swap rates and credit quality this article presents a model for valuing claims subject to default by both contracting parties such as swaps and forwards with counterparties of different default risk the promised cash flows of a swap are discounted by a switching discount rate that at any given state and time is equal to the discount rate of the counterparty for whom the swap is currently out of the money that is a liability the impact of credit risk asymmetry and of netting is presented through both theory and numerical examples which include interest rate and currency swaps this article presents a model for valuing claims subject to default by both contracting parties such as swaps and forwards this extends the valuation model for defaultable claims proposed by duffie and singleton 1994 to cases in which the two counterparties have asymmetric default risk the extension permits a reexamination of the impact of credit risk on swap rates while the valuation model applies to all forms of contingent claims in which both contracting parties are at risk to default such as forward contracts we focus on swaps for purposes of illustration for example consider a 5 year interest rate swap between a given party paying a floating rate such as the london inter bank offered rate libor and another counterparty paying a fixed rate replacing the given fixed rate counterparty with a lower quality counterparty whose bond yields are 100 basis points higher increases the swap rate by roughly 1 basis point using our model and typical parameters for libor rate processes this credit impact on swap rates is approximately linear within the range of normally encountered credit quality for a 5 year currency swap given a foreign exchange rate with 15 percent volatility our model shows the impact of credit risk asymmetry on the market swap rate to be roughly 10 fold greater than that for interest rate swaps that is approximately 10 basis points in swap rate per 100 basis points in bond yield credit spread the main goal of this article is to provide a simple and theoretically consistent model allowing such computations

mutual fund performance an analysis of quarterly portfolio holdings this article employs the 1975 84 quarterly holdings of a sample of mutual funds to construct an estimate of their gross returns this sample which is not subject to survivorship bias is used in conjunction with a sample that contains the actual net returns of the mutual funds in addition to allowing the authors to estimate the bias in measured performance that is due to the survival requirement and to estimate total transaction costs the sample is used to test for the existence of abnormal performance the tests indicate that the risk adjusted gross returns of some funds were significantly positive copyright 1989 by the university of chicago

the valuation of options on yields abstract many contingent claims incorporate options on yield levels i derive closed form expressions for european yield option prices using a general equilibrium model in which the underlying yield is the relevant state variable the properties of these options differ markedly from those of conventional options on traded assets for example yield call values can be less than their intrinsic value and can be decreasing functions of the underlying yield these features have important hedging implications i examine the empirical implications of the model using price data for the 13 week t bill options traded on the chicago board options exchange

interest rate swaps abstract using quotations from two interest rate swap dealers with different credit ratings aaa and a we examine the effect of dealers credit reputations on swap quotations and bid offer spreads the aaa offer rates are significantly higher than the a offer rates and the aaa bid rates are significantly lower than the a bid rates we also document the relation between swap rates and par bond yields estimated from london interbank offered rate libor and bid rate libid data we identify some of the problems in testing the implications of swap pricing theory

collective learning tacit knowledge and regional innovative capacity lawson c and lorenz e 1999 collective learning tacit knowledge and regional innovative capacity reg studies 33 305 317 the paper reviews key ideas in the firm capabilities literature and shows how they can be usefully extended to develop a conception of collective learning among regionally clustered enterprises the paper also explores the relationship between codifiable and tacit knowledge in the innovation process and investigates the claim that tacit knowledge because it is difficult to transfer in the absence of labour mobility may constitute a basis for sustained regional competitive advantage the closing section uses case study material based on minneapolis and cambridge to illustrate the importance for innovation of a regional capability for combining and integrating diverse knowledge and of the sources of such capabilities as pre conditions for successful high technology regions lawson c et lorenz e 1999 l apprentissage collectif la connaissance implicite et la capacite regio

history friendly models of industry evolution the computer industry the model presented in this paper is the first of a new generation of evolutionary economic models history friendly models history friendly models are formal models that aim to capture in stylized form qualitative and appreciative theories about the mechanisms and factors affecting industry evolution technological advance and institutional change put forth by empirical scholars of industrial economics technological change business organization and strategy and other social scientists in this paper we have analyzed the long term evolution of the computer industry in particular we have examined the emergence of a dominant firm in mainframes the introduction of a major innovation microprocessor the opening up of a new market segment personal computers ad the competition there between newcomers and diversified old established firms we have taken a body of verbal appreciative theorizing developed a formal representation of that theory and found that the formal version of that theory is consistent and capable of generating the stylized facts the appreciative theory purports to explain going through this analytic exercise has significantly sharpened our theoretical understanding of the key factors behind salient aspects of the evolution of the computer industry copyright 1999 by oxford university press

the agenda for growth theory a different point of view it is argued here that the basic assumptions of neoclassical growth theory inherently limit the ability of models within that theory to cast light on economic growth as we have experienced it this holds for the new growth theory as well as the older growth theory of the 1950s and 190js it is proposed that to make real headway with understanding economic growth a growth theory needs the following elements 1 the ability to treat technological advance as an essentially disequilibrium process 2 to incorporate a theory of the firm in which firm capabilities and differences across firms are central elements and 3 to incorporate into the theory a richer body of institutions than currently are treated in standard growth theory including at the least universities copyright 1998 by oxford university press

the risk in hedge fund strategies theory and evidence from trend followers hedge fund strategies typically generate option like returns linear factor models using benchmark asset indices have difficulty explaining them following the suggestions in glosten and jagannathan 1994 this article shows how to model hedge fund returns by focusing on the popular trend following strategy we use lookback straddles to model trend following strategies and show that they can explain trend following funds returns better than standard asset indices though standard straddles lead to similar empirical results lookback straddles are theoretically closer to the concept of trend following our model should be useful in the design of performance benchmarks for trend following funds

emergent innovation systems and the delivery of clinical services the case of intra ocular lenses abstract this paper is an exploration of the dynamics of technical change in medicine we argue that innovation in medicine is a process that is distributed across time space and epistemic and institutional domains that it entails the entrepreneurial effort of creative individuals as well as the emergence of correlated understanding among heterogeneous agents whose rules of interaction are contingently instituted in socio economic systems along unfolding scientific and technological trajectories we illustrate our arguments through an in depth analysis of a major ophthalmologic innovation the intra ocular lens that has literally transformed the treatment of cataract in the developed world and has the potential to do so in many developing countries we investigate the advancement of clinical knowledge about the disease the development of effective technological capabilities and the co evolution of the supply capacity and demand of a micro innovation system emerged along a specific sequence of interrelated problems and associated solutions which engaged scientists technicians practitioners regulators and patients alike over a period of around three decades

the default risk of swaps we characterize the exchange of financial claims from risky swaps these transfers are among three groups shareholders debtholders and the swap counterparty from this analysis we derive equilibrium swap rates and relate them to debt market spreads we then show that equilibrium swaps in perfect markets transfer wealth from shareholders to debtholders in a simplified case we obtain closed form solutions for the value of the default risk in the swap for interest rate swaps we obtain numerical solutions for the equilibrium swap rate including default risk we compare these with equilibrium debt market default risk spreads swaps have been one of the most explosive and important innovations in international capital markets in the last 10 years in its simplest form a swap consists of an agreement hetween two entities called counterparties to exchange in the future two streams of cash flows in a currency swap these streams of cash flows consist of a stream of interest and principal payments in one cvtrrency exchanged for a stream of interest and principal payments of the same maturity in another currency in an interest rate swap they consist of streams of interest payments of one type fixed or floating exchanged for streams of interest payments of the other type in the same currency the two types of swap are shown in appendix 1 the economic importance of swap transactions is the fact that they can he comhined with deht issues to change the nature of the liahility for the borrower the sum of a hond issue and a currency swap gives a net liability stream which is equivalent to transforming the bond liability into a different currency a floating rate note combined with an interest rate swap results in a liability equivalent to fixed rate debt two issues have dominated the academic literature on swaps the first concerns the reasons for their use arbitrage of imperfections in capital markets was the original cause of their appearance price and henderson 1984 turnbull 1987 shows that lowering borrowing costs by a synthetic transaction involving a swap is not possible in a complete integrated capital market subsequent authors wall and pringle 1988 arak estrella groodman and silver 1988 smith smithson and wakeman 1987 observe

the analytic pricing of asymmetric defaultable swaps swaps where both parties are exposed to credit risk still lack convincing pricing mechanisms this article presents a reduced form model where the event of default is related to structural characteristics of each party the cash flows submitted to credit risk are identified before the swap is priced analytical pricing formulas for interest rate and currency swaps are computed using a gaussian model for risky bonds currency swaps exhibit additional correlation risk the benefits from netting depend on the balance between exposures and market conditions in valuation we show that sources of credit risk asymmetries are also likely to impact on credit spreads

the emergence of technology systems knowledge production and distribution in the case of the emilian plastics district the emergence of technology systems is the result of interdependen t dynamics of generation and diffusion of complementary bits of localised technological knowledge technological communication is the crucial element assessing the collective conditions under which technological knowledge is accumulated and diffused the case study of the emerging emilian technological system in the plastics sector shows that the synchronic and diachronic localised interactions among industrial dynamics institutional r d efforts and technological interrelatedness are the determinants of the systematic production accumulation and distribution of localised technological knowledge in turn explaining the origin and development of the technology system itself

localised production of technology for global markets given the trends towards increasing globalization of markets and of production the globalization of technology remains a subject of considerable interest to analysts and policymakers in the 1990s the main conclusion of this paper is that there is no systematic evidence to suggest that widespread globalization of technological activities occurred in the 1980s the evidence based on the u s patenting activities of 569 of the world s largest firms based in 13 countries and covering 17 product groups shows that for an overwhelming majority of them technology production remains close to the home base the analysis also shows the dangers of generalizing on the basis of anecdotal evidence from a small sample of firms from a particular country or sector c 1995 academic press inc copyright 1995 by oxford university press

the impact of default risk on the prices of options and other derivative securities abstract this paper presents a model for valuing derivative securities when there is default risk the holder of a security is assumed to recover a proportion of its no default value in the event of a default by the counterparty both the probability of default and the size of the proportional recovery are random the paper shows how data on bonds issued by the counterparty can be used to provide information about model parameters

hedge fund benchmarks information content and biases we discuss the information content and potential measurement biases in hedge fund benchmarks hedge fund indexes built from databases of individual hedge funds inherit the measurement biases in the databases in addition broad based indexes mask the diversity of individual hedge fund return characteristics consequently these indexes provide incomplete information to investors seeking diversification from traditional asset classes through the use of hedge funds the approach to constructing hedge fund benchmarks we propose is based on the simple idea that the most direct way to measure hedge fund performance is to observe the investment experience of hedge fund investors themselves the funds of hedge funds fofs in terms of measurement biases returns of fofs can deliver a cleaner estimate of the investment experience of hedge fund investors than the traditional approach in terms of risk characteristics indexes of fofs are more indicative of the demand side dynamics driven by hedge fund investors p

asset based style factors for hedge funds asset based style factors link returns of hedge fund strategies to observed market prices they provide explicit and unambiguous descriptions of hedge fund strategies that reveal the nature and quantity of risk asset based style factors are key inputs for portfolio construction and for benchmarking hedge fund performance on a risk adjusted basis we used previously developed models to construct asset based style factors and demonstrate that one model correctly predicted the return behavior of trend following strategies during out of sample periods in particular during stressful market conditions like those of september 2001

hedge fund index engineering methodologies a comparison and demonstration we examine hedge fund hf index construction methodologies by describing and analyzing case studies from two well known database vendors and evaluating them using numerical examples on the same dataset despite the fact that they follow a similar due diligence process there are great differences in the index engineering practices arising from different quantitative techniques even for indices in the same hf category however those quantitative techniques provide similar results the differences are rather due to the use of different hf universes and different inclusion criteria this paper is the first to use actual numerical case studies to illustrate and compare how hf index engineering works having read it the reader will have a good understanding of how hf indices are formed

cross sectional versus time series estimation of term structure models empirical results for the dutch bond market abstract we compare time series and cross section estimates of the well known vasicek and cir term structure models for a dataset of daily bond prices and short term interest rates for the netherlands the main finding is the great similarity between the two models with respect to the cross sectional term structure parameter estimates and implied bond option values from a time series perspective we find that for some maturities the data reject the constant volatility vasicek model and indicate the presence of the cir volatility effects

on measuring credit risks of derivative instruments abstract this paper critically reviews current practices for measuring credit risks of derivative instruments it argues that there are two major problems with the standard measurement approach first it uses models of the stoachstic behavior of finanacial variables while ignoring both their inherent oversimplification and the uncertainty in their parameters second it ignores the correlations among exposures in derivative intruments and the probabilities of countrypartly default this paper deomonstrates that these practices can produce large errors in the estimation of distribution of both future credit exposures and future credit losses

the road less traveled strategy distinctiveness and hedge fund performance we investigate whether skilled hedge fund managers are more likely to pursue unique investment strategies that result in superior performance we propose a measure of the distinctiveness of a fund s investment strategy based on historical fund return data we call the measure the strategy distinctiveness index sdi we document substantial cross sectional variations as well as strong persistence in sdi our main result indicates that on average a higher sdi is associated with better subsequent performance after adjusting for risk funds in the highest sdi quintile outperform funds in the lowest quintile by 3 5 in the subsequent year the author 2011 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

credit risk exposure with interest and currency swaps abstract the increased use of financial derivatives like interest rate and currency swap contracts has drawn much attention as it exposes banks to non performance by their counterparts this credit risk exposure is of great concern to monetary authorities e g the bank for international settlements in this paper a method for the determination of credit risk exposure is developed in which the exposure is a function of interest rates exchange rates and lives of the contracts to quantify the credit risk exposure simulations of the variables have been used

policies for the development of knowledge intensive local production systems starting from the empirical literature concerning the analysis of industrial districts this paper focuses on the importance of industrial policies in supporting the development and consolidation of local production systems here institutions and markets are envisaged as equally important for long term performance the objective is to propose a conceptual framework for the formulation of public policies that places organisational learning at the centre of interest

credit derivatives with multiple debt issues abstract we evaluate the most actively traded types of credit derivatives within a unified pricing framework that allows for multiple debt issues since firms default on all of their obligations total debt is instrumental in the likelihood of default and therefore in credit derivatives valuation we use a single factor interest rate model where the exponential default frontier is based on total debt and is made coherent with observed bond prices analytical formulae are derived for credit default swaps total return swaps both fixed for fixed and fixed for floating and credit risk options cros price behaviors and hedging properties of all these credit derivatives are investigated simulations document that credit derivatives prices may be significantly affected by terms of debt other than those of the reference obligation the analysis of cros indicates their superior ability to fine tune the hedging of magnitude and arrival risks of default

pricing derivatives on financial securities subject to credit risk this article provides a new methodology for pricing and hedging derivative securities involving credit risk two types of credit risks are considered the first is where the asset underlying the derivative security may default the second is where the writer of the derivative security may default we apply the foreign currency analogy of jarrow and turnbull 1991 to decompose the dollar payoff from a risky security into a certain payoff and a spot exchange rate arbitrage free valuation techniques are then employed this methodology can be applied to corporate debt and over the counter derivatives such as swaps and caps the purpose of this article is to provide a new theory for pricing and hedging derivative securities involving credit risk two sources of credit risk are identified and analyzed the first is where the asset underlying the derivative security may default paying off less than promised this is the case for example with imbedded options on corporate debt the second is the credit risk introduced by the writer of the derivative security who may also default examples include over the counter writers of options on eurodollar futures swaps and swaptions for pricing derivative securities involving credit risk there are currently two approaches the first views these derivatives as contingent claims not on the financial securities themselves but as compound options on the assets underlying the financial securities this is the case for example with the pricing of imbedded options on corporate debt see merton 1974 1977 black and cox 1976 ho and singer 1982 chance 1990 and kim ramaswamy and sundaresan 1993 or the pricing of vulnerable options see johnson and stulz 1987 in practice however this valuation methodology is difficult to use first the assets underlying the financial security are often not tradeable and therefore their values are not observable this makes application of the theory and estimation of the relevant parameters problematic second as in the case of corporate debt all of the other liabilities of the firm senior to the corporate debt must first and simultaneously be valued this generates significant computational difficulties as a result this approach has not

performance characteristics of hedge funds and commodity funds natural vs spurious biases it is well known that the pro forma performance of a sample of investment funds contains biases these biases are documented in brown goetzmann ibbotson and ross 1992 using mutual funds as subjects the organization structure of hedge funds as private and often offshore vehicles makes data collection a much more onerous task amplifying the impact of performance measurement biases theis paper reviews these biases in hedge funds we also propose using funds of hedge funds to measure aggregate hedge fund performance based on the idea that the investment experience of hedge fund investors can be used to estimate the performance of hedge funds

hedge fund return dependence model misspecification or liquidity spirals we test whether model misspecification or liquidity spirals primarily explain the observed excess dependence in filtered for economic fundamentals hedge fund index returns and the links between volatility liquidity shocks and hedge fund return clustering evidence supports the model misspecification hypothesis i hedge fund filtered return clustering is symmetric ii filtered short bias fund returns exhibit negative dependence with filtered returns for other hedge fund types iii negative liquidity shocks are associated with clustering in both tails and market volatility subsumes the role of negative liquidity shocks and iv these same patterns appear in size sorted equity portfolios

the shift to knowledge intensive production in the plastics processing industry and its implications for infrastructure development three case studies new york state england and israel abstract during the 1980 s the plastic processing industry in developed countries has had to shift to knowledge intensive production in order to remain competitive to accomplish this the industry was forced to reorganize in order to ensure the existence of a technological infrastructure that would permit such production to take place in this paper a comparative study was made of this shift in new york state u s england and israel the main findings are 1 most processors are small firms that cannot provide all technological services such as research and marketing in house consequently they depend on external services 2 the formation of adequete services may be inhibited by failure of market forces compelling firms to cooperate to assure their development 3 cooperation is feasible only if firms understand that in the new production approach industrial activity takes place in a network composed of processors research and development centers materials suppliers trade companies and end users 4 in new york state such awareness developed during the 1980s and contributed to the expansion of technological infrastructure and the upgrading of firms 5 in england technological services developed partly with government assistance but most processors lacking awareness of the developments made few restructuring efforts the only exceptions were those serving sophisticated end users such as the defense and automative industries 6 israeli industry failed to create adequate services until 1991 however many kibbutz factories with their highly educated labor force successfully developed their own services even though this often caused wasteful redundancy of efforts the principal conclusion is that policies meant to stimulate restructurng should focus above all on creating awareness of developments in the industry and ensuring an educated labor force moreover inter firm cooperation should be stimulated to ensure development of technological services and industrial networking

basic research inside the firm lessons from an in depth case study abstract the economic analysis of basic research in firms has been a growing concern but only a few attempts have been made to understand the realities which characterize the implementation of this activity in an in depth case study this paper considers the organisational specificities of basic research inside the firm and emphasizes the strategic role of human resources it shows that the process of innovation which was seen in the 1970s as a stock of information to be managed became during the 1980s a sequential learning process which covers a variety of different but complementary organizational designs in the basic research unit on this basis some analytical implications for technology and innovation processes are suggested as the production process is a sequential learning process an innovative firm strategy is defined as one which is able to balance short and long terms requirements with regard to profitability this appears as an out of equilibrium problem where the crucial determinant is the organizational design chosen by the firm in order to generate and implement new learning and skills

pricing interest rate options in a two factor cox ingersoll ross model of the term structure solutions are presented for prices on interest rate options in a two factor version of the cox ingersoll ross model of the term structure specific solutions are developed for caps on floating interest rates and for european options on discount bonds coupon bonds coupon bond futures and euro dollar futures the solutions for the options are expressed as multivariate integrals and we show how to reduce the calculations to univariate numerical integrations which can be calculated very quickly the two factor model provides more flexibility in fitting observed term structures and the fixed parameters of the model can be set to capture the variability of the term structure over time article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

pricing interest rate derivative securities this article shows that the one state variableinterest rate models of vasicek 1977 and cox ingersoll and ross 1985b can be extended sothat they are consistent with both the current termstructure of interest rates and either the currentvolatilities of all spot interest rates or the currentvolatilities of all forward interest rates theextended vasicek model is shown to be very tracta ble analytically the article compares option pricesobtained using the extended vasicek model withthose obtained using a number of other models