchange rate period for g 6 and oecd countries we show explicitly that failure to find such evidence in previous research was due to the low power of the tests

clearing the air the effects of gasoline content regulation on air quality this paper examines the effects of u s gasoline content regulations on groundlevel ozone pollution these regulations are costly and have been shown to fragment gasoline markets and raise prices paid by consumers we provide the first comprehensive empirical estimates of the regulations air quality benefits we exploit the fact that gasoline regulations vary by time and place of introduction using both difference in difference and regression discontinuity designs we show that federal regulations targeting the emissions of volatile organic compounds vocs one of the two main precursors to ozone do not substantially improve air quality this outcome is driven by the response of refiners to the regulation minimizing the cost of abatement involves removing a type of voc from gasoline that is not an important determinant of ozone pollution in california however we show that precisely targeted regulations requiring the removal of vocs particularly prone to forming ozone caused a significant improvement in air quality

real exchange rate behavior abstract using random simulations with artificial data with identical sample characteristics to the long sample exchange rate data employed by lothian and taylor lothian j r and taylor m p 1996 the recent float from the perspective of the past two centuries journal of political economy 104 488 509 we show that standard unit root tests have extremely low power over sample sizes corresponding to the recent float the probability of rejecting the null hypothesis when it is false is extremely low with 20 years or even 50 years of data and only reaches an acceptable level over much longer spans

a ban on one is a boon for the other strict gasoline content rules and implicit ethanol blending mandates ethanol and methyl tertiary butyl ether mtbe were close substitutes in the gasoline additives market until mtbe was banned due to the concerns about groundwater contamination leading to a sudden and dramatic substitution toward ethanol as an alternative oxygenate and octane booster we use variation in the timing of mtbe bans across states to identify their effects on gasoline prices we find that state bans increased reformulated gasoline prices by 3 6 cents in non midwestern states for which the bans were binding with larger impacts during times of high ethanol prices relative to mtbe and crude oil we find qualitatively similar yet smaller effects for conventional gasoline we argue on the basis of a simple conceptual model and supporting empirical evidence that these bans functioned as implicit ethanol blending mandates in areas that were previously using mtbe to comply with strict environmental constraints overall our results are consistent with the theoretical prediction that mandating a minimum market share for a more costly alternative fuel either directly or implicitly through a ban on the preferred conventional fuel will inevitably increase fuel prices in a competitive market

mean reversion in g 10 nominal exchange rates according to conventional wisdom industrial country floating exchange rates contain unit roots sur tests on panels of monthly group of ten g 10 log nominal rates reject the null of unit roots for various samples over the current float with significance levels from 0 5 to 15 on average in out of sample forecasts mean reversion models beat random walks significantly in some forecast periods for monthly data the range of expected usd dem appreciation rates exceeds 15 per year in the mean reversion model mean reversion places strong restrictions on international models over the sample period the g 10 had to run monetary policies consistent with stable long run nominal rates

localized market power in the u s airline industry this paper tests whether the observed dominance of most city pair markets and airports in the u s domestic airline industry by single carriers confers any pricing power on the dominan t firms the results of fixed effects estimation indicate that airport dominance by a carrier does confer upon it substantial pricing power whereas dominance at the route level seems to confer no such pricing power additionally the authors find a positive yet small correlation between both route concentration and price and airport concentration and price the quantitative importance of airport dominance reveals that the most promising direction for public polic y aimed at improving the industry s performance is to ensure equal acc ess to sunk airport facilities copyright 1993 by mit press

conditional var estimation using pearson s type iv distribution abstract this paper presents a new value at risk var estimation model for equity returns time series and tests it extensively on stock indices of 14 countries two most important stylized facts of such series are volatility clustering and non normality as a result of fat tails of the return distribution while volatility clustering has been extensively studied using the garch model and its various extensions the phenomenon of non normality has not been comprehensively explored at least in the context of var estimation a combination of extreme value theory evt and garch has been explored to analyze financial data showing non normal behavior this paper proposes a combination of the pearson s type iv distribution and the garch 1 1 approach to furnish a new method with superior predictive abilities the approach is back tested for the entire sample as well as for a holdout sample using rolling windows

real exchange rates under alternative nominal exchange rate systems abstract the paper develops an equilibrium model of the determination of exchange rates the relative price of nontraded goods and the current account the focus is on the effects of various real and nominal disturbances and the conditions under which the nominal exchange rate system is neutral with respect to real variables in the economy the model demonstrates an assymetry in the roles of trade and nontraded goods in affecting exchange rates an econometric investigation of the raltion between the exchange rate system and the variability of real exchange rates provides some evidence against the neutrality hypothesis

estimating multi period value at risk of oil futures prices abstractin this study we estimate the multi period value at risk var of oil future prices under a generalized autoregressive conditional heteroscedasticity with a skewed t residuals garch st model which is developed to account for the stylized facts of oil futures returns such as serial correlation volatility clustering asymmetry and heavy tails an efficient approximation algorithm based on the moment calibration method is developed to compute the multi period var and the numerical experiments show that the algorithm can yield good approximation quality in the empirical analysis we find that the garch st model can yield superior out of sample performance to a garch normal model or a garch t model especially when measuring the extreme tail risk meanwhile the square root of time rule srtr tends to underestimate the multi period tail risk and cannot produce a better performance than the garch family models

real and nominal exchange rates in the long run an empirical investigation abstract this paper reports on econometric tests of the hypothesis that purchasing power parity holds as a long run relationship using data on eight industrialized countries during the flexible exchange rate period the empirical work proceeds by i testing whether nominal exchange rates and relative price levels are co integrated and ii conducting impulse response analysis of long run exchange rate and relative price level changes to explain the data keynesian models suggest that shocks during the estimation period were due principally to exogenous shifts in aggregate demand while equilibrium models suggest that monetary factors have been relatively more important

correlations in price changes and volatility across international stock markets the short run interdependence of prices and price volatility across three major international stock markets is studied daily opening and closing prices of major stock indexes for the tokyo london and new york stock markets are examined the analysis utilizes the autoregressive conditionally heteroskedastic arch family of statistical models to explore these pricing relationships evidence of price volatility spillovers from new york to tokyo london to tokyo and new york to london is observed but no price volatility spillover effects in other directions are found for the pre october 1987 period article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

modeling asymmetric comovements of asset returns existing time varying covariance models usually impose strong restrictions on how past shocks affect the forecasted covariance matrix in this article we compare the restrictions imposed by the four most popular multivariate garch models and introduce a set of robust conditional moment tests to detect misspecification we demonstrate that the choice of a multivariate volatility model can lead to substantially different conclusions in any application that involves forecasting dynamic covariance matrices like estimating the optimal hedge ratio or deriving the risk minimizing portfolio we therefore introduce a general model which nests these four models and their natural asymmetric extensions the new model is applied to study the dynamic relation between large and small firm returns article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

real exchange rate adjustment in european transition countries abstract in single equation tests real exchange rates show mean reversion for nine of 10 central and eastern european transition countries for the period january 1993 to december 2005 because of the shift from controlled to market economies and accompanying crises failed policy regimes and changes in exchange rate regimes unit root tests for transition countries often require allowance for structural changes accounting for structural breaks gives substantially faster mean reversion speeds than those found for major industrialized countries these fast adjustment speeds are plausible transition countries had perhaps 10 years to make unprecedented adjustments required for accession to the european union a number of papers have applied non linear models to the central and eastern european countries this paper investigates four non linear models and compares them with piece wise linear break models the break models appear superior in detecting mean reversion for the central and eastern european transition countries

the purchasing power parity persistence paradigm abstract rogoff journal of economic literature 1996 34 647 668 describes the remarkable consensus of 3 5 year half lives of purchasing power parity deviations among studies using long horizon data these studies however focus on rejections of unit roots in real exchange rates and do not use appropriate techniques to measure persistence our half life estimates explicitly account for serial correlation sampling uncertainty and most importantly small sample bias calculating confidence intervals as well as point estimates for long horizon and post 1973 data we find that even though most of the point estimates lie within the 3 5 year range univariate methods provide virtually no information regarding the size of the half lives

asset pricing higher moments and the market risk premium a note following the work of rubinstein 4 kraus and litzenberger kl 2 derived and tested a linear three moment pricing model finding the additional variable co skewness to explain the empirical anomalies of the two moment capital asset pricing model capm the three moment model was reexamined by friend and westerfield fw 1 with mixed results the purpose of this note is to examine why the market risk premium rm rf may influence tests of asset pricing models with higher moments when skewness is added to a pricing model developed within the usual two fund separation assumptions the market risk premium enters the pricing equation in a nonlinear fashion and is implicit in the estimation of each moment s coefficient unless this nonlinearity is recognized incorrect conclusions regarding the tests of such models may result section i examines the implications of the risk premium nonlinearity while section ii contains a brief summary

does the exchange rate follow a random walk a monte carlo study of four tests for a random walk abstract several authors have urged that real and nominal exchange rates follow a random walk conditions under which the exchange rate follows a random walk are reviewed in this paper many of these do not appear to hold therefore the empirical evidence presents a puzzle some evidence suggets the exchange rate follows a random walk while other evidence suggests the opposite should be true this paper attempts to reconcile the evidence it is argued that the tests for a random walk have low power monte carlo evidence on four tests for a random walk is presented that suppors this claim

transitory and permanent disturbances and the current account an empirical analysis in the intertemporal framework the intertemporal models of current account determination demonstrate that in the analysis of the current account balance of a country it is important to distinguish between transitory and permanent disturbances in income and relative prices this paper attempts to decompose the observed data on income and real exchange rate into transitory and permanent components and then uses the decomposed series to test the empirical validity of the predictions of the intertemporal models evidence from the united states and japan provide very limited support for the intertemporal models in terms of the effects of transitory and permanent changes in income on current account balance for both us and japan the study finds that permanent changes in real exchange rate have significant effects on the current account balance statistical tests find no evidence of hysteresis in the trading relations of the two countries

a re examination on dissecting the purchasing power parity puzzle the purpose of this paper is to examine the source of a real exchange rate adjustment based on the impulse response function constructed from local projections when the true data generating process dgp is unknown this work extends the local projection method proposed by jorda 2005 estimation and inference of impulse responses by local projections american economic review 95 161 182 to allow for variables that are i 1 and exhibit cointegration our paper shows that nominal exchange rate adjustments dominate in the reversion toward ppp regardless of a nominal exchange rate shock or a price shock it is also shown that the half life of real exchange rates is close to that of nominal exchange rates since these results are consistent with those of cheung et al cheung y w lai k s bergman m 2004 dissecting the ppp puzzle the unconventional roles of nominal exchange rate and price adjustments journal of international economics 64 135 150 we therefore conclude that their main findings are robust to possible misspecifications in the true dgp

unfolded garch models abstract a new garch type model for autoregressive conditional volatility skewness and kurtosis is proposed the approach decomposes returns into their signs and absolute values and specifies the joint distribution by combining a multiplicative error model for the absolute values a dynamic binary choice model for the signs and a copula function for their interaction the conditional volatility and kurtosis are determined by innovations following a folded or absolute student t distribution with time varying degrees of freedom and separate time variation in conditional return skewness is achieved by allowing the copula parameter to be dynamic model estimation is performed with bayesian methods using an adaptive markov chain monte carlo algorithm an empirical application to the returns on four major international stock market indices illustrates the statistical and economic significance of the new model for conditional higher moments

dynamic pricing in retail gasoline markets supergame models of tacit collusion show that supportable price cost margins increase with expected future collusive profits ceteris paribus as a result collusive margins will be larger when demand is expected to increase or marginal costs are expected to decline using panel data on sales volume and gasoline prices in 43 cities over 72 months we find behavior consistent with tacit collusion in retail gasoline markets controlling for current demand and cost current margins increase with expected next month demand and decrease with expected next month cost the results are not consistent with intertemporal l inkages due to inventory behavior or customer loyalty

real exchange rate behavior the recent float from the perspective of the past two centuries using annual data spanning two centuries for dollar sterling and franc sterling real exchange rates we find strong evidence of mean reverting real exchange rate behavior using simple stationary autoregressive models estimated on prefloat data we easily outperform nonstationary real exchange rate models in dynamic forecasting exercises over the recent float such stationary univariate equations explain 60 80 percent of the in sample variation in real exchange rates although the degree of short run persistence may be high the econometric estimates imply a half life of shocks to the real exchange rate of about 6 years for dollar sterling and a little under 3 years for franc sterling

an equilibrium model of exchange rate determination and asset pricing with nontraded goods and imperfect information this paper presents a two country model with maximizing households stochastic production stochastic money growth and perfect capital mobility because of the presence of nontraded goods households in different countries consume different goods analytic solutions are presented for the nominal exchange rate the real exchange rate nominal interest rates and real interest rates it is shown that the model is compatible with some important features of the real world behavior of exchange rates when households are imperfectly informed about the distribution of money growth the exchange rate exhibits patterns of overshooting and is more volatile than the ratio of the money stocks copyright 1987 by university of chicago press

the copula garch model of conditional dependencies an international stock market application abstract modeling the dependency between stock market returns is a difficult task when returns follow a complicated dynamics when returns are non normal it is often simply impossible to specify the multivariate distribution relating two or more return series in this context we propose a new methodology based on copula functions which consists in estimating first the univariate distributions and then the joining distribution in such a context the dependency parameter can easily be rendered conditional and time varying we apply this methodology to the daily returns of four major stock markets our results suggest that conditional dependency depends on past realizations for european market pairs only for these markets dependency is found to be more widely affected when returns move in the same direction than when they move in opposite directions modeling the dynamics of the dependency parameter also suggests that dependency is higher and more persistent between european stock markets

purchasing power parity in the long run a test of the dollar pound exchange rate 1890 1978 this paper tests the purchasing power parity ppp hypothesis by analyzing t he long run tendency of the dollar pound exchange rate using data sin ce 1890 two different models are considered 1 a na ive model and 2 a modified monetary model the conditions of propor tionality and symmetry cannot be rejected when using the naive model the final results using the monetary model however indicate that t he existence of permanent deviations from ppp cannot be ruled out copyright 1987 by ohio state university press

do gasoline prices respond asymmetrically to crude oil price changes the authors test and confirm that retail gasoline prices respond more quickly to increases than to decreases in crude oil prices among the possible sources of this asymmetry are production inventory adjustment lags and market power of some sellers by analyzing price transmission at different points in the distribution chain the authors attempt to shed light on these theories spot prices for generic gasoline show asymmetry in responding to crude oil price changes which may reflect inventory adjustment effects asymmetry also appears in the response of retail prices to wholesale price changes possibly indicating short run market power among retailers

can nominal exchange rates be differenced to stationarity abstract the objective of this paper is to examine the well known assumption of difference stationarity of nominal exchange rates with the method of leybourne et al 1996 we conclude that the assumption of difference stationarity is innocuous for quarterly exchange rates but not for monthly exchange rates in fact a randomized unit root process is appropriate for monthly exchange rates these findings are important for exchange rates modeling

price indices and nonlinear mean reversion of real exchange rates author affiliation jyh lin wu institute of economics national sun yat sen university kaohsiung 804 taiwan jlwu2 mail nsysu edu tw and the department of economics national chung cheng university chia yi 106 taiwan ecdjlw ccu edu tw corresponding authorpei fen chen department of international business and trade shu te university kaohsiung taiwan cpf mail stu edu tw acknowledgment we thank two anonymous referees for interesting and constructive comments on an earlier version of the paper any remaining errors are ours 1 introduction are price indices crucial for the existence of a nonlinear mean reversion of real exchange rates do prices or exchange rate adjustments dominate when deviations from purchasing power parity ppp occur is the half life implied by a nonlinear model reasonable the purpose of this article is to address the above three questions for the uk and new zealand over the period of recent float the ppp hypothesis has been one of the most intensive research issues in empirical international finance over the past two decades the rationale behind it is a simple arbitrage hypothesis which results in a linear adjustment of deviations from ppp and the stationarity of real exchange rates empirically existing evidence based on unit root tests provide mixed results for ppp abuaf and jorion 1990 mark 1990 o connell 1998a theoretically there are several reasons for the nonlinear adjustment of deviations from ppp such as the existence of market frictions or transaction costs sercu uppal and van hulle 1995 in addition models of pricing to market and exchange rate pass through give rise to impediments to goods arbitrage krugman 1987 froot and klemperer 1989 the implication is that the speed of adjustment of deviations from ppp depends on the magnitude of the deviations on the other hand the adoption of a price index is crucial in examining ppp several authors have argued that the consumer and producer price indices cpi and ppi respectively do not correspond to their theoretical counterparts and contain measurement errors and aggregation biases cheung and lai 1993 imbs et al 2005 in addition the commodity basket for cpi and ppi includes nontradable goods which impart a nonstationary component to real cpi or ppi exchange rates engel 1999 recently xu 2003 argues that the price index of traded goods tpi is the appropriate one for ppp since it reflects the behavior of arbitrage better than the cpi or ppi the purpose of this article therefore is to examine the nonlinear dynamics of tpi based real exchange rates several authors have applied a smooth transition autoregressive star model to capture the nonlinear dynamics of real exchange rates as it allows for a smooth adjustment between regimes michael nobay and peel 1997 taylor peel and sarno 2001 there are several reasons for us to apply a band threshold autoregressive tar instead of a star type model in our empirical analysis first our empirical evidence fails to reject the unit root hypothesis against the hypothesis of a nonlinear star stationary process based on the test provided by kapetanios shin and snell 2003 1 second the plots of cpi ppi and tpi based real exchange rates in figure 1 show that the tpi based real rate has the largest variation among these three real rates third our empirical evidence rejects the null hypothesis of linearity against tar type nonlinearity and supports the hypothesis that real exchange rates are tar type stationary figure 1 plots of real exchange rates for the uk and new zealand figure omitted see article image several empirical studies have applied a threshold type process to examine the nonlinear mean reversion of real exchange rates obstfeld and taylor 1997 o connell 1998b taylor 2001 sarno taylor and chowdhury 2004

dissecting the ppp puzzle the unconventional roles of nominal exchange rate and price adjustments the conventional view as expounded by sticky price models is that price adjustment determines the ppp reversion rate this study examines the mechanism by which ppp deviations are corrected nominal exchange rate adjustment not price adjustment is shown to be the key engine governing the speed of ppp convergence moreover nominal exchange rates are found to converge much more slowly than prices with the reversion being driven primarily by nominal exchange rates real exchange rates also revert at a slower rate than prices as identified by the ppp puzzle j econ lit 34 1996 647 c 2003 elsevier b v all rights reserved

quadratic arch models we introduce a new model for time varying conditional variances as the most general quadratic version possible within the arch class hence it encompasses all the existing restricted quadratic variance functions its properties are very similar to those of garch models but avoids some of their criticisms in univariate applications to daily u s and monthly u k stock market returns qarch adequately represents volatility and risk premia qarch is easy to incorporate in multivariate models to capture dynamic asymmetries that garch rules out such asymmetries are found in an empirical application of a conditional factor model to 26 u k sectorial stock returns

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

portfolio optimization in the presence of dependent financial returns with long memory a copula based approach abstract in this paper we seek to examine the effect of the presence of long memory on the dependence structure between financial returns and on portfolio optimization first we focus on the dependence structure using copulas to select the best copula in addition to the goodness of fit tests we employ a graphical method based on visual comparison of the fitted copula density and the smoothed copula density estimated by wavelets moreover we check the stability of the copula parameter the empirical results show that the long memory affects the dependence structure second we analyze the impact of this dependence structure on the optimal portfolio we propose a new approach based on minimizing the conditional value at risk and assuming that the dependence structure is modeled by the copula parameter the empirical results show that our approach outperforms the traditional minimizing variance approach where the dependence structure is represented by the linear correlation coefficient

would hotelling kill the electric car in this paper we show that the potential for endogenous technological change in alternative energy sources may alter the behaviour of resource owning firms when technological progress in an alternative energy source can occur through learning by doing resource owners face competing incentives to extract rents from the resource and to prevent expansion of the new technology we show that in such a context it is not necessarily the case that scarcity driven higher traditional energy prices over time will induce alternative energy supply as resources are exhausted rather we show that as we increase the learning potential in the substitute technology lower equilibrium energy prices prevail and there may be increased resource extraction and greenhouse gas emissions we show that the effectiveness and the incidence of emissions reduction policies may be altered by increased potential for technological change our results suggest that treating finite resource rents as endogenous consequences of both technological progress and policy changes will be important for the accurate assessment of climate change policy

cointegration how short is the long run abstract when testing for cointegration and faced with short sample periods it is common for researchers to turn to more frequently sampled observations that is to move from annual to quarterly or monthly data in order to increase the number of observations we argue that such a gain in the degrees of freedom is more apparent than real essentially cointegration is a long run concept and hence requires long spans of data to give tests for cointegration much power rather than merely large numbers of observations using monte carlo simulations we demonstrate this for four popular tests for cointegration

conditionally heteroskedastic factor models with skewness and leverage effects conditional heteroskedasticity skewness and leverage effects are well known features of financial returns the literature on factor models has often made assumptions that preclude the three effects to occur simultaneously in this paper i propose a conditionally heteroskedastic factor model that takes into account the presence of both the conditional skewness and leverage effects this model is specified in terms of conditional moment restrictions and unconditional moment conditions are proposed allowing inference by the generalized method of moments gmm the model is also shown to be closed under temporal aggregation an application to daily excess returns on sectorial indices from the u k stock market provides a strong evidence for dynamic conditional skewness and leverage with a sharp efficiency gain resulting from accounting for both effects the estimated volatility persistence from the proposed model is lower than that estimated from models that rule out such effects i also find that the longer the returns horizon the fewer conditionally heteroskedastic factors may be required for suitable modeling and the less strong is the evidence for dynamic leverage some of these results are in line with the main findings of harvey and siddique 1999 and jondeau and rockinger 2003 namely that accounting for conditional skewness impacts the persistence in the conditional variance of the return process

the share price reaction of u k exporters to exchange rate movements an empirical study contrary to prior research this u k based study finds a contemporaneous relation between the foreign exchange rate and the market value of large exporters we also find a weak lagged relationship which suggests that the stock market takes time to incorporate all of the implications of foreign currency movements into share prices evidence that the nature of this relationship changed when sterling was in the erm is also provided

arch models properties estimation and testing abstract the aim of this survey paper is to provide an account of some of the important developments in the autoregressive conditional heteroskedasticity arch model since its inception in a seminal paper by engle 1982 this model takes account of many observed properties of asset prices and therefore various interpretations can be attributed to it we start with the basic arch models and discuss their different interpretations arch models have been generalized in different directions to accommodate more and more features of the real world we provide a comprehensive treatment of many of the extensions of the original arch model next we discuss estimation and testing for arch models and note that these models lead to some interesting and unique problems there have been numerous applications and we mention some of these as we present different models the paper includes a glossary of the acronyms for the models we describe

flexible exchange rates prices and the role of news lessons from the 1970s recent experience with flexible exchange rate systems has led to renewed interest in the operation of foreign exchange markets as reflected in many recent studies of the principal determinants of exchange rates the 1970s witnessed the dramatic alteration of the international monetary system from a regime of pegged exchange rates which prevailed for about a quarter of a century since the bretton woods conference into a regime of flexible though managed rates as a consequence of the emergence of the new legal and economic system traders national governments and international organisations were confronted with new economic problems choices and instruments during the 1970s ex change rates fluctuated widely and inflation rates accelerated the international monetary system had to accommodate extraordinarily large oil related shocks which affected trade flows in goods and assets huge oil payments had to be recycled uncertainties concerning future developments in international politics reached new heights and the prospects for the world economy got gloomier these developments placed unprecedented pressures on the markets for foreign exchange as well as on other asset markets they were associated with a large slide in the value of the us dollar and resulted in speeding up the creation of new institutions like the european monetary system which provided the formal framework for the management of exchange rates among members

the competitive impact of hypermarket retailers on gasoline prices abstracthypermarkets are large retail suppliers of general merchandise or grocery items that also sell gasoline often at very low margins this paper estimates the impact of hypermarkets on average state level retail gasoline prices and margins the empirical results indicate an economically and statistically significant price decreasing effect of increased hypermarket competition the estimations also suggest that refiners lower the delivered wholesale prices charged to their affiliated lessee dealer and open dealer stations in response to increased hypermarket competition which in turn translates to lower retail street prices the adoption of sales below cost laws may lessen the price reducing effects from hypermarket competition

hourly volatility spillovers between international equity markets abstract this paper examines the timing of mean and volatility spillovers between new york and london equity markets using an arch model it is found that the evidence of volatility spillovers between these markets is minimal and have a duration which lasts only an hour or so the most significant effects surround the movement of share prices around the new york opening but these results are not strong several new arch models are estimated including an asymmetric or leverage model and a non linear model which allows big shocks to have a different impact from small shocks

a stochastic volatility model with conditional skewness we develop a discrete time affine stochastic volatility model with time varying conditional skewness svs importantly we disentangle the dynamics of conditional volatility and conditional skewness in a coherent way our approach allows current asset returns to be asymmetric conditional on current factors and past information which we term contemporaneous asymmetry conditional skewness is an explicit combination of the conditional leverage effect and contemporaneous asymmetry we derive analytical formulas for various return moments that are used for generalized method of moments gmm estimation applying our approach to s p500 index daily returns and option data we show that one and two factor svs models provide a better fit for both the historical and the risk neutral distribution of returns compared to existing affine generalized autoregressive conditional heteroscedasticity garch and stochastic volatility with jumps svj models our results are not due to an overparameterization of the mod

on the asymmetric u shaped relationship between inflation inflation uncertainty and relative price skewness in the uk we investigate the asymmetric relationships between aggregate inflation and the second and third moments of the cross sectional distribution of relative prices using a modified calvo pricing model with regime dependent price rigidities calibration experiments reveal that the inflation standard deviation and inflation skewness relationships exhibit u shaped asymmetries around the historical mean inflation rate uk sectoral data support our results we conclude that monetary policy should target an inflation rate proximate to the common minima of these nonlinear relationships and that core inflation measures should not be used for policy purposes as they exclude much of the information contained in the higher moments

the determination of the real exchange rate the productivity approach abstract this paper explains deviations of exchange rates from purchasing power parity with the differences between countries of the relative growth rates of labor productivity between traded and nontraded sectors two cases are considered germany and japan versus their respective major trading partners the results show that the time series methodology yields a more favorable confirmation of the productivity differential model than the cross section regressions in the literature

tail granger causalities and where to find them extreme risk spillovers vs spurious linkages abstract identifying risk spillovers in financial markets is of great importance for assessing systemic risk and portfolio management granger causality in tail or in risk tests whether past extreme events of a time series help predicting future extreme events of another time series the topology and connectedness of networks built with granger causality in tail can be used to measure systemic risk and to identify risk transmitters here we introduce a novel test of granger causality in tail which adopts the likelihood ratio statistic and is based on the multivariate generalization of a discrete autoregressive process for binary time series describing the sequence of extreme events of the underlying price dynamics the proposed test has very good size and power in finite samples especially for large sample size allows inferring the correct time scale at which the causal interaction takes place and it is flexible enough for multivariate extension when more than two time series are considered in order to decrease false detections as spurious effect of neglected variables an extensive simulation study shows the performances of the proposed method with a large variety of data generating processes and it introduces also the comparison with the test of granger causality in tail by hong et al 2009 we report both advantages and drawbacks of the different approaches pointing out some crucial aspects related to the false detections of granger causality for tail events an empirical application to high frequency data of a portfolio of us stocks highlights the merits of our novel approach

testing deviations from purchasing power parity abstract this paper studies analytically how the presence of transportation costs in a model of deviations from purchasing power parity ppp affects the testing procedure of the ppp hypothesis the analysis shows that in the presence of transportation costs traditional regression analysis will tend to reject the ppp hypothesis even if goods markets are well arbitraged because the values of the regression coefficients are affected systematically by considerations that are independent of the degree to which markets are arbitraged thus the content of the ppp approach cannot be tested satisfactorily without considering the systematic effects of transportation costs and other costs of goods arbitrage

market frictions and real exchange rates abstract one explanation for the failure of purchasing power parity ppp is that market frictions impede trade allowing departures from ppp to grow quite large without precipitating goods arbitrage if this explanation is correct then other things equal large deviations from ppp should be less persistent than small differences this paper examines this prediction over the modern floating rate era the outcome is surprising between most countries large deviations from ppp appear to be at least as persistent as small deviations and perhaps even more so the exceptions are for some intra ec real exchange rates the implication is that market frictions alone do not explain the chimerical nature of ppp

risk dependence of covar and structural change between oil prices and exchange rates a time varying copula model abstract this paper analyses the dynamic dependence between wti crude oil and the exchange rates of the united states and china taking structural changes of dependence into account by using six time varying copula models upside and downside conditional values at risk covars are introduced specifically to measure the upward and downward risk dependences between oil prices and exchange rates the findings indicate a structural break point of dependence exists between daily or weekly crude oil and the us dollar index the dependence between crude oil and the rmb exchange rate is faintly positive with lower tail dependence while the dependence between crude oil and the us dollar index is significantly negative with lower upper and upper lower tail dependence finally the covars results show that there is significant risk spillover from crude oil to chinese and the us exchange rate markets furthermore the spillover effect is significantly asymmetry in chinese exchange rate market in response to rising and falling oil returns while the asymmetry of spillover effect for the us dollar index is not significant

beyond the purchasing power parity testing for cointegration and causality between exchange rates prices and interest rates abstract this paper reexamines the causality between the dollar and the yen in a multivariate framework with the aid of cointegration and error correcting modeling for the 1951 94 period the phillips perron tests and johansen s tests are performed while causality from interest rates to exchange rates is found in the short run no causality between prices and exchange rates is found in the short run however causality is found running from relative prices to exchange rates along with interest rates between the u s and japan in the long run which supports the long run ppp hypothesis

arbitrage equilibrium with skewed asset returns the quadratic form of the covariance co skewness model by kraus and litzenberger and arbitrage pricing theory are used for an empirical investigation of market equilibrium with skewed seecurity returns empirical tests similar to the ones in black jensen scholes and gibbons are discussed the empirical estimates give some support to the kraus litzenberger hypothesis on skewness preference however there is some evidence that the tested arbitrage equilibrium is not a complete description of security pricing

clean air regulation and heterogeneity in us gasoline prices in order to improve public health in areas with air quality problems the us clean air act imposes a variety of federal regulations on gasoline which have led to a proliferation of fuel blends known as boutique fuels more than 45 fuel blends are sold nationwide we examine the effects of this program on wholesale gasoline prices the methodological innovation in this study is the use of a regulatory distance measure as a proxy for measuring market power that arises from product differentiation we find that clean air regulation increases gasoline prices by increasing the cost of refining but more importantly by creating regulatory islands it segments the market and increases the market power of firms our estimation controls for the potential endogeneity of the regulatory variables we find that ols techniques systematically underestimate the effect of regulation on gasoline prices

conditional volatility skewness and kurtosis existence persistence and comovements abstract recent portfolio choice asset pricing value at risk and option valuation models highlight the importance of modeling the asymmetry and tail fatness of returns these characteristics are captured by the skewness and the kurtosis we characterize the maximal range of skewness and kurtosis for which a density exists and show that the generalized student t distribution spans a large domain in the maximal set we use this distribution to model innovations of a garch type model where parameters are conditional after demonstrating that an autoregressive specification of the parameters may yield spurious results we estimate and test restrictions of the model for a set of daily stock index and foreign exchange returns the estimation is implemented as a constrained optimization via a sequential quadratic programming algorithm adequacy tests demonstrate the importance of a time varying distribution for the innovations in almost all series we find time dependency of the asymmetry parameter whereas the degree of freedom parameter is generally found to be constant over time we also provide evidence that skewness is strongly persistent but kurtosis is much less so a simulation validates our estimations and we conjecture that normality holds for the estimates in a cross section setting we also document covariability of moments beyond volatility suggesting that extreme realizations tend to occur simultaneously on different markets

common trends in global volatility abstract this paper investigates the long term patterns in global foreign exchange equity and bond markets in three different trading zones namely japan europe and the united states recent advances in the measurement of volatility from high frequency data are used together with the concepts of fractional integration and cointegration the specific objective is to consider whether there are common trends that drive volatility in the global marketplace this so called commonality in volatility hypothesis is formulated using a cofractional model the results confirm that volatility in all three financial asset markets across all three trading zones share a single common trend which lends itself to interpretation as a global news stream

a critique of the stochastic discount factor methodology in this paper we point out that the widely used stochastic discount factor sdf methodology ignores a fully specified model for asset returns as a result it suffers from two potential problems when asset returns follow a linear factor model the first problem is that the risk premium estimate from the sdf methodology is unreliable the second problem is that the specification test under the sdf methodology has very low power in detecting misspecified models traditional methodologies typically incorporate a fully specified model for asset returns and they can perform substantially better than the sdf methodology asset pricing theories such as those of sharpe 1964 lintner 1965 black 1972 merton 1973 ross 1976 and breeden 1979 show that the expected return on a financial asset is a linear function of its covariances or betas with some systematic risk factors this implication has been tested extensively in the finance literature by the so called traditional methodologies in the traditional methodologies a data generating process is first proposed for the returns and then the restrictions imposed by an asset pricing model are tested as parametric constraints on the return generating process the approach taken by the traditional methodologies has a potential problem which is that when the proposed return generating process is misspecified the test results could be misleading therefore in applying the traditional methodologies researchers typically have to justify that the proposed data generating process provides a good description of the returns for example when the proposed return generating process is a factor model one would like the model to have high r 2 in explaining the returns on the test assets especially when the test assets are well diversified portfolios as many of the earlier theories are special cases of the stochastic discount factor sdf model recent empirical asset pricing studies have been focused on testing the pricing restrictions in terms of the sdf model rather

a model of exchange rate dynamics this model treats the exchange rate as an asset price that depends on expectations concerning exogenous real and monetary factors that will affect relative prices and absolute price levels in future periods changes in exchange rates reflect both expected changes in these exogenous factors and changes in expectations occasioned by new information the model explains the random component in exchange rate behavior the source of divergences from purchasing power parity the anticipatory response of exchange rates to future expected disturbances and the causes of exchange rate overshooting

transactions costs and nonlinear adjustment in real exchange rates an empirical investigation eolquilibrium models of real exchange rate determination in the presence of transactions costs imply a nonlinear adjustment process toward purchasing power parity ppp conventional cointegration tests which ignore the effect of transactions costs may be biased against the long run ppp hypothesis our results using both monthly data for the interwar period and annual data spanning two centuries clearly reject the linear framework in favor of an exponential smooth transition autoregressive process the systematic pattern in the estimates of the nonlinear models provides strong evidence of mean reverting behavior for ppp deviations and helps explain the mixed results of previous studies

modeling the conditional distribution of daily stock index returns an alternative bayesian semiparametric model this article introduces a new family of bayesian semiparametric models for the conditional distribution of daily stock index returns the proposed models capture key stylized facts of such returns namely heavy tails asymmetry volatility clustering and the leverage effect a bayesian nonparametric prior is used to generate random density functions that are unimodal and asymmetric volatility is modeled parametrically the new model is applied to the daily returns of the s p 500 ftse 100 and eurostoxx 50 indices and is compared with garch stochastic volatility and other bayesian semiparametric models

superstitious seasonality in precious metals markets evidence from garch models with time varying skewness and kurtosis in this article we analyse whether the friday the 13th effect documented by kolb and rodriguez 1987 can be observed in precious metals markets specifically we use dummy augmented garch models to investigate the impact of this specific calendar day on the conditional means of gold silver palladium and platinum returns the specification of the garch model follows a flexible class recently proposed by leon et al 2005 that incorporates time varying skewness and kurtosis by applying a gram charlier series expansion of the normal density function our results for the period from july 1996 to august 2013 provide three important insights first there is no evidence that human superstition regarding bad luck fridays affects precious metals markets in a negative way i e returns on fridays the 13th are not significantly lower than on regular fridays second besides showing robustness in a variety of settings we can confirm this main result in a sensitivity check where we replace the dummy variables

portfolio selection in multidimensional general and partial moment space abstract this paper develops a general approach for the single period portfolio optimization problem in a multidimensional general and partial moment space a shortage function is defined that looks for possible increases in odd moments and decreases in even moments a main result is that this shortage function ensures sufficient conditions for global optimality it also forms a natural basis for developing tests on the influence of additional moments furthermore a link is made with an approximation of an arbitrary order of a general indirect utility function this non parametric efficiency measurement framework permits to differentiate mainly between portfolio efficiency and allocative efficiency finally information can in principle be inferred about the revealed risk aversion prudence temperance and other higher order risk characteristics of investors

sell or not sell biodiesel local competition and government measures the introduction of biofuels is one of the objectives of the european union for this reason measures to promote the production and consumption of this product have been implemented such as tax exemptions fixing a minimum amount of mixture or the introduction of public transport that consume biofuels in this paper we test different factors that can affect the introduction of biodiesel in the spanish gasoline market these factors are mainly the level of local competition technical difficulties and local government action empirical evidence shows that a higher level of competition more buses that consume biodiesel and a lower adjustment costs increase significantly the probability of sell biodiesel at service stations these results show how the promotion of competition and public procurement of vehicles can improve the commercialization of biofuels

understanding the empirical literature on purchasing power parity the post bretton woods era abstract this paper argues that the empirical failure of statistical tests of ppp in post bretton woods data is largely due to the low power of the tests employed this result is demonstrated using monte carlo experiments on the size and power of different testing procedures a new procedure based on horvath and watson econometric theory 11 pp 984 1014 1995 has greater power than previous approaches using the horvath watson procedure we find moderate evidence in favor of ppp in the post bretton woods era

model free evaluation of directional predictability in foreign exchange markets we examine directional predictability in foreign exchange markets using a model free statistical evaluation procedure based on a sample of foreign exchange spot rates and futures prices in six major currencies we document strong evidence that the directions of foreign exchange returns are predictable not only by the past history of foreign exchange returns but also the past history of interest rate differentials suggesting that the latter can be a useful predictor of the directions of future foreign exchange rates this evidence becomes stronger when the direction of larger changes is considered we further document that despite the weak conditional mean dynamics of foreign exchange returns directional predictability can be explained by strong dependence derived from higher order conditional moments such as the volatility skewness and kurtosis of past foreign exchange returns moreover the conditional mean dynamics of interest rate differentials contributes significantly to directional predictability we also examine the co movements between two foreign exchange rates particularly the co movements of joint large changes there exists strong evidence that the directions of joint changes are predictable using past foreign exchange returns and interest rate differentials furthermore both individual currency returns and interest rate differentials are also useful in predicting the directions of joint changes several sources can explain this directional predictability of joint changes including the level and volatility of underlying currency returns copyright 2007 john wiley sons ltd

generating volatility forecasts from value at risk estimates statistical volatility models rely on the assumption that the shape of the conditional distribution is fixed over time and that it is only the volatility that varies the recently proposed conditional autoregressive value at risk caviar models require no such assumption and allow quantiles to be modeled directly in an autoregressive framework although useful for risk management caviar models do not provide volatility forecasts such forecasts are needed for several other important applications such as option pricing and portfolio management it has been found that for a variety of probability distributions there is a surprising constancy of the ratio of the standard deviation to the interval between symmetric quantiles in the tails of the distribution such as the 0 025 and 0 975 quantiles this result has been used in decision and risk analysis to provide an approximation of the standard deviation in terms of quantile estimates provided by experts drawing on the same result we construct financial volatility forecasts as simple functions of the interval between caviar forecasts of symmetric quantiles forecast comparison using five stock indices and 20 individual stocks shows that the method is able to outperform generalized autoregressive conditional heteroskedasticity garch models and moving average methods

the price concentration relationship in banking the commonly observed positive correlation between market concentration and profitability may be explained by noncompetitive pricing behavior as argued by the structure performance hypothesis or by the greater efficiency of firms with dominant market shares as argued by the efficient structure hypothesis by examining the price concentration relationship instead of the profit concentration relationship this paper tests the structure performance hypothesis in a manner that excludes the efficient structure hypothesis as an alternative explanation of the results the results strongly support the structure performance hypothesis and are robust with respect to model specification measurement of concentration and econometric technique copyright 1989 by mit press

market timing with option implied distributions a forward looking approach we address the empirical implementation of the static asset allocation problem by developing a forward looking approach that uses information from market option prices to this end we extract constant maturity s p 500 implied distributions and transform them to the corresponding risk adjusted ones then we form optimal portfolios consisting of a risky and a risk free asset and evaluate their out of sample performance we find that the use of risk adjusted implied distributions times the market and makes the investor better off than if she uses historical returns distributions to calculate her optimal strategy the results hold under a number of evaluation metrics and utility functions and carry through even when transaction costs are taken into account not surprisingly the reported market timing ability deteriorated during the recent subprime crisis an extension of the approach to a dynamic asset allocation setting is also presented this paper was accepted by wei xiong finance