the asset pricing effects of fixed holding costs an upper bound the capital asset pricing model predicts that investors will hold diversified portfolios but many households actually hold very few assets the paper examines the asset pricing implications of one possible explanation for this phenomenon fixed costs of holding assets while earlier authors found the exact asset pricing effects of such costs in single period models under restrictive assumptions i derive a general upper bound on these effects that is also valid in continuous time illustrative calculations reveal that large holding costs must be postulated to generate significant asset pricing effects

martingales and arbitrage in securities markets with transaction costs abstract we derive the implications from the absence of arbitrage in dynamic securities markets with bid ask spreads the absence of arbitrage is equivalent to the existence of at least an equivalent probability measure that transforms some process between the bid and the ask price processes of traded securities into a martingale the martingale measures can be interpreted as possible linear pricing rules and can be used to determine the investment opportunities available in such an economy the minimum cost at which a contingent claim can be obtained through securities trading is its largest expected value with respect to the martingale measures journal of economic literature classification numbers g11 g12 g13 d52 and d90

the comparative advantage of cities abstract what determines the distributions of skills occupations and industries across cities we develop a theory to jointly address these fundamental questions about the spatial organization of economies our model incorporates a system of cities their internal urban structures and a high dimensional theory of factor driven comparative advantage it predicts that larger cities will be skill abundant and specialize in skill intensive activities according to the monotone likelihood ratio property we test the model using data on 270 us metropolitan areas 3 to 9 educational categories 22 occupations and 19 industries the results provide support for our theory s predictions

taxes and transaction costs in asset market equilibrium abstract this paper examines the effects of capital taxation in an imperfect capital market in which acquiring risky assets incurs costs individual portfolio choice has two distinct aspects the extensive choice of which assets to hold in the portfolio and the intensive choice of what fraction of wealth to invest in each asset held the traditional assumption of zero transaction costs obscures the extensive choice this paper shows that if trading in assets is costly capital taxes have extensive effects as well as the intensive effects previously studied

international trade and investments in a vertically differentiated industry abstract a model of vertical product differentiation is applied to the study of trade and investments between two economies of differing sizes at the autarky equilibrium firms in the smaller country are shown to produce lower quality the choice of the firms between exports and foreign investments when borders open is studied intra industry trade or reciprocal investments arise when the quality gap is not too wide the strategic role of foreign investments is emphasized in particular the establishment of a subsidiary abroad can crowd out both sales by local firms and exports by the co national firm

long forward and zero coupon rates can never fall in frictionless markets having no arbitrage the asymptotic zero coupon rate never falls the same is true of the long forward rate the long par coupon rate can rise and fall due to forward rate movements at short maturities this article relates the three types of interest rates and formalizes and proves the impossibility results for falling asymptotic rates these results can be tested in a parametric term structure specification that is rich enough to identify a time series of long rates the results show that it is not possible to specify arbitrarily the long forward or zero coupon rate process copyright 1996 by university of chicago press

the asymmetric effect of endowments on vertical intra industrial trade este articulo trata de analizar los determinantes del comercio intra industrial vertical en espana con una muestra de paises extensa se contrasta empiricamente la hipotesis de la ventaja comparativa con esta finalidad hemos construido series de capital fisico humano y tecnologico en media cuando se utiliza la estimacion mco las diferencias en dotaciones suponen una limitacion al comercio intra industrial vertical usando la tecnica de regresion por cuantiles se observa que este efecto negativo disminuye en terminos absolutos a medida que los flujos de comercio intra industrial vertical se incrementan y en algunos casos llegan a ser positivos en los cuantiles altos de la distribucion este resultado ofrece evidencia a favor de una version reducida de la hipotesis de la ventaja comparativa

greasing the wheels of international commerce how services facilitate firms international sourcing we use unique plant level data to study the link between the local availability of services and the decision of manufacturing firms to source materials from abroad to guide our empirical analysis we develop a monopolistic competition model of the materials sourcing decisions of heterogeneous firms the model generates predictions about how the intensity of international sourcing of materials depends on a firm s productivity and the availability of local services these predictions are supported by the data we find evidence that more productive manufacturing firms tend to have a higher ratio of imported materials to sales in addition we find evidence that services grease the wheels of international commerce a greater availability of services across regions industries and time increases a firm s foreign sourcing of materials relative to sales interestingly this positive impact of local service availability on imports especially applies to stand alone firms that unlike multinationals are less likely to rely on imported or internally provided services

drivers of vertical intra industry trade the case of the hungarian agri food sector this article investigates the drivers of vertical intra industry trade viit in hungarian agri food trade with the european union eu it identifies three possible ways to measure intra industry trade iit flows ghm ff and n methods and defines six hypotheses to test for the drivers of viit with three panel data models static dynamic and fevd the results suggest that factor endowments are negatively while economic size is positively and significantly related to viit distance and viit were found to be negatively related as is commonly the case in the standard gravity model it was also found that viit is greater if a new member state nms is exporting agri food produce to an nms while eu accession has ambiguously influenced the share of viit in general it seems that our results are independent from model estimations and interestingly they do not differ considerably as we a priori expected moreover our results seem surprisingly robust across various measurements of itt

simple binomial processes as diffusion approximations in financial models a binomial approximation to a diffusion is defined as computationally simple if the number of nodes grows at most linearly in the number of time intervals it is shown how to construct computationally simple binomial processes that converge weakly to commonly employed diffusions in financial models the convergence of the sequence of bond and european option prices from these processes to the corresponding values in the diffusion limit is also demonstrated numerical examples from the constant elasticity of variance stock price and the cox ingersoll and ross 1985 discount bond price are provided article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the empirical implications of the cox ingersoll ross theory of the term structure of interest rates the one factor version of the cox ingersoll and ross model of the term structure is estimated using monthly quotes on u s treasury issues trading from 1952 through 1983 using data from a single yield curve it is possible to estimate implied short and long term zero coupon rates and the implied variance of changes in short rates analysis of residuals points to a probable neglected tax effect the term structure of interest rates is important to economists because the relationship among the yields on default free securities that differ in their term to maturity reflects the information available to the market about the future course of events the expectations hypothesis the liquidity preference hypothesis hicks 10 and the market segmentation hypothesis culbertson 6 are theories of the term structure that predict little more than that the implied forward rate is either equal to or not equal to the expectation of future spot rates cox ingersoll and ross 5 cir model the term structure of interest rates in a competitive equilibrium context their model has elements in common with the earlier hypotheses of the term structure however the cir model has a rich class of empirical implications not only for the pricing of default free securities but also for the pricing of bond options callable bonds and other types of financial claims this paper examines the extent to which the model in its simplest one factor form is descriptive of the prices of u s treasury bills bonds and notes traded from 1952 to 1983 section i describes the model and the parsimonious representation of bond prices which it implies section ii describes the data and section iii outlines the preliminary results obtained by fitting the model to observed data the final section outlines directions for future research

transactions costs and portfolio choice in a discrete continuous time setting abstract this paper makes the following observation concerning a new formulation of the consumption and portfolio choice model of merton 1971 with transaction costs suppose an investor observes his or her current wealth only when making a transaction that transactions are costly and that decisions to transact can be made at any time based on all current information if at each transaction the agent is charged a fixed fraction of current portfolio value an optimal policy exists and the optimal interval of time between transactions is fixed independent of time and current wealth

arbitrage with fixed costs and interest rate models in this paper we study securities market models with fixed costs we characterize the absence of arbitrage opportunities and we provide fair pricing rules we then apply these results to extend some popular interest rate and option pricing models which present arbitrage opportunities in the absence of fixed costs in particular we prove that the quite striking result obtained by dybvig ingersoll and ross 1996 which asserts that under the assumption of absence of arbitrage long zero coupon rates can never fall is no longer true in models with fixed costs even arbitrarily small ones for instance models where the long term rate follows a diffusion process are arbitrage free in the presence of fixed costs including arbitrarily small ones we also rationalize models with partially absorbing or reflecting barriers on the price processes in particular we propose a version of the cox ingersoll and ross 1985 model which as in longstaff 1992 produces yield curves with realistic humps but does not assume an absorbing barrier for the short term rate this is made possible by the presence of even arbitrarily small fixed costs

term structure movements and pricing interest rate contingent claims this paper derives an arbitrage free interest rate movements model ar model this model takes the complete term structure as given and derives the subsequent stochastic movement of the term structure such that the movement is arbitrage free we then show that the ar model can be used to price interest rate contingent claims relative to the observed complete term structure of interest rates this paper also studies the behavior and the economics of the model our approach can be used to price a broad range of interest rate contingent claims including bond options and callable bonds

transaction costs and the pricing of assets the existence of transaction costs explains why investors do not fully diversify their portfolios this paper examines the implications of such limited diversification oi equilibrium asset prices in the framework of the capital asset pricing model in the pricing equation obtained here an asset s risk premium depends on a weighted average of its covariance with the market and its own variance the absence of transaction costs in the sharpe lintner capital asset pricing model capm is often claimed to be only a minor idealization which hardly affects the substantive implications of the model this paper aims to demonstrate that this is not the case incorporating transaction costs into the capm leads to a major reformulation of its basic asset pricing equation in contrast with the capm formula

bundling and international market segmentation the paper shows how firms by bundling their products with nontradables may contribute to the segmentation of international oligopoly markets we develop a simple example with two products one that is homogeneous across markets and one that is bundled with a nontradable e g local services integration of the markets for the homogeneous product yields the expected price equalization across markets however integration of the markets for bundled products leaves the economy entirely unaffected hence the standard methodology of comparing a segmented and an integrated equilibrium would exaggerate the effects of integration in this economy

currency options hedging and social value in early september 1982 a conference on exchange rate determination organized by l klein and w krelle took place at the deutsche bundesbank in frankfurt at this conference i presented a paper currency options theory and practicability this paper gave formulas for the pricing and hedging of currency options and showed by means of ex post simulations their practicability examples were given of how to hedge dm options on either the spot bond or forward market cp sondermann 1985a at that time markets for currency options did not yet exist but i was convinced that these markets would soon emerge since i the theory for pricing and hedging of currency options was now available ii the computational facilities were available and most importantly iii currency options do have a social value the stormy development of these markets which started soon after has proved this expectation correct that currency options have a social value has been questioned both on practical and theoretical grounds the first type of arguments stress the speculative element of such options and refer to the forward exchange markets as the approved means of hedging against foreign exchange risks this view overlooks the fact that only future currency streams which are expected with certainty can be hedged on forward markets if for some reason these future payments fail to realize or deviate from their expected value the hedger on the forward market may end up with a costly open position this may e g be the case in a tender situation currency options as a non redundant alternative to forward markets allow for a better allocation of exchange risks the social value of currency options is

product cycles and market penetration this paper constructs a quality ladders product cycle model with multiple quality levels a lower quality level of each product sells due to differences in willingness to pay for quality across consumers the model determines how far southern firms penetrate high technology product markets expanded resources or weakened protection of intellectual property rights in the south relative to the north lead to increased southern market penetration as observed with east asian countries either cause of increased southern market penetration implies a reduction in the wage in the north relative to the south and a reduction in the rate of innovation copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the case of the negative nominal interest rates new estimates of the term structure of interest rates during the great depression throughout the 1930s and early 1940s u s treasury bonds and notes appeared to have negative nominal yields as they approached maturity but negative nominal interest rates are impossible in a world in which one can always hold cash the resolution to this puzzle is that treasury securities in addition to making coupon payments gave the owner the right to buy a new security on a future date this paper describes the institutional environment that led to the apparent negative nominal interest rates develops a method for valuing the exchange privilege and computes accurate measures of the yield to the coupon bearing component of these composite bond options these corrected bond and not yields are then used to calculate new estimates of the term structure of interest rates from 1929 to 1949