bond liquidity premia recent asset pricing models of limits to arbitrage emphasize the role of funding conditions faced by financial intermediaries in the us the repo market is the key funding market then the premium of on the run u s treasury bonds should share a common component with risk premia in other markets

sovereign default risk and the u s equity market i develop a two country general equilibrium model with firms governments and endogenous default decisions this paper shows that the risk of sovereign default abroad is important in the explanation of the level and the volatility of u s equity returns the intuition is that negative economic shocks deteriorate the fiscal situation of foreign governments thereby increasing the risk of a sovereign default that would trigger a local contraction in economic growth the rise in the risk of an economic slowdown abroad amplifies the direct eect of these shocks on the level and the volatility of equity returns in the u s through i a decrease in the present value of future firm earnings due to the unfavorable adjustment of the real exchange rate for u s exporters and ii a fall in u s equity prices that originates from the investors incentive to rebalance their portfolio towards risk free securities the amplification eect is strongest during periods of financial distress when the risk of corporate default is high in the u s a structural estimation of the model provides strong support for this prediction using monthly data for brazil and the u s over the period 1994 2008

variance risk premium dynamics the role of jumps using high frequency stock market data and synthetic variance swap rates this paper identifles and investigates the temporal variation in the market variance risk premium the variance risk is manifest in two salient features of flnancial returns stochastic volatility and jumps the pricing of these two separate components is analyzed in a general semiparametric framework the key empirical results imply that investors fears of future jumps are especially sensitive to recent jump activity and that their willingness to pay for protection against jumps increase signiflcantly immediately after the occurrence of jumps this in turn suggests that time varying risk aversion as previously documented in the literature is primarily driven by large or extreme market moves the dynamics of risk neutral jump intensity extracted from deep out of the money put options conflrms these flndings jel c51 c52 g12 g13

the behavior of risk and market prices of risk over the nasdaq bubble period we exploit the information in the options market to study the variations of return risk and market prices of different sources of risk during the rise and fall of the nasdaq market we specify a model that accommodates fluctuations in both risk levels and market prices of different sources of risk and we estimate the model using the time series returns and option prices on the nasdaq 100 tracking stock our analysis reveals three key variations during the period from march 1999 to march 2001 first return volatility increased together with the rising nasdaq index level even though the two tend to move in opposite directions second although the market price of diffusion return risk averages around 1 82 over the whole sample the estimates reached negative territory at the end of 1999 the estimates reverted back to highly positive values after the collapse of the nasdaq market third the market price of jump risk increased with the rising nasdaq valuation and this increase in market price coincided with an increased imbalance in open interest between put and call options

realignment risk and currency option pricing in target zones abstract this paper extends the krugman target zone model by including a realignment mechanism various properties of that realignment mechanism are discussed the movement of the exchange rate is governed both by a wiener process on fundamental and by a poisson jump process with endogenous realignment size the realignment mechanism is such that except in cases where a speculative attack occurs no jump in fundamental is needed to accompany the jump in the exchange rate a risk neutral valuation of currency options is constructed some properties of option values under realignment risk are illustrated by numerical results

spot and forward volatility in foreign exchange this paper investigates the empirical relation between spot and forward implied volatility in foreign exchange we formulate and test the forward volatility unbiasedness hypothesis which is the volatility analogue to the extensively researched hypothesis of unbiasedness in forward exchange rates using a new data set of spot implied volatility quoted on over the counter currency options we compute the forward implied volatility that corresponds to the forward contract on future spot implied volatility known as a forward volatility agreement we nd statistically signi cant evidence that forward implied volatility is a systematically biased predictor that overestimates future spot implied volatility the bias in forward volatility generates high economic value to an investor exploiting predictability in the returns to volatility speculation and indicates the presence of predictable volatility term premiums in foreign exchange

recovering probability distributions from option prices this article derives underlying asset risk neutral probability distributions of european options on the s p 500 index nonparametric methods are used to choose probabilities that minimize an objective function subject to requiring that the probabilities are consistent with observed option and underlying asset prices alternative optimization specifications produce approximately the same implied distributions a new and fast optimization technique for estimating probability distributions based on maximizing the smoothness of the resulting distribution is proposed since the crash the risk neutral probability of a three four standard deviation decline in the index about 36 percent 46 percent over a year is about 10 100 times more likely than under the assumption of lognormality recently the increasing popularity of derivatives and some highly publicized failures to control risk have led to increased efforts to find reasonable methods to measure the sensitivity of large institutional derivatives portfolios to extreme events merely because such events are rare is not sufficient to ignore them since on the few occasions when they do occur significant amounts of money can change hands potentially wiping out profits accumulated over long prior periods a key assumption behind methods of estimation is the joint probability distribution of constituent underlying asset returns this has long been a concern of financial economists since probability assumptions are critical to much of their research during the last quarter century heretofore probability distributions of stock market returns have typically been estimated from historical time series unfortunately common hypotheses may not capture the probability of extreme events and the events of interest are rare or may not be present in the historical record even though they are clearly possible

price formation and liquidity in the u s treasury market the response to public information the arrival of public information in the u s treasury market sets off a two stage adjustment process for prices trading volume and bid ask spreads in a brief first stage the release of a major macroeconomic announcement induces a sharp and nearly instantaneous price change with a reduction in trading volume demonstrating that price reactions to public information do not require trading the spread widens dramatically at announcement evidently driven by inventory control concerns in a prolonged second stage trading volume surges price volatility persists and spreads remain moderately wide as investors trade to reconcile residual differences in their private views how do financial markets form prices and provide liquidity when information arrives efforts to address this issue have led to an extensive microstructure literature on equity markets and to a lesser extent on the foreign exchange fx market relatively little work has focused on the u s treasury market however in spite of its importance in its own right and the advantages it offers as an alternative testing ground for microstructure hypotheses

an exploration of the forward premium puzzle in currency markets a standard empirical finding is that expected changes in exchange rates and interest rate differentials across countries are negatively related implying that uncovered interest rate parity is violated in the data this article provides new empirical evidence that suggests that violations of uncovered interest rate parity and its economic implications depend on the sign of the interest rate differentially a framework related to term structure models is developed to account for the puzzling relationship between expected changes in exchange rates and interest rate differentials estimation results suggest that a particular term structure model can account for the puzzling empirical evidence article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

the impact of jumps on carry trade returns abstract this paper investigates how jump risks are priced in currency markets we find that currencies whose changes are more sensitive to negative market jumps provide significantly higher expected returns the positive risk premium constitutes compensation for the extreme losses during periods of market turmoil using the empirical findings we propose a jump modified carry trade strategy which has approximately two percentage point per annum higher returns than the regular carry trade strategy these findings result from the fact that negative jump betas are significantly related to the riskiness of currencies and business conditions

pricing american options under stochastic volatility and stochastic interest rates we introduce a new analytical approach to price american options using an explicit and intuitive proxy for the exercise rule we derive tractable pricing formulas using a short maturity asymptotic expansion depending on model parameters this method can accurately price options with time to maturity up to several years the main advantage of our approach over existing methods lies in its straightforward extension to models with stochastic volatility and stochastic interest rates we exploit this advantage by providing an analysis of the impact of volatility mean reversion volatility of volatility and correlations on the american put price

the effects of macroeconomic news on high frequency exchange rate behavior this paper studies the high frequency reaction of the dem usd exchange rate to publicly announced macroeconomic information emanating from germany and the u s by us ing data sampled at a five minute frequency we are able to identify significant impacts of most announcements on the exchange rate change in the 15 minutes post announcement although the significance of these effects decreases rapidly as the interval over which the post announcement change in exchange rates is increased the direction of the exchange rate response conforms in general with a reaction function interpretation whereby reac tions to macroeconomic news are driven by the likely operations of monetary authorities in domestic money markets further we detect influences of german monetary policy deci sions on the reaction of the exchange rate and also differences between u s and german announcements in the exchange rate reaction time pattern i introduction this paper studies the high frequency reaction of the dem usd exchange rate to macroeconomic information emanating from germany and the u s specif ically we utilize exchange rate data covering the period 1 1 92 to 31 12 94 sam pled at a five minute frequency to investigate how the major monthly macroe conomic releases from these two countries impact the dem usd the infor mation contained in announcements over this three year period is extracted via a set of market expectation series supplied by money market services interna tional mms 1 our analysis improves on previous work in this area in two main respects first our study is conducted using very high frequency data whereas most earlier work has used exchange rate data sampled at a frequency of a number of hours or more this allows us to construct a very precise characterization of

leverage effect volatility feedback and self exciting market disruptions equity index volatility variation and its interaction with the index return can come from three distinct channels first index volatility increases with the market s aggregate financial leverage second positive shocks to systematic risk increase the cost of capital and reduce the valuation of future cash flows generating a negative correlation between the index return and its volatility regardless of financial leverage finally large negative market disruptions show self exciting behaviors this article proposes a model that incorporates all three channels and examines their relative contribution to index option pricing and stock option pricing for different types of companies

option implied volatility factors and the cross section of market risk premia abstract the main goal of this paper is to study the cross sectional pricing of market volatility the paper proposes that the market return diffusion volatility and jump volatility are fundamental factors that change the investors investment opportunity set based on estimates of diffusion and jump volatility factors using an enriched dataset including s p 500 index returns index options and vix the paper finds negative market prices for volatility factors in the cross section of stock returns the findings are consistent with risk based interpretations of value and size premia and indicate that the value effect is mainly related to the persistent diffusion volatility factor whereas the size effect is associated with both the diffusion volatility factor and the jump volatility factor the paper also finds that the use of market index data alone may yield counter intuitive results

commodity trade and the carry trade a tale of two countries persistent interest rate differentials account for much of the currency carry trade profitability commodity currencies offer high interest rates on average while countries that export finished goods tend to have low interest rates we develop a general equilibrium model of international trade and currency pricing where countries have an advantage in producing either basic inputs or final goods in the model domestic production insulates commodity producing countries from global productivity shocks forcing final good producers to absorb them commodity currency exchange rates and risk premia increase with productivity differentials and trade frictions these predictions are strongly supported in the data this article is protected by copyright all rights reserved

asset prices and exchange rates in this paper we study the implications of introducing demand shocks and trade in goods into an otherwise standard international asset pricing model trade in goods gives rise to an additional channel of international propagation through the terms of trade absent in traditional single good asset pricing models the inclusion of demand shocks helps overturn many unrealistic implications of existing international flnance models in which productivity shocks are the sole source of uncertainty our model generates a rich set of implications on how stock bond and foreign exchange markets co move we solve the model in closed form which yields a system of equations that can be readily estimated empirically our estimation validates the main predictions of the theory

the pricing of jump propagation evidence from spot and options markets this paper examines the joint time series of the s p 500 index and its options with a two factor hawkes jump diffusion model that captures jump propagation i e the phenomenon in which the strike of one jump substantially raises the probability for more to follow the propagation effect uncovered from the joint data is severe but short lived on average this component takes up more than two thirds of the total jump risks our jump specification proves crucial not only in reconciling the dynamics implied from the joint data but also in explaining the time series of option implied volatility skew the online appendix is available at https doi org 10 1287 mnsc 2017 2885 this paper was accepted by lauren cohen finance

time changed levy processes and option pricing abstract the classic black scholes option pricing model assumes that returns follow brownian motion but return processes differ from this benchmark in at least three important ways first asset prices jump leading to non normal return innovations second return volatilities vary stochastically over time third returns and their volatilities are correlated often negatively for equities time changed levy processes can simultaneously address these three issues we show that our framework encompasses almost all of the models proposed in the option pricing literature and it is straightforward to select and test a particular option pricing model through the use of characteristic function technology

the finite moment log stable process and option pricing we document a surprising pattern in s p 500 option prices when implied volatilities are graphed against a standard measure of moneyness the implied volatility smirk does not flatten out as maturity increases up to the observable horizon of two years this behavior contrasts sharply with the implications of many pricing models and with the asymptotic behavior implied by the central limit theorem clt we develop a parsimonious model which deliberately violates the clt assumptions and thus captures the observed behavior of the volatility smirk over the maturity horizon calibration exercises demonstrate its superior performance against several widely used alternatives

a nonlinear factor analysis of s p 500 index option returns growing evidence suggests that extraordinary average returns may be obtained by trading equity index options and that at least part of this abnormal performance is attributable to volatility and jump risk premia this paper asks whether such priced risk factors are alone sufficient to explain these average returns to provide an answer in as general as possible a setting i estimate a flexible class of nonlinear models using all s p 500 index futures options traded between 1986 and 2000 the results show that priced factors contribute to these expected returns but are insufficient to explain their magnitudes particularly for short term out of the money puts in a recent paper c oval and shumway 2001 examine the returns on deltahedged option positions focusing on the at the money straddle and find average returns close to minus 3 per week since over short time horizons these positions are approximately invariant to movements in the underlying index coval and shumway argue that their capm betas should be near zero and their expected returns close to the risk free rate they conclude that large deviations from the capm are the norm which they suggest is evidence that some other systematic factor such as stochastic volatility might be priced by the market similar conclusions are made by jackwerth 2000 who finds risk adjusted profitability from selling puts and by bakshi and kapadia 2003 who find that the volatility risk premium contributes significantly to higher prices for calls and puts buraschi and jackwerth 2001 concur suggesting that more than one priced risk factor is necessary to explain option prices a less direct set of evidence is the now standard observation that the black scholes implied volatilities of equity index options are upward biased predictors of future realized volatility numerous studies such as fleming ostdiek and whaley 1995 and christensen and prabhala 1998 document that implied volatilities of short term at the money equity index options are on average several percentage points higher than the volatilities realized over the option s

evidence of risk premiums in foreign currency futures markets benchmark portfolios for con sumption and wealth when the parameters rep resenting the prices of the covariance risks areheld constant no risk premiums are detected however when these prices are allowed to varywith the conditional expected returns and vari ances of the benchmark portfolios possibly reflect ing changing investment opportunities strong evi dence of risk premiums is obtained recent examinations of foreign currency futures datahave tested the hypothesis that today s futures priceis an unbiased predictor of tomorrow s price againstan unspecified alternative hypothesis the accumu lated evidence against the unbiasedness hypothesishas not been accompanied by evidence consistentwith a particular equilibrium risk premium model

do investors follow the herd in option markets we investigate the previously unexplored herding behaviour of investors in option markets by examining equity option contracts traded in the us between 1996 and 2012 we document strong herding effects in option trading activity that are conditional on a set of systematic factors related to periods of market stress more specifically we find that option investors tend to herd during periods of high market volatility risk on dates of macroeconomic announcements during the financial crisis of 2008 when a large number of market option positions is either opened or closed and during periods of a large average dispersion of analysts forecasts

equilibrium valuation of foreign exchange claims this article studies the equilibrium valuation of foreign exchange contingent claims within a continuous time lucas 1982 two country model exchange rates interest rates and in particular factor risk prices are all endogenously and jointly determined this guarantees the internal consistency of these price processes with a general equilibrium in the same model closed form valuation formulas are presented for currency options and currency futures options common to these formulas is that stochastic volatility and stochastic interest rates are admitted hedge ratios and other comparative statics are also provided analytically it is shown that most existing currency option models are included as special cases this article studies the equilibrium valuation and hedging of foreign exchange contingent claims the framework for analysis is the continuous time counterpart of the well known two country monetary model of lucas 1982 1 that is we use the modeling structure of lucas 1982 and adopt his representativeagent perfect pooling equilibrium notion rather than extending the lucas setup to a cox ingersoll and ross 1985a henceforth cir production economy as is done in nielsen and saa requejo 1993 for our purpose the lucas framework offers the desired simplicity and tractability we assume a stochastic structure for the international economy such that the resulting nominal interest rates and exchange rate dynamics exhibit similar empirically plausible features as the corresponding ones in nielsen and saa requejo 1993 for example the endogenous interest rates are positively correlated across national borders campbell and clarida 1987 and ilmanen 1995 as a predictor of future spot exchange rates the equilibrium forward exchange rate is biased in a direction consistent with the forward premium puzzle

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

the spirit of capitalism asset pricing and growth in a small open economy abstract conventional models of economic behavior have failed to account for a number of observed empirical regularities in macroeconomics and international economics this may be due to preference specifications in conventional models in this paper we consider preferences with the spirit of capitalism the desire to accumulate wealth as a way of acquiring status we analyze a number of potential effects of international catching up and the spirit of capitalism on savings growth portfolio allocation and asset pricing moreover we obtain a multi factor capital asset pricing model capm our results show that status concerns have non trivial effects on savings growth portfolio allocation asset prices and the foreign exchange risk premium

option pricing under time varying risk aversion with applications to risk forecasting abstract we present a two factor option pricing model which parsimoniously captures the difference in volatility persistences under the historical and risk neutral probabilities the model generates an s shaped pricing kernel that exhibits time varying risk aversion we apply our model for two purposes first we analyze the risk preference implied by s p500 index options during 2001 2009 and find that risk aversion level strongly increases during stressed market conditions second we apply our model for value at risk var forecasts during the subprime crisis period and find that it outperforms several leading var models

the fine structure of asset returns an empirical investigation we investigate the importance of diffusion and jumps in a new model for asset returns in contrast to standard models we allow for jump components displaying finite or infinite activity and variation empirical investigations of time series indicate that index dynamics are devoid of a diffusion component which may be present in the dynamics of individual stocks this leads to the conjecture confirmed on options data that the risk neutral process should be free of a diffusion component we conclude that the statistical and risk neutral processes for equity prices are pure jump processes of infinite activity and finite variation

a theory of the nominal term structure of interest rates a model of the nominal term structure of interest rates is developed that has a positive and stationary process for the interest rate and delivers closed form expressions for the prices of discount bonds and european options on bonds unlike the one state variable version of the cox ingersoll and ross 1985 model this model even in its one state variable version allows the term premium to change sign as a function of the state and the term to maturity and also allows for shapes of the yield curve that are observed in the u s data but that are disallowed in the cox ingersoll and ross model article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

bounds and prices of currency cross rate options abstract this paper derives the pricing bounds of a currency cross rate option using the option prices of two related dollar rates via a copula theory and presents the analytical properties of the bounds under the gaussian framework our option pricing bounds are useful because 1 they are general in the sense that they do not rely on the distribution assumptions of the state variables or on the selection of the copula function 2 they are portfolios of the dollar rate options and hence are potential hedging instruments for cross rate options and 3 they can be applied to generate bounds on deltas the empirical tests suggest that there are persistent and stable relationships between the market prices and the estimated bounds of the cross rate options and that our option pricing bounds obtained from the market prices of options on two dollar rates and the historical correlation of two dollar rates are highly informative for explaining the prices of the cross rate options moreover the empirical results are consistent with the predictions of the analytical properties under the gaussian framework and are robust in various aspects

sequential bayesian analysis of time changed infinite activity derivatives pricing models this article investigates time changed infinite activity derivatives pricing models from the sequential bayesian perspective it proposes a sequential monte carlo method with the proposal density generated by the unscented kalman filter this approach overcomes to a large extent the particle impoverishment problem inherent to the conventional particle filter simulation study and real applications indicate that 1 using the underlying alone cannot capture the dynamics of states and by including options the precision of state filtering is dramatically improved 2 the proposed method performs better and is more robust than the conventional one and 3 joint identification of the diffusion stochastic volatility and jumps can be achieved using both the underlying data and the options data

the effect of macroeconomic news on beliefs and preferences evidence from the options market we examine the effect of regularly scheduled macroeconomic announcements on the beliefs and preferences of participants in the u s treasury market by comparing the option implied state price densities spds of bond prices shortly before and after the announcements we find that the announcements reduce the uncertainty implicit in the second moment of the spd regardless of the content of the news the changes in the higher order moments in contrast depend on whether the news is good or bad for economic prospects we explore three alternative explanations for our empirical findings relative mispricing changes in beliefs and changes in preferences we find that our results are consistent with time varying risk aversion

a stochastic volatility model with conditional skewness we develop a discrete time affine stochastic volatility model with time varying conditional skewness svs importantly we disentangle the dynamics of conditional volatility and conditional skewness in a coherent way our approach allows current asset returns to be asymmetric conditional on current factors and past information which we term contemporaneous asymmetry conditional skewness is an explicit combination of the conditional leverage effect and contemporaneous asymmetry we derive analytical formulas for various return moments that are used for generalized method of moments gmm estimation applying our approach to s p500 index daily returns and option data we show that one and two factor svs models provide a better fit for both the historical and the risk neutral distribution of returns compared to existing affine generalized autoregressive conditional heteroscedasticity garch and stochastic volatility with jumps svj models our results are not due to an overparameterization of the mod

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

dampened power law reconciling the tail behavior of financial security returns this article proposes a stylized model that reconciles several seemingly conflicting findings on financial security returns and option prices the model is based on a pure jump levy process wherein the jump arrival rate obeys a power law dampened by an exponential function the model allows for different degrees of dampening for positive and negative jumps and also for different pricing for upside and downside market risks calibration of the model to the s p 500 index shows that the market charges only a moderate premium on upward index movements but the maximally allowable premium on downward index movements

international capital markets and foreign exchange risk author s brennan michael j xia yihong abstract the relation between the volatilities of pricing kernels associated with di erent currencies and the volatility of the exchange rate between the currencies is derived under the assumption of integrated capital markets and the volatilities of the pricing kernels are related to the foreign exchange risk premium time series of pricing kernel volatilities are estimated from panel data on bond yields for five major currencies using a parsimonious term structure model that allows for time varying pricing kernel volatilities the resulting estimates are used to test hypotheses about the relation between the volatilities of the pricing kernels in di erent currencies and the volatility of the exchange rate as predicted time variation in foreign exchange risk premia is found to be related to time variation in both the volatility of the pricing kernels and the volatility of exchange rates the estimated pricing kernel volatilities can account for the forward premium puzzle in an average sense across exchange rates

meteor showers or heat waves heteroskedastic intra daily volatility in the foreign exchange market this paper seeks to explain the causes of volatility clustering in exchange rates careful examination of intra daily exchange rates provides a test of two hypotheses heat waves and meteor showers the heat wave hypothesis is that the volatility has only country specific autocorrelation alternatively the meteor shower is a phenomenon of intra daily volatility spillovers from one market to the next using the garch model to specify the heteroskedasticity across intra daily market segments we find that the empirical evidence is generally against the null hypothesis of the heat wave using a volatility type of vector autoregression we examine the impact of news in one market on the time path of per hour volatility in other markets

on the asset market view of exchange rates if the asset market is complete then the difference between foreign and domestic agents log intertemporal marginal rates of substitution imrss equals the log change in the real exchange rate this equation is frequently used to argue that changes in real exchange rates reflect differences between agents required compensation for exposure to asset return uncertainty we show that the relative returns on frictionlessly traded assets are only reflected in the common component of agents imrss not in differences instead when this equation does offer insights frictions in the goods market are the source of economic distinction between agents

a theory of dissimilarity between stochastic discount factors this paper proposes a measure of dissimilarity between stochastic discount factors sdfs in different economies the sdfs are made comparable using the respective bond prices as the numeraire the

organizational structure police activity and crime abstract how does the organizational structure of law enforcement agencies affect police activity and crime we examine the consequences of an organizational reform in israel that transferred the responsibility for housing arrestees from the police to the prison authority using the staggered rollout of the reform in different regions of the country we document strong evidence that this organizational change led to an increase of 11 in the number of arrests and to a decrease of 4 in the number of reported crimes with these effects concentrated in more minor crimes the reform also led to a decrease in the quality of arrests measured by the likelihood of being charged following an arrest these findings are consistent with the idea that the reform externalized the cost of housing arrestees from the police s perspective and therefore led the police to increase its activity against crime

asset pricing under the quadratic class we identify and characterize a class of term structure models where bond yields are quadratic functions of the state vector we label this class the quadratic class and aim to lay a solid theoretical foundation for its future empirical application we consider asset pricing in general and derivative pricing in particular under the quadratic class we provide two general transform methods in pricing a wide variety of fixed income derivatives in closed or semi closed form we further illustrate how the quadratic model and the transform methods can be applied to more general settings i introduction we identify and characterize a class of term structure models where bond yields are quadratic functions of the markov process we label this class the quadratic class and aim to lay a solid theoretical foundation for its future empirical application we identify the necessary and sufficient conditions for the quadratic class and consider the general asset pricing problem under the quadratic framework in particular we propose two transform methods to price a wide variety of interest rate derivatives in closed or semi closed form we further illustrate how the pricing methods can be applied to more general settings examples include option pricing for currencies or stocks with quadratic stochastic volatilities our interests in the quadratic class come mainly from concerns on empirical application recent empirical research within the affine framework of duffie and kan 1996 indicates an inherent tension between i delivering good empirical performance in matching salient features of the interest rate data and ii excluding positive probabilities of having negative interest rates for example backus telmer and wu 1999 and dai and singleton 2000 find that incorporating gaussian state variables in the affine framework significantly increases the flexibility for model design and greatly improves its empirical performance in capturing the conditional dynamics of interest rates dai and singleton 2001

how not to run auctions the european 3g telecom auctions abstract there were enormous differences in the revenues from the european third generation 3g or umts mobile phone license auctions from 20 euros per capita in switzerland to 650 euros per capita in the uk though the values of the licenses sold were similar poor auction designs in some countries facilitated collusion between firms and failed to attract entrants the sequencing of the auctions was also crucial we discuss the auctions in the uk netherlands germany italy austria switzerland belgium greece and denmark

bond yields and the federal reserve bond yields respond to policy decisions by the federal reserve and vice versa to learn about these responses i model a high frequency policy rule based on yield curve information and an arbitrage free bond market in continuous time the fed s target is a pure jump process jump intensities depend on the state of the economy and the meeting calendar of the federal open market committee the model has closed form solutions for yields as functions of a few state variables introducing monetary policy helps to match the whole yield curve because the target is an observable state variable that pins down its short end and introduces important seasonalities around fomc meetings the volatility of yields is snake shaped which the model explains with policy inertia the policy rule crucially depends on the two year yield and describes fed policy better than taylor rules

stochastic risk premiums stochastic skewness in currency options and stochastic discount factors in international economies abstract we develop models of stochastic discount factors in international economies that produce stochastic risk premiums and stochastic skewness in currency options we estimate the models using time series returns and option prices on three currency pairs that form a triangular relation estimation shows that the average risk premium in japan is larger than that in the us or the uk the global risk premium is more persistent and volatile than the country specific risk premiums and investors respond differently to different shocks we also identify high frequency jumps in each economy but find that only downside jumps are priced finally our analysis shows that the risk premiums are economically compatible with movements in stock and bond market fundamentals

simulated likelihood estimation of diffusions with an application to exchange rate dynamics in incomplete markets abstract we present an econometric method for estimating the parameters of a diffusion model from discretely sampled data the estimator is transparent adaptive and inherits the asymptotic properties of the generally unattainable maximum likelihood estimator we use this method to estimate a new continuous time model of the joint dynamics of interest rates in two countries and the exchange rate between the two currencies the model allows financial markets to be incomplete and specifies the degree of incompleteness as a stochastic process our empirical results offer several new insights into the dynamics of exchange rates