what uip tests on extreme samples reveal about the missing variable abstract in their uip regressions huisman et al 1998 extreme support for uncovered interest parity journal for international money and finance 17 211 228 focus on extreme forward premia and find much higher coefficients we show that for such results the expectation signal needs to be thicker tailed than the missing variable transaction costs may produce the right sort of bias it is i bounded i e it has no tails at all ii wide i e it may generate betas below 1 2 and iii u distributed which makes an extreme sample quite effective we derive theoretical and numerical results in the direction of what huisman et al observe we also tighten fama s moment conditions

the behavior of prices in the nikkei spot and futures market abstract we examine the relation between the prices of japanese stocks traded on the tokyo stock exchange tse as reflected in the nikkei stock average nsa stock index and the prices of the nsa futures contract traded on the singapore international monetary exchange simex since the inception of trading in september 1986 the nsa futures contract has generally sold at a discount relative to its theoretical value trading restrictions and transaction costs may explain some of this mispricing which has been declining over time as in the u s markets

costly arbitrage through pairs trading abstract we study the optimal trading policy of an arbitrageur who can exploit temporary mispricing in a market with two convergent assets we build on the model of liu and timmermann 2013 and include transaction costs which impose additional limits to the implementation of such convergence trade strategy we show that the presence of transaction costs could reveal an endogenous stop loss concern in a certain economy which affects the optimal policy of the arbitrageur in significant ways using pairs of dual listed chinese stock shares as samples and a pairs trading strategy based on standard deviation of the spread as benchmark we demonstrate the efficiency of the strategy implied by our model several extensions of our model are also discussed

program trading and expiration day effects the arbitrage between index futures and the underlying cash index and the cash settlement feature of index futures contracts which requires arbitrageurs to unwind positions in the stock market are thought to be at the heart of the abnormal stock price movements during the triple witching hour the last hour of trading on days on which index futures index options and options on index futures expire simultaneously during 1984 and 1985 volume was substantially higher than normal in the last hour of trading on those quarterly fridays open interest in the expiring futures contracts on the expiration day amounted to about 40 per cent of the average month end open interest the incremental stock market volume however was approximately one third the volume that would be inmplied if the entire expiration day open interest were traded in the stock market analysis of stock market price changes in the last hour of expiration days and the first halfhour of the following day indicates that the volatility of price changes was significantly higher on expiration days with the stock market tending to fall stocks not in the sp index option expirations themselves did not lead to abnormal market movements when the magnitude of price effects was measured by the degree of reversal in prices on the morning after the expiration day the average magnitude of the price effect in the 10 most recent quarterly futures contract expirations examined was about 0 4 per cent of the closing index value at expiration the average expiration day price effect of 0 4 per cent is not large considering that a price impact of approximately 0 25 per cent of the value of the transaction can be expected on the basis of the bid ask spread once this market impact cost is drawn out the average expiration day price impact falls to about 0 15 per cent of the value of the transaction an amount representing the additional cost of liquidity furthermore price impacts in excess of those found on expiration days are frequently encountered in large block transactions where the cost of providing liquidity also increases on expiration days however transactions in many stocks occur simultaneously so the market as a whole is affected

relative pricing of eurodollar futures and forward contracts past research explains observed spreads between futures and forward eurodollar yields as being due to the futures contract s mark to market feature we derive closed form solutions for this yield spread and show that theoretically it should be small also differences in liquidity taxation and default risk cannot account for the large spreads observed we also present evidence that the spreads which are nonnegligible primarily in the first half of the sample period are likely to be attributable to the mispricing of futures contracts relative to the forward rates and that the mispricing was gradually eliminated over time

the butterfly effect of small open economies abstract the rational expectations equilibrium of a small open economy can be subject to indeterminacy if foreign monetary policy does not satisfy the taylor principle we study the implications of foreign induced indeterminacy in the two country version of the sticky price small open economy model our main finding is that smallness is a property of the unique rational expectations equilibrium of the large economy and not a general property of the small open economy model if the large economy fails to anchor expectations shocks to the small economy can affect the large one this form of indeterminacy gives rise to a butterfly effect additional assumptions are required to preserve the smallness of the small economy

stock volatility and the levels of the basis and open interest in futures contracts this article tests a theoretical model of the basis and open interest of stock index futures the model is based on the differences between stock and futures in terms of investors ability to customize stock portfolios and liquidity empirical evidence confirms the model s prediction that increased volatility decreases the basis and increases open interest copyright 1995 by american finance association

market watch information and availability cascades among the media and investors in the u s ipo market in this study we advance current research on social influence in markets by examining how the recency and availability of information about others actions within and between different communities influence their allocation of attention and their evaluations specifically we examine how the media and investors allocate attention to and evaluate newly public firms in the days following their initial public offerings ipos our findings have implications for understanding the fieldwide processes through which the value of new firms is established in markets

a transactions data test of stock index futures market efficiency and index arbitrage profitability this paper investigates the efficiency of the market for stock index futures and the profitability of index arbitrage for the chicago board of trade s major market index contracts the spot value of the index is computed with transactions prices for the component shares of the index obtained from the fitch database the tests account for transaction costs execution lags and the uptick rule for short sales of stocks results indicate that the size and frequency of boundary violations are substantially smaller than those reported by earlier studies and have declined sharply with time index arbitrage is a strategy whereby institutions brokerage houses or other large investors seek to profit from the spread between prices in the spot and futures markets for stock indices for example an investor might purchase predetermined baskets of stocks on the floor of the new york stock exchange and simultaneously sell a related index futures contract on the floor of the chicago board of trade hoping to profit from the price differences on the two exchanges computer programs constantly monitor stock and futures prices and automatically execute buy and sell orders when it appears that a profit is possible stock index futures can be priced by a simple arbitrage argument if the dividends paid by the underlying basket of shares and interest rates are nonstochastic markets are perfect and there are no taxes the pricing equation is

monetary policy and exchange rate volatility in a small open economy we lay out a small open economy version of the calvo sticky price model and show how the equilibrium dynamics can be reduced to a simple representation in domestic inflation and the output gap we use the resulting framework to analyse the macroeconomic implications of three alternative rulebased policy regimes for the small open economy domestic inflation and cpi based taylor rules and an exchange rate peg we show that a key difference among these regimes lies in the relative amount of exchange rate volatility that they entail we also discuss a special case for which domestic inflation targeting constitutes the optimal policy and where a simple second order approximation to the utility of the representative consumer can be derived and used to evaluate the welfare losses associated with the suboptimal rules

sets arbitrage activity and stock price dynamics this paper provides an empirical description of the relationship between the trading system operated by a stock exchange and the trading behaviour of heterogeneous investors who use the exchange the recent introduction of sets in the london stock exchange provides an excellent opportunity to study the impact of an electronic trading system upon traders who use the exchange using the cost of carry model of futures prices we estimate non linearly the transaction costs and trade speeds faced by arbitragers who take advantage of mispricing of ftse100 futures contracts relative to the spot prices of the stocks that make up the ftse100 stock index we divide the sample period into pre sets and post sets sample periods and conduct a comparative study of arbitrager behaviour under different trading systems the results indicate that there has been a significant reduction in the level of transaction costs faced by arbitragers and in the degree of transaction cost heterogeneity finally generalised impulse response functions show that both spot and futures prices adjust more quickly in the post sets period these results suggest that both spot and futures markets have become more efficient under sets

transaction cost economics the natural progression abstract this manuscript provides the nobel laureate s reflections on transaction cost economics the overview section frames governance as the overarching concept and transaction cost economics as the means by which to breathe operational content into governance and organization the vertical integration section identifies efficiency factors associated with determining when a firm produces a good or service to its own needs rather than outsource a discussion of the rudiments of transaction cost analysis is subsequently provided puzzles and challenges that require pushing the logic of efficient governance to completion are examined and followed by concluding remarks

testing for indeterminacy an application to u s monetary policy reply this paper considers a prototypical new keynesian model in which the equilibrium is undetermined if monetary policy is passive the likelihood based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations we construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks according to the estimated model u s monetary policy post 1982 is consistent with determinacy whereas the pre volcker policy is not we find that before 1979 indeterminacy substantially altered the propagation of shocks

option markets and implied volatility past versus present abstract traders in the nineteenth century appear to have priced options the same way that twenty first century traders price options empirical regularities relating implied volatility to realized volatility stock prices and other implied volatilities including the volatility skew are qualitatively the same in both eras modern pricing models and centralized exchanges have not fundamentally altered pricing behavior but they have generated increased trading volume and a much closer conformity in the level of observed and model prices the major change in pricing is the sharp decline in implied volatility relative to realized volatility evident immediately upon the opening of the cboe

interest rate rules for fixed exchange rate regimes abstract this paper shows that properly designed interest rate rules can be consistent with maintaining exchange rate stability it sheds light on the relation between interest rate rules exchange rate regimes and determinacy of the rational expectation equilibrium in a modern macroeconomic framework

optimal monetary policy in open versus closed economies an integrated approach in clarida et al 1999 hereafter cgg we presented a normative analysis of monetary policy within a simple optimization based closedeconomy framework we derived the optimal policy rule and among other things characterized the gains from commitment also we made precise the implications for the kind of instrument feedback rule that a central bank should follow in practice in this paper we show how our analysis extends to the case of a small open economy openness complicates the problem of monetary management to the extent the central bank must take into account the impact of the exchange rate on real activity and inflation how to factor the exchange rate into the overall design of monetary policy accordingly becomes a central consideration here we show that under certain conditions the monetary policy design problem for the small open economy is isomorphic to the problem of the closed economy that we considered earlier hence all our qualitative results for the closed economy carry over to this case openness does affect the parameters of the model suggesting quantitative implications though the general form of the optimal interest rate feedback rule remains the same as in the closedeconomy case for example how aggressively a central bank should adjust the interest rate in response to inflationary pressures depends on the degree of openness in addition openness gives rise to an important distinction between domestic inflation and consumer price inflation as defined by the cpi to the extent that there is perfect exchange rate pass through we find that the central bank should target domestic inflation and allow the exchange rate to float despite the impact of the resulting exchangerate variability on the cpi kosuki aoki 1999 gali and tommaso monacelli 2000

the yield curve in a small open economy abstract long term nominal interest rates in a number of inflation targeting small open economies have tended to be strongly correlated with those of the united states this observation has recently led support to the view that in these economies the long end of the yield curve has decoupled from its short end and naturally to a concern that monetary policy may have lost some of its autonomy we set up and estimate a two country small open economy model in which the expectations hypothesis and uncovered interest rate parity hold to study the co movement of long term nominal interest rates of different currencies we show that differences in the persistence of domestic and foreign disturbances a hypothesis for which we find support in recent data can explain the observed pattern of correlations these correlations are not evidence of weaker monetary policy

the pricing of futures and options contracts on the value line index this paper considers the problems peculiar to the value line index because of its use of geometric averaging as regards the pricing of options and futures on that index the value line composite index vlci is an equally weighted geometric average index of nearly 1700 stocks the vlci futures market has existed since 1982 while the vlci options market was established in 1985 this paper provides valuation formulas and analyzes the economic properties of these contracts because of the geometric averaging in the vlci its contingent claims have special properties for example the futures price may fall short of the spot price and the value of a vlci call option may decline when the volatility of the index is increased vlci futures are shown to provide a direct means for duplicating an equally weighted portfolio of the underlying stocks the value line composite index vlci is an unweighted geometric average of stock prices expressed in index form the index on june 30 1961 was set at 100 and subsequent values are compared against it futures contracts on the vlci are traded on the kansas city board of trade kcbt they were the first stock index futures to be traded in the united states starting on february 24 1982 unlike commodity futures contracts no delivery ever takes place instead any open contracts on expiration day are settled in cash according to the actual vlci value 1 more recent market innovations are options on the vlci that have been traded on the philadelphia stock exchange pse since january

an economic theory of economic analysis the case of the school of salamanca the school of salamanca often is identified as the first economic tradition in the history of the dismal science its members anticipated principles later developed by the likes of adam smith and carl menger this paper provides an economic theory of the production of economic analysis by the doctors of salamanca beginning from the observation that producers of economic analysis respond to incentives the same way producers of meat beer or bread do historically the demand for economic analysis arises from two sources governments and interest groups i argue that the changes in international trade associated with the emergence of new transatlantic markets in the sixteenth century led to an increase in the demand for economic analysis by spanish merchants and that the contribution of the school of salamanca was grounded in the predictable supply response to those fresh incentives

on non uniqueness in rational expectations models an attempt at perspective abstract many macroeconomic models involving rational expectations give rise to an infinity of solution paths even when the models are linear in all variables some writers have suggested that this non uniqueness constitutes a serious weakness for the rational expectations hypothesis one purpose of the present paper is to argue that the non uniqueness in question is not properly attributable to the rationality hypothesis but instead is a general feature of dynamic models involving expectations it is also argued that there typically exists in a very wide class of linear rational expectations models a single solution that excludes bubble or bootstrap effects one that occur only because they are arbitrarily expected to occur a systematic procedure for obtaining solutions free from such effects is introduced and discussed in addition this procedure is used to interpret and reconsider several prominent examples with solution multiplicities including ones developed by fischer black and john b taylor

technology shocks in the new keynesian model in the new keynesian model preference cost push and monetary shocks all compete with the real business cycle model s technology shock in driving aggregate fluctuations a version of this model estimated via maximum likelihood points to these other shocks as being more important for explaining the behavior of output inflation and interest rates in the postwar u s data these results weaken the links between the current generation of new keynesian models and the real business cycle models from which they were originally derived they also suggest that federal reserve officials have often faced difficult trade offs in conducting monetary policy

optimal trading with mean reverting prices switching between foreign stocks and closed end country funds we develop a model based on options theory which shows the optimal trading strategy for switching between two similar assets when the difference in their prices is mean reverting statistical tests indicate that most closed end country funds discounts are mean reverting using empirical estimates of the volatility and rate of mean reversion of these funds we derive the optimal switch points and simulate the trading profits associated with switching between country funds and their foreign equities and vice versa whenever the optimal switch points are reached

inflation forecasts and monetary policy proposals for inflation targeting as a strategy for monetary policy leave open the important operational question of how to determine whether current policies are consistent with the long run inflation target an interesting possibility is that the central bank might target current private sector forecasts of inflation either those made explicitly by professional forecasters or those implicit in asset prices we address the issue of existence and uniqueness of rational expectations equilibria when the central bank uses private sector forecasts as a guide to policy actions in a dynamic model which incorporates both sluggish price adjustment and shocks to aggregate demand and aggregate supply we show that strict targeting of inflation forecasts is typically inconsistent with the existence of rational expectations equilibrium and that policies approximating strict inflation forecast targeting are likely to have undesirable properties we also show that economies with more general forecast based policy rules are particularly susceptible to indeterminacy of rational expectations equilibria we conclude that although private sector forecasts may contain information useful to the central bank ultimately the monetary authorities must rely on an explicit structural model of the economy to guide their policy decisions this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

a comparison of futures and forward prices abstract this paper uses the pricing models of cox ingersoll and ross 1981 richard and sundaresan 1981 and french 1982 to examine the relation between futures and forward prices for copper and silver there are significant differences between these prices the average differences are generally consistent with the predictions of the futures and forward price models however these models are not helpful in describing intra sample variations in the futures forward price differences this failure is apparently caused by measurement errors in both the price differences and in the explanatory variables

hierarchies markets and power in the economy an economic perspective this paper adopts the transaction cost economics perspective for purposes of examining hierarchies markets and power in the economy transaction cost economics works out of an economizing perspective in which markets and hierarchies are alternative modes of governance and the object is to ascertain which transactions go where and why the role of power in this setup is strictly limited partly because power tends to be myopic transactions are not examined in their entirety and partly because it is tautological power needs to be operationalized whereupon the refutable implications that accrue to this perspective can be derived copyright 1995 by oxford university press

basis convergence and long memory in volatility when dynamic hedging with futures abstractwhen market returns follow a long memory volatility process standard approaches to estimating dynamic minimum variance hedge ratios mvhrs are misspecified simulation results and an application to the s p 500 index document the magnitude of the misspecification that results from failure to account for basis convergence and long memory in volatility these results have important implications for the estimation of mvhrs in the s p 500 example and other markets as well

explaining the early discounts on stock index futures the case for disequilibrium 1984 explaining the early discounts on stock index futures the case for disequilibrium financial analysts journal vol 40 no 4 pp 43 47 67

index arbitrage with heterogeneous investors a smooth transition error correction analysis abstract the traditional index arbitrage model assumes a constant threshold mispricing between the futures and cash prices for all investors allowing for heterogeneity in investors transaction costs objectives and capital constraints we model the intraday mispricing of djia futures as a smooth transition autoregressive star process with the speed of adjustment toward equilibrium varying directly with the mispricing we show that the observed mean reversion in mispricing changes is induced by heterogeneous arbitrageurs instead of a statistical illusion infrequent trading of index portfolio stocks we further use a star error correction model to describe the nonlinear dynamics between the djia futures and index this model describes not only which market is more informationally efficient than the other but also the legging process the nonsimultaneous establishing of cash and futures positions

the money and bond markets in france abstract when rates of return on bonds are computed over extremely short holding periods the ex post cross sectional relationship between realized return and risk is linear it is therefore possible at any time to extrapolate the cross sectional relationship to a zero risk level and thus to determine the implied instantaneous riskless rate of interest we apply this technique to french bond price data using a rather unique data set in which prices are sampled daily we are able to compare the overnight rate implied in bond price data to the actual overnight money market rate we conclude that the two rates are significantly different which is evidence of segmentation between the two markets the institutional set up prevailing in france during the sample period explains the segmentation result

tax managed factor strategies we examine the tax efficiency of an indexing strategy and six factor tilts between june 1995 and march 2018 average value added by tax management exceeded 1 50 per year at a 10 year horizon for

designing targeting rules for international monetary policy cooperation this study analyzes a two country dynamic general equilibrium model with nominal rigidities monopolistic competition and producer currency pricing a quadratic approximation to the utility of the consumers is derived and assumed as the policy objective function of the policymakers it is shown that only under special conditions there are no gains from cooperation and moreover that the paths of the exchange rate and prices in the constrained efficient solution depend on the kind of disturbance that affects the economy it might be the case either for fixed or floating exchange rates despite this result simple targeting rules that involve only targets for the growth of output and for both domestic gdp and cpi inflation rates can replicate the cooperative allocation

index arbitrage and nonlinear dynamics between the s p 500 futures and cash we use a cost of carry model with nonzero transaction costs to motivate estimation of a nonlinear dynamic relationship between the s p 500 futures and cash indexes discontinuous arbitrage suggests that a threshold error correction mechanism may characterize many aspects of the relationship between the futures and cash indexes we use minute by minute data on the s p 500 futures and cash indexes the results indicate that nonlinear dynamics are important and related to arbitrage and suggest that arbitrage is associated with more rapid convergence of the basis to the cost of carry than would be indicated by a linear model article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

stock index futures mispricing profit opportunities or risk premia this paper reports empirical evidence on stock index futures pricing based on about four years of synchronous hourly data from the uk reported index values are based on firm quotes identified arbitrage opportunities are therefore actually exploitable and economically significant the analysis controls for cash market settlement procedures the results show that ex ante trading rules would have generated attractive profits after transaction costs and after the risks of dividend uncertainties marking to market and possible delays in execution are considered the far contract and the near contract tend to be mispriced in the same direction the mild tendency of futures to be overpriced in rising markets and underpriced in falling markets appears to be unimportant finally significant positive relationships are observed between the absolute magnitude of mispricing and time to maturity and between mispricing and index option implied volatility

information and index arbitrage a random cash futures basis is derived in a dynamic multimarket learning game with sequential information shocks and strategic arbitrageurs who trade to exploit gaps in the basis statistical properties of the authors theoretical basis are derived both with and without index arbitrage the authors find that basis volatility a measure of intermarket mispricing may initially increase even as individual prices become more precise and that arbitrage reduces basis volatility the model is also used to analyze regulatory issues such as the possible impact of circuit breakers on the quality of the trading process copyright 1994 by university of chicago press

financial innovation the last twenty years and the next the word revolution is entirely appropriate for describing the changes in financial institu tions and instruments that have occurred in the past twenty years the major impulses to successful financial innovations have come from regulations and taxes the outlook for the future is for a slowing down of the rate of financial innovation but much growth and improvement are still in prospect

managerial ability compensation and the closed end fund discount this paper shows that the existence of managerial ability combined with the labor contract prevalent in the industry implies that the closed end fund discount should exhibit many of the primary features documented in the literature we evaluate the model s ability to match the quantitative features of the data and find that it does well although there is some observed behavior that remains to be explained the role of delegated portfolio managers in financial markets has puzzled

arbitrage opportunities in the japanese stock and futures markets 1990 arbitrage opportunities in the japanese stock and futures markets financial analysts journal vol 46 no 2 pp 14 24

arbitrage in stock index futures the textbook description of arbitrage suggests that it is a straightforward matter of taking offsetting positions in different securities and realizing the arbitrage profit such descriptions however typically ignore the transaction costs that give rise to the arbitrage opportunity in the first place taking proper account of these transactions costs may considerably complicate the problem particularly when as is usually the case the arbitrage potential is restricted this article is concerned withoptimal arbitrage strategies with transaction costs when the arbitrage potential is restricted by position limits the particular case we shall analyze is the standard and poor s sp the corresponding figure for the s p 500 portfolio for the same period was

stock index futures arbitrage in finland theory and evidence in a new market abstract this paper examines the pricing of stock index futures contracts on the new finnish market the striking feature of the finnish market is that there is no institutional framework for short selling of stocks this has been suggested to be the most important reason for the underpricing futures contracts persistent mispricing would however imply that also early and delayed unwindings have value which increases the arbitrage profits several rollover profits are reported in this study this suggest that current stock owners have not yet begun trading on the finnish futures market on a large scale

revisiting legal realism the law economics and organization perspective the contrast between american legal realism which ran itself into the sand schlegel 1979 p 459 and the law and economics movement which is perhaps the most important development in legal thought in the last quarter century posner 1986 p xix is dramatic that the one foundered while the other flourished is explained in large measure by the absence of an intellectual framework for legal realism and the use by law and economics of the powerful framework of neoclassical economics

the use of knowledge about society abstract selection of efficient institutions or policies in politics requires constituents to estimate the net benefits of political reforms political competition fails to inform constituents of the costs of forgone political alternatives ignorance of political opportunity costs prevents the adoption of welfare enhancing reforms of public institutions and policies the empirical record supports this contention

appropriation violent enforcement and transaction costs a critical survey this paper focuses on the extension of transaction costs to appropriative activity and coercive power in the property rights approach it has been argued that including the costs of appropriation and violent enforcement in transaction costs is based on the assumption that coaseian bargaining can be extended to any institutional scenario i e voluntary as well as coercive exchange however voluntary transactions cannot capture the logic of coercive power this means that the assumption of an efficient political market is not valid and that the political coase theorem lacks the logical consistency to provide a cornerstone for political theory

hedging performance and basis risk in stock index futures in early 1982 trading began at three different exchanges in futures contracts based on stock indexes stock index futures were an immediate success and quickly led to a proliferation of new futures and options markets tied to various indexes one reason for this success was that index futures greatly extended the range of investment and risk management strategies available to investors by offering them for the first time the possibility of unbundling the market and nonmarket components of risk and return in their portfolios many portfolio management and other hedging applications in investment banking and security trading have been described elsewhere1 ranging from use by a passive fund manager to reduce risk over a long time horizon to use by an underwriter to hedge the market risk exposure in a stock offering for one or two days in considering the potential applications of index futures it is clear that in nearly every case a cross hedge is involved that is the stock position that is being hedged is different from the underlying portfolio for the index contract 2 this means that return and risk for an index futures hedge will depend upon the behavior of the basis i e the difference between the futures price and the cash price hedging a position in stock will necessarily expose it to some measure of basis risk risk that the change in the futures price over time will not track exactly the value of the cash position basis risk can arise from a number of different sources and is a more significant problem for stock index contracts than for other financial futures like treasury bills and bonds 3 the most apparent cause of basis risk is the nonmarket component of return on the cash stock position since the index contract is tied to the behavior of an underlying stock market index nonmarket risk cannot be hedged this is the essential problem of a cross hedge however basis risk can be present even when the hedge involves a position in the index portfolio itself and there is no nonmarket risk for one thing returns to the index portfolio include dividends while the index and the index future only track the capital value of the portfolio any risk associated with dividends on the portfolio will become basis risk in a hedged position still dividends are fairly low and also quite stable so this may not be a terribly important shortcoming

intraday relationships among index arbitrage spot and futures price volatility and spot market volume a transactions data test abstract this paper examines intraday temporal relationships among arbitrage spreads cash and futures price volatility and cash trading volume using transactions data for the major market index futures contracts and the component stocks of the index results indicate that changes in the spread have a significant impact on cash and futures price volatility as well as on cash trading volume the impact of the spread however is attenuated by the short sale restriction in the cash market contrary to popular beliefs a more volatile market leads to subsequent decreases in the spread probably because of increases in the supply of arbitrage services or faster price adjustments

short sale restrictions implications for stock index arbitrage abstract this paper offers a study of relevant transaction costs when examining the efficiency of stock index futures markets we suggest that a different transaction cost estimate should be used when testing the upper side of the cost of carry model than when testing the lower side of the model empirical evidence indicates that this explains most of the underpricing observed in the finnish stock index futures market

index futures arbitrage and the behavior of stock index futures prices this article examines intraday transaction datafor s p 500 stock indexfutures prices and the intraday quotes for the underlying index the data indicate that thefutures price changes are uncorrelated and that the variability of these price changes exceeds the variability ofprice changes in the s p 500 index this excess variability of the futures over the index remains even after controlling for the nonsynchronous prices in the index quotes which induces autocorrelation in the index changes we advance and examine empirically two hypotheses regarding the difference between the futures price and its theoretical value that this mispricing increases on average with maturity and that it is path dependent evidence supporting these hypotheses is presented

law or economics w hen aaron director and edward levi launched the journal of law and economics in 1958 director suggested the title law or economics this alternative title certainly described the world more accurately at that time the traditional attitude of each discipline toward the other had been one of indifference only gradually has that attitude been replaced by a mixture of cooperation and hostility the first systematic application in america of economics to law was the use of price theory to explain economic phenomena involved in the antitrust cases director made creative use of price theory to explain phenomena such as tie in sales and patent licensing and assisted younger colleagues such as john mcgee and lester telser in their respective studies of predatory competition and resale price maintenance in such applications professional economic analysis was replacing the amateur economics of the lawyer lawyers did not welcome this development the national committee for the study of the antitrust laws was the scene of a deep schism between the fifty three lawyers and the eight economists 2 these numbers probably represented the belief that 13 percent of antitrust policy is economics the remainder law at one point the lawyers attempted to exclude the economists completely from the formulation of the report the division was not simply one between angels and legally trained devils consider the question of price discrimination economists insisted that price discrimination could persist only under noncompetitive conditions under full competition rivals would undermine any attempt to sell part of the supply at a higher price the lawyers argued to the contrary

long term interest rates risk premia and unconventional monetary policy abstract we study two kinds of unconventional monetary policies announcements about the future path of the short term rate and long term nominal interest rates as operating instruments of monetary policy we do so in a model where the risk premium on long term debt is in part endogenously determined we find that both policies are consistent with unique equilibria that at the zero lower bound announcements about the future path of the short term rate can lower long term interest rates through their impact both on expectations and on the risk premium and that long term interest rate rules perform as well as and at times better than conventional taylor rules with simulations we show that long term interest rate rules generate sensible dynamics both when in operation and when expected to be applied

perverse consequences of well intentioned regulation evidence from india s child labor ban although bans against child labor are a ubiquitous policy tool there is very little empirical evidence on their effectiveness in this paper we examine the consequences of india s landmark legislation against child labor the child labor prohibition and regulation act of 1986 using data from employment surveys conducted before and after the ban and using age restrictions that determined whom the ban applied to we show that the relative probability of child employment increases and child wages relative to adult wages decrease after the ban our main specification relies on comparing changes in work probabilities over time for children of the same age but with siblings who are rendered either eligible or ineligible for legal work when the ban is implemented the increases in the probability of economic activity are largest for children i in areas where the industries targeted by the ban play a larger role in local labor markets ii in areas where the probability of employer inspections is higher and iii in families that are poorer these results are consistent with a theoretical model building on the seminal work of basu and van 1998 and basu 2005 where families use child labor to reach subsistence constraints and where child wages decrease in response to bans leading poor families to utilize more child labor we also find decreases in child participation in schooling for younger children only and no economically meaningful change in household outcomes like assets or calorie intake

order imbalances and stock price movements on october 19 and 20 1987 on october 19 1987 nyse stocks in the s p index declined seven percentage points more than nyse stocks not in this index in the first hour of trading on october 20 the s p stocks virtually recovered to the level of the non s p stocks there is a strong relation between order imbalances and stock price movements both in analyses of time series and cross sections thus in addition to the breakdown in the linkage between future prices and the spot index on these two days there were also breakdowns in the linkage among nyse stocks

taxes and the pricing of stock index futures stock index futures prices are generally below the level predicted by simple arbitrage models this paper suggests that the discrepancy between the actual and predicted prices is caused by taxes capital gains and losses are not taxed until they are realized as constantinides demonstrates in a recent paper this gives stockholders a valuable timing option if the stock price drops the investor can pass part of the loss on to the government by selling the stock on the other hand if the stock price rises the investor can postpone the tax by not realizing the gain since this option is not available to stock index futures traders the futures prices will be lower than standard no tax models predict on 24 february 1982 the kansas city board of trade began trading futures contracts on the value line average stock index during the next two months both the chicago mercantile exchange and the new york futures exchange also initiated trading in stock index futures although these contracts are actively traded their prices have puzzled both practitioners and academics the observed

monetary policy and the exchange rate evaluation of var models abstract this paper examines the ability of vector autoregressive var models to properly identify the transmission of monetary policy in a controlled experiment simulating data from a small open economy dsge model estimated for australia we find that sign restricted var models do reasonably well at estimating the responses of macroeconomic variables to monetary policy shocks this is in contrast to models that use recursive zero type restrictions for which inflation can rise following an unexpected interest rate increase while the exchange rate can appreciate or depreciate depending on the ordering of the variables sign restricted var models seem to be able to overcome puzzles related to the real exchange rate provided that a sufficient number of different types of shocks are identified despite delivering the correct sign of the impulse responses central tendency measures of sign restricted var models can however be misleading and hardly ever coincide with the true impulses this finding casts doubt on the common notion that the median impulses are the most probable description of the true data generating process

direct tests of index arbitrage models previous tests of stock index arbitrage models have rejected the no arbitrage constraint imposed by these models this paper provides a detailed analysis of actual s p 500 arbitrage trades and directly relates these trades to the predictions of index arbitrage models an analysis of arbitrage trades suggests that i short sale rules are unlikely to affect the cashfutures mispricing ii the opportunity cost of arbitrage funds exceeds the treasury bill rate and iii the average price discrepancy captured by arbitrage trades is small tests of the models provide some support for a version ofthe arbitrage model that incorporates an early liquidation option the ability of these models to explain arbitrage trades however is surprisingly low

the relation between forward prices and futures prices abstract this paper consolidates the results of some recent work on the relation between forward prices and futures prices it develops a number of propositions characterizing the two prices these propositions contain several testable implications about the difference between forward and futures prices many of the propositions show that equilibrium forward and futures prices are equal to the values of particular assets even though they are not in themselves asset prices the paper then illustrates these results in the context of two valuation models and discusses the effects of taxes and other institutional factors

liquidity and the law of one price the case of the futures cash basis deviations from no arbitrage relations should be related to market liquidity because liquidity facilitates arbitrage at the same time a wide futures cash basis may trigger arbitrage trades and in turn affect liquidity we test these ideas by studying the dynamic relation between stock market liquidity and the index futures basis there is evidence of two way granger causality between the short term absolute basis and liquidity and liquidity granger causes longer term absolute bases shocks to the absolute basis predict future stock market liquidity the evidence suggests that liquidity enhances the efficiency of the futures cash pricing system copyright 2007 by the american finance association

the saga of the first stock index futures contract benchmarks models and learning in the presence of imperfect or perturbed benchmarks pricing based on relative valuation or arbitrage can be affected adversely this study highlights persistent pricing irregularities in the kansas city value line kcvl stock index futures market this contract is especially interesting because the underlying benchmark underwent a midstream change in definition from a complex equally weighted geometric index to an equally weighted arithmetic index empirical analysis reveals that during a four year period the market displayed herd like behavior and priced the kcvl geometric contract using the simple but wrong cost of carry benchmark model a dramatic change occurs around the publication of the eytan harpaz 1986 model when the market turns efficient from the perspective of this new model the market appears to have succumbed initially to a bad information cascade primarily because arbitrage was difficult to understand and carry out under complex benchmarking the evidence provides empirical extension to the observational social learning paradigms of simon 1955 banerjee 1992 and bikhchandani hirshleifer and welch 1992 that lead to behavioral herding and information cascades

the pricing of japanese equity warrants discrepancies between the black scholes value of japanese equity warrants and their observed prices are explained in part by the stochastic volatility of changes in prices of the underlying stocks we fit garch and egarch models to the stochastic volatility and briefly compare their performance to the cev model a hopscotch algorithm is used to value the warrants in the presence of the stochastic stock price volatility the stochastic volatility hopscotch warrant values still differ substantially from corresponding prices in contrast away from the money short term nikkei 225 options valued with the same stochastic volatility models are close to observed prices a regression model is used to fit the differences between warrant values and prices as a function of proxies for market impediments

intraday volatility in international stock index futures markets meteor showers or heat waves the international transmission of intraday price volatility among the united states united kingdom and japanese stock index futures markets in the period 1988 1994 is investigated in this paper the empirical results based on extreme value estimators and vector autoregression indicate the rapid transmission of information between markets the volatilities of the u s and u k futures markets appear to follow a meteor shower rather than a heat wave type of process this means that these volatilities react to shocks from other markets i e they cannot be described only by their past values however the heat wave hypothesis is not rejected for the japanese market meaning that the shocks to japanese volatility are mostly country specific a multivariate garch model supports the u k and japanese but not the u s results

does trade openness matter for aggregate instability abstract this paper presents a cash in advance model of a small open economy and shows that whether an inflation targeting interest rate rule introduces aggregate instability depends in general on the degree of openness to international trade this result emerges regardless of whether prices are sticky or flexible in a closed economy as the monetary authority responds to movements in inflation the resulting changes in interest rates affect aggregate consumption through an intertemporal substitution effect and an inflation tax effect in a small open economy this policy also induces changes in the terms of trade which depending on the degree of openness can generate counteracting effects on consumption as a consequence the implications of interest rate rules on macroeconomic stability in an open economy differ from those in a closed economy

does voluntary participation undermine the coase theorem abstract the coase theorem states that costless enforcement of voluntary agreements yields efficient outcomes we argue that previous treatments fail to recognize the full meaning of voluntary it requires a two stage game a non cooperative participation decision followed by coaseian bargaining only among those who choose to participate we illustrate this in a simple public goods model and find outcomes ranging from extremely inefficient to fully efficient however the efficient equilibrium is not robust to even very small transaction costs thus we cast doubt on coaseian claims of universal efficiency finally we outline a kind of coercion that restores efficiency