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

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

the pricing of options on assets with stochastic volatilities one option pricing problem that has hitherto been unsolved is the pricing of a european call on an asset that has a stochastic volatility this paper examines this problem the option price is determined in series form for the case in which the stochastic volatility is independent of the stock price numerical solutions are also produced for the case in which the volatility is correlated with the stock price it is found that the black scholes price frequently overprices options and that the degree of overpricing increases with the time to maturity one option pricing problem that has hitherto remained unsolved is the pricing of a european call on a stock that has a stochastic volatility from the work of merton 12 garman 6 and cox ingersoll and ross 3 the differential equation that the option must satisfy is known the solution of this differential equation is independent of risk preferences if a the volatility is a traded asset or b the volatility is uncorrelated with aggregate consumption if either of these conditions holds the risk neutral valuation arguments of cox and ross 4 can be used in a straightfoward way this paper produces a solution in series form for the situation in which the stock price is instantaneously uncorrelated with the volatility we do not assume that the volatility is a traded asset also a constant correlation between the instantaneous rate of change of the volatility and the rate of change of aggregate consumption can be accommodated the option price is lower than the blackscholes b s 1 price when the option is close to being at the money and higher when it is deep in or deep out of the money the exercise prices for which overpricing by b s takes place are within about ten percent of the security price this is the range of exercise prices over which most option trading takes place so we may in general expect the b s price to overprice options this effect is exaggerated as the time to maturity increases one of the most surprising implications of this is that if the b s equation is used to determine the implied volatility of a near the money option the longer the time to maturity the lower the implied volatility numerical solutions for the case in which the volatility is correlated with the stock price are also examined the stochastic volatility problem has been examined by merton 13 geske 7 johnson 10 johnson and shanno 11 eisenberg 5 wiggins 16 and

are interest rate options important for the assessment of interest rate risk abstract fixed income options contain substantial information on the price of interest rate volatility risk in this paper we ask if those options will also provide information related to other moments of the objective distribution of interest rates based on dynamic term structure models within the class of affine models we find that interest rate options are useful for the identification of interest rate quantiles two three factor models are adopted and their adequacy to estimate value at risk of zero coupon bonds is tested we find significant difference on the quantitative assessment of risk when options are or not included in the estimation process of each of these dynamic models statistical backtests indicate that bond estimated risk is clearly more adequate when options are adopted although not yet completely satisfactory

on the job specific training and efficient screening employment relationships are governed by short term incomplete contracts and typically involve on the job screening and firm specific training this article studies a dynamic employment relationship with these features and identifies a potential conflict between the employer s twin objectives to screen and train the worker when the training technology is quite productive the employer may have to sacrifice from worker performance during the screening process the article thus offers an explanation for why firms may invest suboptimally on training which complements the standard inappropriable rents explanation based on ex post mobility of young employees

the stochastic volatility of short term interest rates some international evidence this paper estimates a stochastic volatility model of short term riskless interest rate dynamics estimated interest rate dynamics are broadly similar across a number of countries and reliable evidence of stochastic volatility is found throughout in contrast to stock returns interest rate volatility exhibits faster meanreverting behavior and innovations in interest rate volatility are negligibly correlated with innovations in interest rates the less persistent behavior of interest rate volatility reflects the fact that interest rate dynamics are impacted by transient economic shocks such as central bank announcements and other macroeconomic news the past decade has witnessed unprecedented growth in the market for fixedincome derivatives domestically as well as internationally in light of this growth recent research has attempted to empirically characterize the dynamics of short term riskless interest rates necessary for the valuation of many of these securities with few exceptions much of this evidence has been concerned with the behavior of u s interest rates the purpose of this paper is to investigate the dynamics of short term interest rates across a number of countries a particularly noteworthy feature at least of the u s evidence is that the volatility of short term interest rates is itself volatile the stochastic nature of volatility is an important property of interest rate dynamics which we wish to focus on in our comparison to do so practically this paper implements a computationally efficient and statistically reliable method for estimating stochastic volatility models in finance we apply this method to chan et al s 1992 specification of short term riskless interest rate dynamics augmented with stochastic volatility for a clean international comparison we use proxies for short term riskless interest rates drawn from the same market the london interbank market over the same sample period unlike nowman 1997 we find that the

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

search theoretic models of the labor market a survey we survey the literature on search theoretic models of the labor market we show how this approach addresses many issues including the following why do workers sometimes choose to remain unemployed what determines the lengths of employment and unemployment spells how can there simultaneously exist unemployed workers and unfilled vacancies what determines aggregate unemployment and vacancies how can homogeneous workers earn different wages what are the tradeoffs firms face from different wages how do wages and turnover interact what determines efficient turnover we discuss various modeling choices concerning wage determination and the meeting process including recent models of directed search

housing tenure and labor market impacts the search goes on abstract we develop two search theoretic models emphasizing firm entry to examine the oswald hypothesis the idea that homeownership is linked to inferior labor market outcomes and compare their predictions to three extant theories the five models have surprisingly different predictions about the labor market at both the aggregate and micro levels using a suitable instrumental variable strategy we estimate both micro and aggregate level regression models of wages and unemployment and compare the estimates to those predictions we find that while homeowners are less likely to be unemployed they also have lower wages all else equal compared to renters in addition higher regional homeownership rates are associated with a greater probability of individual worker unemployment and higher wages the outcome of a horserace between our new search theoretic models is mixed the wage posting model predicts observed unemployment impacts while a bargaining variant does a better job explaining observed wages and aggregate labor market outcomes overall we conclude that firm behavior is important for understanding the labor market impacts of homeownership because this is the case regional homeownership rates are not good instruments for individual tenure choice in empirical work and while individual homeowners may have inferior labor market outcomes as compared to renters from the viewpoint of society higher homeownership rates may result in greater job creation and overall production among other benefits

job search and commuting time we structurally analyze a job search model for unemployed individuals that allows jobs to have different wage commuting time combinations the structural parameter of interest is the degree of willingness to pay for commuting time we use a unique dataset containing responses by unemployed individuals on the optimal search strategy to estimate this parameter without the need to rely on functional form assumptions we address specification errors in the model and measurement errors in the data the results identify types of individuals who have a high disutility of commuting time

housing tenure job mobility and unemployment in the uk this article examines the effects of housing tenure on individuals job and unemployment durations in the uk we examine job to job transitions and transitions from unemployment we take account of whether or not the arrival of a job was synonymous with a non local residential move tenure endogeneity and unobserved heterogeneity we find that home ownership is a constraint for the employed and public renting is more of a constraint for the unemployed employed home owners have a lower transition into employment with a distant move and unemployed public renters have a lower probability of gaining employment in more distant labour markets the nature of housing tenure has long been blamed for discouraging spatial mobility and thereby having an impact upon labour market outcomes in the early 1980s in the uk the main culprit was deemed to be local authority housing mccormick 1983 hughes and mccormick 1981 1987 examined the longer distance migration rates of those in local authority housing and found that they had lower longer distance migration rates compared to both owner occupiers and those in private rented accommodation although the latest research suggests that these effects may have lessened hughes and mccormick 2000 the relative immobility of public renters may stem from public housing rents being below market rates the restricted transferability within public housing high waiting lists and security of tenure public renters are then locked in and face higher costs if they accept a job that involves a long distance move more recently the blame has been pinned on private home ownership oswald 1996 1999 in a series of papers using macro time series and cross section data for oecd countries and regions within a number of those countries has argued that home own ership causes unemployment one explanation revolves around the reduced mobility of home owners relative to private renters owing to the costs of buying and selling homes subsequent and arguably more sophisticated micro econometric tests have placed doubt upon the alleged relationship coulson and fisher 2002 for the us find that unemployment duration is shorter for home owners relative to renters though neither is unobserved heterogeneity nor the endogenous nature of housing tenure accounted for van leuvensteijn and koning 2004 do account for the endogeneity of home ownership and find using dutch data that employed home owners are less likely to become unemployed relative to employed renters more recently munch et al 2006a using danish data find shorter unemployment spells amongst home owners compared to renters after controlling for the endogeneity of home ownership

educational mismatch and promotions to managerial positions a test of the career mobility theory abstractcareer mobility theory suggests that given a certain occupation schooling improves upward mobility in terms of promotion and wage growth we are the first to test the implications of this theory for over and undereducation by means of direct information about promotions to managerial positions using german administrative data entailing an employer reported and hence objective measure of educational requirements we show that overeducated workers are indeed more likely to be promoted and that this career mobility advantage is more pronounced in the early stages of their working lives by contrast undereducated workers are less likely to be promoted to managerial positions moreover in terms of wage growth while overeducated workers benefit more undereducated workers benefit less from promotions than their well matched educational peers altogether these findings strongly support the career mobility theory furthermore by differentiating between internal and external promotions we prov

equity and time to sale in the real estate market evidence from the boston condominium market of the early 1990s reveals that an owner s equity position determines his experience as a seller an owner of a property with a high loan to value ratio sets a higher asking price has a higher expected time on the market and if he sells receives a higher price than an owner with proportionately less debt the down payment requirement for purchasers but not incumbent owners provides a simple explanation for this phenomenon among owner occupants the results provide supporting evidence for equity based aggregate theories of price volume movements in the housing market copyright 1997 by american economic association

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

interest rate variations mortgage prepayments and household mobility the volatility of interest rates and the deregulation of the mortgage lending sector have meant that many homeowners also own mortgages at terms more favorable than current interest rates this paper presents a model of residential mobility decisions and an empirical analysis that evaluates the importance of the ownership of these mortgages upon the mobility of homeowners the results based upon proportional and nonproportional hazard models indicate that these effects are quite large the empirical analysis distinguishes between different regulatory regimes that govern the assumption of existing mortgages and indicates the implications of these findings for the pricing and valuation of mortgage backed securities copyright 1987 by mit press

the causal effect of mortgage refinancing on interest rate volatility empirical evidence and theoretical implications this article investigates the effects of mortgage backed security mbs hedging activity on interest rate volatility and proposes a model that takes these effects into account an empirical examination suggests that the inclusion of information about mbss considerably improves model performance in pricing interest rate options and in forecasting future interest rate volatility the empirical results are consistent with the hypothesis that mbs hedging affects the interest rate volatility implied by both options and the actual interest rate volatility the results also indicate that the inclusion of information about the mbs universe may result in models that better describe the price of fixed income securities

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

an analysis of occupational upgrading differentials between black and white males the racial occupational mobility gap is examined by applying a decomposition methodology to logistic functions results indicate that approximately one third of the mobility gap between black and white male workers is due to differences in average characteristics the endowment effect the residual difference accounts for the remaining two thirds formal education is found to be a major component of both the endowment effect and the resdiual difference the returns to tenure with a firm overall labour market experience and marriage reduce the mobility gap in favour of black workers

unspanned stochastic volatility evidence from hedging interest rate derivatives most existing dynamic term structure models assume that interest rate derivatives are redundant securities and can be perfectly hedged using solely bonds we find that the quadratic term structure models have serious difficulties in hedging caps and cap straddles even though they capture bond yields well furthermore at the money straddle hedging errors are highly correlated with cap implied volatilities and can explain a large fraction of hedging errors of all caps and straddles across moneyness and maturities our results strongly suggest the existence of systematic unspanned factors related to stochastic volatility in interest rate derivatives markets

a theory of career mobility this paper analyzes theoretically and empirically the role and significance of occupational mobility in the labor market focusing on individuals careers it provides additional dimensions to the analysis of investment in human capital wage differences across individuals and the relationships among promotions quits and interfirm occupational mobility it is shown that part of the returns to education is in the form of higher probabilities of occupational upgrading within or across firms given an origin occupation schooling increases the likelihood of occupational upgrading furthermore workers who are not promoted despite a high probability of promotion are more likely to quit

stochastic volatilities and correlations of bond yields i develop an interest rate model with separate factors driving innovations in bond yields and their covariances it features a flexible and tractable affine structure for bond covariances maximum likelihood estimation of the model with panel data on swaptions and discount bonds implies pricing errors for swaptions that are almost always lower than half of the bid ask spread furthermore market prices of interest rate caps do not deviate significantly from their no arbitrage values implied by the swaptions under the model these findings support the conjectures of collin dufresne and goldstein 2003 dai and singleton 2003 and jagnnathan kaplin and sun 2003

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

the effect of home ownership on labor mobility in the netherlands abstract in various macro studies home ownership is found to hamper job mobility and to increase unemployment this paper addresses similar issues but uses a micro econometric framework where both individual job mobility as well as the probability of being homeowner are modeled simultaneously using a panel of individual labor and housing market histories for the period 1989 1998 we estimate a nonparametric model of both job durations and home ownership we do not find homeowners to change less from jobs than tenants instead our results suggest that the housing decision is driven by job commitment and not the reverse we do however find homeowners to be less vulnerable to unemployment

auction failures and the market for auction rate securities abstract the market for auction rate securities ars made headlines during the second week of february 2008 when auctions at which the bonds interest rates reset experienced a wave of failures contrary to headlines that attribute the failures to a frozen market or investors irrationality we find that 1 even at their height less than 50 of ars experienced auction failures 2 the likelihood of auction failure was directly related to the level of the bonds maximum auction rates 3 the implied market clearing yields of bonds with failed auctions were significantly above their maximum auction rates and 4 ars yields were generally higher than yields of various cash equivalent investment alternatives we infer that investors priced the possibility of auctions failures into ars yields and rationally declined to bid for bonds for which required market yields exceeded their maximum auction rates

exploiting the conditional density in estimating the term structure an application to the cox ingersoll and ross model we propose an empirical method that utilizes the conditional density of the state variables to estimate and test a term structure model with known price formulae using data on both discount and coupon bonds the method is applied to an extension of a two factor model due to cox ingersoll and ross 1985 cir our results show that estimates based on only bills imply unreasonably large price errors for longer maturities we reject the original cir model using a likelihood ratio test and conclude that the extended cir model also fails to provide a good description of the treasury market

unemployment questions and some answers in more or less every country in the oecd unemployment was lower in the decades following the second world war than in any other period of comparable length either before or since for example in britain unemployment has exceeded 5 in every peacetime decade from 1850 onwards except for the 1950s and 1960s alternatively as we can see in table 1 p 779 average unemployment in the 1980s and 90s is higher generally much higher than in the 1960s in every country considered why this is so is one of the questions which underlies this paper a second question which is also illustrated in the unemployment numbers presented in table 1 p 779 concerns the causes of the enormous variation in unemployment rates across the oecd countries as we shall see these are difficult questions the first in particular is one for which we do not have a complete answer by this i do not mean that we do not have theories which are broadly consistent with these numbers in fact we have theories consistent with more or less any numbers what we lack is a satisfactory empirical explanation of the time series pattern of oecd unemployment in what follows we remain focused on these two questions first considering the theoretical background and then looking at some possible answers we finish with some speculative conjectures on the first question

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

the social and private micro level consequences of homeownership abstract this paper reviews the literature that describes the micro level economic and social consequences of homeownership we adopt an interdisciplinary approach and include studies from economics sociology geography political science psychology and other disciplines our focus is on the set of consequences of homeownership in developed countries our list of potential outcomes of homeownership includes the impact on household wealth and portfolio choice mobility labor force participation urban structure and segregation home maintenance political and social activities health demographics self esteem and child outcomes there is substantial evidence that homeownership has important effects on some household behaviors and outcomes however we find that much of the past 30 year s literature on consequences of homeowning is deficient from a theoretical or econometric perspective we suggest solutions and identify research gaps present in the literature

an alternative approach to the analysis of wage differentials a key question in many studies of male female or black white wage differentials is how much of the differential can be explained by economic factors and how much remains unexplained the unexplained portion is then ascribed to discrimination since oaxaca 17 first formalized this decomposition the residual difference methodology has been the dominant methodology utilized in empirical studies of wage differentials 4 7 8 10 15 18 but recently the validity of the assumptions underlying the residual difference methodology have been called into question by butler 5 6 in this paper the theoretical underpinnings of the residual difference methodology are reexamined and an alternative theoretical framework for this methodology is suggested the new framework overcomes the shortcomings inherent in oaxaca s specification of the model and therefore provides a sound theoretical foundation for the residual difference decomposition

a european cross country comparison of the impact of homeownership and transaction costs on job tenure de graaff t and van leuvensteijn m a european cross country comparison of the impact of homeownership and transaction costs on job tenure regional studies this paper looks at the impacts across european countries of homeownership and transaction costs on job tenure the analysis is based on a representative household sample of fourteen european countries covering the period 1994 2001 these data are merged with country specific transaction tax data and aggregate homeownership rates similar to previous microeconomic studies the results indicate that homeownership reduces job mobility as well as the probability of becoming unemployed or economically inactive it is found however that this effect is severely mitigated by two factors first it decreases when aggregate homeownership rates are higher thus homeowners have larger job tenures but more so in countries with low homeownership rates second transaction costs on the housing market are positively associated with the probability of becoming

empirical analysis of occupational hierarchies using data on u s engineers and the position of engineering jobs within firms this paper estimates a model of hierarchies within firms the model extends rosen s 1982 model of recursive production to two skills and multiple hierarchy levels the model generates an empirical model that is nested within a general roy 1951 model of self selection maximum likelihood estimates of the parameters of the production technology and the skill experience profiles are estimated the results suggest that approximately two thirds of changes in employment shares across hierarchy levels across time are explained by demographic shifts in the stock of engineering skills most of the returns to experience and to assignment to higher hierarchy levels within firms are caused by skill accumulation and self selection rather than technological dierences across hierarchy levels

home ownership job duration and wages we investigate the impact of home ownership on individual job mobility and wages in denmark we find that home ownership has a negative impact on job to job mobility both in terms of transition into new local jobs and new jobs outside the local labor market in addition there is a clear negative effect of home ownership on the unemployment risk and a positive impact on wages these results are robust to different strategies for correcting for the possible endogeneity of the home owner variable

job matching and occupational choice this paper presents a model of job matching the generalizes the existing literature by allowing for different jobs types or occupations such differences affect the value of job specific experience inducing a career profile where certain types are sampled before others more specifically the analysis shows that it is optimal for the young and inexperienced to gravitate toward jobs exhibiting a certain kind of risk then after deriving the equilibrium job turnover rate for an economy in which people do not switch occupations panel data are used to estimate its underlying parameters the hypothesis that people do not switch occupations is rejected against the alternative that they do thus providing empirical support for the theoretical extension undertaken here