can oil prices forecast exchange rates an empirical analysis of the relationship between commodity prices and exchange rates we show the existence of a very short term relationship at the daily frequency between changes in the price of a country s major commodity export and changes in its nominal exchange rate the relationship appears to be robust and to hold when we use contemporaneous realized commodity price changes in our regression however when we use lagged commodity price changes the predictive ability is ephemeral mostly appearing after instabilities have been appropriately taken into account

optimal consumption portfolio policies a convergence from discrete to continuous time models abstract we establish a convergence of optimal intertemporal consumption and portfolio policies from a sequence of discrete time multivariate and multinomial models to a continuous time multi dimensional diffusion model

short run forecasting of the euro dollar exchange rate with economic fundamentals abstract we propose a fundamentals based econometric model for the weekly changes in the euro dollar rate with the distinctive feature of mixing economic variables quoted at different frequencies the model obtains good in sample fit and more importantly encouraging out of sample forecasting results at horizons ranging from one week to one month specifically we obtain statistically significant improvements upon the hard to beat random walk model using traditional statistical measures of forecasting error at all horizons moreover our model obtains a great improvement when we use the direction of change metric which has more economic relevance than other loss measures with this measure our model performs much better at all forecasting horizons than a naive model that predicts the exchange rate as an equal chance to go up or down with statistically significant improvements

non linear hybrid exchange rate modeling and trading profitability in the foreign exchange market abstract a neuro fuzzy decision making technology is designed and implemented to obtain the optimal daily currency trading rule it is found that a non linear artificial neural network exchange rate microstructure hybrid model combined with a fuzzy logic controller generates a set of trading strategies that earn a higher rate of return compared to the simple buy and hold strategy after accounting for realistic transaction costs the gains from utilizing a dynamic neuro fuzzy model are still present

the microstructure of the canada u s dollar exchange rate a robustness test abstract the recent international economics literature suggests that market microstructure effects matter for exchange rate determination and forecasting this paper investigates performance robustness of the pure microstructure canada u s dollar exchange rate model it is found that when used for forecasting this microstructure model is very sensitive to the choice of time period and forecasting horizon

is there a penalty for registered women is there a premium for registered men evidence from a sample of transsexual workers abstract in this paper we study the earnings of transsexual workers using a large administrative sample drawn from the dutch labor force in particular we make two comparisons first we compare transsexual workers to other women and men and find that they earn more than women and less than men second we compare transsexual workers before and after their administrative gender transition and find that male to female transsexual workers earn less as registered women and female to male transsexual workers earn as much if not marginally more as registered men these patterns hold for annual and hourly earnings and do not change when we account for individual fixed effects together our results are consistent with a labor market model in which transsexual workers are discriminated against as a registered female as well as a lgbt worker

survival of overconfidence in currency markets this paper tests the influential hypothesis that irrational traders will be driven out of financial markets by trading losses the paper s main finding is that overconfident currency dealers are not driven out of the market dealers with extensive experience are neither more nor less overconfident than their junior colleagues we set the stage for this investigation by providing evidence that currency dealers display two forms of overconfidence they underestimate uncertainty and they overestimate their professional success this is notable because one might have expected the opposite currency dealers face strong incentives for accuracy they have access to comprehensive information and they have extensive experience

sexual orientation and labour supply this is the first study of the effects of sexual orientation on labour supply after discussing various reasons to expect that labour supply could differ by sexual orientation the 2001 current population survey is used to test for differences in both labour supply and labour market status part time full time and not employed it is found that gay men supply less labour than married and unmarried heterosexual men with regard to women it is found that lesbians supply more labour and are more likely to be employed full time than either married or unmarried heterosexual women extensive controls are used and links to the discrimination literature are found

the multinomial option pricing model and its brownian and poisson limits the cox ross and rubinstein binomial model is generalized to the multinomial case limits are investigated and shown to yield the blacks scholes formula in the case of continuous sample paths for formula in the case of complete market structures in the discontinuous case a merton type formula is shown to result provided jump probabilities are replaced by their corresponding arrow debreu prices article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

frequency domain analysis of foreign exchange order flows abstract using a unique data set from the bank of canada this paper presents the frequency domain analysis of a causal relationship between the canada us dollar exchange rate movements and currency order flows the evidence shows that the existence as well as the direction of causality depends on the customer type frequency and time period

exchange rate uncertainty and international portfolio flows a multivariate garch in mean approach abstract this paper examines the impact of exchange rate uncertainty on different components of net portfolio flows namely net equity and net bond flows as well as their dynamic linkages specifically a bivariate var garch bekk in mean model is estimated using bilateral monthly data for the us vis a vis australia canada the euro area japan sweden and the uk over the period 1988 01 2011 12 the results indicate that the effect of exchange rate uncertainty on net equity flows is negative in the euro area the uk and sweden and positive in australia the impact on net bond flows is also negative in all countries except canada where it is positive under the assumption of risk aversion the findings suggest that exchange rate uncertainty induces a home bias and causes investors to reduce their financial activities to maximise returns and minimise exposure to uncertainty this effect being stronger in the uk the euro area and sweden compared to canada australia and japan overall the results indicate that exchange rate or credit controls on these flows can be used as a policy tool in countries with strong uncertainty effects to pursue economic and financial stability

option pricing with transaction costs using a markov chain approximation an efficient algorithm is developed to price european options in the presence of proportional transaction costs using the optimal portfolio framework of davis in dempster m a h pliska s r eds mathematics of derivative securities cambridge university press cambridge uk a fair option price is determined by requiring that an infinitesimal diversion of funds into the purchase or sale of options has a neutral effect on achievable utility this results in a general option pricing formula in which option prices are computed from the solution of the investor s basic portfolio selection problem without the need to solve a more complex optimisation problem involving the insertion of the option payoff into the terminal value function option prices are computed numerically using a markov chain approximation to the continuous time singular stochastic optimal control problem for the case of exponential utility comparisons with approximately replicating strategies are made the method results in a uniquely specified option price for every initial holding of stock and the price lies within bounds which are tight even as transaction costs become large a general definition of an option hedging strategy for a utility maximising investor is developed this involves calculating the perturbation to the optimal portfolio strategy when an option trade is executed

why does junior put all his eggs in one basket a potential rational explanation for holding concentrated portfolios abstract empirical studies of household portfolios show that young households with little financial wealth hold underdiversified portfolios that are concentrated in a small number of assets a fact often attributed to behavioral biases we present a potential rational alternative we show that investors with little financial wealth who receive labor income rationally limit the number of assets they invest in when faced with financial constraints such as margin requirements and restrictions on borrowing we provide theoretical and numerical support for our results and identify the ratio of financial wealth to labor income as a useful control variable for household portfolio studies

valuing managerial flexibility an application of real option theory to mining investments abstract the value of managerial flexibility is assessed using data on prices costs grades reserves ore extraction and metal output for a panel of canadian copper mines a real option model is estimated and solved for project and option values most empirical researchers i consider the initial investment decision but neglect flexible operation thereafter ii assume that price is stochastic but ignore cost and reserve uncertainty and iii model price as a nonstationary stochastic process the evolution of three state variables price cost and reserves is assessed here differences in assumptions compared to others are found to lead to large differences in estimated project and option values

commercially available order flow data and exchange rate movements caveat emptor research suggests that customer order flow should help predict exchange rates we make two contributions first we provide a review of the recent literature on order flow and exchange rate movements second we critically evaluate the practical value of customer order flow data that are commercially available to the wider market as well as the forecasting properties of inter dealer order flow in line with microstructure theory we find little evidence that the latter can forecast exchange rates but our results also cast considerable doubt on the practical value to market practitioners of commercially available customer order flow data

an analysis of the effects of higher education on wage differentials between blacks and whites by gender in the united states previous analyses that have examined the effect to higher education on the wage differences between blacks and whites have largely been focussed on males and failed to provide quantitative estimates of the impact that higher education has on discrimination and the black white wage differential for both genders in 1980 in particular we find that equalizing the years of college completed by black and white males reduces the wage differential by 14 conversely equalizing the years of college completed by black and white females exacerbates wage inequality by increasing the wage advantage accruing to black females by nearly 24 hence the egalitarian policy mission of higher education in narrowing wage inequality between blacks and whites is complicated by the issue of gender

the use of the control variate technique in option pricing this paper presents a generalized version of the lattice approach to pricing options it shows how the control variate technique can produce significant improvements in the effi ciency ofthe approach the control variate technique is illustrated using american puts on dividend and nondividend paying stocks

the sexual orientation wage gap the role of occupational sorting and human capital using data from the 2000 u s census the authors explore two alternative explanations for the sexual orientation wage gap occupational sorting and human capital differences they find that lesbian women earned more than heterosexual women irrespective of marital status while gay men earned less than their married heterosexual counterparts but more than their cohabitating heterosexual counterparts results of a oaxaca blinder decomposition indicate that the relative wage advantages observed for some groups of lesbians and gay men were mainly owing to greater levels of human capital accumulation particularly education while occupational sorting had little or no influence the relative wage penalties that were observed in other cases however cannot be attributed either to differences in occupational sorting or to human capital an analysis employing a dinardo fortin and lemieux decomposition which allows for variation in the wage gap at different points along the wage distribution broadly confir

the influence of gay and lesbian coupled households on house prices in conservative and liberal neighborhoods abstract gays and lesbians perceive themselves to be targets of discrimination in the housing market previous research has found that the presence of gays and lesbians is associated with increased housing values we reconcile the perceived discrimination and research results by classifying neighborhoods as more conservative or liberal according to voting outcomes of the defense of marriage act using a data set comprised of over 20 000 house sale observations we show that an increase in the number of same sex coupled households is associated with an increase in house prices in more liberal neighborhoods and a decrease in house prices in more conservative neighborhoods this suggests that gay and lesbian coupled households do experience prejudice in conservative neighborhoods

computation of reservation prices of options with proportional transaction costs abstract in this paper we consider the problem of computing reservation prices of options in the model proposed in a companion paper by damgaard 2003 journal of economic dynamics and control 27 667 700 for the problem concerning european options we show that the value functions of the associated portfolio maximization problems are unique viscosity solutions of their respective hamilton jacobi bellman equations moreover we suggest a numerical procedure for computing reservation prices and provide convergence proofs of the involved discretization schemes we implement the procedures and present numerical examples that illustrate the convergence pattern along which the discrete time prices convergence to their continuous time limits furthermore we describe how to extend the numerical procedure to handle computation of reservation buy prices of american options also the latter algorithm is implemented and we present an example showing that in an economy with transaction costs premature exercise of an american call option written on a non dividend paying stock maybe optimal

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

intraday patterns in fx returns and order flow using a comprehensive high frequency foreign exchange dataset we present evidence of time of day effects in foreign exchange returns through a significant tendency for currencies to depreciate during local trading hours we confirm this pattern across a range of currencies and time zones we also find that this pattern is reflected in order flow and suggest that both patterns relate to the tendency of market participants to be net purchasers of foreign exchange in their own trading hours data from a single market maker appears to corroborate that interpretation

convergence from discrete to continuous time contingent claims prices this article generalizes the cox ross and rubinstein 1979 binomial option pricing model and establishes a convergence from discrete time multivariate multinomial models to continuous time multidimensional diffusion models for contigent claims prices the key to the approach is to approximate the n dimensional diffusion price process by a sequence of n variate n 1 nomial processes it is shown that contingent claims prices and dynamic replicating portfolio strategies derived from the discrete time models converge to their corresponding continuous time limits article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

do euro exchange rates follow a martingale some out of sample evidence abstract traditional autocorrelation and variance ratio tests are based on serial uncorrelatedness rather than martingale difference as such they do not capture potential nonlinearity in mean which could lead to misleading inferences in favor of the martingale hypothesis this paper employs various parametric and nonparametric nonlinear models as well as several model comparison criteria to examine the potential martingale behavior of euro exchange rates in the context of out of sample forecasts the overall evidence indicates that while martingale behavior cannot be rejected for euro exchange rates with major currencies such as the japanese yen british pound and us dollar there is nonlinear predictability in terms of economic criteria with respect to several smaller currencies

valuing executive stock options with endogenous departure abstract executive stock options differ from exchange traded options because of vesting and portability restrictions executive departure from the firm forces early exercise reducing the value of executive options current methodology calculates the option value by multiplying the black scholes option price by the departure probability this ignores the possibility that executive departure is less likely when stock price is high and thus is correlated with the stock price we show that this correlation implies a substantial increase in option values a similar situation occurs in performance based option packages where the actual number of options granted depends on stock performance

optimal portfolio choice with wash sale constraints abstract we analytically solve the portfolio choice problem in the presence of wash sale constraints in a two period model with one risky asset our results show that wash sale constraints can heavily affect portfolio choice of investors with unrealized losses the trading behavior of such investors is to a large extent driven by the desire to realize those losses either immediately by sharply decreasing the holding of assets carrying unrealized losses or indirectly by increasing such holdings in order to prepare for a decrease in a future period to earn the tax rebate payment our findings are robust to increasing the number of trading dates and introducing a second risky asset and a correlation structure

a critique of variance bounds tests for monetary exchange rate models note the monetary approach to exchange rate determination attributes the observed volatility of floating rates to revisions of expectations about current and future disturbances that affect the supply and demand conditions in the money market see for example frenkel and mussa 1980 a number of recent studies have proposed and implemented variance bounds tests of monetary exchange rate models along the lines of bond price and stock price volatility tests pioneered by leroy and porter 1981 shiller 1979 1981 and singleton 1980 huang 1981 presents evidence apparently demonstrating that some exchange rates are more volatile than a simple monetary model based on the assumptions of purchasing power parity and uncovered interest parity can rationalize meese and singleton 1983 derive but do not test the variance bounds implied by a number of monetary models vander kraats and booth 1983 henceforth referred to as v b implement volatility tests for three monetary models they conclude that only a variant of the sticky price model developed by dornbusch 1976 can potentially explain under certain rather implausible assumptions about parameter values the observed volatility of the exchange rates included in their sample in the literature this evidence of excess volatility of floating rates is considered damaging to the monetary approach and or to the rational expectations hypothesis for example in his recent survey of the literature richard levich remarks that on the basis of huang s results it follows that either the market is inefficient or that the rational expectations monetary model is incorrect or both levich 1985 p 994 the primary purpose of the present paper is to point out that the excess volatility evidence presented by huang and by ai b arises from a calculation error namely the value they assign to the interest semielasticity of money demand may be appropriate for a study using annual time series but is inappropriate for their monthly data once this error is corrected their exchange rate series no longer violate the variance bounds they test

informational integration and fx trading abstract this paper addresses international financial integration in a new way we focus on informational integration specifically the importance of information conveyed by order flow in major currencies for pricing minor currencies we develop a multi currency model of portfolio allocation in the presence of dispersed information we then test the model s implications using four months of concurrent transaction data on nine currencies the model explains 45 to 78 of daily returns in all nine currencies moreover its prediction that order flow in individual markets should be relevant for determining prices in other markets is borne out

portfolio investment with the exact tax basis via nonlinear programming computing the optimal portfolio policy of an investor facing capital gains tax is a challenging problem because the tax to be paid depends on the price at which the security was purchased the tax basis the optimal policy is path dependent and the size of the problem grows exponentially with the number of time periods dammon et al 2001 2002 2004 garlappi et al 2001 and gallmeyer et al 2001 address this problem byapproximating the exact tax basis by the weighted average purchase price our contribution is threefold first we show that the structure of the problem has several attractive features that can be exploited to determine the optimal portfolio policy using theexact tax basis via nonlinear programming second we characterize the optimal portfolio policy in the presence of capital gains tax when using theexact tax basis third we show that the certainty equivalent loss from using the average tax basis instead of the exact basis is very small it is typically less than 1 for problems with up to 10 periods and this result is robust to the choice of parameter values and to the presence of transaction costs dividends intermediate consumption labor income tax reset provision at death and wash sale constraints

nontraded asset valuation with portfolio constraints a binomial approach we provide a simple binomial framework to value american style derivatives subject to trading restrictions the optimal investment of liquid wealth is solved simultaneously with the early exercise decision of the nontraded derivative noshort sales constraints on the underlying asset manifest themselves in the form of an implicit dividend yield in the risk neutralized process for the underlying asset one consequence is that american call options may be optimally exercised prior to maturity even when the underlying asset pays no dividends applications to executive stock options eso are presented it is shown that the value of an eso could be substantially lower than that computed using the black scholes model we also analyze nontraded payoffs based on a price that is imperfectly correlated with the price of a traded asset the economics of asset pricing when one or more of the assets in the opportunity set are either subject to trading restrictions or entirely nontraded is a matter of great interest viewed from a practical perspective we have several important examples of such assets that are subject to trading restrictions pensions which represent perhaps the most significant of assets held by individual households are subject to trading restrictions it is typically the case that assets in pensions are not available for immediate consumption borrowing against pension assets is subject to significant direct and indirect costs by way of taxes and early withdrawal penalties human capital is another example housing investment is also illiquid and subject to significant transaction costs together pensions human capital and housing constitute a substantial part of a typical household s assets the significance of such nontraded assets for risk premia has already been noted by bewley 1982 there are other circumstances where lack of unrestricted trading plays an important role executive compensation plans usually take the this article was presented at boston university we would like to thank the editor bernard dumas and two anonymous referees for very helpful comments we also thank nalin kulatilaka and seminar participants for useful suggestions ganlin chang fei guan and carlton osakwe provided valuable research assistance j detemple acknowledges support from the social sciences and humanities research

convergence and biases of monte carlo estimates of american option prices using a parametric exercise rule abstract this paper presents an algorithm for pricing american options using monte carlo simulation the method is based on using a parametric representation of the early exercise decision it is shown that as long as this parametric representation subsumes all relevant stopping times error bounds can be constructed using two different estimates one which is biased low and one which is biased high both are consistent and asymptotically unbiased estimators of the true option value results for high dimensional american options confirm the viability of the numerical procedure the convergence results of the paper shed light into the biases present in other algorithms proposed in the literature

evaluation of callable bonds finite difference methods stability and accuracy the purpose of this paper is to evaluate numerically the semi american callable bond by means of finite difference methods this study implies three results first the numerical error is greater for the callable bond price than for the straight bond price and too large for real applications secondly the numerical accuracy of the callable bond price computed for the relevant range of interest rates depends entirely on the finite difference scheme which is chosen for the boundary points thirdly the boundary scheme which yields the smallest numerical error with respect to the straight bond does not perform best with respect to the callable bond the callable bond is a straight coupon bond with the provision that allows the debtor to buy back or to call the bond for a specified amount the call price plus the accrued interest since the last coupon date at some time the call date s during the life of the bond three types of callable bonds can be observed in financial markets the american callable bond may be repurchased at any time on or before the final redemption day in contrast to the european or semi american counterparts which may only be called at one or several specific dates respectively in the case of semi american bonds the debtor gives the bondholder two months notice the callable bond can be viewed as a compound security which consists of an otherwise identical straight bond and of an embedded call option which is not traded and the price of which is therefore not observable the embedded call option which is written on the underlying straight bond can be viewed as being sold by the initial

accounting for exchange rate variability in present value models when the discount factor is near 1 a well known stylized fact about nominal exchange rates among low inflation advanced countries particularly u s exchange rates is that their logs are approximately random walks michael i mussa 1979 is most frequently cited for observing this regularity in a famous pair of papers richard a meese and kenneth rogoff 1983a b found that the structural models of the 1970 s could not beat a random walk in explaining exchange rate movements recently some authors menzie chinn and meese 1995 nelson mark 1995 mark and donggyu sul 2001 have argued that the models can outforecast the random walk at long horizons but a comprehensive recent study by yin wong cheung et al 2003 documents that no model consistently outperforms a random walk why one obvious explanation is that the macroeconomic variables that determine the exchange rate themselves follow random walks if the log of the nominal exchange rate is a linear function of forcing variables that are random walks then it will inherit the random walk property the problem with this explanation is that the economic fundamentals proposed in the most popular models of exchange rates do not in fact follow simple random walks one resolution to this problem is that there may be some other fundamentals ones that have been proposed in some models but are not easily measurable or ones that have not yet been proposed at all that are important in determining exchange rates if these unobserved fundamentals follow random walks and dominate the variation in exchange rate changes then exchange rates will nearly be random walks even if the standard observed fundamentals are not in engel and west 2003a hereinafter ew we propose an alternative explanation we consider linear models of the exchange rate that are in the asset market approach to exchange rates these models emphasize the role of expectations of future economic fundamentals in determining the current exchange rate the exchange rate expressed as the home currency price of foreign currency in this paper can be written as a discounted sum of the current and expected future fundamentals

order flow and the monetary model of exchange rates evidence from a novel data set we propose an exchange rate model that is a hybrid of the conventional specification with monetary fundamentals and the evans lyons microstructure approach we estimate a model augmented with order flow variables using a unique data set almost 100 monthly observations on interdealer order flow on dollar euro and dollar yen the augmented macroeconomic or hybrid model exhibits greater in sample stability and out of sample forecasting improvement vis a vis the basic macroeconomic and random walk specifications

financial amplification of foreign exchange risk premia abstract theories of financial frictions in international capital markets suggest that financial intermediaries balance sheet constraints amplify fundamental shocks we present empirical evidence for such theories by decomposing the u s dollar risk premium into components associated with macroeconomic fundamentals and a component associated with financial intermediary balance sheets relative to the benchmark model with only macroeconomic state variables balance sheets amplify the u s dollar risk premium we discuss applications to financial stability monitoring

error correction modelling and dynamic specifications as a conduit to outperforming the random walk in exchange rate forecasting the proposition that dynamic exchange rate models can outperform the random walk in out of sample forecasting in the sense that they produce lower mean square errors is examined and disputed by using several dynamic versions of three macroeconomic exchange rate models it is demonstrated that dynamic specifications outperform the corresponding static models but improvement in the forecasting power may not be sufficient for the dynamic models to perform better than the random walk the results are explained by suggesting that any dynamic specification or transformation of the static model leads to the introduction of a lagged dependent variable which in effect is a random walk component the analysis leads to the conclusion that it is implausible to aim at beating the random walk by augmenting a static model with a random walk component

optimal consumption and portfolio policies when asset prices follow a diffusion process abstract we consider a consumption portfolio problem in continuous time under uncertainty a martingale technique is employed to characterize optimal consumption portfolio policies when there exist nonnegativity constraints on consumption and on final wealth we also provide a way to compute and verify optimal policies our verification theorem for optimal policies involves a linear partial differential equation unlike the nonlinear partial differential equation of dynamic programming the relationship between our approach and dynamic programming is discussed we demonstrate our technique by explicitly computing optimal policies in a series of examples in particular we solve the optimal consumption portfolio problem for hyperbolic absolute risk aversion utility functions when the asset prices follow a geometric brownian motion the optimal policies in this case are no longer linear when nonnegativity constraints on consumption and on final wealth are included by these examples one can see that our approach is much easier than the dynamic programming approach

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

option pricing in a multi asset complete market economy this paper extends the seminal cox ross rubinstein 1979 crr hereafter binomial model to multiple assets it differs from previous models in that it is derived under the complete market environment specified by duffie and huang 1985 and he 1990 the complete market assumption requires the number of states to grow linearly with the number of assets however the number of correlations grows at a faster rate causing the crr model to be indirectly extendable we solve such a problem by recognizing that the fast growing correlation number is matched by the number of the angles of the edges of a hypercube spanned by the risky assets as a result we derive a solution that allows the number of equations to equal the number of risky assets and the riskless bond the resulting tree structure hence provides the same intuition of pricing and hedging contingent claims as that provided by the crr model finally the proposed model is not only as easy to implement as the one dimensional crr model but also it is more memory efficient than the existing multi factor lattice models

the impact of international remittances on child outcomes and household expenditures in nepal abstractnepal has one of the highest ratios of international remittances to gross domestic product in the world we examine whether the massive inflow of international remittances affects child schooling child labour and household expenses controlling extensively for a host of observed characteristics of households and migrants and using an instrumental variable approach this research finds no effect of international remittances on child education or child labour in nepal however it does find a significant increase in non food expenditures including education spending due to international remittances despite increased expenditure on child education educational outcomes are not improving because of international remittances

primal dual simulation algorithm for pricing multidimensional american options this paper describes a practical algorithm based on monte carlo simulation for the pricing of multidimensional american i e continuously exercisable and bermudan i e discretely exercisable

an empirical analysis of homosexual heterosexual male earnings differentials unmarried and unequal using data from the 1990 u s census pums 5 the authors present the first large scale study of wage differentials between heterosexual and homosexual men the homosexual sample consisting of gay men in unmarried partnered relationships are estimated to have earned 15 6 less than similarly qualified married heterosexual men and 2 4 less than similarly qualified unmarried partnered heterosexual men the authors interpret these two figures as upper and lower bound estimates of the differential between homosexual and heterosexual men the dual comparison enables the authors to disentangle the penalty to being unmarried from other determinants of the wage differential estimated at 14 1 this variable appears to be the main source of the wage gap

european option pricing and hedging with both fixed and proportional transaction costs abstract in this paper we provide a systematic treatment of the utility based option pricing and hedging approach in markets with both fixed and proportional transaction costs we extend the framework developed by davis et al siam j control optim 31 1993 470 and formulate the option pricing and hedging problem we propose and implement a numerical procedure for computing option prices and corresponding optimal hedging strategies we present a careful analysis of the optimal hedging strategy and elaborate on important differences between the exact hedging strategy and the asymptotic hedging strategy of whalley and wilmott risk 7 1994 82 we provide a simulation analysis in order to compare the performance of the utility based hedging strategy against the asymptotic strategy and some other common strategies

a lattice approach for pricing of multivariate contingent claims abstract the lattice approach developed by boyle evnine and gibbs beg is hitherto one of the most appealing when it comes to pricing multivariate contingent claims the beg approach has however some problems two of the major ones being that the method can lead to negative jump probabilities and has a slow rate of convergence in this paper a lattice approach the nek approach is developed which avoids both of the aforementioned problems of the beg approach it is shown that the nek approach has a very fast rate of convergence the results are accurate enough for most needs with as few as ten time steps and the results are astonishingly accurate with twenty time steps moreover the nek approach is simple and easy to understand and also easy to implement the latter property follows from the fact that all jump probabilities are equal and that the formulas for the jump sizes are extremely simple

banking on currency forecasts how predictable is change in money abstract the paper examines the predictive performance of four structural exchange rate models using both parametric and nonparametric techniques error correction versions of the models are fit so that plausible long run elasticities can be imposed on the fundamental variables of each model a variety of model evaluation statistics are reported our findings confirm that fundamental exchange rate models forecast no better than a random walk model for short term prediction horizons for longer horizons error correction terms can explain exchange rate movements significantly better than a no change forecast for a subset of the models and currencies we consider

order flow information and spot rate dynamics abstract this paper examines why order flows are empirically important drivers of spot exchange rate dynamics we consider a decomposition for the depreciation rate that must hold in any model and show that order flows will appear as important proximate drivers when they convey significant incremental information about future interest rate differentials risk premiums and or long run exchange rate levels i e information that cannot be inferred from publicly observed variables we estimate the importance of these incremental information flows for the eurnok spot exchange rate using eight years of high quality disaggregated end user order flow data collected by the norges bank

cointegration as an explanation for the meese rogoff puzzle abstractsome economists suggest that the failure of exchange rate models to outperform the random walk in exchange rate forecasting out of sample can be attributed to failure to take into account cointegration when it is present we attempt to find out if cointegration matters for forecasting accuracy by examining the relation between the stationarity and size of the forecasting error results based on three macroeconomic models of exchange rates do not provide strong support for the proposition that cointegration matters for forecasting accuracy the simulation results show that while stationary errors tend to be smaller than non stationary errors this is not a universal rule irrespective of the presence or absence of cointegration none of the three models can outperform the random walk in out of sample forecasting which means that cointegration cannot solve the meese rogoff puzzle

meese rogoff redux micro based exchange rate forecasting meese rogoff redux micro based exchange rate forecasting by martin d d evans and richard k lyons this paper compares the true ex ante fore casting performance of a micro based model against both a standard macro model and a random walk in contrast to existing literature which is focused on longer horizon forecasting we examine forecasting over horizons from one day to one month the one month horizon being where micro and macro analysis begin to over lap over our three year forecasting sample we find that the micro based model consistently outperforms both the random walk and the macro model micro based forecasts account for almost 16 percent of the sample variance in monthly spot rate changes these results pro vide a level of empirical validation as yet unat tained by other models the forecasting experiment proposed by richard meese and kenneth rogoff 1983 re mains a benchmark against which exchange rate models are judged their result that structural macro models cannot outperform a naive random walk has proved robust over the decades yet the meese rogoff paper was never about forecasting in the true sense i e using tirrie f information to forecast exchange rates at t 1 b y using concurrent realized values of the forcing variables their regressions were more about concurrent explanation than about ex ante forecasting their only forecast ing element is in their reliance on ex ante data to estimate equation parameters which appro priately penalized models whose estimated pa rameters were unstable tion for the random walk nature of exchange rates is that there exists some unobserved fun damental that itself follows a random walk un observed being important because fundamentals proposed in most macro models do not follow random walks they offer a different explana tion one rooted in the asset approach to ex change rates and the present value relation that follows from it specifically they show that i f fundamentals are 1 1 but not necessarily ran dom walks then as the discount factor in the present value relation approaches 1 the ex change rate will follow a process arbitrarily close to a random walk intuitively given that an 1 1 process can be split into random walk and stationary components a discount factor near 1 means that most all of the weight is placed on fundamentals far into the future ex pectations of which are dominated by the random walk component charles engel and kenneth west 2004 2005 provide a valuable perspective on the forecastability of exchange rates one explana this paper takes the analysis of engel and west as an important reorientation of thinking and brings it to the natural next step specifi cally if there is little room for forecasting based on stationary components of fundamentals then one needs to focus on where all the action is namely exchange rate dynamics that come from expectational surprises though the sur prise part is by definition orthogonal to public information our micro based model shows that there should exist types of nonpublic infor mation that are useful for forecasting this part and where to look for these types of informa tion we then locate data on these types of nonpublic information and test whether they have true ex ante forecasting power we should evans department of economics georgetown uni versity washington dc 20057 and nber lyons haas school of business university of california berkeley c a 94720 1900 and nber we are grateful to ken west for his comments and to the national science foundation for financial support we refrain from using the word news because it has too strong an association with macro information that is public which even in the most careful of event studies explains less than 5 percent of exchange rate variation in total see torben andersen et al 2003

an investigation of customer order flow in the foreign exchange market this paper examines the effect that heterogeneous customer orders flows have on exchange rates by using a new propreitary dataset of weekly net order flow segmented by customer type across nine of the most liquid currency pairs we make three contributions first we investigate the extent to which order flow can help to explain exchange rate movements over and above the influence of macroeconomic variables second we look at the usefulness of order flow in forecasting exchange rate movements at longer horizons than those generally considered in the microstructure literature finally we address the question of whether the out of sample exchange rate forecasts generated by order flows can be employed profitably in the foreign exchange markets

local information in foreign exchange markets abstract this study shows that order flow in a foreign exchange market appears to have permanent price impact only if it comes from certain regions these regions are as predicted by the local information hypothesis centers of political and financial decision making it is revealing that orders from other regions only show a very short lived but no permanent price impact local information is so important that it carries over from the usually considered market orders to aggressively priced limit orders too the finding is robust to common news shocks to the consideration of feedback trading and to further controls

sexual orientation and labour relations new evidence from athens greece we use data from the 2008 2009 athens area study aas to provide the first evidence on the relationship between men s sexual orientation and wages in the greek capital athens gay and bisexual men are found to receive significantly lower monthly wages than heterosexual male workers after accounting for demographic and occupational characteristics the estimations reveal that educated gay and bisexual workers face lower wage differentials than less educated gay and bisexual workers which is consistent with the statistical theory of discrimination however wage gaps are significant at all educational attainment levels suggesting that these workers face strong prejudices in the athenian labour market the same pattern holds also across all occupations and sectors furthermore to better understand the determinants of the wage gaps we compare gay bisexual men with both married and unmarried heterosexual men by making these comparisons we are able to disentangle the penalty associated with being unmarr

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

a lattice framework for option pricing with two state variables a procedure is developed for the valuation of options when there are two underlying state variables the approach involves an extension of the lattice binomial approach developed by cox ross and rubinstein to value options on a single asset details are given on how the jump probabilities and jump amplitudes may be obtained when there are two state variables this procedure can be used to price any contingent claim whose payoff is a piece wise linear function of two underlying state variables provided these two variables have a bivariate lognormal distribution the accuracy of the method is illustrated by valuing options on the maximum and minimum of two assets and comparing the results for cases in which an exact solution has been obtained for european options one advantage of the lattice approach is that it handles the early exercise feature of american options in addition it should be possible to use this approach to value a number of financial instruments that have been created in recent years

the monetary approach to exchange rate in an efficient foreign exchange market tests based on volatility the variance bounds on exchange rate movements implied by the monetary approach to exchange rate in an efficient foreign exchange market is shown to be violated by sample data the paper also presents evidence showing that the forecast errors implied by the monetary model can be forecasted using historical data the results are interpreted to suggest either the incompatibility of the monetary approach with sample data or an inefficient foreign exchange market or both models of exchange rate determination based on the monetary approach to the balance of payments imply when coupled with an interest rate parity relation and the assumption of an efficient foreign exchange market that exchange rates are related to a long average of money stocks differentials 1 2 the long average is analogous to the difference across countries of the long average of expected future money stocks which was supposed to characterize the price level of a single country see e g sargent and wallace 20 since long averages are known to have certain smoothing properties it appears that the observed volatility of exchange rates may be inconsistent with these models thus alternative tests of the models may be produced which rely on those properties the aim of this paper is to determine if the observed volatility is consistent with those properties the paper is the first to use tests based on the volatility of the exchange rate in an efficient market model of the monetary approach the first set of tests is based on the property of implied variance bounds for exchange rate movements and the second set consists of the more familiar efficient market tests of forecastability the empirical results violate these two sets of tests of the model thus casting doubt on the model even though the claim that exchange rates are too volatile has been commonly made few direct attempts have been made in the past to determine the validity of the claim some studies have presented estimates of variances of spot and forward rates but lacking an objective criterion to determine what constitutes

sexual orientation work and income in canada abstract we provide the first evidence on sexual orientation and economic outcomes in canada using confidential data that ask adults a direct question about their sexual orientation gay men have 12 lower personal incomes and lesbians have 15 higher personal incomes than otherwise similar heterosexual men and women respectively different labour force patterns can account for some of the income differentials we also document large differences in educational attainment childrearing and urbanicity that generally mirror patterns found in the us finally we show that applying couples based approaches common in this literature greatly overstates the magnitudes of gay straight income gaps

swimming upstream trends in the gender wage differential in the 1980s using michigan panel study of income dynamics data for 1979 and 1988 we analyze how a falling gender wage gap occurred despite changes in wage structure unfavorable to low wage workers the decrease is traced to gender specific factors which more than counterbalanced changes in measured and unmeasured prices working against women supply shifts net of demand were unfavorable for women generally and hurt high skilled more than middle and low skilled women by analyzing wages we find support for the notion of a gender twist in supply and demand having its largest negative effect on high skilled women

real and nominal interest rates a discrete time model and its continuous time limit i provide a general equilibrium theory of the term structure of real interest rates in a discrete time economy i derive the prices for one period and two period real bonds and a simple recursive formula for general k period bonds and prove that the price formula with appropriately specified parameters converges to that of the cox ingersoll and ross model 1985 in addition i consider the behavior of nominal bond prices in a partial equilibrium setting in which an exogenous price level process is correlated with the real economy finally i provide an illustrative empirical investigation of the model the results indicate a significant correlation between the price level and the growth rate of consumption which does not support the money nuetrality assumption underlying cox ingersoll and ross s nominal bond prices and related empirical studies such as gibbons and ramaswamyu 1992 heston 1991 and pearson and sun 1991 article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies