the public choice of superior sanctions this paper analyzes the public choice of specific forms of sanctions current sanctions are essentially quantity constraints q sanctions which are like quotas in that they might bestow benefits on certain special interest groups in the target country revenue sanctions r sanctions may be able to recapture such benefits in the form of sender government revenue which could either compensate for the costs of sanctions to the sending country or finance other sanction enhancing activities aimed at the target country hence r sanctions may be superior to q sanctions in general or on the basis of target efficiency however public choice analysis suggests that q sanctions will generally be chosen over r sanctions by democratic countries

political influence motives and the choice between tariffs and quotas abstract tariffs and quotas are not symmetric under a variety of circumstances this paper pursues the implications of one such circumstance domestic market power for the political choice of protectionist instrument in the context of a political support maximization model tariffs dominate quotas in the political model in the absence of revenue seeking motives in the presence of revenue seeking ambiguity arises but limits can be placed on the range of tariff or quota levels also some welfare implications emerge

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

option pricing when the variance changes randomly theory estimation and an application in this paper we examine the pricing of european call options on stocks that have vari ance rates that change randomly we study continuous time diffusion processes for the stock return and the standard deviation parameter and we find that one must use the stock and two options to form a riskless hedge the riskless hedge does not lead to a unique option pricing function because the random standard deviation is not a traded security one must appeal to an equilibrium asset pricing model to derive a unique option pricing function in general the option price depends on the risk premium associated with the random standard deviation we find that the problem can be simplified by assuming that volatility risk can be diversified away and that changes in volatility are uncorrelated with the stock return the resulting solution is an integral ofthe black scholes formula and the distribution function for the variance of the stock price we show that accurate option prices can be computed via monte carlo simulations and we apply the model to a set of actual prices

why voluntary export restraints are voluntary the paper presents an analysis of the effect upon an oligopolistic equilibrium of introducing a voluntary export restraint ver upon an importing firm a ver set at the free trade level of imports is shown to raise the profits of all firms within the industry the result follows as the imposition of a ver upon a free trade nash price competition forces the domestic firm to become an industry price leader the ver raises industry prices by facilitating collusion and lowers consumer welfare pourquoi les restrictions volontaires d 1 exportation sont volontaires ce memoire presente une analyse des effets de l introduction de restrictions volontaires a l exportation rve sur une entreprise qui importe dans un monde en equilibre oligopolistique on montre que l introduction de rve approximant le niveau des importations en regime de libre echange devrait augmenter les profits de toutes les entreprises dans l industrie cela decoule du fait que l imposition de rve sur un univers de concurrence par les prix a la nash en regime de libre echange force l entreprise domestique a devenir le leader en prix l introduction de rve augmente le niveau des prix de l industrie en facilitant la collusion et de ce fait reduit le niveau de bien etre des consomrnateurs

protection lobbying and market structure abstract we look at a model of lobbying by oligopolistic industry where firms allocate resources between lobbying and internal cost reducing activities we ask the following questions i if firms differ with respect to comparative advantage in lobbying what is the equilibrium allocation of resources between lobbying and cost reducing activities ii can lobbying opportunities reverse the profitability ranking among firms iii under what condition is the conventional wisdom that highly concentrated industries tend to obtain more protection valid the answers depend on various measures of comparative advantage in lobbying and on the demand curve

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

option valuation with systematic stochastic volatility we use an extension of the equilibrium framework of rubinstein 1976 and brennan 1979 to derive an option valuation formula when the stock return volatility is both stochastic and systematic our formula incorporates a stochastic volatility process as well as a stochastic interest rate process in the valuation of options if the mean volatility and covariance processes for the stock return and the consumption growth are predictable our option valuation formula can be written in preference free form further many popular option valuation formulae in the literature can be written as special cases of our general formula in this paper we investigate the valuation of individual stock options when the volatility of the underlying stock return is stochastic and has a systematic component which is related to the stochastic volatility of the consumption growth or the market return such an investigation is timely and of significant interest because there is now a considerable amount of evidence that the volatility of stock prices is not only stochastic but that it is also highly correlated with the volatility of the market as a whole for example see black 1975 conrad kaul and gultekin 1991 jarrow and rosenfeld 1984 jorion 1988 and ng engle and rothschild 1992 furthermore empirical work by black and scholes 1972 gultekin rogalski and tinic 1982 and whaley 1982 has shown that the empirical biases inherent in the black scholes option prices are different for options on high and low risk stocks because low risk stocks are mainly large firm stocks with stochastic return volatilities that are highly correlated with the return volatility of the market and high risk stocks are mainly small firm stocks with a lessimportant systematic volatility component incorporating systematic volatility effects in option valuation models has the potential to reduce the empirical biases exhibited by prices computed from the black scholes formula we use equilibrium arguments that extend the consumption based representative agent framework of rubinstein 1976 brennan 1979 and stapleton and subrahmanyam 1984 to allow individual asset returns and the consumption growth to exhibit stochastic volatility in particular we permit the volatility of individual asset returns to consist of a systematic component that is related to the consumption or market volatility in addi

political economy of public policies insights from distortions to agricultural and food markets the agricultural and food sector is an ideal case for investigating the political economy of public policies many of the policy developments in this sector since the 1950s have been sudden and transformational while others have been gradual but persistent this paper reviews and synthesizes the literature on trends and fluctuations in market distortions and the political economy explanations that have been advanced based on a rich global data set covering a half century of evidence on commodities countries and policy instruments the paper identifies hypotheses that have been explored in the literature on the extent of market distortions and the conditions under which reform may be feasible

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

permanent and transitory oil volatility and aggregate investment in malaysia abstract this paper investigates the relation between aggregate investment and oil volatility and its permanent and transitory components for a developing country malaysia in the paper the components generalized autoregressive conditional heteroskedasticity cgarch model is utilized to decompose conditional oil volatility into permanent oil volatility and transitory oil volatility respectively reflecting fundamental driven and random shifts in oil volatility they are expected to exert differential effects on aggregate investment adopting a vector autoregression var framework to allow feedback effects between aggregate investment and its determinants the paper documents evidence supporting the adverse effects of conditional oil volatility permanent oil volatility and transitory oil volatility on aggregate investment and real output interestingly contrary to the findings for the developed markets us and oecd the real effects of permanent oil volatility tend to be stronger these findings are reasonably robust to variable specification and measurements in the var system hence there is an indication that heightened oil volatility accounts for the slumps in malaysia s aggregate investment after the asian financial crisis

endogenous trade policy under foreign direct investment abstract using bernheim and whinston 1986 common agency game we endogenize trade policy in a duopoly composed of a domestic firm and a foreign firm where both firms influence the domestic government s trade policy via their contributions the foreign firm can jump over trade restrictions by undertaking foreign direct investment fdi in the domestic market the government prefers a voluntary export restraint ver to a tariff for two reasons first a ver leads to higher contributions from the foreign firm than a tariff second a ver provides a higher level of protection to the domestic firm without generating fdi by the foreign firm

price and quantity controls as facilitating devices abstract this letter examines three cases in which a regulation imposed on one of two duopolists can increase the profit levels of both firms the regulations examined include a price floor an output quota and a sales tax

pricing options under generalized garch and stochastic volatility processes in this paper we develop an efficient lattice algorithm to price european and american options under discrete time garch processes we show that this algorithm is easily extended to price options under generalized garch processes with many of the existing stochastic volatility bivariate diffusion models appearing as limiting cases we establish one unifying algorithm that can price options under almost all existing garch specifications as well as under a large family of bivariate diffusions in which volatility follows its own perhaps correlated process through an equilibrium argument duan 1995 shows that options can be priced when the dynamics for the price of the underlying instrument follows a general autoregressive conditionally heteroskedastic garch process the theory of pricing under such processes is now well understood however the design of efficient numerical procedures for pricing them is lacking most applications resort to large sample simulation methods with a variety of variance reduction techniques the complexity of pricing arises from the massive path dependence inherent in garch models this path dependence causes typical lattice based procedures to grow exponentially in the number of time increments the lack of efficient numerical schemes hinders empirical tests among the wide array of competing garch models most tests of garch models limit themselves to the use of high frequency data on spot assets with little attention placed on the information content of options 1

pricing claims under garch level dependent interest rate processes this article considers the pricing of interest rate sensitive claims when the underlying interest rate is driven by a two state variable garch process analytical solutions are established for the case when the innovations in the short rate are normal and or chi squared random variables and the volatility of rates take on a special garch form garch models that nest level dependent interest rate models including the cox ingersoll and ross model are also considered algorithms are provided that permit the efficient pricing of american style interest rate claims under a rather broad array of garch level dependent processes

role of oil price shocks on macroeconomic activities an svar approach to the malaysian economy and monetary responses abstract this study examines the impact of oil price uncertainty on malaysian macroeconomic activities and monetary responses we use a structural var svar model based on monthly data over the period 1986 2009 the egarch model estimates show an important asymmetric effect of oil price shocks on the conditional oil price volatility dynamic impulse response functions obtained from the svar model show a prolonged dampening effect of oil price volatility shock on malaysian industrial production we also find that levels of consumer price index cpi decline with a positive shock to oil price uncertainty this is the result of negative demand shock due to the postponement of consumption of big ticket items by individuals households and other sectors of the economy we also found that the malaysian central bank adopts an expansionary monetary policy in response to oil price uncertainty variance decomposition analysis reconfirms that volatility in the oil price is the second most important factor to explain the variance of industrial production after its own shocks these results shed some light on how the central bank of malaysia can use controlling mechanisms to stabilize aggregate output and price level

pricing hang seng index options around the asian financial crisis a garch approach abstract this paper investigates how well the hang seng index options the most important class of option contracts traded in hong kong are priced using the garch approach we calibrated the garch parameters using the call and put option data and used them to price options in the subsequent weeks we found the garch model performs very well in comparison with the black scholes model even after allowing for a smile smirk adjustment its superior performance was also evident both before and during the recent asian financial turmoil

permanent and temporary inflation uncertainty and investment in the united states abstract we estimate the impact on us non residential fixed investment of permanent and temporary inflation uncertainty we find that while both have a negative effect temporary uncertainty is more important for investment this study has implications for monetary policy and applied econometric practice

which garch model for option valuation characterizing asset return dynamics using volatility models is an important part of empirical finance the existing literature on garch models favors some rather complex volatility specifications whose relative performance is usually assessed through their likelihood based on a time series of asset returns this paper compares a range of garch models along a different dimension using option prices and returns under the risk neutral as well as the physical probability measure we judge the relative performance of various models by evaluating an objective function based on option prices in contrast with returns based inference we find that our option based objective function favors a relatively parsimonious model specifically when evaluated out of sample our analysis favors a model that besides volatility clustering only allows for a standard leverage effect

ec trade protection law produmping or antidumping this paper argues that the anticipation of protection can have astimulating effect on exports instead of the commonly claimed effect of harassment if protection serves market cartelization by fixing export quantities or prices exporters may have an incentive to increase their sales abroad in order to secure a large share of the expected rent which is brought about by the anticipated import restriction this may even result in sales below marginal costs or dumping the effect of the protectionist threat may then be the reverse of what is intended it can raise the speed of import penetration and it can provoke dumping a formal model and a supportive institutional analysis of ec trade protection is supplemented by preliminary empirical evidence

panel data evidence of the impact of exchange rate uncertainty on private investment in south east asia this article examines the impact of real exchange rate uncertainty on the private investment in south east asia using panel data from four countries of the region namely indonesia malaysia the philippines and thailand annual time series data from 1972 to 2001 is used before carrying out the estimation the time series properties of the data are diagnosed and an error correction model is developed and estimated the model is estimated using both the fixed effects and the random effects estimators the estimated results from both the estimations suggest that the real exchange rate uncertainty had a negative effect on the private investment in that region

multinomial approximating models for options with k state variables contingent claims whose values depend on multiple sources of uncertainty arise in many financial contracts and in the analysis of real projects unfortunately closed form solutions for these options are rare and numerical methods can be computationally expensive this article extends the literature on multinomial approximating models specifically new multinomial models are presented that include as special cases existing models the more general models are shown to be computationally more efficient

the economic value of realized volatility using high frequency returns for option valuation many studies have documented that daily realized volatility estimates based on intraday returns provide volatility forecasts that are superior to forecasts constructed from daily returns only we investigate whether these forecasting improvements translate into economic value added

stock price distributions with stochastic volatility an analytic approach we study the stock price distributions that arise when prices follow a diffusion process with a stochastically varying volatility parameter we use analytic techniques to derive an explicit closed form solution for the case where volatility is driven by an arithmetic ornstein ublenbeck or ar1 process we then apply our results to two related problems in the finance literature 1 options pricing in a world of stochastic volatility and 2 the relationship between stochastic volatility and the nature of fat tailes in stock price distributions article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

forecasting financial volatilities with extreme values the conditional autoregressive range carr model we propose a dynamic model for the high low range of asset prices within fixed time intervals the conditional autoregressive range model henceforth carr the evolution of the conditional range is specified in a fashion similar to the conditional variance models as in garch and is very similar to the autoregressive conditional duration acd model of engle and russell 1998 extreme value theories imply that the range is an efficient estimator of the local volatility e g parkinson 1980 hence carr can be viewed as a model of volatility out of sample volatility forecasts using the s p500 index data show that the carr model does provide sharper volatility estimates compared with a standard garch model

protectionist policies as the regulation of international industry the political feasibility of protectionist policies that regulate international industry derives from the absence of overt collusion among domestic import competing producers the regulation of international industry cannot be explicit since governments would thereby be perceived to be approving or instigating international collusion hence voluntary export restraints have been popularly presented with a focus on the difficulties confronted by domestic import competing producers and a de emphasis on the mutual gains to domestic and foreign producers from monitoring by a foreign government of a restrictive export cartel arrangement similarly trigger price mechanisms have popularly been explained in terms of the need for anti dumping measures to preserve fair competition likewise the involuntary export tax derived in the first instance from an administratively validated but as demonstrated by kalt s econometric analysis contentious complaint of unfair foreign competition voluntary export restraints trigger price mechanisms and involuntary export taxes are however protectionist devices the beneficiaries of which can transcend national jurisdictions and which have in common the characteristic that the gains to domestic industry interests derive from the regulation of foreign competitors

a hybrid stock trading system using genetic network programming and mean conditional value at risk abstract this paper describes a hybrid stock trading system based on genetic network programming gnp and mean conditional value at risk model gnp cvar the proposed method combining the advantages of evolutionary algorithms and statistical model has provided useful tools to construct portfolios and generate effective stock trading strategies for investors with different risk attitudes simulation results on five stock indices show that model based on gnp and maximum sharpe ratio portfolio performs the best in bull market and that based on gnp and the global minimum risk portfolio performs the best in bear market the portfolios constructed by markowitz s mean variance model performs the same as mean cvar model it is clarified that the proposed system significantly improves the function and efficiency of original gnp which can help investors make profitable decisions

identifying the oil price macroeconomy relationship an empirical mode decomposition analysis of us data this paper employs the empirical mode decomposition emd method to filter cyclical components of us quarterly gross domestic product gdp and quarterly average oil price west texas intermediate wti the method is adaptive and applicable to non linear and non stationary data a correlation analysis of the resulting components is performed and examined for insights into the relationship between oil and the economy several components of this relationship are identified however the principal one is that the medium run component of the oil price has a negative relationship with the main cyclical component of the gdp in addition weak correlations suggesting a lagging demand driven component and a long run component of the relationship were also identified comparisons of these findings with significant oil supply disruption and recession dates were supportive the study identifies a number of lessons applicable to recent oil market events including the eventuality of persistent oil price and economic decline following a long oil price run up in addition it was found that oil market related exogenous events are associated with short to medium run price implications regardless of whether they lead to actual supply losses

domestic politics foreign interests and international trade policy reply this paper incorporates the foreign interest in the determination of a country s international trade policy into a model of political competition between candidates contesting elective office we envisage foreign and domestic producer interests as expressing political support for a candidate via campaign contributions and candidates as making trade policy pronouncements to maximize political support from producer interests tariffs are divisive but vers are consistent with conciliatory policy positions yielding mutual gain to foreign and domestic interests no candidate has an interest in formulating a trade policy position using a tariff if a ver is a policy option protection in the developed countries has in recent years often taken the form of bilaterally negotiated voluntary export restraints vers rather than the more traditional unilaterally imposed import restrictions the use of voluntary export restraints has been paralleled by interest in the theoretical literature the effects of vers have been compared with tariffs and quotas and vers have been examined in a political economy framework with a view to identifying the gainers and losers from this form of restric

option pricing under garch processes using pde methods in this paper we propose a partial differential equation formulation for the value of an option when the underlying asset price is described by a discrete time garch process our numerical approach involves a spectral fourier chebyshev interpolation numerical illustrations are provided and the results are compared with other available valuation methods our numerical procedure converges exponentially fast and allows for the efficient computation of option prices achieving a high level of precision in a few seconds of computing time

trade restrictions as facilitating practices abstract the effect of quantitative restrictions in oligopolistic markets is shown to depend on whether imports are substitutes or complements for domestic products in the former case they have profound effects even when set at free trade levels because they impede the ability of the foreign firm to compete in the domestic market thereby acting to facilitate collusion and raise prices and profits for this reason tariffs and quotas are fundamentally non equivalent with substitute goods when goods are complements a voluntary export restriction ver at the free trade level has no effect and tariffs and quotas are equivalent

the valuation of path dependent contracts on the average this article values option contracts based on the average price realized over a finite time horizon such contracts are of importance to traders who periodically transact in spot markets and who require protection from adverse moves in their total accrued costs realized over their trading horizons explicit valuation models for pricing a variety of path dependent contracts based on geometric and arithmetic averages are developed the early exercise features of american contracts are investigated and it is shown that this feature has significant value

nonlinear portfolio selection using approximate parametric value at risk abstract as the skewed return distribution is a prominent feature in nonlinear portfolio selection problems which involve derivative assets with nonlinear payoff structures value at risk var is particularly suitable to serve as a risk measure in nonlinear portfolio selection unfortunately the nonlinear portfolio selection formulation using var risk measure is in general a computationally intractable optimization problem we investigate in this paper nonlinear portfolio selection models using approximate parametric value at risk more specifically we use first order and second order approximations of var for constructing portfolio selection models and show that the portfolio selection models based on delta only delta gamma normal and worst case delta gamma var approximations can be reformulated as second order cone programs which are polynomially solvable using interior point methods our simulation and empirical results suggest that the model using delta gamma normal var approximation performs the best in terms of a balance between approximation accuracy and computational efficiency

asymmetric impacts of international energy shocks on macroeconomic activities while limited by its scarcity of natural resources the impacts of energy price changes on taiwan s economic activities have been an important issue for social public and government authorities this study applies the multivariate threshold model to investigate the effects of various international energy price shocks on taiwan s macroeconomic activity by separating energy price changes into the so called decrease and increase regimes we can realize different impacts of energy price changes and their shocks on economic output the results confirm that there is an asymmetric threshold effect for the energy output nexus the optimal threshold levels are exactly where the oil price change is at 2 48 the natural gas price change is at 0 66 and the coal price change is at 0 25 the impulse response analysis suggests that oil price and natural gas shocks have a delayed negative impact on macroeconomic activities 2012 published by elsevier ltd

endogeneous protection factor returns and resource allocation we consider a heckscher ohlin samuelson trade model with two lobbies representing the interests of factor owners and two political parties the lobbies contribute resources to politics equating their returns to political and economic activity at the margin while the parties maximize their probability of election trading off general voter dissatisfaction with protection against the electioneering resources that favorable policies attract from the lobbies the equilibrium level of protection of a factor and its expected rate of return increase with its relative endowment if this relative endowment is high low then the factor will be better worse off than under free trade but at intermediate factor endowment ratios both factors will be worse off under parameter changes making lobbies more sensitive to the commodity price the lobbies contribute more resources to politics and can both be worse off even though the parties are proposing lower trade distortions

political competition rent seeking and the choice of environmental policy instruments comment in this comment i analyze damania s political economy model environmental and resource economics 13 415 433 1999 correcting some flaws and clarifying some ambiguities i arguethat the political parties are identical at the outset of the game onlyafter the parties have chosen the instrument standards or taxation and thestrictness of environmental policy do the environmentalists and thepolluting firms know which party to support in the election campaign inequilibrium both parties choose the same platform so that both have anequal probability of winning the election

a closed form garch option valuation model this paper develops a closed form option valuation formula for a spot asset whose variance follows a garch p q process that can be correlated with the returns of the spot asset it provides the first readily computed option formula for a random volatility model that can be estimated and implemented solely on the basis of observables the single lag version of this model contains heston s 1993 stochastic volatility model as a continuous time limit empirical analysis on s p500 index options shows that the out of sample valuation errors from the single lag version of the garch model are substantially lower than the ad hoc black scholes model of dumas fleming and whaley 1998 that uses a separate implied volatility for each option to fit to the smirk smile in implied volatilities the garch model remains superior even though the parameters of the garch model are held constant and volatility is filtered from the history of asset prices while the ad hoc black scholes model is updated every period the improvement is largely due to the ability of the garch model to simultaneously capture the correlation of volatility with spot returns and the path dependence in volatility article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

europe 1992 and the western pacific economies the main stimulus to completing the integration of the economies of the european community under the i992 programme has been the ec s relatively slow economic growth during the past two or three decades while japan s share of world gdp has trebled since the early i96os to about one sixth the eci 2 s share has fallen slightly to around one quarter many expect or at least hope that the removal of remaining barriers to movements of goods services people and capital within the ec not only will provide a one off boost to ec output cecchini et al i988 but will set ec incomes on a permanently higher growth path baldwin i989 numerous non europeans worry however that the trade diverting consequences of the ec reforms together with possible enlargements of ec membership and changes in ec preferential trading arrangements will be much more significant than any external trade creation and may make some excluded economies worse off this paper seeks to assess the effects of the ec92 programme and related changes currently underway in europe on the trade and growth prospects of a particularly vulnerable group namely the western pacific economies the next section of the paper explains why the western pacific region defined to include northeast and southeast asia plus australia and new zealand is a natural grouping of economies for considering external effects of european policy changes 2 the subsequent section summarizes the likely effects of those changes on the volume and commodity composition of europe s external trade and hence on the trade and welfare of different western pacific economies the fourth section examines possible responses by that region to these developments and their likely repercussions for europe the paper concludes that while the western pacific economies are likely to respond positively to whatever changes take place in europe welfare there in europe

oil price uncertainty in canada bernanke bernanke ben s irreversibility uncertainty and cyclical investment quarterly journal of economics 98 1983 85 106 shows how uncertainty about energy prices may induce optimizing firms to postpone investment decisions thereby leading to a decline in aggregate output elder and serletis elder john and serletis apostolos oil price uncertainty http ssrn com abstract 908675 2009 find empirical evidence that uncertainty about oil prices has tended to depress investment in the united states in this paper we assess the robustness of these results by investigating the effects of oil price uncertainty in canada our results are remarkably similar to existing results for the united states providing additional evidence that uncertainty about oil prices may provide another explanation for why the sharp oil price declines of 1985 failed to produce rapid output growth impulse response analysis suggests that uncertainty about oil prices may tend to reinforce the negative response of output to positive oil shocks

firms investment decisions in response to demand and price uncertainty we investigate the effect of demand and price uncertainty on firms planned and realized investment from a panel of manufacturing firms uncertainty measures are derived from firms own expectations about demand and prices and firm s sales we find that demand uncertainty at the time of planning depresses planned and subsequent realized investment firms do not revise their plans due to demand uncertainty at the time of spending suggesting that reducing demand uncertainty will only have lagged effects on investment we do not find any effect of price uncertainty our results are consistent with the behaviour of monopolistic firms with irreversible capital

political competition rent seeking and the choice of environmental policy instruments this paper investigates the impact of political lobbying on the choice of environmental policy instruments it is argued that the prevalence of pollution emission standards over more efficient policy instruments may result from rent seeking behaviour the model further predicts that when an emission standard is used to control pollution rival political parties have an incentive to set the same standard there is therefore a convergence of policies moreover it is shown that emission taxes are more likely to be supported and proposed by political parties which represent environmental interest groups this feature appears to accord with the observed support for environmental taxes by green parties in europe australia new zealand and elsewhere

exchange rate uncertainty and the level of investment in selected south east asian countries the effect of real exchange rate uncertainty on aggregate private investment in indonesia malaysia the philippines and thailand is examined using time series data from 1972 2000 since the use of non stationary time series data may produce spurious results the data series are tested for stationarity using the augmented dickey fuller and phillips perron tests after establishing the stationarity of the data series cointegration tests are performed the cointegration test results reject the hypothesis of no cointegration therefore an error correction model is developed and estimated the estimated results point to an inconclusive empirical relationship between real exchange rate volatility and aggregate private investment

lessons from the asian crisis abstract this paper provides an asymmetric information analysis of the recent east asian crisis it then outlines several lessons from this crisis first there is a strong rationale for an international lender of last resort second without appropriate conditionality for this lending the moral hazard created by operation of an international lender of last resort can promote financial instability third although capital flows did contribute to the crisis they are a symptom rather than an underlying cause of the crisis suggesting exchange controls are unlikely to be a useful strategy to avoid future crises fourth pegged exchange rate regimes are a dangerous strategy for emerging market countries and make financial crises more likely

impact of oil price shocks on selected macroeconomic variables in nigeria abstract the impact of oil price shocks on the macroeconomy has received a great deal of attention since the 1970 s initially many empirical studies found a significant negative effect between oil price shocks and gdp but more recently empirical studies have reported an insignificant relationship between oil shocks and the macroeconomy a key feature of existing research is that it applies predominantly to advanced oil importing countries for oil exporting countries different conclusions are expected but this can only be ascertained empirically this study conducts an empirical analysis of the effects of oil price shocks on a developing country oil exporter nigeria our findings showed that oil price shocks do not have a major impact on most macroeconomic variables in nigeria the results of the granger causality tests impulse response functions and variance decomposition analysis all showed that different measures of linear and positive oil shocks have not caused output government expenditure inflation and the real exchange rate the tests support the existence of asymmetric effects of oil price shocks because we find that negative oil shocks significantly cause output and the real exchange rate

the performance of alternative valuation models in the otc currency options market abstract we compare option valuation models based on regime switching garch and jump diffusion processes to a standard smile model in which black and scholes 1973 implied volatilities are allowed to vary across strike prices the regime switching garch and jump diffusion models provide significant improvement over a fixed smile model in fitting gbp and jpy option prices both in sample and out of sample the jump diffusion model achieves the tightest fit a time varying smile model however provides hedging performance that is comparable to the other models for the gbp options this result suggests that standard option valuation techniques may provide a reasonable basis for trading and hedging strategies

lattice models for pricing american interest rate claims this article establishes efficient lattice algorithms for pricing american interest sensitive claims in the heath jarrow and morton paradigm under the assumption that the volatility structure of forward rates is restricted to a class that permits a markovian representation of the term structure the class of volatilities that permits this representation is quite large and imposes no severe restrictions on the structure for the spot rate volatility the algorithm exploits the markovian property of the term structure and permits the efficient computation of all types of interest rate claims specific examples are provided

american garch employee stock option valuation abstract we implement a flexible simulation based approach for the fair value of employee stock option eso that accounts for the vesting period departure risk and voluntary suboptimal early exercise we introduce garch effects on the underlying asset and we analyze the price bias with respect to the constant volatility case we also perform a sensitivity analysis with respect to changes in several eso characteristics we compare this valuation with fas 123 method revealing a fas overvaluation finally we value a real eso plan providing the confidence intervals for the estimated eso prices

risk averse rent seekers and the social cost of monopoly power there is now quite general recognition that the social cost of monopoly power encompasses the resources expended by individuals seeking to become the beneficiaries of monopoly rents however since the activity of rent seeking is generally not observable direct estimates of resources expended in quests to acquire monopoly power are usually impossible to come by 1 as a consequence the indirect approach of taking the observed value of monopoly rents as indicative of the unobserved value of the resources expended in rent seeking is quite generally adopted in approaches to evaluation of the social cost of such activity

real exchange rate uncertainty private investment in ldcs this paper examines empirically the link between real exchange rate uncertainty and private investment in developing countries using a large cross country time series data set the paper builds a garch based measure of real exchange rate volatility and finds that it has a strong negative effect on investment after controlling for other standard investment determinants and taking into account their potential endogeneity the effect of uncertainty is not uniform however there is some evidence of threshold effects so that uncertainty only matters when it exceeds some critical level in addition the negative effect of real exchange rate uncertainty on investment is significantly larger in economies that are highly open and in those with less developed financial systems

hedging options under transaction costs and stochastic volatility in this paper we consider the problem of hedging contingent claims on a stock under transaction costs and stochastic volatility extensive research has clearly demonstrated that the volatility of most stocks is not constant over time as small changes of the volatility can have a major impact on the value of contingent claims hedging strategies should try to eliminate this volatility risk we propose a stochastic optimization model for hedging contingent claims that takes into account the effects of stochastic volatility transaction costs and trading restrictions simulation results show that our approach could improve performance considerably compared to traditional hedging strategies

waiting to invest investment and uncertainty the textbook analysis that accepts all projections with positive net present values as positive is quite generally wrong the ability to delay a project means that almost every project competes with itself postponed with uncertain interest rates even the simplest of projects has an option value the effect of interest rate uncertainty on the optimal delay of investment is sizable this implies that the rate of aggregate investment will depend on both the level of the real interest rate and the degree of interest rate uncertainty furthermore it is not necessarily true that investment rises with a fall in interest rates copyright 1992 by university of chicago press

economic impact of oil price shocks on the turkish economy in the coming decades a dynamic cge analysis as a small open economy turkey depends on both imported oil and natural gas importing almost two thirds of its primary energy demand this paper analyzes the economic effects of oil price shocks for turkey as a small open oil and gas importing country to analyze the potential long term effects of oil price shocks on macroeconomic variables of interest including gdp consumer price inflation indirect tax revenues trade balance and carbon emissions we developed turgem d a dynamic multisectoral general equilibrium model for the turkish economy using turgem d we analyzed the impact of oil price shocks under three distinct scenarios reference high and low oil prices the simulation results show that these oil prices have very significant effects on macro indicators and carbon emissions in the turkish economy

dynamic programming approach for valuing options in the garch model in this paper we develop an efficient algorithm to value options under discrete time garch processes we propose a procedure based on dynamic programming coupled with piecewise polynomial approximation to compute the value of a given option at all observation dates and levels of the state vector the method can be used for the large garch family of models based on gaussian innovations and may accommodate all low dimensional european as well as american derivatives numerical implementations show that this method competes very advantageously with other available valuation methods

estimation of direct and indirect impact of oil price on growth abstract using a new methodology this paper measures the direct and indirect effects of oil prices on gdp growth of 12 economies because of the indirect effect which is transmitted through a trade matrix even the net oil exporters like indonesia and malaysia cannot escape the negative influence of high oil prices

option values under stochastic volatility theory and empirical estimates abstract this paper numerically solves the call option valuation problem given a fairly general continuous stochastic process for return volatility statistical estimators for volatility process parameters are derived and parameter estimates are calculated for several individual stocks and indices the resulting estimated option values do not differ dramatically from black scholes values in most cases although there is some evidence that for longer maturity index options black scholes overvalues out of the money calls in relation to in the money calls

endogenous lobby formation and endogenous protection a long run model of trade policy determination this paper provides a theory of lobby formation within a framework in which trade policy is determined through political contributions under certain conditions free trade turns out to be an equilibrium outcome either when the government has a high affinity for political contributions or when it cares a great deal about social welfare moreover greater inequality in asset distribution results in a greater number of lobbies and in most cases more protection for each of these lobbies furthermore industries with higher levels of capital stock fewer capitalists more inelastic demand and smaller geographical dispersion are the ones that get organized

recent oil price shock and tunisian economy abstract the objective of this paper is to study the oil prices macroeconomy relationship by the analysis of the role of subsidy policy the vector autoregression var method was employed to analyze the data over the period 1993 q1 2007 q3 the results of the model using both linear and non linear specifications indicate that there is no direct impact of oil price shock on the economic activity the shock of oil prices affects economic activity indirectly the most significant channel by which the effects of the shock are transmitted is the government s spending

growth and oil price a study of causal relationships in small pacific island countries this paper investigates the nexus between economic growth and oil price in small pacific island countries pics except papua new guinea none of the 14 pics has fossil any fuel resources consequently the other 13 pics are totally dependent on oil imports for their economic activities since pics have limited foreign exchange earning capacities as they have a very narrow range of exports and are highly dependent on foreign aid high oil prices in recent months have seriously tested their economic resilience this paper applies the ardl bounds testing methodology to four selected pics samoa solomon islands tonga and vanuatu which have consistent and reliable time series of data with a view to assess the impact of oil price on economic growth the findings are that oil price gross domestic product and international reserve are cointegrated in all the four pics further both in the long and short runs we observe that there is a uni directional relationship as causality linkage runs only from oil price and international reserves to economic growth the paper makes some policy recommendations

endogenous choice of trade policy instruments abstract recently developed theories of endogenous trade policy formation have attempted to explain tariffs as the result of economic interest seeking by individuals or groups this note demonstrates that tariffs will not emerge as a policy choice if income is redistributed solely through trade policy induced factor price changes a production tax cum subsidy will be adopted as both gainers and losers are better off than with a tariff

transitional politics emerging incentive based instruments in environmental regulation abstract this paper proposes a positive theory of environmental instrument choice we study a democratic society that seeks to lower the level of pollution from industrial sources to a pre specified target the target can be implemented by one of three instruments s uniform emission standards p tradeable permits and t emission taxes the conflict of interest between special interests representing polluters and the electorate is resolved by an elected politician we characterize when each of the three policy instruments is chosen in political equilibrium and show that the transition observed in many countries from s to either p or t can be understood as a natural consequence of increasingly ambitious environmental targets

regional free trade and social integration this paper analyzes recent free trade arrangements from a positive political economy perspective in contrast to most other literature which fails to take into account geographical factors it is argued here that proximity and transportation costs play an important role in trade arrangements another important also largely neglected factor is the degree of social cohesion in terms of labor standards among potential trading partners a political support maximizing government will consider these factors when balancing political support from free traders and protectionists

american option pricing under garch by a markov chain approximation abstract we propose a numerical method for valuing american options in general and for the garch option pricing model in particular the method is based on approximating the underlying asset price process by a finite state time homogeneous markov chain since the markov transition probability matrix can be derived analytically the price of an american option can be computed by simple matrix operations the markov transition probability matrix is typically sparse the use of a sparse matrix representation can substantially increase the dimension of the markov chain to obtain better numerical results the markov chain method works well for the garch option pricing framework and it serves as an alternative to the existing numerical methods for the valuation of american options in other pricing settings we provide a convergence proof for the markov chain method and analyze its numerical performance for the black scholes 1973 and garch option pricing models

numerical evaluation of multivariate contingent claims we develop a numerical approximation method for valuing multivariate contingent claims the approach is based on an n dimensional extension of the lattice binomial method closed form solutions for the jump probabilities and the jump amplitudes are obtained the accuracy of the method is illustrated in the case of european options when there are three underlying assets article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

what do we know about investment under uncertainty recent theoretical developments relating to investment under uncertainty have highlighted the importance of irreversibility for the timing of investment expenditures and their expected returns this has subsequently stimulated a growing empirical literature which examines uncertainty and threshold effects on investment behaviour this paper presents a review of this literature a variety of methods have been used to investigate the empirical implication of irreversibility in investment the majority focusing on the relationship between investment flows and proxy measures of uncertainty a general conclusion is that increased uncertainty at both aggregate and disaggregate levels leads to lower investment rates this suggests that there is an irreversibility effect under which greater uncertainty raises the value of the call option to delay a commitment to investment this effect appears to dominate any positive impact on investment arising from the fact that greater uncertability under certain circumstances increases the marginal profitability of capital the methods used raise a number of issues which call into question the reliability of the findings and these are addressed in the paper however if such irreversibility effects are present then their omission from traditional investment models casts doubt on the efficacy of such specifications jel classification d81 d92 e22

service induced campaign contributions and the electoral equilibrium candidates for office are modeled as promising services such as support for legislation and intervention in the bureaucracy to interest groups in exchange for campaign contributions an electoral equilibrium is characterized in which candidates choose service contribution offers and interest groups choose whether to contribute the model provides several explanations of congressional incumbents success in over 90 percent of their reelection contests a recognition advantage a high personal valuation of the office a lower cost of providing services and policy alignment with high demand interest groups the model yields predictions that are consistent with empirical findings on the relation between campaign contributions and election outcomes

tariffs subsidies and welfare with endogenous policy abstract it is a well established proposition of trade theory that in the absence of directly trade related distortions or policy goals subsidies are superior to tariffs for achieving any economic or non economic objective this paper shows that once the endogeneity of the distortion or non economic objective is allowed for the welfare ranking of various policies can be reversed the particular model analyzed is one where the level of non economic objectives that have to be fulfilled itself depends on the policy tools considered to fulfill them with this arises from the public good nature of tariffs compared to subsidies

comment upon a new classical model of the postwar uk the results presented by attfield demery and duck 1981 in the european economic review 18 p 367 385 are replicated the model is re estimated to take account of the policy switch to floating exchange rates in 1972 with rather less than favourable results a major problem being misspecification of the monetary growth equation