microstructure noise realized variance and optimal sampling a recent and extensive literature has pioneered the summing of squared observed intra daily returns realized variance to estimate the daily integrated variance of financial asset prices a traditional object of economic interest we show that in the presence of market microstructure noise realized variance does not identify the daily integrated variance of the frictionless equilibrium price however we demonstrate that the noise induced bias at very high sampling frequencies can be appropriately traded off with the variance reduction obtained by high frequency sampling and derive a mean squared error mse optimal sampling theory for the purpose of integrated variance estimation we show how our theory naturally leads to an identification procedure which allows us to recover the moments of the unobserved noise this procedure may be useful in other applications finally using the profits obtained by option traders on the basis of alternative variance forecasts as our economic metric we find that explicit optimization of realized variance s finite sample mse properties results in accurate forecasts and considerable economic gains copyright 2008 wiley blackwell

futures prices on yields forward prices and implied forward prices from term structure when futures contracts are settled with respect to underlying asset prices received theory suggests that the differences between futures prices and implied forward prices from the term structure are strictly due to marking to market ceteris paribus empirical evidence appears to indicate that such differences are small for contracts with short maturities what happens when the futures contract settles to yields implied by future prices of underlying assets the eurodollar futures contract which is the most actively traded futures contract in the united states settles to yield as opposed to prices this unique settlement feature is shown to imply that the implied forward prices from the libor term structure should differ from the futures prices even in the absence of marking to market differences due to marking to market effect are small they are shown to vary between 2 to 45 basis points less than one half percent of futures prices on the other hand differences between implied forward prices and futures prices are shown to be relatively large

answering the skeptics yes standard volatility models do provide accurate forecasts a voluminous literature has emerged for modeling the temporal dependencies in financial market volatility using arch and stochastic volatility models while most of these studies have documented highly significant in sample parameter estimates and pronounced intertemporal volatility persistence traditional ex post forecast evaluation criteria suggest that the models provide seemingly poor volatility forecasts contrary to this contention we show that volatility models produce strikingly accurate interdaily forecasts for the latent volatility factor that would be of interest in most financial applications new methods for improved ex post interdaily volatility measurements based on high frequency intradaily data are also discussed

the ramsey problem for congestible facilities abstract in recent years a new set of models drawing on vickrey 1969 has been developed to analyze the economics of congestible facilities these models are structural in that they derive the cost function from consumers time of use decisions and the congestion technology standard models in contrast simply assume the general form of the cost function we apply the new approach to analyze the ramsey problem for a congestible facility and show that the solution generally entails cost inefficiency standard models have failed to reveal this result because they treat the cost function as completely determined by technology

a joint framework for consistently pricing interest rates and interest rate derivatives dynamic term structure models explain the yield curve variation well but perform poorly in pricing and hedging interest rate options most existing option pricing practices take the yield curve as given thus having little to say about the fair valuation of the underlying interest rates this paper proposes an m n model structure that bridges the gap in the literature by successfully pricing both interest rates and interest rate options the first m factors capture the yield curve variation whereas the latter n factors capture the interest rate options movements that cannot be effectively identified from the yield curve we propose a sequential estimation procedure that identifies the m yield curve factors from the libor and swap rates in the first step and the n options factors from interest rate caps in the second step the three yield curve factors explain over 99 of the variation in the yield curve but account for less than 50 of the implied volatility variation for the caps incorporating three additional options factors improves the explained variation in implied volatilities to over 99

an empirical test of hypercongestion in highway bottlenecks abstract there is a widely held view that as demand for travel goes up this decreases not only speed but also the capacity of the road system a phenomenon known as hypercongestion we revisit this idea in the context of highway bottlenecks we propose an empirical test using an event study design to measure changes in highway capacity at the onset of queue formation we apply this test to three highway bottlenecks in california for which detailed data on traffic flows and vehicles speeds are available we find no evidence of a reduction in highway capacity at any of the three sites during periods of high demand across sites and specifications we have sufficient statistical power to rule out even small reductions in highway capacity this lack of evidence of hypercongestion stands in sharp contrast to most previous studies and informs core models in urban and transportation economics

price discovery in the u s treasury market the impact of orderflow and liquidity on the yield curve we examine the role of price discovery in the u s treasury market through the empirical relationship between orderflow liquidity and the yield curve we find that orderflow imbalances excess buying or selling pressure can account for as much as 26 percent of the day to day variation in yields on days without major macroeconomic announcements the effect of orderflow on yields is permanent and strongest when liquidity is low all of the evidence points toward an important role of price discovery in understanding the behavior of the yield curve

bottleneck congestion and residential location of heterogeneous commuters this study examines the effects of bottleneck congestion and an optimal time varying congestion toll on the spatial structure of cities we develop a model in which heterogeneous commuters choose departure times from home and residential locations in a monocentric city with a bottleneck located between a central downtown and an adjacent suburb we then demonstrate that commuters sort themselves temporally and spatially on the basis of their value of travel time and their flexibility furthermore we reveal that introducing an optimal congestion toll alters the urban spatial structure which contrasts with the previous literature we further demonstrate through an example that congestion tolling can cause the city to physically expand outward which helps rich commuters but hurts poor commuters

estimating the effects of global patent protection in pharmaceuticals a case study of quinolones in india under the trips agreement wto members are required to enforce product patents for pharmaceuticals the debate about the merits of this requirement has been extremely contentious many low income economies claim that patent protection for pharmaceuticals will result in substantially higher prices for medicines with adverse consequences for the health and well being of their citizens on the other hand research based global pharmaceutical companies argue that prices are unlikely to rise significantly because most patented products have therapeutic substitutes in this paper we empirically investigate the basis of these claims central to the ongoing debate is the structure of demand for pharmaceuticals in poor economies where because health insurance coverage is so rare almost all medical expense are met out of pocket using a detailed product level data set from india we estimate key price and expenditure elasticities and supply side parameters for the fluoroquinolones sub segment of the systemic anti bacterials i e antibiotics segment of the indian pharmaceuticals market we then use these estimates to carry out counterfactual simulations of what prices profits and consumer welfare would have been had the fluoroquinolone molecules we study been under patent in india as they were in the u s at the time our results suggest that concerns about the potential adverse welfare effects of trips may have some basis we estimate that in the absence of any price regulation or compulsory licensing the total annual welfare losses to the indian economy from the withdrawal of the four domestic product groups in the fluoroquinolone sub segment would be on the order of u s 450 million or about 73 of the sales of the entire systemic anti bacterials segment in 2000 of this amount foregone profits of domestic producers constitute roughly 50 million or 11 the overwhelming portion of the total welfare loss therefore derives from the loss of consumer welfare in contrast the profit gains to foreign producers in the absence of any price regulation are estimated to be only around 53 million per year

coordinating on lower prices pharmaceutical pricing under political pressure we investigate the effects of political activity on pharmaceutical prices focusing on the health care reform period in the early 1990s we characterize firms based on their vulnerability to future price regulation and find that the more vulnerable firms were more likely to take various actions to forestall regulation most notably coordinating on a specific percentage price increase during 1993 since moderating price increases could have averted regulation the coordination appears to be the industry s response to a collective action problem

the effects of new public projects to expand urban rail transit abstract many us cities invest in large public transit projects in order to reduce private vehicle dependence and to reverse the downward trend in public transit use using a unique panel data set for five major cities that upgraded their rail transit systems in the 1980s we estimate new rail transit s impact on usage and housing values using distance as a proxy for transit access new rail transit has a small impact on usage and housing values this impact is enough to represent tangible benefits of new transit to nearby residents new transit s benefits are not uniformly distributed we document which demographic groups are over represented in transit growth areas and the changes in transit usage by different demographic groups

static and dynamic effects of health policy evidence from the vaccine industry public policies designed to increase utilization of existing technologies may also affect incentives to develop new technologies this paper investigates this phenomenon by examining policies designed to increase usage of preexisting vaccines i find that these policies were associated with a 2 5 fold increase in clinical trials for new vaccines for several diseases the induced innovation is socially wasteful though small in magnitude in one case however the dynamic social welfare benefits from induced innovation exceed the policies static benefits from increasing vaccination with existing technology these findings underscore the importance of including technological progress in economic analysis of public policy

the marginal cost of raising tax revenue and redistributing income we present analytic formulas for calculating marginal welfare costs when taxes are levied against the wages of a heterogeneous population of households and marginal tax revenue finances either the supply of a public good or lump sum transfers the formulas are applied to explain the wide discrepancy between estimates of marginal welfare costs for redistribution previously obtained through computer simulation procedures our calculations reveal that these procedures introduced lump sum transfers that were not specified as part of the reforms to be simulated but explain most of the differences between their estimates we also show that welfare cost estimates are quite sensitive to the elasticity of labor supply with respect to exhaustive public spending

clearing the air in atlanta transit and smart growth or conventional economics abstract the atlanta s regional transportation plan addresses the problems of pollution and congestion by proposing to expand the existing transit network and to promote a more intensive use of the existing built up area this paper argues that neither of these proposals is feasible the current spatial structure of atlanta is incompatible with a sizable transit market share and atlanta s spatial structure cannot be changed significantly in the next 20 years even if draconian land use regulations were adopted as a result technology and congestion pricing are the only way to solve the problems of pollution and congestion in atlanta

unspanned stochastic volatility and fixed income derivatives pricing we propose a parsimonious unspanned stochastic volatility model of the term structure and study its implications for fixed income option prices the drift and quadratic variation of the short rate are affine in three state variables the short rate its long term mean and variance which follow a joint markov vector process yet bond prices are exponential affine functions of only two state variables independent of the current interest rate volatility level because this result holds for an arbitrary volatility process such a process can be calibrated to match fixed income derivative prices furthermore this model can be extended by relaxing the time homogeneity to fit any arbitrary term structure in its hjm form this model nests the analogous stochastic equity volatility model of heston 190 heston s l 1993 a closed form solution for options with stochastic volatility review of financial studies 6 327 343 in particular if the volatility process is specified to be affine closed form solutions for interest rate options obtain we propose an efficient algorithm to compute these prices an application using data on caps and floors shows that the model can capture very well the implied black spot volatility surface while simultaneously fitting the observed term structure c 2005 elsevier b v all rights reserved

pre event trends in the panel event study design we consider a linear panel event study design in which unobserved confounds may be related both to the outcome and to the policy variable of interest we provide sufficient conditions to identify the causal effect of the policy by exploiting covariates related to the policy only through the confounds our model implies a set of moment equations that are linear in parameters the effect of the policy can be estimated by 2sls and causal inference is valid even when endogeneity leads to pre event trends pre trends in the outcome alternative approaches perform poorly in our simulations

a political economy model of road pricing abstract in this paper we use a simple majority voting model to study the introduction of urban congestion tolls the model allows for different types of uncertainty and considers different uses of the toll revenues the following results are obtained first we show that individual uncertainty with respect to modal substitution costs may imply that a majority votes against road pricing ex ante although a majority would have been in favor after its introduction ex post moreover if a majority is against road pricing ex ante there will also be no majority for organizing an experiment that would take away the individual uncertainty second political uncertainty with respect to the use of the revenues corroborates the finding that ex ante more voters will be against the introduction of tolls third both types of uncertainty suggest that fewer voters are against road pricing when toll revenues are used to subsidize public transport than when they are redistributed to all voters importantly the results of this paper are consistent with a number of recent empirical observations on efforts to introduce road pricing including the systematic rejection of road pricing in referenda the more favorable attitudes towards road pricing after than before its introduction and tying the toll revenues to support public transport

on the social desirability of urban rail transit systems despite a decline in its mode share investment to build new urban rail transit systems and extend old ones continues we estimate the contribution of each u s urban rail operation to social welfare based on the demand for and cost of its service we find that with the exception of bart in the san francisco bay area every system actually reduces welfare and is unable to become socially desirable even with optimal pricing or physical restructuring of its network we conclude rail s social cost is unlikely to abate because it enjoys powerful political support from planners civic boosters and policymakers

can interest rate volatility be extracted from the cross section of bond yields most affine models of the term structure with stochastic volatility predict that the variance of the short rate should play a dual role in that it should also equal a linear combination of yields however we find that estimation of a standard affine three factor model results in a variance state variable that while instrumental in explaining the shape of the yield curve is essentially unrelated to garch estimates of the quadratic variation of the spot rate process or to implied variances from options we then investigate four factor affine models of the models tested only the model that exhibits unspanned stochastic volatility usv generates both realistic short rate volatility estimates and a good cross sectional fit our findings suggest that short rate volatility cannot be extracted from the cross section of bond prices in particular short rate volatility and convexity are only weakly correlated c 2009 elsevier b v all rights reserved

conceptual developments in the economics of transportation an interpretive survey the objective in this paper is to survey the literature in transportation economics exploring two basic themes first the conceptual developments in the analysis of supply and demand which recognizes noteworthy aggregation biases in the empirical work on aggregate data and indicate that a correct analysis of the issues should take place at a highly disaggregated level second the use of these conceptual developments to evaluate efficiency aspects of transportation pricing investment and the impact of government regulation on resource allocation and distribution in the transportation sector it is important to acknowledge that the survey is based on research throughout the world but our institutional perspective and to some extent the topics that are covered is based largely on the u s experience author

patents and the global diffusion of new drugs analysis of the timing of launches of 642 new drugs in 76 countries during 1983 2002 shows that patent and price regulation regimes strongly affect how quickly new drugs become commercially available in different countries price regulation delays launch while longer and more extensive patent rights accelerate it health policy institutions and economic and demographic factors that make markets more profitable also speed up diffusion the estimated effects are generally robust to controlling for endogeneity of policy regimes with country fixed effects and instrumental variables the results highlight the important role of policy choices in driving the diffusion of new innovations

public transit and air pollution evidence from canadian transit strikes little is known about the causal impacts of public transit on local air pollution exploiting variation in transit availability resulting from transit strikes in 18 canadian cities between 1974 and 2011 this study identifies the short run effect of public transit on air pollution our findings indicate that transit leads to a 3 5 part per billion increase in nitrogen oxides while having no statistically significant effect on carbon monoxide or pm2 5 estimates are robust to a series of specification tests and magnitudes are consistent with a calibrated simulation model overall the results suggest that expanding the current configuration of public transit in north american cities is unlikely to yield improvements in local air quality transports publics et pollution de l air l exemple des greves canadiennes il existe peu d informations sur l effet causal des transports publics sur la pollution de l air a l echelle locale en exploitant les variations au niveau de la disponibilite des transports publics a la suite de greves dans 18 villes canadiennes entre 1974 et 2011 cette etude identifie l effet a court terme des transports publics sur la pollution de l air nos resultats montrent que les transports publics generent une augmentation de 3 5 parties par milliard d oxyde d azote sans avoir d effet statistiquement significatif sur les taux de monoxyde de carbone ou de particules fines type pm2 5 nos estimations sont robustes a une serie de tests de specification et les mesures sont coherentes relativement a un modele de simulation calibre dans l ensemble les resultats suggerent que l expansion des transports publics en amerique du nord dans leur configuration actuelle n ameliorera probablement pas la qualite de l air a l echelle locale

obtaining a driver s license in india an experimental approach to studying corruption we conduct two experiments to understand the process of obtaining a driver s license in india in the first experiment we randomly assign license candidates to one of three groups bonus offered a financial reward if they could obtain their license fast lesson offered free driving lessons upfront and control the control group alone illustrates bureaucratic failures 71 of the license getters in that group avoided the mandated driving test and 62 failed a surprise driving test the system responds to private needs there are more license getters in the bonus group but at a social cost there are more license getters who cannot drive in the bonus group the system however also appears to respond to social considerations as there are more license getters in the lesson group large extra legal payments are made by license getters those in the control group pay 2 5 times the official fee more of these extra legal payments take place in the bonus group surprisingly these extra legal payments are not direct bribes to bureaucrats but instead payments to agents in the second experiment we perform an audit study to better understand the role of agents the audit shows that agents can provide licenses to individuals even if they cannot drive but the audit also shows that agents cannot as easily circumvent all other rules we argue that our findings are most consistent with agents being the channel for corruption in this system we also report some suggestive evidence that bureaucrats create red tape possibly to induce more license candidates to use agents

testing the heath jarrow morton ho lee model of interest rate contingent claims pricing this paper presents empirical tests of the constant volatility version of the heath jarrow and morton model which is also the continuous time limit of the ho and lee model using a generalized method of moments gmm test on three years of daily data for eurodollar futures and futures options the model can be rejected for most subperiods various biases in the fitted option prices relative to the market prices are documented through a regression study the small sample properties and power of the gmm framework to this setting are also studied through simulations

strategic interaction among governments in the provision of a global public good abstract how do governments respond to other governments when providing a global public good using data from 2007 to 2014 on medical research funding for infectious and parasitic diseases we examine how governments and foundations in 41 countries respond to funding changes by the us government which accounts for half of funding for these diseases because funding across governments might be positively correlated due to unobserved drivers they have in common we use variation in the representation of research intensive universities on us congressional appropriations committees as an instrument for us funding we find that a 10 increase in us government funding for a disease is associated with a 2 to 3 reduction in funding for that disease by another government in the following year

hypercongestion in downtown metropolis engineering studies demonstrate that traffic in dense downtown areas obeys a stable functional relationship between average speed and density including a region of hypercongestion where flow decreases with density this situation can be described as queuing behind a bottleneck whose capacity declines when the queue is large we combine such a variable capacity bottleneck with vickrey scheduling preferences for the special case where there are only two possible levels of capacity solving the model leads to several new insights including that the marginal cost of adding a traveler is especially sensitive to the lowest level of capacity reached we analyze an optimal toll a coarse toll and metering showing substantial benefits from using these policies to eliminate the period of reduced capacity under hypercongestion all of these policies can be designed so that travelers gain even without considering any toll revenues

unspanned stochastic volatility evidence from hedging interest rate derivatives most existing dynamic term structure models assume that interest rate derivatives are redundant securities and can be perfectly hedged using solely bonds we find that the quadratic term structure models have serious difficulties in hedging caps and cap straddles even though they capture bond yields well furthermore at the money straddle hedging errors are highly correlated with cap implied volatilities and can explain a large fraction of hedging errors of all caps and straddles across moneyness and maturities our results strongly suggest the existence of systematic unspanned factors related to stochastic volatility in interest rate derivatives markets

statistical inference for random variance option pricing this article deals with the estimation of continuous time stochastic volatility models of option pricing we argue that option prices are much more informative about the parameters than are asset prices this is confirmed in a monte carlo experiment that compares two very simple strategies based on the different information sets both approaches are based on indirect inference and avoid any discretization bias by simulating the continuous time model we assume an ornstein uhlenbeck process for the log of the volatility a zero volatility risk premium and no leverage effect we do not pursue asymptotic efficiency or specification issues rather we stick to a framework with no overidentifying restrictions and show that given our option pricing model estimation based on option prices is much more precise in samples of typical size without increasing the computational burden

tax rates and tax evasion evidence from missing imports in china tax evasion by its very nature is difficult to observe we quantify the effects of tax rates on tax evasion by examining the relationship in china between the tariff schedule and the evasion gap which we define as the difference between hong kong s reported exports to china at the product level and china s reported imports from hong kong our results imply that a one percentage point increase in the tax rate is associated with a 3 percent increase in evasion furthermore the evasion gap is negatively correlated with tax rates on closely related products suggesting that evasion takes place partly through misclassification of imports from higher taxed categories to lower taxed ones in addition to underreporting the value of imports

do bonds span the fixed income markets theory and evidence for unspanned stochastic volatility most term structure models assume bond markets are complete that is that all fixed income derivatives can be perfectly replicated using solely bonds however we find that in practice swap rates have limited explanatory power for returns on at the money straddles portfolios mainly exposed to volatility risk we term this empirical feature unspanned stochastic volatility usv while usv can be captured within an hjm framework we demonstrate that bivariate models cannot exhibit usv we determine necessary and sufficient conditions for trivariate markov affine systems to exhibit usv for such usv models bonds alone may not be sufficient to identify all parameters rather derivatives are needed

one for the road public transportation alcohol consumption and intoxicated driving we exploit arguably exogenous train schedule changes in washington dc to investigate the relationship between public transportation the risky decision to consume alcohol and the criminal decision to engage in alcohol impaired driving using variation over time across days of the week and over the course of the day we provide evidence that overall there was little effect of expanded public transit service on dui arrests alcohol related fatal traffic and alcohol related arrests however we find that these overall effects mask considerable heterogeneity across geographic areas specifically we find that areas where bars are within walking distance to transit stations experience increases in alcohol related arrests and decreases in dui arrests we observe no sign of behavioral changes in neighborhoods without any bars within walking distance of transit stations

how do patent laws influence innovation evidence from nineteenth century world fairs studies of innovation have focused on the effects of patent laws on the number of innovations but have ignored effects on the direction of technological change this paper introduces a new dataset of close to fifteen thousand innovations at the crystal palace world s fair in 1851 and at the centennial exhibition in 1876 to examine the effects of patent laws on the direction of innovation the paper tests the following argument if innovative activity is motivated by expected profits and if the effectiveness of patent protection varies across industries then innovation in countries without patent laws should focus on industries where alternative mechanisms to protect intellectual property are effective analyses of exhibition data for 12 countries in 1851 and 10 countries in 1876 indicate that inventors in countries without patent laws focused on a small set of industries where patents were less important while innovation in countries with patent laws appears to be much more diversified these findings suggest that patents help to determine the direction of technical change and that the adoption of patent laws in countries without such laws may alter existing patterns of comparative advantage across countries jel d2 k11 l51 no 014

compulsory licensing price controls and access to patented foreign products abstract we analyze how a price control and the threat of compulsory licensing cl affect consumer access in a developing country south to a patented foreign product in the model the southern government sets the level of the price control on a northern patent holder who chooses between entry and voluntary licensing vl while entry incurs a higher fixed cost licensed production is of lower quality if the patent holder does not work its patent locally the south is free to use cl the threat of cl ensures that consumers have access to a lower quality version of the patented good when the patent holder chooses not to work its patent locally improves the terms at which vl occurs can cause the patent holder to switch from vl to entry and can delay consumer access when cl replaces vl or entry we also show that a price control and cl are mutually reinforcing instruments

bicycle infrastructure and traffic congestion evidence from dc s capital bikeshare abstract this study explores the impact of bicycle sharing infrastructure on urban transportation we estimate a causal effect of the capital bikeshare on traffic congestion in the metropolitan washington d c area we exploit a unique traffic dataset that is finely defined on a spatial and temporal scale our approach examines within city commuting decisions as opposed to traffic patterns on major thruways empirical results suggest that the availability of a bikeshare reduces traffic congestion upwards of 4 within a neighborhood in addition we estimate heterogeneous treatment effects using panel quantile regression results indicate that the congestion reducing impact of bikeshares is concentrated in highly congested areas

the medium term impact of medicare part d on pharmaceutical prices medicare part d began coverage of prescription drugs in 2006 using data from the first year of the program we found that part d reduced pharmaceutical prices for medicare recipients with these effects driven by enrollees previously without drug coverage in this paper we extend our analysis through 2009 the fourth year of the program to investigate whether plans continued to extract price concessions in return for favorable formulary placement or if consumer inertia or other factors caused prices to bounce back after their initial decline we find price declines persisted through at least the third year of the program

how do incumbents respond to the threat of entry evidence from the major airlines this paper examines how incumbents respond to the threat of entry of competitors as distinguished from their response to competitors actual entry it uses a case study from the passenger airline industry specifically the evolution of southwest airlines route network to identify particular routes where the probability of future entry rises abruptly when southwest begins operating in airports on both sides of a route but not the route itself this dramatically raises the chance they will start flying that route in the near future we examine the pricing of the incumbents on threatened routes in the period surrounding such events we find that incumbents cut fares significantly when threatened by southwest s entry into their routes this is true even after controlling in several ways for airport specific operating costs the response of incumbents seems to be limited only to the threatened route itself and not to routes out of nearby competitor airports where southwest does not operate e g fares drop on routes from chicago midway but not chicago o hare the largest responses appear to be restricted to routes that were concentrated beforehand incumbents do experience short run increases in their passenger loads concurrent with these fare cuts this is consistent with theories implying incumbents will try to generate some longer term loyalty among current customers before the entry of a new competitor we examine evidence relating this demand building motive to frequent flyer programs and find suggestive evidence in favor of this notion there is only weak evidence that incumbents increase capacity on the routes

unspanned stochastic volatility and the pricing of commodity derivatives commodity derivatives are becoming an increasingly important part of the global derivatives market here we develop a tractable stochastic volatility model for pricing commodity derivatives the model features unspanned stochastic volatility quasi analytical prices of options on futures contracts and dynamics of the futures curve in terms of a low dimensional affine state vector we estimate the model on nymex crude oil derivatives using an extensive panel data set of 45 517 futures prices and 233 104 option prices spanning 4082 business days we find strong evidence for two predominantly unspanned volatility factors jel g13

the behavior of interest rates implied by the term structure of eurodollar futures this paper considers an equilibrium model of the term structure that is determined by two stochastic factors a short term interest rate and a target level to which the short rate is expected to revert a kalman filter technique that uses a time series cross section of eurodollar futures prices is developed to estimate the parameters of the model the term structures of spot libor and eurodollar futures volatility are compared to that predicted by the model the empirical results indicate that the two factor specification represents a significant improvement over its one factor version copyright 1996 by ohio state university press

affine model of inflation indexed derivatives and inflation risk premium abstract this paper proposes an affine based approach which jointly captures the nominal interest rate the real interest rate and the inflation risk premium to price inflation indexed derivatives including zero coupon inflation indexed swaps year on year inflation indexed swaps inflation indexed swaptions and inflation indexed caps and floors we provide an example and explain how to use traded zero coupon inflation indexed swap rates to estimate inflation risk premiums

expectation puzzles time varying risk premia and dynamic models of the term structure abstract linear projections of returns on the slope of the yield curve have contradicted the implications of the traditional expectations theory this paper shows that these findings are not puzzling relative to a large class of richer dynamic term structure models specifically we match all the key empirical findings reported by fama and bliss 1987 american economic review 77 4 680 692 and campbell and shiller 1991 review of economic studies 58 495 514 among others within large subclasses of affine and quadratic gaussian term structure models additionally we show that certain risk premium adjusted projections of changes in yields on the slope of the yield curve recover the coefficients of unity predicted by the models key to this matching are parameterizations of the market prices of risk that let the risk factors affect the market prices of risk directly and not only through factor volatilities the risk premiums have a simple form consistent with fama s findings on the predictability of forward rates and are also shown to be consistent with interest rate feedback rules used by a monetary authority in setting monetary policy

alfred marshall lecture intellectual property rights protection in developing countries the case of pharmaceuticals patent enforcement in developing countries generates considerable controversy especially when patents involve potentially life saving drugs this paper argues that common concerns regarding the effects of patents on prices and on research incentives of pharmaceutical multinationals are misplaced rather the most significant effects are likely to concern access to patented drugs in poor countries because prices in developing countries are much lower than in the developed world multinationals may choose to enter such markets with a delay or not at all implying a complete loss of access to patented drugs in developing countries even when multinationals enter countries like india their marketing and distribution networks are not currently built out leading to limited access within the country such considerations may provide a justification for policies targeting access in the short and medium run such as compulsory licensing

pareto improvements from lexus lanes the effects of pricing a portion of the lanes on congested highways abstract though economists have long advocated road pricing as an efficiency enhancing solution to traffic congestion it has rarely been implemented primarily because it is thought to create losers as well as winners this paper shows that a judiciously designed toll applied to a portion of the lanes of a highway can generate a pareto improvement before using the revenue a sufficient condition being that drivers with a high value of time travel at the peak of rush hour i obtain these new theoretical results by extending a standard dynamic congestion model to reflect an important additional traffic externality extra traffic does not simply increase travel times but also introduces frictions that reduce throughput the analysis draws attention to a practical policy that may help overcome the widespread opposition to road pricing

the economics of crowding in rail transit abstract we model trip timing decisions of rail transit users who trade off crowding costs and disutility from traveling early or late with no fare or a uniform fare ridership is too concentrated on timely trains marginal cost pricing calls for time dependent fares that smooth train loads and generate more revenue than an optimal uniform fare the welfare gains from time dependent fares are unlikely to increase as ridership grows however imposing time dependent fares raises the benefits of expanding capacity by either adding trains or increasing train capacity we illustrate these results by calibrating the model to the paris rer a transit system

unspanned stochastic volatility in affine models evidence from eurodollar futures and options unspanned stochastic volatility usv refers to the inability of bonds to replicate volatility sensitive derivative securities affine term structure models require special restrictions on the parameters to exhibit usv we use a joint eurodollar futures and options data set to estimate affine three factor models with and without usv restrictions the unrestricted model captures prices of futures and options well option pricing errors are much larger in the usv model the usv model is rejected in favor of the unrestricted model based on the likelihood ratio and wald tests we use the implications of the unrestricted model as a benchmark for understanding the extant evidence that favors usv specifically we replicate extant tests in samples simulated from the unrestricted model we show that none of the existing findings contradict the model without usv restrictions

the market impacts of pharmaceutical product patents in developing countries evidence from india in 2005 as the result of a world trade organization mandate india implemented a patent reform for pharmaceuticals that was intended to comply with the 1995 trade related aspects of intellectual property rights trips exploiting variation in the timing of patent decisions we estimate that a molecule receiving a patent experienced an average price increase of just 3 6 percent with larger increases for more recently developed molecules and for those produced by justone firm when the patent system began our results also show little impact on quantities sold or on the number of pharmaceutical firms operating in the market

monetary policy uncertainty and economic fluctuations uncertainty associated with the monetary policy transmission mechanism is a key driving force of business cycles to investigate this link we propose a new term structure model that allows the volatility of the yield curve to interact with macroeconomic indicators the data favors a model with two volatility factors that capture shortterm and long term monetary policy uncertainty increases in either of them lead higher unemployment rates but they interact with ination in opposite directions

do patents work thickets trolls and antibiotic resistance this paper connects ideas from recent literature on the economics of intellectual property ip to address the question did the strengthening and broadening of ip rights from important patent policy changes in the us promote greater innovation the analysis rests on the theory of cumulative innovation which shows that if ip rights on a pioneer invention extend to follow on research and impediments to contracting exist then strengthening patents can actually reduce overall innovation recent empirical studies are consistent with the theory patents can significantly deter follow on research in complex technology areas where contracting is difficult computers electronics telecommunications but not in drugs chemicals and human genes i outline remedies from court decisions and antitrust policy for addressing inefficiencies from patent trolling patent thickets and the anti commons of fragmented ownership i then apply the analysis to the antibiotics market drawing on recent research to examine how patent and competition policies can be used to improve incentives for drug development in the battle against antibiotic resistance the literature provides persuasive evidence that the policy changes overreached in broadening and strengthening ip rights and reveals important patent reforms for improving the effectiveness of patent systems in the us and canada

effects of the optimal step toll scheme on equilibrium commuter behaviour this paper derives commuters equilibrium queuing costs and equilibrium schedule delay costs before and after levying the optimal step tolls at a queuing bottleneck dealing with these equilibrium costs technically one can forecast some changes in equilibrium commuter behaviour from the no toll to the optimal step toll cases there is some useful information provided in this paper first the number of commuters who will or will not pay the tolls can be investigated before tolling a queuing bottleneck second all commuters departure time switching decisions from the no toll to the tolled cases can be investigated before tolling third the increased leisure time in the morning to the toll payer due to depart from home later than their original departure times in the no toll case can be investigated before tolling the above information of equilibrium commuter behaviour which the related literature has failed to provide is useful to policy makers if the optimal step toll scheme is considered to be put

information effects in transport with stochastic capacity and uncertainty costs in this paper the impact of information provision to travelers using a model based on a stochastic equilibrium concept is analyzed a new analytical framework is proposed by including a specific term related to the costs of travel time uncertainty per se into the generalized cost function different driver information models are analyzed to assess the efficiency improving features of driver information systems compared with the optimal first best policy of road pricing the results reveal that the potential of driver information systems as an efficiency improving policy instrument are underestimated if costs of uncertainty are ignored coauthors are erik t verhoef peter nijkamp and piet rietveld copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

should urban transit subsidies be reduced this paper derives empirically tractable formulas for the welfare effects of fare adjustments in passenger peak and off peak rail and bus transit and for optimal pricing of those services the formulas account for congestion pollu tion accident externalities scale economies and agency adjustment of transit service offerings we apply them using parameter values for washington dc los angeles and london the results support the efficiency of the large cur rent fare subsidies even starting with fares at 50 percent of operating costs incremental fare reductions are welfare improving in almost all cases these findings are robust to alternative assumptions and parameters jel l92 r41

economics of a bottleneck abstract drawing on vickrey amer econ rev 59 251 261 1969 and subsequent literature this paper provides a thorough economic analysis of the simplest bottleneck model of road congestion with peak load demand in the morning rush hour a fixed number of identical individuals one per car must travel from home to work between which is a bottleneck of given capacity the costs of travel include queuing time and schedule delay time early or late for work the frequency distribution of departure times adjusts so that in equilibrium all individuals have the same travel costs the paper extends the previous literature by examining a coarse toll and solving for optimal capacities the application of congestion tolls can generate efficiency gains by altering the frequency distribution of departure times previous estimates of the efficiency gains from congestion tolling are likely to be substantially downward biased because they have ignored this effect