target zones and interest rate variability abstract for narrow exchange rate bands and for reasonable parameter values the interest rate differential s asymptotic unconditional variability is increasing in the width of the exchange rate band whereas for wide exchange rate bands it is slowly decreasing in the exchange rate band the interest rate differential s instantaneous conditional variability is decreasing in the width of the exchange rate band a narrow target zone differs from a completely fixed exchange rate regime in that the interest rate differential s instantaneous standard deviation is high and even increases when the zone narrows

estimating the open market desk s daily reaction function this paper presents the results of an empirical investigation into the proximate determinants of the federal reserve s daily open market operations using information available each morning at the fed conference call the author models the open market desk s choice of both the quantity and the type of operation using a friction model for the former and a multinomial logit framework for the latter different types of operations are shown to send different signals to the market about the underlying thrust of fed policy and open market operations in recent years are shown to have become increasingly keyed to the federal funds rate copyright 1993 by ohio state university press

a model of target changes and the term structure of interest rates abstract we investigate the effects of short term rate targeting by the federal reserve on the term structure of interest rates and make contributions at two levels using a new series of interest rate targets made available by the federal reserve bank of new york we develop a family of models that highlight the implications of discrete changes in interest rate targets for the term structure of interest rates we show that spreads between short term rates and the overnight federal reserve funds rate are mainly driven by expectations of changes in the target not by the transitory dynamics of the overnight rate around the target hence the bias in tests of the expectations hypothesis that we document can be mainly attributed to the erroneous anticipation of future changes in monetary policy our modeling assumptions and newly available data make it possible to extract a series of market expectations of the next target change which are compared with a series of realized target changes

gibrat s law for all cities reply this reply refutes the objection raised by levy 2009 about the fit of the upper tail of the city size distribution in eeckhout 2004 i show that the method on which his conclusion is based is unsubstantiated the visual interpretation of the fit on log log plots is misleading in addition the methodology used to estimate a truncated subsample of the distribution while testing its significance against a distribution with prespecified parameters is ill founded the main conclusion is that gibrat s law holds city sizes follow proportionate growth thus giving rise to a lognormal size distribution tail included jel r11 r12 r23

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

the incentive effects of levelling the playing field an empirical analysis of amateur golf tournaments levelling the playing field is an important policy instrument to guarantee an equitable competition among heterogeneous individuals however the incentive effects of those policies are usually not explicitly addressed in empirical studies in this article the performance in amateur golf tournaments is analysed to gain insights into the incentive effects of those types of policies the empirical analysis takes advantage of the fact that tournaments in amateur golf are of two distinctive types that apply different scoring rules while one scoring rule is based on gross scores i e the total number of strokes of a player the second scoring rule is based on net scores where the total number of strokes is normalized with respect to the respective player s handicap performance comparisons of players who participated in both types of tournaments suggest that levelling the playing field as in tournaments based on net score has positive and significant performance effects

do tournaments have incentive effects much attention has been devoted to studying models of tournaments or situations in which an individual s payment depends only on his or her output or rank relative to that of other competitors academic interest derives from the fact that under certain sets of assumptions tournaments have desirable normative properties because of the incentive structures they provide our paper uses nonexperimental data to test whether tournaments actually elicit effort responses we focus on professional golf tournaments because information on the incentive structure prize distribution and measures of individual output players scores are both available we find strong support for the proposition that the level and structure of prizes in pga tournaments influence players performance

a micro model of the federal funds market this paper demonstrates that valuable insights into the determination of federal funds rates can be gained through modeling the micro decisions of market participants fed fund demand functions are derived for different bank valuation functions and several implications are discussed specifically it is i possible to rationalize the observation that large banks are net purchasers and small banks net sellers of fed funds ii to explain the positive spread of fed funds rates over other short term money market rates and iii to link the size of this spread to the federal reserve s underlying monetary policy strategy

a new look at incentive effects and golf tournaments abstract this paper uses data from the 1992 professional golf association tour to analyze the incentive effects offered by tournaments the results suggest that the level of the total prize money has an insignificant effect on the total score output of the players workers this conclusion contradicts the findings of an earlier paper by ehrenberg and bognanno journal of political economy 1990 98 1307 1324

the eonia spread before and during the crisis of 2007 2009 the role of liquidity and credit risk abstract this paper provides an empirical assessment of the factors affecting the spread between the euro overnight index average eonia and the main policy rate of the european central bank ecb up until the period when lehman brothers collapsed in mid september 2008 the spread was small and positive after this point the liquidity surplus that developed from the fixed rate full allotment tendering arrangement in refinancing operations drove the widening of eonia spread trading below the ecb policy rate although other factors also played a significant role this paper explains the drivers of spread across alternative non crisis crisis regimes in addition the paper examines how the eonia spread reacts to shocks imposed on a range of liquidity and credit risk factors in alternative crisis non crisis regimes the results have implications for factors that should be monitored closely across both regimes and also the implications that this may have for steering an unsecured overnight rate in crisis times

quitters never win the adverse incentive effects of competing with superstars internal competition may motivate worker effort yet the benefits of competition may depend critically on workers relative abilities large skill differences may reduce efforts i use panel data from professional golf tournaments and find that the presence of a superstar is associated with lower performance on average golfers first round scores are approximately 0 2 strokes worse when tiger woods participates relative to when woods is absent the overall tournament effect is 0 8 strokes the adverse superstar effect varies with the quality of woods s play there is no evidence that reduced performance is attributable to media attention intensity or risky strategy adoption

the term structure with semi credible targeting the federal reserve sets targets for interest rates which it enforces through direct market intervention these targets are changed periodically in this paper we develop a term structure model in which the short rate is subject to a control which keeps it close to a target which changes from time to time the probability of target changes is not constant in the model but changes as a function of observables the model performs well at explaining the shifts in the yield curve that accompany target changes in u s financial markets the federal reserve bank the fed is a unique player usually we assume that market participants are price takers in financial markets however there is evidence that this is not true of the fed in fact the fed sets targets for short term rates which it attempts to maintain by market intervention injecting or withdrawing funds from the market to keep the rates near their targets targets are changed from time to time and market participants know when such a target change occurs they may in fact have some limited ability to forecast such target changes several recent papers have provided evidence that models which allow the short rate to revert toward a mean which is itself a random process perform

the incentive effects of tournaments revisited evidence from the european pga tour this analysis of data from the 1987 european men s professional golf association pga tour strongly supports the hypothesis that the level and structure of prizes in pga tournaments influence players performance specifically players performance appears to vary positively with both the total money prizes awarded in a tournament and the marginal return to effort in the final round of play a value that varies among players largely depending on how the prize money is allocated among finishers of different ranks the authors suggest that these results together with the similar results of their earlier study of the 1984 u s men s pga tour may have implications for the design of compensation systems for certain groups of workers such as corporate executives college professors and salespeople

comovements in volatility in the euro money market abstract this paper assesses the sources of volatility persistence in euro area money market interest rates and the existence of linkages relating volatility dynamics the main findings of the study are as follows firstly there is evidence of stationary long memory of similar degree in all series secondly there is evidence of fractional cointegration relationships relating all series except the overnight rate the common long memory factor analysis points to a two factor volatility curve the most important factor in terms of proportion of total variance explained can be interpreted as a level factor 64 of total variance while the other as a slope factor 13 of total variance impulse response analysis and forecast error variance decomposition finally point to non significant forward transmission of liquidity shocks

tournament incentives and match outcomes in women s professional tennis our research examines the effect of prize money differentials in women s professional tennis tournaments on the probability that the favoured player wins the match this study adds to the existing literature on tournament theory through its focus on rosen s 1986 elimination style match play tournament model we estimate a standard probit model using a unique data set containing detailed information on prize money player specific characteristics and match play outcomes for all tournaments played during the 2004 tour sponsored by the women s tennis association wta our results support predictions by rosen s tournament model larger prize money differentials have a positive statistically significant effect on the favoured player s probability of winning the match in addition the number of stages remaining has a significant negative effect on winning consistent with tournament theory predictions associated with the number of contestants in a tournament

the large small bank dichotomy in the federal funds market abstract despite the central importance of the federal fund market little research has been undertaken on the micro decision making of individual market participants and their interactions this paper demonstrates that there are asymmetries of information between federal funds lenders and borrowers that can only be resolved through frequent and continuous trading smaller banks are constrained in their ability to borrow federal funds due to their size and location it is shown that information asymmetries and resulting adverse selection problems may be resolved through the use of implicit multi period contracts

cross country differences in monetary policy execution and money market rates volatility abstract volatility patterns in overnight interest rates display differences across industrial countries that existing models designed to replicate the features of individual countries markets cannot account for this paper presents an equilibrium model of the overnight interbank market that matches cross country differences in patterns in interest volatility by incorporating differences in how central banks manage liquidity in response to shocks our model is consistent with central banks practice of rationing access to marginal facilities when the objective of stabilizing short term interest rates conflicts with another high frequency objective such as an exchange rate target

fixed costs and the behavior of the federal funds rate abstract this paper presents an equilibrium model of the federal funds market that ties movements in the funds rate to changes in the supply of reserves and to a fixed cost facing banks that borrow at the discount window it is found that the existence of the fixed cost is capable of explaining a number of features of the funds market in particular it is critical for explaining occasional instances of extremely high funds rates it also provides an explanation for heterogeneous behavior across banks towards the discount window and for higher average funds rates at the end of maintenance periods

the economic design of sporting contests what is the optimal number of entrants in a race or the optimal number of teams in a baseball league what is the optimal structure of prizes for a golf tournament or degree of revenue sharing for a football championship how evenly balanced should the competing teams be in the nascar or formula one championships what is the maximum number of entrants per nation to the olympic games that should be permitted what quota of qualifying teams to the soccer world cup should be allocated to the developing nations

interest on reserves and the flexibility of monetary policy in the euro area this paper shows that remunerating required reserves can increase the flexibility of monetary policy the remuneration at the current policy rate implies constant net marginal interest costs of holding required reserves this allows the central bank to change the policy rate also within a reserve maintenance period without inducing a problematic reserve shifting on behalf of the banks in the euro area required reserves are remunerated at an average rate therefore the way in which reserves are remunerated has to be changed in order to make use of the advantage of a higher flexibility of monetary policy

interest rate targeting and the dynamics of short term rates a feature of u s monetary policy has been active targeting of overnight fed funds rates the authors show that during a period of tight targeting 1989 96 term fed funds spreads from the target displayed pronounced volatility and persistence which increase with the maturity of the loan they show that the increase in persistence is consistent with a model of infrequent but predictable revisions of the target in the authors model the autoco variance of the spreads of term fed funds rates from the target increases with the maturity because longer term rates reflect persistent expectations of the next target change coauthors are giuseppe bertola silverio foresi and leora klapper

the sports business as a labor market laboratory with superior data on compensation and productivity as well as the occurrence of abrupt dramatic market structure and player allocation rules changes sports labor markets offer an excellent setting in which to test economic hypotheses this paper reviews evidence from sports in four areas employer monopsony discrimination the coase theorem and incentive contracts supervision and performance there is considerable evidence of monopsony as well as for the existence of some forms of discrimination against minority athletes incentive contracts have strong effects on player performance and behavior and there is mixed evidence on the predictions of the coase theorem

the micromechanics of the federal funds market implications for day of the week effects in funds rate variability the federal funds rate arguably is the most important interest rate in the u s capital market because it plays a central role in monetary policy and the term structure this paper examines the micromechanics of the funds market we show that in a continuous market with asynchronous trading regulatory constraints and accounting conventions that focus agents attention on discrete time instants have important implications for the dynamics of trading activity and realized market prices we also exhibit a model of the market that explains observed regularities in the intertemporal behavior of the funds rate

a computational model of banks optimal reserve management policy abstract this paper uses numerical methods to model the demand for excess reserves by a representative bank in a framework that includes many realistic features of the current reserve market structure in the united states in particular the model incorporates a 14 day maintenance period and an accurate representation of carryover provisions we use the model to evaluate the effect of various changes to the operating environment increased uncertainty modified penalties and changes to policy paying interest on reserves

the effort effects of prizes in the second half of tournaments abstract the theory of tournaments predicts that a worker s effort depends on the difference between the winning and losing prizes as well as the degree that increases in effort affect the probability of winning this paper tests these predictions using a data set from arabian horse racing jockeys increase their efforts lower their times in the second half of races when the amount of prize money lost by dropping a place is greater and when there is less distance between them and their closest competitors these findings are consistent with the theory

day to day monetary policy and the volatility of the federal funds rate we propose a model of the interbank money market with an explicit role for central bank intervention and periodic reserve requirements and study the interaction of profit maximizing banks with a central bank targeting interest rates at high frequency the model yields predictions on biweekly patterns of the federal funds rate s volatility and on its response to changes in target rates and in intervention procedures such as those implemented by the fed in 1994 theoretical results are consistent with empirical patterns of interest rate volatility in the u s market for federal funds

the growing reluctance to borrow at the discount window an empirical investigation federal reserve regulation a imposes formal guidelines on borrowing from the discount window and ensures that the facility is used for appropriate purposes in a way this regulation imposes a nonprice mechanism that compels depository institutions to be more prudent in exercising their borrowing privileges in the 1980s however banks became increasingly more reluctant to borrow adjustment credit from the discount window this behavior is puzzling because discount window guidelines have not changed this paper investigates the reasons behind the weakened demand for borrowed reserves our empirical findings suggest that the growing reluctance to borrow stems from the deteriorating financial position of banks during this period in particular banks avoided the discount window because they feared that market participants might have interpreted their visits as a signal of serious funding difficulties

performance responses to competition across skill levels in rank order tournaments field evidence and implications for tournament design tournaments are widely used in the economy to organize production and innovation we study individual data on 2775 contestants in 755 software algorithm development contests with random assignment the performance response to added contestants varies nonmonotonically across contestants of different abilities precisely conforming to theoretical predictions most participants respond negatively whereas the highest skilled contestants respond positively in counterfactual simulations we interpret a number of tournament design policies number of competitors prize allocation and structure number of divisions open entry and assess their effectiveness in shaping optimal tournament outcomes for a designer

banks demand for reserves when future monetary policy is uncertain abstract the extensive use of revolving securities repurchase agreements has increased the flexibility of the money market management of many european central banks using an extended reserve management model this paper shows that a flexible central bank can influence money market conditions just by being more or less vague or determined about its future course of monetary policy employing arch in mean models for german money market rates confirms that more uncertainty reduces banks demand for borrowed reserves and thereby leads to decreasing interest rates in the interbank money market

incentives versus sorting in tournaments evidence from a field experiment existing field evidence on rank order tournaments typically does not allow disentangling incentive and sorting effects we conduct a field experiment illustrating the confounding effect students in an introductory microeconomics course selected themselves into tournaments with low medium or high prizes for the best score at the final exam nonexperimental analysis of the results would suggest that higher rewards induce higher productivity but a comparison between treatment and control groups reveals that there is no such effect this stresses the importance of nonrandom sorting into tournaments

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

identifying a liquidity effect in the japanese interbank market this article examines whether there was a liquidity effect in the japanese interbank market for reserves during the period from january 4 1996 to february 12 1999 according to the standard martingale model the only determinant of the overnight rate during the reserve maintenance period is the rate that is expected to prevail on the settlement day the last day of the period but this model ignores the fact that reserves are used for interbank payments if overdraft costs are introduced into banks reserve management problem the overnight rate will also depend on what this paper calls the reserve surplus which captures the liquidity effect of reserves we identify the liquidity effect by exploiting two institutional features first the overnight rates observed in the morning are forward rates for a contract to be settled later in the day second changes in reserves that are due to factors other than open market operations are rendered temporary through defensive operations by the open market desk we show that the liquidity effect can be identified from the regression of the spot forward differential on these temporary liquidity shocks our estimates indicate that there was a liquidity effect at least before the yamaichi debacle of november 1997