the pricing of foreign currency options this study examines the assumption that the exchange rate follows a log normal probability distribution and it tests whether different stochastic specifications translate into important differences in implied option prices we investigate a class of processes which includes the log normal probability distribution as a limiting case none of the models performs particularly well the main problem appears to be that the volatility estimates from actual exchange rate data are significantly smaller than those implied by observed option prices la formation du prix des options sur des devises etrangeres cette etude examine le pos tulat que le taux de change suit une courbe de probabilite log normale et verifie si des specifications stochastiques differentes se traduisent en des diff6rences importantes dans les prix des options qui en decoulent les auteurs examinent une famille de processus dont le processus log normal est un cas limite aucun des modeles ne donne des resultats particu lierement bons le probleme principal semble etre que la volatilite des evaluations a partir des donnees sur les taux de change reel est plus faible et de maniere significative que celle des evaluations derivees des prix d options observes

comparing the welfare effects of public and private health care subsidies in the united kingdom we use a calibrated analytical model to compare the welfare costs gross of externalities of increasing subsidies for public and private health care in the uk the model incorporates wait costs for rationed public care burdens that subsidies impose on the tax system and distributional weights for different households welfare costs are significantly higher for expanding public health care over a range of parameter scenarios both policies reduce average wait times but for public health care this is offset by new waiting costs incurred on extra treatments and the burden on the tax system is much larger for expanding public health care

modelling real interest rates abstract in this paper we model real interest rates as a generalised mean reverting ornstein uhlenbeck process empirical tests of the model using us and uk data for the period 1870 1975 shows that there exists significant mean reversion in both the us and uk for real interest rates inflation rates and nominal interest rates we present evidence for some stylised empirical facts which might be incorporated in models linking real interest rates inflation and nominal interest rates

goal programming data envelopment analysis godea for target based multi level planning allocating central grants to the greek local authorities abstract in this paper we develop an interface between goal programming and data envelopment analysis godea in order to integrate target setting and resource allocation in multi level planning problems data envelopment analysis dea has been traditionally used for assessing the performance of individual decision making units and therefore necessary extensions are needed to apply dea principles to the global organisational level without however losing its attractive features the method was originally developed as an aid to the reorganisation of the allocation of central funds to local authorities in greece

do informal risk sharing networks crowd out public voluntary health insurance evidence from vietnam many governments in low income countries have promoted voluntary health insurance schemes in recent years with the principal aim of improving access to services amongst those working in the informal economy few attempts to understand demand for such schemes exist particularly in light of the importance of informal social security arrangements for many households a model of demand for health insurance is developed reflecting this context and estimated using data from vietnam the results show that informal financial networks may crowd out government promoted health insurance implications for theory and policy are discussed

super efficiency and dea sensitivity analysis abstract this paper discusses and reviews the use of super efficiency approach in data envelopment analysis dea sensitivity analyses it is shown that super efficiency score can be decomposed into two data perturbation components of a particular test frontier decision making unit dmu and the remaining dmus as a result dea sensitivity analysis can be done in 1 a general situation where data for a test dmu and data for the remaining dmus are allowed to vary simultaneously and unequally and 2 the worst case scenario where the efficiency of the test dmu is deteriorating while the efficiencies of the other dmus are improving the sensitivity analysis approach developed in this paper can be applied to dmus on the entire frontier and to all basic dea models necessary and sufficient conditions for preserving a dmu s efficiency classification are developed when various data changes are applied to all dmus possible infeasibility of super efficiency dea models is only associated with extreme efficient dmus and indicates efficiency stability to data perturbations in all dmus

option prices as predictors of equilibrium stock prices the black scholes option pricing model modified for dividend payments is used to calculate jointly implied stock prices and implied standard deviations a comparison of the implied stock prices with observed stock prices reveals that the implied prices contain information regarding equilibrium stock prices that is not fully reflected in observed stock prices the implications of this finding are discussed this study investigates the role of call option prices as predictors of the equilibrium prices of their underlying stocks using the black scholes 3 bs model previous tests of the bs model have shown that the formula is highly successful in explaining the observed market prices of options see black and scholes 2 galai 8 chiras and manaster 6 and macbeth and merville 12 according to the model the option price is a function of the current value of the underlying stock the instantaneous variance of the stock s rate of return the time to maturity of the option the risk free rate of interest and the exercise price of the option 1 given an observed option price and known values of all input parameters to the bs model except the stock price one can determine the price of the underlying stock that equates the observed option price to its calculated value it follows from the underlying logic of the model that the implied price is the value of the underlying stock for which a continuously revised option bond portfolio would be a perfect substitute for the stock hence if options are actually priced according to the model implied stock prices will be the option market s assessment of equilibrium stock values previous empirical studies have assumed that observed stock prices are the relevant stock prices for option valuation however just as stock prices may differ in the short run from one exchange to another i e nyse midwest

some models for estimating technical and scale inefficiencies in data envelopment analysis in management contexts mathematical programming is usually used to evaluate a collection of possible alternative courses of action en route to selecting one which is best in this capacity mathematical programming serves as a planning aid to management data envelopment analysis reverses this role and employs mathematical programming to obtain ex post facto evaluations of the relative efficiency of management accomplishments however they may have been planned or executed mathematical programming is thereby extended for use as a tool for control and evaluation of past accomplishments as well as a tool to aid in planning future activities the ccr ratio form introduced by charnes cooper and rhodes as part of their data envelopment analysis approach comprehends both technical and scale inefficiencies via the optimal value of the ratio form as obtained directly from the data without requiring a priori specification of weights and or explicit delineation of assumed functional forms of relations between inputs and outputs a separation into technical and scale efficiencies is accomplished by the methods developed in this paper without altering the latter conditions for use of dea directly on observational data technical inefficiencies are identified with failures to achieve best possible output levels and or usage of excessive amounts of inputs methods for identifying and correcting the magnitudes of these inefficiencies as supplied in prior work are illustrated in the present paper a new separate variable is introduced which makes it possible to determine whether operations were conducted in regions of increasing constant or decreasing returns to scale in multiple input and multiple output situations the results are discussed and related not only to classical single output economics but also to more modern versions of economics which are identified with contestable market theories

an equilibrium model of bond pricing and a test of market efficiency in two previous and related papers 3 4 the authors have reported the results of estimating a particular equilibrium model of bond pricing using quarterly data on canadian government bonds for the period 1964 to 1979 this paper reports the results of applying a similar model to the pricing of u s government bonds for the period 1958 1979 using data from the crsp government bond file the paper also extends the previous empirical analysis by evaluating the ability of the pricing model to detect underpriced and overpriced bonds the data reveal a strong relation between price prediction errors and subsequent bond returns

a dynamic programming approach for pricing options embedded in bonds abstract we propose a dynamic programming dp approach for pricing options embedded in bonds the focus being on call and put options with advance notice an efficient procedure is developed for the cases where the interest rate process follows the vasicek cox ingersoll ross cir or generalized vasicek models our dp methodology uses the exact joint distribution of the interest rate and integrated interest rate at a future date conditional on the current value of the interest rate we provide numerical illustrations for the vasicek and cir models comparing our dp method with finite difference methods our procedure compares quite favorably in terms of both efficiency and accuracy an important advantage of the our dp approach is that it can be applied to more general models calibrated to capture the term structure of interest rates e g the generalized vasicek model

efficient resource allocation via efficiency bootstraps an application to r d project budgeting resource allocation decisions are crucial for the success of an organization this paper proposes an integrated approach to resource allocation problems in which decision makers have one observation of the multiple input output criteria of candidates we offer important improvements over existing approaches based on the widely used data envelopment analysis dea which has two major limitations in its application to resource allocation first traditional dea models compute efficiency scores by optimizing firm specific shadow prices of inputs and outputs this could be problematic because in practice stakeholders would usually require unanimously agreed upon trade offs among evaluation criteria second previous allocation approaches based on dea do not allow for controlling the risk exposure of allocation portfolios to tackle these problems we propose an efficiency measure based on equilibrium shadow prices of different criteria and we use the bootstrap efficiency distributions to gather information regarding efficiency variations and correlations through our methodology decision makers can obtain the risk minimizing allocation portfolio we illustrate the proposed approach through an empirical r d project budgeting problem in which we allocate funding according to the projects efficiency distributions

measuring super efficiency in dea in the presence of infeasibility super efficiency data envelopment analysis dea model is obtained when a decision making unit dmu under evaluation is excluded from the reference set because of the possible infeasibility of super efficiency dea model the use of super efficiency dea model has been restricted to the situations where constant returns to scale crs are assumed it is shown that one of the input oriented and output oriented super efficiency dea models must be feasible for a any efficient dmu under evaluation if the variable returns to scale vrs frontier consists of increasing constant and decreasing returns to scale dmus we use both input and output oriented super efficiency models to fully characterize the super efficiency when super efficiency is used as an efficiency stability measure infeasibility means the highest super efficiency stability if super efficiency is interpreted as input saving or output surplus achieved by a specific efficient dmu infeasibility does not necessary mean the highest super efficiency

public vs private demand for covering long term care expenditures this article studies the determinants of the willingness to pay wtp for long term care ltc insurance coverage two alternatives are considered one compulsory financed through taxes the other purchased on a voluntary basis and paid through a premium wtp was elicited through open ended contingent valuation within a survey conducted in the italian region emilia romagna about ltc population needs we model information on individual wtp as a two stage process where respondents first establish their interest for ltc cover then state their wtp results show that interest and wtp are influenced by different variables and that differences arise also between the wtp for public and private coverage

a dynamic analysis of the demand for health insurance and health care we find that asymmetric information is important for the uptake of supplementary private health insurance and health care utilization we use dynamic panel data models to investigate the sources of asymmetric information and distinguish short run selection effects into insurance from long run selection effects short run selection effects i e responses to shocks are adverse but small in size also long run effects driven by differences in for example preferences and risk aversion are small but we find some evidence for multidimensional asymmetric information for example mental health causes advantageous selection estimates of health care utilization models suggest that moral hazard is not important

a nonlinear general equilibrium model of the term structure of interest rates abstract we derive and test an alternative closed form general equilibrium model of the term structure within the cox ingersoll and ross theoretical framework in which yields are nonlinear functions of the risk free rate we show that equilibrium bond prices and the risk free rate are not always inversely related and that bond risk need not be strictly increasing in maturity using hansen s generalized method of moments to obtain parameter estimates this nonlinear model outperforms the cox ingersoll and ross square root model in describing actual treasury bill yields for the 1964 1986 period

incentive plans for productive efficiency innovation and learning in many industries where production or sales is delegated to a number of subunits the central management faces the classical problem how to induce continuous efficiency improvements organizational learning and transfer of knowledge with a minimum of control exercised this paper draws on recent results regarding regulatory frameworks to construct simple yet powerful incentive schemes for decentralized production under asymmetric information the theoretical foundation is based on principal agent theory cf laffont and tirole econometrica 56 1986 614 641 and extensions to production theory by bogetoft management science 40 1994 959 968 the proposed incentive system is operational and makes use of available information to provide positive incentives for participation in the dynamic development of the entire organization

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

the empirical implications of the cox ingersoll ross theory of the term structure of interest rates the one factor version of the cox ingersoll and ross model of the term structure is estimated using monthly quotes on u s treasury issues trading from 1952 through 1983 using data from a single yield curve it is possible to estimate implied short and long term zero coupon rates and the implied variance of changes in short rates analysis of residuals points to a probable neglected tax effect the term structure of interest rates is important to economists because the relationship among the yields on default free securities that differ in their term to maturity reflects the information available to the market about the future course of events the expectations hypothesis the liquidity preference hypothesis hicks 10 and the market segmentation hypothesis culbertson 6 are theories of the term structure that predict little more than that the implied forward rate is either equal to or not equal to the expectation of future spot rates cox ingersoll and ross 5 cir model the term structure of interest rates in a competitive equilibrium context their model has elements in common with the earlier hypotheses of the term structure however the cir model has a rich class of empirical implications not only for the pricing of default free securities but also for the pricing of bond options callable bonds and other types of financial claims this paper examines the extent to which the model in its simplest one factor form is descriptive of the prices of u s treasury bills bonds and notes traded from 1952 to 1983 section i describes the model and the parsimonious representation of bond prices which it implies section ii describes the data and section iii outlines the preliminary results obtained by fitting the model to observed data the final section outlines directions for future research

on the intertemporal behavior of the short term rate of interest this paper examines the intertemporal behavior of the short term rate of interest in a mean reverting model vasicek s elastic random walk model using the goldfeldquandt switching regressions technique we show that the mean reverting model switched regimes three times over the sample period march 1959 to december 1985 and that two of these switches coincide with the 1979 and 1982 changes in federal reserve monetary policy on interest rates parameter estimates prove to be unstable over the sample period there is evidence of slow mean reversion over the entire sample period yet significant mean reversion emerges only in the 1979 1982 regime

gaussian estimation of single factor continuous time models of the term structure of interest rates this article presents the first application in finance of recently developed methods for the gaussian estimation of continuous time dynamic models a range of one factor continuous time models of the short term interest rate are estimated using a discrete time model and compared to a recent discrete approximation used by chan karolyi longstaff and sanders 1992a hereafter ckls whereas the volatility of short term rates is highly sensitive to the level of rates in the united states it is not in the united kingdom the econometric estimation of continuous time models of the short term interest rate has been a relatively recent development in empirical finance see for example brown and dybvig 1986 melino and turnbull 1986 barone cuoco and zautzik 1991 babbs 1992 abken 1993 chen and scott 1993 das 1993 gibbons and ramaswamy 1993 pearson and sun 1994 lund 1994 pfann schotman and tschernig 1995 ait sahalia 1995 and broze scaillet and zakoian 1995 1 in an important study chan karolyi longstaff and sanders 1992a hereafter ckls develop a general framework to estimate and compare a range of different single factor term structure models for the short term interest rate their major conclusion is that term structure models with volatilities more highly sensitive to the level of interest rates than more generally used models have a closer empirical fit to the data in addition the functional form of the drift with or without mean reversion is of secondary importance to the correct specification of the conditional heteroskedasticity in ckls the continuous time models of the term structure are estimated using a discrete approximation we present in this article an alternative

how sensitive is short term japanese interest rate volatility to the level of the interest rate abstract the sensitivity of volatility to the level of the interest rate is well documented in the literature we investigate whether such results are robust over a range of maturities ranging from seven days to twelve months and whether these findings hold for offshore japanese yen rates the volatility is sensitive to level of the rate itself for every maturity examined

discretized reality and spurious profits in stochastic programming models for asset liability management in the literature on stochastic programming models for practical portfolio investment problems relatively little attention has been devoted to the question how the necessarily approximate description of the asset price uncertainty in these models influences the optimal solution in this paper we will show that it is important that asset prices in such a description are arbitrage free descriptions which have been suggested in the literature are often inconsistent with observed market prices and or use sampling to obtain a set of scenarios about the future we will show that this effectively introduces arbitrage opportunities in the optimization model for an investor who cannot exploit arbitrage opportunities directly because of market imperfections and trading restrictions we will illustrate that the presence of such arbitrage opportunities may cause substantial biases in the optimal investment strategy

quasi markets and social policy introduction j le grand w bartlett the theory of quasi markets w bartlett j le grand quasi markets contracts and quality in health and social care the us experience c propper quasi markets and the nhs reforms l harrison w bartlett quasi markets and the reform of community care l hoyes r means quasi markets and educational reforms w bartlett the quasi market in social housing g bramley quasi markets and regulation c propper quasi markets and social policy the way forward j le grand w bartlett references index

are mortgage lenders guilty of the housing bubble a uk perspective existing theoretical models of house prices and credit rely on continuous rationality of consumers an assumption that has been frequently questioned in recent years meanwhile empirical investigations of the relationship between prices and credit are often based on national level data which is then tested for structural breaks and asymmetric responses usually with subsamples meen 1999 argues that local markets are structurally different from one another and so the coefficients of any estimated housing market model should vary from region to region we investigate differences in the price credit relationship for 12 regions of the uk markov switching is introduced to capture asymmetric market behaviours and turning points results show that credit abundance had a large impact on house prices in greater london and nearby regions alongside a strong positive feedback effect from past house price movements this impact is even larger in greater london and the south east of england when house prices are falling which are the only instances where the credit effect is more prominent than the positive feedback effect a strong positive feedback effect from past lending activity is also present in the loan dynamics furthermore bubble probabilities extracted using a discrete kalman filter neatly capture market turning points

the stochastic properties of term structure movements abstract the aim of this paper is to identify a stationary statistical model for treasury bill discount changes we find that the sample variance of discount changes are non stationary over short differencing intervals but stabilize as the intervals increase to quarterly or semi annual periods this result has important implications for pricing options and for analyzing the predictive properties of forward rates we show that the stochastic process structure leads to a downward revision in estimates of forward rate predictive power

a model of strategic default of sovereign debt this paper presents a continuous time stochastic model to study the timing decision of strategic default of sovereign debt the debtor country precommits to an investment plan finances part of it with a foreign loan and maximizes the present value pv of utility from an infinite stream of consumption default risk arises from uncertainty surrounding the evolution of gdp over time as the debt ratio increases it introduces an increasing drag on the growth of gdp and also increases the risk premium on the loans at each moment the nation must decide whether to service the loan over the next period infinitesimally small or to default thereby gaining the pv of the loan but correspondingly suffering a default penalty and forgoing the option to default in the future this choice is cast as a first passage problem default occurs if and when the pv of consumption under default first exceeds the pv given continuance of debt service the actual values of the debt ratio for several debt ridden countries is found to be close to the theoretically derived critical level this framework also enables the study of austerity programs rescheduling and other policy alternatives

goal congruence analysis in multi division organizations with shared resources based on data envelopment analysis abstract in multi division organizations goal congruence between different divisions and top management is critical to the success of management in this paper drawing upon a nonparametric framework to model production technology we derive a necessary and sufficient condition for a firm with multiple divisions to be goal congruent and then extend it to a goal congruence testing measure which coincides with a data envelopment analysis dea model the goal congruence measure not only shows empirically whether the firm is goal congruent or not but also provides a measurement for the degree of goal incongruence to be goal congruent resources shared among divisions are suggested to be allocated so that the conditions for an optimizable operation are satisfied in addition goal congruent firms are verified to be cost efficient all findings in this research are examined and illustrated with a dataset of 20 bank branches with shared resources for service and sales divisions

super efficiency dea in the presence of infeasibility it is well known that super efficiency data envelopment analysis dea approach can be infeasible under the condition of variable returns to scale vrs by extending of the work of chen 2005 the current study develops a two stage process for calculating super efficiency scores regardless whether the standard vrs super efficiency mode is feasible or not the proposed approach examines whether the standard vrs super efficiency dea model is infeasible when the model is feasible our approach yields super efficiency scores that are identical to those arising from the original model for efficient dmus that are infeasible under the super efficiency model our approach yields super efficiency scores that characterize input savings and or output surpluses the current study also shows that infeasibility may imply that an efficient dmu does not exhibit super efficiency in inputs or outputs when infeasibility occurs it can be necessary that i both inputs and outputs be decreased to reach the frontier formed by the remaining dmus under the input orientation and ii both inputs and outputs be increased to reach the frontier formed by the remaining dmus under the output orientation the newly developed approach is illustrated with numerical examples

nonparametric modeling of u s interest rate term structure dynamics and implications on the prices of derivative securities this paper develops a nonparametric model of interest rate term structure dynamics based on a spot rate process that permits only positive interest rates and a market price of interest rate risk that precludes arbitrage opportunities both the spot rate process and the mar ket price of interest rate risk are nonparametrically specified so that the model allows for maximal flexibility in fitting into the data marginal density of interest rates and historical term structure data are exploited to provide robust estimation of the nonparametric term structure model the model is implemented using u s data and the estimation results are compared to those in the available literature empirical results not only provide strong evidence that most traditional spot rate models and market prices of interest rate risk are misspecified but also confirm that the nonparametric model generates significantly differ ent term structures and prices of common derivatives

the sensitivity of an empirical model of married women s hours of work to economic and statistical assumptions this study undertakes a systematic analysis of several theoretic and statistical assumption s used in many empirical models of female labor supply using a singl e data set psid 1975 labor supply data the author is able to replic ate most of the range of estimated income and substitution effects fo und in previous studies in this field he undertakes extensive specif ication tests and finds that most of this range should be rejected du e to statistical and model misspecifications the two most important assumptions appear to be the tobit assumption used to control for sel f selection into the labor force and exogeneity assumptions on the wi fe s wage rate and her labor market experience copyright 1987 by the econometric society

a theory of yardstick competition in the typical regulatory scheme a franchised monopoly has little incentive to reduce costs this article proposes a mechanism in which the price the regulatedfirm receives depends on the costs of identical firms in equilibrium each firm chooses a socially efficient level of cost reduction the mechanism generalizes to cover heterogeneous firms with observable differences medicare s prospective reimbursement of hospitals by using diagnostically related groups is a scheme very similar to the one outlined here

are tax subsidies for private medical insurance self financing evidence from a microsimulation model this paper develops an empirical strategy to estimate whether subsidies to private medical insurance are self financing in countries where public and private insurance coexist and the latter covers the same treatments as the former we construct a simulation routine based on a micro econometric discrete choice model that allows us to evaluate the impact of premium changes on the utilization of outpatient and inpatient health care services as an application we estimate the budgetary effects of scrapping a subsidy from the purchase of individual private policies using micro data from catalonia our results suggest that the subsidy is not self financing this result is driven by the fact that private medical insurance holders make concurrent use of public and private services and by the price inelasticity of the demand for private policies

discounting the distant future how much do uncertain rates increase valuations abstract we demonstrate that when the future path of the discount rate is uncertain and highly correlated the distant future should be discounted at significantly lower rates than suggested by the current rate we then use two centuries of us interest rate data to quantify this effect using both random walk and mean reverting models we compute the certainty equivalent rate that summarizes the effect of uncertainty and measures the appropriate forward rate of discount in the future under the random walk model we find that the certainty equivalent rate falls continuously from 4 to 2 after 100 years 1 after 200 years and 0 5 after 300 years at horizons of 400 years the discounted value increases by a factor of over 40 000 relative to conventional discounting applied to climate change mitigation we find that incorporating discount rate uncertainty almost doubles the expected present value of mitigation benefits

time varying term premia on u s treasury bills and bonds abstract we use instrumental variables estimation to document variation in ex ante term premia on u s treasury bills and bonds of maturities ranging from two months to twenty years for the april 1959 to december 1989 sample period ex ante term premia are found to be positively related to the ex ante variability in the nominal one month risk free rate of interest significant shifts in the stochastic process generating term premia are documented subsequent to the october 1979 and october 1982 shifts in monetary policy subperiod results document variation in ex ante tenn premia in each of the three monetary regimes

an econometric analysis of the demand for private health insurance in england and wales this paper discusses the nature of demand for private health insurance in a health care market in which the consumer can neither opt out of tax payments for nor lose his entitlement to public health care a single equation econometric model of the demand for private health cover is estimated using the 1982 general household survey the results indicate that income and employment status are significant determinants of the probability of health insurance purchase

on alternative interest rate processes abstract in this paper alternative interest rate processes are estimated for denmark germany sweden and the uk using the generalized method of moments gmm in line with the study by chan karolyi longstaff and sanders 1992 on us data there seems to be a positive relation between interest rate level and volatility for some countries in contrast to their study it is found that mean reversion plays an important role for the specification of the interest rate dynamics the results seem to be robust to the use of different moment conditions and simulations of the estimated models reveal that they are fairly able to capture non fitted moments as well in addition there is evidence of a structural change in the danish interest rate process in august 1985 which may be due to a change in monetary policy the small sample properties of the gmm estimators are also studied through simulations

rational expectations econometric analysis of changes in regime an investigation of the term structure of interest rates abstract this paper is of interest both for its methodological contribution of new tools for analyzing rational expectations models and for its substantive conclusions concerning the term structure of interest rates during the monetary experiment of october 1979 the paper studies systems subject to changes in regime interpreted here as occasional discrete shifts in the parameters governing the time series behavior of exogenous economic variables the specification is shown to be quite tractable both theoretically and empirically the technique is used to analyze yields on three month treasury bills and ten year treasury bonds during 1962 to 1987 a constant parameter linear model for short term rates is shown to be inconsistent both with the univariate time series properties of short rates and with the observed bivariate relation between long and short rates under the expectations hypothesis of the term structure an alternative nonlinear model that admits the possibility of changes in regime affords a much better description of the univariate process for short rates moreover the cross equation restrictions implied by the expectations hypothesis of the term structure are consistent with the nonlinear specification indeed the residuals of the restricted relation have a standard error of only 0 8 basis points this is a third less than that of a completely unrestricted linear regression of long rates on short rates and compares with an unconditional standard deviation of long rates of 142 basis points i conclude that once the recognition by bond traders of changes in regime is taken into account the expectations hypothesis of the term structure of interest rates holds up fairly well for these data

constrained choice sets in the u k demand for private medical insurance abstract the paper examines the demand for a privately supplied good private medical insurance in a market dominated by a large public supplier it is argued that the high political visibility of the public alternative means that individual demand for private medical insurance is the outcome of two processes the first process is one of choice set generation the second process is that of the choice between the insurance and the no insurance prospects the factors affecting these processes are discussed and an econometric specification suggested the estimation results indicate the importance of political belief in determining choice sets and of income and health in determining choice between the two prospects

stochastic volatility movements in short term interest rates and bond option values abstract two classes of models for pricing interest rate contingent claims are compared the first contains standard single factor models while the second includes stochastic volatility variants of these it is demonstrated that incorporating stochastic volatility significantly improves the ability of the models to fit movements in short term interest rates the fundamental reason for this is that standard univariate models do not generate enough conditional heteroskedasticity the models are also compared on the basis of bond option prices when each is constrained to fit a particular yield curve the results suggest that stochastic volatility models will typically produce lower option values than corresponding single factor models particularly for near the money to deep out of the money options this is because estimated historical volatilities are significantly lower under stochastic volatility when single factor models are constrained to the same level of volatility as implied by stochastic volatility models in most cases the pricing differences become minor

a generalized dea model for centralized resource allocation abstract in this paper we introduced a new generalized centralized resource allocation model which extends lozano and villa s and asmild et al s models to a more general case in order to uncover the sources of such total input contraction in the generalized centralized resource allocation model we applied the structural efficiency to further decompose it into three components the aggregate technical efficiency the aggregate allocative efficiency and re transferable efficiency components the proposed models are not only flexible enough for the central decision maker to adjust the inputs and outputs to achieve the total input contraction but also identify the sources of such total input contraction thereby giving rise to an important interpretation and understanding of the generalized centralized resource allocation model finally an empirical example is used to illustrate the approach

statistical models for zero expenditures in household budgets household budget surveys are an important source of data on consumer s expenditure not just for individual consumers but also for estimating national aggregates however it is a widespread finding that for certain commodities most notably tobacco and alcohol the estimate from the household survey falls short of the known consumption total calculated with some confidence from data on production imports exports and excise duties for example in the british family expenditure survey with which we shall largely be concerned total tobacco expenditure was underestimated in 1976 by 21 percent see kemsley redpath and holmes 1980 p 51 much of this understatement together with that on alcohol is thought to occur because of the design of the survey which excludes many persons amongst whom consumption of such items is thought to be atypically high e g prisoners hoteliers and their residents merchant seamen even so the possibility remains that some of the understatement is due to various types of misreporting by households included in the survey in this paper we consider a model in which the standard tobit specification tobin 1958 is supplemented by the operation of a simple binary censor the tobit model is essentially a linear regression model in which non positive observations of the dependent variable are replaced by zero we take this specification as our starting point but add a second censoring process that randomly replaces a fraction of the observations generated by the tobit model bv zeroes the combined model can serve as a representation of several types of

incentive efficient production frontiers an agency perspective on dea in this paper we examine how empirical production frontiers may contribute to the incentives of production units we consider a series of data envelopment analysis dea frontiers and we show when these may be incentive efficient in the sense that they contain all the information that are relevant for optimal incentive provision the frontiers considered include the so called constant decreasing and varying return to scale models the free disposability and the free replicability models as well as the increasing and decreasing return to scale models based on a relaxed set of assumptions also we illustrate how to design optimal incentive schemes based on such frontiers contents 1 introduction 2 the incentive problem 3 production frontiers and productivity measures 4 incentive efficient production frontiers 5 extensions 6 an example 7 final remarks mathematical appendix references

a dea based incentives system for centrally managed multi unit organisations in multi unit organisations such as a bank and its branches or a national body delivering publicly funded health or education services through local operating units the need arises to incentivize the units to operate efficiently in such instances it is generally accepted that units found to be inefficient can be encouraged to make efficiency savings however units which are found to be efficient need to be incentivized in a different manner it has been suggested that efficient units could be incentivized by some reward compatible with the level to which their attainment exceeds that of the best of the rest normally referred to as super efficiency a recent approach to this issue varmaz et al 2013 has used data envelopment analysis dea models to measure the super efficiency of the whole system of operating units with and without the involvement of each unit in turn in order to provide incentives we identify shortcomings in this approach and use it as a starting point to develop a new dea based system for incentivizing operating units to operate efficiently for the benefit of the aggregate system of units data from a small german retail bank is used to illustrate our method

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

tax policy and the demand for health insurance estimates of the price and income elasticities of demand for health insurance are derived from econometric estimates of the parameters of a discrete choice model of health insurance demand using data from a survey of plan choices among a sample of federal government employees the estimated income elasticity 0 01 is similar to most previous estimates the estimated price elasticity 0 16 is in absolute value much less than the earlier previous estimates and somewhat less than the more recent previous estimates possible causes of these differences in price elasticity estimates are discussed

a double hurdle model of cigarette consumption this paper shows the importance of the double hurdle approach for modelling individuals cigarette consumption using data from the uk general household survey and argues that participation and consumption should be treated as separate individual choices the likelihood function for the full double hurdle is derived and it is shown how restrictions on the stochastic specification of the model and auxillary information which identifies ex smokers allow it to be decomposed the empirical results highlight the value of the sample separation information and the need to model starting and quitting as separate decisions

on the determinants of the value of call options on default free bonds the fundamental determinants of the value of an option on a bond are the level and slope of the term structure and the level of interest rate uncertainty competing models that have been developed to price bond options produce similar estimates as long as those models are conditioned on similar values for the fundamental determinants this result is established for simple options with known closed form solutions and for more complex options that require numerical methods for evaluation the finding is confirmed for a wide range of economic conditions and it is shown to be robust with respect to the number and nature of factors that generate interest rate movements copyright 1990 by the university of chicago

a parametric nonlinear model of term structure dynamics recent nonparametric estimation studies pioneered by ait sahalia document that the diffusion of the short rate is similar to the parametric function r superscript 1 5 estimated by chan et al whereas the drift is substantially nonlinear in the short rate these empirical properties call into question the efficacy of the existing affine term structure models and beg for alternative models which admit the observed behavior this article presents such a model our model delivers closed form solutions for bond prices and a concave relationship between the interest rate and the yields we show that in empirical analyses our model outperforms the one factor affine models in both time series as well as cross sectional tests article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

incentive and selection effects of medigap insurance on inpatient care the medicare program which provides insurance coverage to the elderly in the united states does not protect them fully against high out of pocket costs for this reason private supplementary insurance named medigap has been available to cover medicare gaps this paper studies how medigap affects the utilization of inpatient care separating the incentive and selection effects of supplementary insurance for this purpose we use two alternative estimation methods a standard recursive bivariate probit and a discrete multivariate finite mixture model we find that estimated incentive effects are modest and quite similar across models there seems to be very significant selection with the presence of both adversely and advantageously selected individuals stemming from the multidimensional nature of residual heterogeneity

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

discrete time valuation of american options with stochastic interest rates we develop an arbitrage free discrete time model to price american style claims for which domestic term structure risk foreign term structure risk and currency risk are important this model combines a discrete version of the heath jarrow and morton 1992 term structure model with the binomial model of cox ross and rubinstein 1979 it converges weakly to the continuous time models in amin and jarrow 1991 1992 the general model is path dependent and can be implemented with arbitrary volatility functions to value claims with maturity up to five years the model is illustrated with applications to long dated american currency warrants and a cross rate swap from the quanto class article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

stochastic processes for interest rates and equilibrium bond prices default free bonds represent in essence money sold forward the investor gives dollars say to the government now in exchange for a contract which promises to pay with probability one a given number of dollars at maturity and possibly a stream of intermediate coupon payments prior to maturity only recently have financial economists begun to examine the pricing of those bonds in a portfolio context in that framework nominal liquidity premiums or risk premiums on long term default free bonds are attributable to uncertainty about taste technological and price level changes which may occur prior to maturity of the bonds and prior to each coupon payment if any to the extent that the investor is unable to diversify away that uncertainty there is a systematic risk attached to the marginal utility which he or she can derive from the use in consumption or investment of the dollar payoffs on the bonds in some term structure models the instantaneous or short term rate of interest denoted here as a function of time t by r t in nominal terms and r t in real terms can be taken as a sufficient statistic1 for the source of systematic uncertainty about the marginal utility of the proceeds to be derived from defaultfree bonds maturing beyond the next instant e g merton 1974 vasicek 1977 cox ingersoll and ross 1977 specific assumptions about tastes technology and utility functions lead to specific equilibrium stochastic processes for the instantaneous short term riskless rate and longer term bond prices which are modelled as functionally dependent upon maturity and that short term riskless rate if a closed form solution exists for the long term bond price as a function of maturity and the short term interest rate it will be conditional inter alia on the parameters of the stochastic process for that short term rate marsh 1981 proposed that the closed form solutions could be tested in terms of the restrictions implied cross sectionally on the parameters of the time series process for the returns or prices of longer term bonds each with a given term to maturity for an analogy outside the term structure literature think of the closed form solution given by black and scholes 1972 for the price of an option on a nondividend paying stock with lognormal price dynamics given the model the cross section of time series for the changes in prices for each of the several options written on the same stock are not unrestricted their dispersion is functionally linked to the same volatility parameter for the stock price thus the option model including

the volatility of short term interest rates an empirical comparison of alternative models of the term structure of interest rates we estimate and compare a variety of continuous time models of the short term riskless rate using the generalised method of moments we find that the most successful models in capturing the dynamics of the short term interest rate are those that allow the volatility of interest rate changes to be highly sensitive to the level of the riskless rate a number of well known models perform poorly in the comparisons because of their implicit restrictions on term structure volatility we show that these results have important implications for the use of different term structure models in valuing interest rate contingent claims and in hedging interest rate risk

valuing swiss default free callable bonds abstract a model to price the call features embedded in swiss riskless callable bonds is developed the model accounts for the time dependent variance of bond returns the specific exercise conditions of this long term non traded call option and the incompleteness of the swiss bond market empirical results show that the call feature s price is particularly sensitive to the riskless rate and variance specifications illiquidity explains some cross sectional call pricing biases found in this study but the underpricing of ordinary versus callable bonds cannot be excluded

statistical tests of contingent claims asset pricing models abstract a new methodology for statistically testing contingent claims asset pricing models based on asymptotic statistical theory is proposed it is introduced in the context of the black scholes option pricing model for which some illustrative estimation inference and simulation results are also presented the proposed methodology is then extended to arbitrary contingent claims by first considering the estimation problem for general ito processes and then deriving the asymptotic distribution of a general contingent claim which depends upon such ito processes