the finance growth link in latin america this paper analyzes the relationship between financial development and economic growth in latin america with a granger causality test and impulse response functions in a panel vector autoregression var model with annual observations from a sample of 18 countries from 1962 to 2005 it is shown that while economic growth causes financial development financial development does not cause economic growth this finding is robust to different model specifications and different financial indicators interestingly when the sample is divided according to different income levels and institutional quality there is two way causality between financial development and economic growth only for the middle income group and for countries with stronger rule of law and creditor rights the impulse response functions show that a shock to financial development has a positive impact on economic growth only for these subsamples but the net effect of financial development on growth is relatively small during the 1980s most latin american countries suffered from distorted financial systems in this decade the government kept interest rate controls allocated credit arbitrarily and deterred the expansion of security markets and the creation of new financial institutions edwards 1999 nonetheless there has been a significant improvement on the levels of financial development in the region while credit to the private sector as a share of gross domestic product gdp in the latin american region was on average 12 in the 1960s it grew to an average of 29 in the early 2000s 1 even though latin american countries experienced significant financial reforms in the 1990s that promoted financial deregulation and the growth of the stock market financial development indicators show that the region is financially underdeveloped when compared to other emerging regions 2 therefore lack of financial depth may be a barrier to better economic performance in latin america the link between financial development and economic growth is complex because the direction of causation between the two variables may run both ways theoretical and empirical analyses support causality running from financial development to economic growth supply leading hypothesis but there is also evidence that economic growth causes financial

the quality effect does financial liberalization improve the allocation of capital abstract we document evidence of a quality effect of financial liberalization on allocative efficiency as measured by dispersion in tobin s q across firms we predict that financial liberalization by equalizing access to credit is associated with reduced variation in expected marginal returns we test this prediction using a new financial liberalization index and firm level data for five emerging markets india jordan korea malaysia and thailand we find robust evidence that financial liberalization rather than financial deepening is associated with improved allocative efficiency

a comparison of the information in the libor and cmt term structures of interest rates abstract we investigate the information contained in the london interbank offered rate libor and the u s constant maturity treasury cmt term structure of interest rates and report three novel findings first we document that the information contained in term structures are significantly different from one another second we provide evidence of a significant change in the nature of this difference as the financial crisis began third we find that the significant changes in the information content of cmt and libor are consistent with significant shocks to credit default swap rates and tenor swap rates

50th anniversary article option pricing valuation models and applications this paper surveys the literature on option pricing from its origins to the present an extensive review of valuation methods for european and american style claims is provided applications to complex securities and numerical methods are surveyed emphasis is placed on recent trends and developments in methodology and modeling

are corruption and taxation really harmful to growth firm level evidence exploiting a unique data set containing information about the estimated bribe payments of ugandan firms the authors study the relationship between bribe payments taxes and firm growth in uganda for the period 1995 97 using industry location averages to circumvent the potential problem of endogeneity and to deal with issues of measurement error they find that both the rate of taxation and the rate of bribery are negatively correlated with firm growth for the full data set a one percentage point increase in the bribery rate is associated with three percentage point reduction in firm growth an effect about three times that of taxation moreover after excluding outliers the authors find that bribery has a much greater negative impact on growth and taxation a considerably smaller one this provides some validation of firm level theories of corruption which posit that corruption retards development even more than taxation does

multi level bargaining during bulgaria s return to capitalism this paper emphasizes the close interrelatedness among various levels of bargaining in transition economies focusing on the bulgarian case the author argues that in bulgaria and other transition economies neither purely national nor purely company based bargaining is occurring instead the social partners interest groups representing labor and business have developed a multi level bargaining structure that encompasses and links together national company industry and regional levels multi tier bargaining is prompted on the one hand by simultaneous pressures for centralization and decentralization during economic restructuring and on the other by the need to legitimate the social partners at all levels the author shows that in bulgaria increasing interdependencies and interactions among levels of bargaining have helped secure greater flexibility adaptability and survivability during extremely uncertain times

unionisation structures and innovation incentives this paper examines how dierent unionisation structures aect rms innovation incen tives and industry employment we distinguish three modes of unionisation with increasing degree of centralisation 1 decentralisation where wages are determined independently at the rm level 2 coordination where one industry union sets individual wages for all rms and 3 centralisation where an industry union sets a uniform wage rate for all rms while rms investment incentives are largest under centralisation investment in centives are non monotone in the degree of centralisation decentralisation carries higher investment incentives than coordination labour market policy can spur innovation by decentralising unionisation structures or through non discrimination rules

interest rate volatility and the term structure a two factor general equilibrium model we develop a two factor general equilibrium model of the term structure the factors are the short term interest rate and the volatility of the short term interest rate we derive closed form expressions for discount bonds and study the properties of the term structure implied by the model the dependence of yields on volatility allows the model to capture many observed properties of the term structure we also derive closed form expressions for discount bond options we use hansen s generalized method of moments framework to test the cross sectional restrictions imposed by the model the tests support the two factor model there are essentially two approaches to the modeling of the term structure of interest rates in continuous time the equilibrium approach pioneered by

pricing american interest rate claims with humped volatility models abstract some of the most recent empirical studies on interest rate derivatives have found humped shapes in the volatility structure of interest rates in this paper we propose a simple model that allows for humped volatility structures and that can be described by one state variable with the model american style claims can be priced very efficiently which is very important if the model has to be calibrated daily to market prices of standard american options furthermore the model allows for explicit formulas for european style options finally the computational efficiency of our model in the li et al 1995 framework is compared with the efficiency in a typical hull and white 1993a 1994 1996 framework in fact we can use both procedures for our model since we prove that if a deterministic volatility model can be embedded in either of these algorithms then so it does in the other one empirical evidence from option data supporting our model is provided as well

what do unions maximise evidence from survey data highly formalised models of union behaviour have been developed and are widely used within neoclassical economics this approach is justified by the argument that most goals pursued by unions can be reduced to a wage or wage equivalent employment trade off however the strong assumptions made about union goals and preferences how these are determined and the range of issues over which a union will seek to bargain with a firm are not supported by extensive empirical evidence this paper explores these issues through a survey of union leaders to ascertain the range of union goals and their preferences and the types of issues over which unions bargain with employers the results of the survey present convincing evidence that standard neoclassical models do not adequately capture union bargaining behaviour or union goals and preferences the findings presented here also throw open but do not resolve the question of whether unions are rational maximisers the most inter esting result not widely found within the economics or industrial relations literature concerns the nature of union bargaining preferences union bargaining over employment appears to be asymmetric around current levels of employment in that unions appear to care more about the employment implications of their bargain ing strategies when they are likely to result in employment decreases

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

bond pricing and the term structure of interest rates a new methodology for contingent claims valuation this paper presents a unifying theory for valuing contingent claims under a stochastic term structure of interest rates the methodology based on the equivalent martingale measure technique takes as given an initial forward rate curve and a family of potential stochastic processee for its subsequent movements a no arbitrage condition restricts this family of processes yielding valuation formulae for interest rate sensitive contingent claims which do not explicitly depend on the market prices of risk examples are provided to illustrate the key results in relation to the term structure of interest rates arbitrage pricing theory has two purposes the first is to price all zero coupon default free bonds of varying maturities from a finite number of economic fundamentals called state variables the second is to price all interest rate sensitive contingent claims taking as given the prices of the zero coupon bonds this paper presents a general theory and a unifying framework for understanding arbitrage pricing theory in this context of which all existing arbitrage pricing models are special cases in particular vasicek 1977 brennan and schwartz 1979 langetieg 1980 ball and torous 1983 ho and lee 1986 schaefer and schwartz 1987 and artzner and delbaen 1988 the primary contribution of this paper however is a new methodology for solving the second problem i e the pricing of interest rate sensitive contingent claims given the prices of all zero coupon bonds the methodology is new because i it imposes its stochastic structure directly on the evolution of the forward rate curve ii it does not require an inversion of the term structure to eliminate the market prices of risk from contingent claim values and iii it has a stochastic spot rate process with multiple stochastic factors influencing the term structure the model can be used to consistently price and hedge all contingent claims american or european on the term structure and it is derived from necessary and more importantly sufficient conditions for the absence of arbitrage the arbitrage pricing models of vasicek 1977 brennan and schwartz 1979 langetieg 1980 and artzner and delbaen 1988 all require an iformerly titled bond pricing and the term structure of interest rates a new methodology

an analytically tractable interest rate model with humped volatility abstract some of the most recent empirical studies on interest rate derivatives have found humped shapes in the volatility structure of interest rates however this realistic feature has been hardly addressed in theoretical works in this paper we propose an interest rate model which allows for a humped volatility structure and which is analytically tractable in that it leads to explicit formulae for european options on discount bonds empirical evidence supporting the model is also provided

the fragmentation of the bargaining society wage setting in the nordic countries 1950 to 1992 it is commonly believed that corporatist bargaining institutions have been in general decline in the 1980s and 1990s the leading explanations of the purported universal trend toward greater decentralization of collective bargaining are the impact of technological change changes in the occupational structure and growing international economic integration decentralization should be particularly visible in the nordic countries because collective bargaining was more centralized in these countries in the 1960s and 1970s than in any others in western europe in this article the authors present data on the changes in the centralization of wage bargaining in the four nordic countries since 1950 they document that a significant decentralization of collective bargaining has occurred in sweden as is well known but not in the other three the article concludes with a review of possible explanations of swedish exceptionalism

the dynamics of trade unionism and national economic performance i test two theories of the political processes of trade unions the first argues that wage moderation depends on a centralized labor movement the second contends that institutional conditions permitting unions coordination of bargaining strategies is sufficient coordination is most likely to he achieved when there are small number of unions that do not compete for members that is when union monopoly is high important empirical anomalies may be resolved by analyzing the effects of union centralization and monopoly separately rather than combining them into a composite index of corporatism reanalyzing comparative data from organization of economic cooperation and development countries between 1963 and 1985 largely corroborates the hypothesis that monopoly is more important than either centralization or composite indices of corporatism for national economic performance the conceptual rationale underlying indices of corporatism should be reexamined

employers and the welfare state the political economic organization of firms and social policy in contemporary capitalist democracies the authors argue that the organization of employers shapes social policy support among firms and in turn affects social policy outcomes specifically the authors argue that the centralization and cohesion of employer groups and economic cooperation across enterprises positively affects social welfare provision empirically the authors assess the impacts of business organization on social welfare effort in 15 developed democracies between the 1970s and 1990s the authors also provide analysis of the impact of employer organization on active labor market policy the authors find that the organization of employers is one of the most important determinants of overall social welfare effort the authors also find that employer organization affects the development of active labor market policies and it influences the degree to which social democratic parties pursue active labor market programs the authors conclude with a discussion of the findings implications for theories of social corporatism and the w

an equilibrium model of bond pricing and a test of market efficiency in two previous and related papers 3 4 the authors have reported the results of estimating a particular equilibrium model of bond pricing using quarterly data on canadian government bonds for the period 1964 to 1979 this paper reports the results of applying a similar model to the pricing of u s government bonds for the period 1958 1979 using data from the crsp government bond file the paper also extends the previous empirical analysis by evaluating the ability of the pricing model to detect underpriced and overpriced bonds the data reveal a strong relation between price prediction errors and subsequent bond returns

long term swings and seasonality in energy markets abstract this paper introduces a two factor continuous time model for commodity pricing under the assumption that prices revert to a stochastic mean level which shows smooth periodic fluctuations over long periods of time we represent the mean reversion price by a fourier series with a stochastic component we also consider a seasonal component in the price level an essential characteristic of many commodity prices which we represent again by a fourier series we obtain analytical pricing expressions for futures contracts using futures price data on natural gas we provide evidence on the presence of long term fluctuations and show how to estimate the long term component simultaneously with a seasonal component using the kalman filter we analyse the in sample and out of sample empirical performance of our pricing model with and without a seasonal component and compare it with schwartz and smith 2000 model our findings show the in sample and out of sample superiority of our model with seasonal fluctuations thereby providing a simple and powerful tool for portfolio management risk management and derivative pricing

pricing and risk management of interest rate swaps this paper reformulates the valuation of interest rate swaps swap leg payments and swap risk measures all under stochastic interest rates as a problem of solving a system of linear equations with random perturbations a sequence of uniform approximations which solves this system is developed and allows for fast and accurate computation the proposed method provides a computationally efficient alternative to monte carlo based valuations and risk measurement of swaps this is demonstrated by conducting numerical experiments and so our method provides a potentially important real time application for analysis and calculation in markets

finance firm size and growth the authors examine whether financial development boosts the growth of small firms more than large firms and hence provides information on the mechanisms through which financial development fosters aggregate economic growth they define an industry s technological firm size as the firm size implied by industrial specific production technologies including capital intensities and scale economies using cross industry cross country data the results indicate that financial development exerts a disproportionately large effect on the growth of industries that are technologically more dependent on small firms this suggests that financial development accelerates economic growth by removing growth constraints on small firms and also implies that financial development has sectoral as well as aggregate growth ramifications

kriging of financial term structures due to the lack of reliable market information building financial term structures may be associated with a significant degree of uncertainty in this paper we propose a new term structure interpolation method that extends classical spline techniques by additionally allowing for quantification of uncertainty the proposed method is based on a generalization of kriging models with linear equality constraints market fit conditions and shape preserving conditions such as monotonicity or positivity no arbitrage conditions we define the most likely curve and show how to build confidence bands the gaussian process covariance hyper parameters under the construction constraints are estimated using cross validation techniques based on observed market quotes at different dates we demonstrate the efficiency of the method by building curves together with confidence intervals for term structures of ois discount rates of zero coupon swaps rates and of cds implied default probabilities we also show how to construct interest rate surfaces or default probability surfaces by considering time quotation dates as an additional dimension

macroeconomic performance and collective bargaining an international perspective this paper critically reviews the research on how collective bargaining systems influence macroeconomic performance in industrialized countries the review considers effects of bargaining level coordination and corporatist institutional arrangements key empirical results turn out to be quite fragile and much of the paper explores issues of measurement and specification that account for the fragility the paper concludes that complementarities between key institutions and between institutions and the economic environment may be more important for macroeconomic performance than the effects of individual institutions and it suggests research strategies

a tractable interest rate model with explicit monetary policy rates abstract this paper proposes a novel interest rate model that presents simple analytical pricing formulas for interest rate based derivatives including swaps futures swaptions caps and floors exploring the regime switching feature of markov chains the proposed model focuses on discrete changes in the central bank policy rates the main driver of short term rate fluctuations an empirical analysis shows that the proposed model generally outperforms other standard short term rate models in fitting cross sections of options prices moreover the explicit nature of policy rates to some extent enables the model to infer risk neutral probabilities of the central bank rate decisions

firm productivity innovation and financial development acknowledgment we are grateful to christopher kilby saul lizondo chris papageorgiou the strategy policy and review departments low income countries group the africa department s macro modeling debt and growth network and two anonymous referees for useful comments and suggestions kersting gratefully acknowledges financial support by the center for global leadership at the villanova school of business 1 introductioneconomists still struggle to explain the large differences in output per worker across countries the view that these differences are mostly the result of variations in investment rates has now largely been abandoned as cross country evidence suggests that total factor productivity tfp rather than capital accumulation accounts for observed per capita income differences hall and jones 1999 the largely unexplained cross country differences in tfp led to prescott s 1998 call for a theory of tfp in response barriers to innovation imitation and adoption e g parente and prescott 2000 and institutions e g acemoglu and johnson 2005 have often been offered as explanations for low tfp in poorer countries the global crisis and the resulting uncertainty have reinforced concerns about growth prospects in many low income countries after a decade of almost universally solid growth performance the medium term outlook for many low income countries appears increasingly uncertain at the same time the growth potential in many countries with low tfp remains dim even beyond the full conclusion of this crisis if tfp drives growth its determinants are the key to development prospects in low income countries some country specific direct determinants of tfp geography history or institutions such as the prevalent legal system are fixed or slow moving and the degree to which policy can influence these conditions is limited others such as innovation or the level of financial development can respond to both foreign and domestic forces external shocks globalization or government policy in this view tfp is not primarily the result of the endowment of a country but instead a direct result of purposeful actions by economic agents and as such can be influenced by policy innovation activity leads to technological progress in two distinct ways purposeful research and development can result in the invention of completely new products and processes this kind of innovative activity moves the global technological frontier and still mainly occurs in developed countries however innovation also consists of the adoption and adaptation of existing technology which can close the gap between countries converging toward the global technological frontier and those on the leading edge pushing the world frontier innovation shares a strong connection with the provision of financial services invention and adoption of technology are costly and risky activities which require financing it is therefore natural to study the impact of a country s financial development on tfp via the innovation channel 1in this article we follow that agenda in two separate steps i how do firm specific actions in particular innovation affect firm productivity ii what is the role of a country s level of development both financial and general in facilitating higher productivity using firm level data taken from the enterprise surveys covering over 14 000 firms in 63 countries we first establish a connection between a firm s innovative activities and its productivity we control for country industry and firm specific factors the countries in our data include low middle and high income countries while the firms span all sizes with a focus on small and medium sized enterprises sme innovation is defined broadly as the introduction of new production processes or product lines so that it includes the adaptation of existing technology we find that other things being equal firms that have introduced a new process or product are more productive

does the organization of capital matter employers and active labor market policy at the national and firm levels does the organization of business matter for social policy development in the advanced capitalist democracies conventional welfare state analysis has given this significant question scant attention we argue however that the representational power of business coordination across business interest units and integration of associations in corporatist policy making forums or what we call the social corporatist organization of business should result in greater support and participation by employers in social policy formation and implementation we test our arguments with models both of 1980 98 pooled time series data on withinand across country variation in spending on active labor market programs and of extensive firm level survey data from denmark and the united kingdom we find that the centralization and coordination of employers as well as the integration of employer organizations in corporatist policy making forums are strongly associated with shares of national income devoted to active labor market policy we find moreover that the degree of employer organization conditions active labor market policy responses to de industrialization and increases in general unemployment at the firm level membership in an employer association has a significant positive effect on employer participation in active labor market programs in corporatist denmark but not in the pluralist united kingdom

a nonlinear general equilibrium model of the term structure of interest rates abstract we derive and test an alternative closed form general equilibrium model of the term structure within the cox ingersoll and ross theoretical framework in which yields are nonlinear functions of the risk free rate we show that equilibrium bond prices and the risk free rate are not always inversely related and that bond risk need not be strictly increasing in maturity using hansen s generalized method of moments to obtain parameter estimates this nonlinear model outperforms the cox ingersoll and ross square root model in describing actual treasury bill yields for the 1964 1986 period

concentration trends in union structure an international comparison the structure of unionism in nine western countries became on the whole more concentrated during the two decades 1957 58 to 1977 78 as indicated by a reduction in the number of national unions affiliated with major federations and an increase in the relative size of the largest unions the reasons for the trend which has implications for the internal life of unions and for collective bargaining are linked to the efforts of unions to adapt their structure to changes in the environments in which they operate often reinforced by pro merger pressures from the central labor federations the trend toward greater concentration may be expected to continue especially in countries in which the major trade union federations are still composed of substantial numbers of affiliated unions

using the black derman toy interest rate model for portfolio optimization abstract no arbitrage interest rate models are designed to be consistent with the current term structure of interest rates the diffusion of the interest rates is often approximated with a tree in which the scenario dependent fair price of any security is calculated as the present value of the risk neutral expectation by backward induction to use this tree in a portfolio optimization context it is necessary to account for the so called market price of risk in this paper we present a method to change the conditional probabilities in the black derman toy model to the physical or real measure including the market price of risk and explore the economic implications for expected spot rates and for expected bond returns

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

pricing caps with hjm models the benefits of humped volatility in this paper we compare different multifactor hjm models with humped volatility structures to each other and to models with strictly decreasing volatility all the models are estimated on euribor and swap rates panel data maximizing the quasi likelihood function obtained from the kalman filter we develop the analysis in two steps first we study the in sample properties of the estimated models then we test the pricing performance on caps we find the humped volatility specification to greatly improve the model estimation and to provide sufficiently accurate cap prices although the models has been calibrated on interest rates data and not on cap prices moreover we find the two factor humped volatility model to outperform the three factor models in pricing caps

organizational determinants of wage moderation this article contributes to the political economic literature regarding the effects of industrial relations institutions on national economic outcomes based on an econometric analysis of the determinants of wage moderation in sixteen industrialized countries between 1974 and 2000 it argues that the organizational characteristics of trade unions have a significant impact on wage dynamics controlling for a number of institutional and economic factors the countries in which trade union confederations directly involve workers in the process of collective bargaining ratification have on average lower wage growth relative to productivity than others the authors also find that collective bargaining coordination and contract ratification magnify each other s wage dampening effect through case studies of ireland and italy the article examines the causal mechanisms underlying the uncovered statistical regularities and concludes that particularly at a time in which classic political exchange is waning worker involvement in contract ratification allows confederation leaders to resolve conflicting claims inside their organizations at lower wage levels than are achieved by a less participatory governance process

multiple wage bargaining systems in the single european currency area little attention in the emu literature has been paid to the interaction between central bank monetary rules and systems of collective wage bargaining analytically and empirically coordinated wage bargaining systems respond with real wage restraint to non accommodating monetary policy since wage determination is dominated by collective bargaining in all the emu member states and wage coordination within the member states has grown since 1980 this is a topic of potential importance in particular the replacement of the bundesbank directly targeting german inflation by an ecb targeting european inflation has removed a major institutional support of wage restraint in germany the consequences of this for emu are worked out under two scenarios that inflation expectations will be generated by ecb monetary policy and that they will reflect german inflation outcomes possible institutional developments are discussed including government union bargains the bundesbank has also played a major role in maintaining fiscal rectitude by targeting excess fiscal deficits in germany again its replacement by the ecb targeting if at all european rather than german fiscal policy loosens fiscal constraints for underlying structural reasons therefore it is possible that germany and other emu countries will move to a period of fiscal activism with wage restraint and low inflation purchased through social contract negotiations

an international study of tax effects on government bonds it is shown that coupon bonds alone are not sufficient to span time dated claims on ordinary income capital gains and non taxable wealth in an incomplete bond market where the pure dated claims are not spanned by existing bonds marginal rates of substitution between present consumption and pure dated claims on ordinary income capital gains income and non taxable wealth respectively can differ across bondholders however the relative pricing of coupon bonds in each of these countries is shown to be consistent with the tax status of the major non tax exempt holders of government debt

spanish unions institutional legacy and responsiveness to economic and industrial change using empirical data drawn from multiple sources including interview material the author examines spanish trade unions responses to the reorganization of spain s economy and changes in the struc

the performance of alternative interest rate risk measures and immunization strategies under a heath jarrow morton framework using a monte carlo simulation this study addresses the question of how traditional risk measures and immunization strategies perform when the term structure evolves in a heath jarrow morton 1992 manner the results suggest that for immunization purposes im munization strategies and portfolio formation strategies are more important than interest rate risk measures the performance of immunization strategies depends more on the transaction costs and the holding period than on the risk measures moreover the immu nization performance of bullet and barbell portfolios is not very sensitive to interest rate risk measures

implications of implicit credit spread volatilities on interest rate modelling abstract we test seven term structure models in the heath jarrow and morton 1992 class in order to find the best representation of the libor rate in interest rate markets after the credit crunch of 2007 the libor rate is considered as a risky rate subject to the credit risk of a generic counterparty whose credit quality is refreshed at each fixing date we study the volatilities of the credit spreads implicitly obtained from libor time series in order to understand how assumed volatility functions affect interest rate curve modelling and asset pricing we develop a model to estimate basis swap prices through the monte carlo simulations we compare obtained results and individuate systematic relations existing between the basis spread forecast error and both the accuracy in volatility modelling and the accuracy of the monte carlo estimates we analyse and document these relations by defining appropriate pricing error measures

does local financial development matter we study the effects of differences in local financial development within an integrated financial market we construct a new indicator of financial development by estimating a regional effect on the probability that ceteris paribus a household is shut off from the credit market by using this indicator we find that financial development enhances the probability an individual starts his own business favors entry of new firms increases competition and promotes growth as predicted by theory these effects are weaker for larger firms which can more easily raise funds outside of the local area these effects are present even when we instrument our indicator with the structure of the local banking markets in 1936 which because of regulatory reasons affected the supply of credit in the following 50 years overall the results suggest local financial development is an important determinant of the economic success of an area even in an environment where there are no frictions to capital movements

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

a one factor model of interest rates and its application to treasury bond options 1990 a one factor model of interest rates and its application to treasury bond options financial analysts journal vol 46 no 1 pp 33 39

testing term structure estimation methods evidence from the uk strips market prices and yields of uk government zero coupon bonds are used to test alternative yield curve estimation models zero coupon bonds permit a more pure comparison as the models are providing only the interpolation service and also not making estimation feasible it is found that better yield curves estimates are obtained by fitting to the yield curve directly rather than fitting first to the discount function a simple procedure to set the smoothness of the fitted curves is developed and a positive relationship between oversmoothness and the fitting error is identified a cubic spline function fitted directly to the yield curve provides the best overall balance of fitting error and smoothness both along the yield curve and within local maturity regions

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

a comparative evaluation of alternative models of the term structure of interest rates abstract in the paper alternative models of the term structure of interest rates are classified in two different approaches the no arbitrage and the general equilibrium approach it is maintained that the general equilibrium approach is superior on a theoretical ground for two main reasons first relevant variables such as the spot interest rate and the interest risk premium are endogenous second the relationship between the real and the financial side of the economy becomes a clear and important element in the understanding of the term structure as regards the applications however the advantages of the general equilibrium over the no arbitrage approach are not so clear the major role in the empiricil performance of alternative models is played by their ability to capture volatility at the current state of the literature there is no model that outperforms others in particular on the empirical side

financial and legal constraints to growth does firm size matter using a unique firm level survey database covering 54 countries we investigate the effect of financial legal and corruption problems on firms growth rates whether these factors constrain growth depends on firm size it is consistently the smallest firms that are most constrained financial and institutional development weakens the constraining effects of financial legal and corruption obstacles and it is again the small firms that benefit the most there is only a weak relation between firms perception of the quality of the courts in their country and firm growth we also provide evidence that the corruption of bank officials constrains firm growth

cross sectional versus time series estimation of term structure models empirical results for the dutch bond market abstract we compare time series and cross section estimates of the well known vasicek and cir term structure models for a dataset of daily bond prices and short term interest rates for the netherlands the main finding is the great similarity between the two models with respect to the cross sectional term structure parameter estimates and implied bond option values from a time series perspective we find that for some maturities the data reject the constant volatility vasicek model and indicate the presence of the cir volatility effects

strikes are more common in countries with majoritarian electoral systems strikes are more common in those oecd countries where the legislature is elected in single member districts smd than in those where it is elected by proportional representation pr furthermore more working days are lost due to industrial conflict in countries with smd i suggest a politico economic explanation for these rarely noticed empirical regularities further empirical testing including controls drawn from previous strike research reveals that they hold up in a variety of econometric specifications

a comparison of yield curve estimation techniques using uk data abstract i compare different methods of estimating the term structure of interest rates on a daily uk treasury bill and gilt data that spans the period from january 1995 to january 1999 in sample and out of sample statistics reveal the superior pricing ability of certain methods characterised by an exponential functional form in addition to these standard goodness of fit statistics model performance is judged in terms of two trading strategies based on model residuals both strategies reveal that parsimonious representations of the term structure perform better than their spline counterparts characterised by a linear functional form this is valid even when abnormal returns are adjusted for market movements linear splines overfit the data and are likely to give misleading results

immigration globalization and unemployment benefits in developed eu states at a time of mounting concern about how traditional welfare states will react to globalization there has been increasing interest in specifying how global economic forces affect welfare policies in industrialized states building on theories from the political economy and comparative institutional literatures we analyze the influence of an important aspect of globalization the flow of immigration focusing on states in the european union we present a theoretical model that illustrates the interactive relationships between immigration eu labor market integration and domestic institutions our findings highlight how immigration in conjunction with domestic political institutions affects unemployment provisions while labor market integrative forces remain in the background the story of immigration and unemployment compensation in the eu is less about the opening of borders and the market forces of integration and more about the domestic political pressures

exploiting the conditional density in estimating the term structure an application to the cox ingersoll and ross model we propose an empirical method that utilizes the conditional density of the state variables to estimate and test a term structure model with known price formulae using data on both discount and coupon bonds the method is applied to an extension of a two factor model due to cox ingersoll and ross 1985 cir our results show that estimates based on only bills imply unreasonably large price errors for longer maturities we reject the original cir model using a likelihood ratio test and conclude that the extended cir model also fails to provide a good description of the treasury market

a test of the cox ingersoll and ross model of the term structure we test the theory of the term structure of indexed bond prices due to cox ingersoll and ross cir the econometric method uses hansen s generalized method of moments and exploits the probability distribution of the single state variable in cir s model thus avoiding the use of aggregate consumption data it enables us to estimate a continuous time model based on discretely sampled data the tests indicate that cir s model for index bonds performs reasonably well when confronted with short term treasury bill returns the estimates indicate that term premiums are positive and that yield curves can take several shapes however the fitted model does poorly in explaining the serial correlation in real treasury bill returns article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

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

the decentralization of collective bargaining a literature review and comparative analysis the author reviews evidence that the bargaining structure is becoming more decentralized in sweden australia the former west germany italy the united kingdom and the united states although in

one factor interest rate models and the valuation of interest rate derivative securities this paper compares different approaches to developing arbitrage free models of the term structure it presents a numerical procedure that can be used to construct a wide range of one factor models of the short rate that are both markov and consistent with the initial term structure of interest rates

bond and option pricing when short rates are lognormal this article describes a one factor model for bond and option pricing that is based on the short term interest rate and that allows the target rate mean reversion and local volatility to vary deterministically through time for any horizon the distribution of possible short rates is lognormal so the rate neither falls below zero nor reflects off a barrier at zero a model like this allows one to match the yield curve the volatility curve and the cap curve surprisingly adding to future local volatility lowers the volatility curve a conventional binary tree with probabilities of 0 5 but variable time spacing is used to value bonds and options when the inputs are constant the slope of the yield curve starts out positive and ends up negative while its curvature shifts from negative to positive even when mean reversion is zero the volatility curve has a negative slope the differential cap curve rises steeply through the effects of volatility and then falls steeply through the effects of discounting and a falling forward rate used as the strike price

an empirical comparison of forward rate and spot rate models for valuing interest rate options our main goal is to investigate the question of which interest rate options valuation models are better suited to support the management of interest rate risk we use the german market to test seven spot and forward rate models with one and two factors for interest rate warrants for the period from 1990 to 1993 we identify a one factor forward rate model and two spot rate models with two factors that are not significantly outperformed by any of the other four models further rankings are possible if additional criteria are applied

finance and the sources of growth the authors evaluate whether the level of development in the banking sector exerts a causal impact on economic growth and its sources total factor productivity growth physical capital accumulation and private saving they use 1 a pure cross country instrumental variable estimator to extract the exogenous component of banking development and 2 a new panel technique that controls for country specific effects and endogeneity they find that banks do exert a large causal impact on total factor productivity growth which feeds through to overall gdp gross domestic product growth the long run links between banking development and both capital growth and private savings are more tenuous

interest rate term structure modelling abstract this article surveys approaches to modelling the term structure of interest rates over the last few decades several frameworks have been developed which are actively used in banks for the pricing and risk management of interest rate related products there seems to be a need for an introductory overview of modelling approaches aimed at the yet unfamiliar reader with a quantitative background

wage setting institutions and pay inequality in advanced industrial societies the distribution of pay differs significantly across countries and over time among advanced industrial societies in this paper institutional and political determinants of pay inequality are studied in sixteen countries from 1980 to 1992 the most important factor in explaining pay dispersion is the level of wage setting i e whether wages are set at the level of the individual the plant the industry or the entire private sector the impact of centralization is the same whether centralization occurs via collective bargaining or via government involvement in private sector wage setting the concentration of unions and the share of the labor force covered by collective bargaining agreements also matter after controlling for wage setting institutions other variables such as the governing coalition the size of government international openness and the supply of highly educated workers have little impact economic political and norm based explanations for the association of centralization with egalitarian outcomes are discussed

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

proximity effects and labour specialization transitions in mexico a spatial markov chain analysis this paper investigates the extent to which the manufacturing industries in mexico exert positive proximity effects on neighbouring states when transitioning to higher levels of labour specializati

the left and organized labor in low inflation times this article presents fresh empirical data showing that policy alignment between center left governments and trade unions was a sustained feature of european politics between 1974 and 2005 this contradicts expectations of a wide delinkage between the electoral left and labor as a consequence of globalization deindustrialization and unionization decline however structural economic change has altered the policy field so that sustained policy alignment can no longer be explained by existing theoretical frameworks based on a theoretical argument and a multivariate empirical test the article contends that policy alignment is likelier to occur if labor plays an important role in economic management at the microlevel and the industry level and if unions are politically cohesive agents thanks to powerful confederation leadership supported by democratic decision making practices in making its case the article bridges the literatures on comparative capitalism and party politics in order to account for change and continuity in policy making processes

a cyclical square root model for the term structure of interest rates this paper presents a cyclical square root model for the term structure of interest rates assuming that the spot rate converges to a certain time dependent long term level this model incorporates the fact that the interest rate volatility depends on the interest rate level and specifies the mean reversion level and the interest rate volatility using harmonic oscillators in this way we incorporate a good deal of flexibility and provide a high analytical tractability under these assumptions we compute closed form expressions for the values of different fixed income and interest rate derivatives finally we analyze the empirical performance of the cyclical model versus that proposed in cox et al 1985 and show that it outperforms this benchmark providing a better fitting to market data

an exact bond option formula this paper derives a closed form solution for european options on pure discount bonds assuming a mean reverting gaussian interest rate model as in vasicek 8 the formula is extended to european options on discount bond portfolios

closed form solutions for term structure derivatives with log normal interest rates we derive a unified model that gives closed form solutions for caps and floors written on interest rates as well as puts and calls written on zero coupon bonds the crucial assumption is that simple interest rates over a fixed finite period that matches the contract which we want to price are log normally distributed moreover this assumption is shown to be consistent with the heath jarrow morton model for a specific choice of volatility closed form solutions for interest rate derivatives in particular caps floors and bond options have been obtained by a number of authors for markovian term structure models with normally distributed interest rates or alternatively log normally distributed bond prices see for example jamshidian 1989 1991a heath jarrow and morton 1992 brace and musiela 1994 geman el karoui and rochet 1995 these models support black scholes type formulas most frequently used by practitioners for pricing bond options and swaptions unfortunately these models imply negative interest rates with positive probabilities and hence they are not arbitrage free in an economy with opportunities for riskless and costless storage of money briys crouhy and schobel 1991 apply the gaussian framework to derive closed form solutions for caps floors and european zero coupon bond options to exclude the influence of negative forward rates on the pricing of zero coupon bond options they introduce an additional boundary condition as shown by rady and sandmann 1994 these pricing formulas are only supported by a term structure model with an absorbing boundary for the forward rate at zero where the absorbing probability is not negligible which for a term structure model is a quite problematic assumption

on finance as a theory of tfp cross industry productivity differences and economic rents we develop a theory of capital market imperfections to study how the ability to enforce contracts affects resource allocation across entrepreneurs of different productivities and across industries with different needs for external financing the theory implies that countries with a poor ability to enforce contracts are characterized by the use of inefficient technologies low aggregate tfp large differences in labor productivity across industries and large employment shares in industries with low productivity these implications are supported by the empirical evidence the theory also suggests that entrepreneurs have a vested interest in maintaining a status quo with low enforcement

market based measures of monetary policy expectations a number of recent articles have used different financial market instruments to measure near term expectations of the federal funds rate and the high frequency changes in these instruments around federal open market committee announcements to measure monetary policy shocks this article evaluates the empirical success of a variety of financial market instruments in predicting the future path of monetary policy all of the instruments we consider provide forecasts that are clearly superior to those of standard time series models at all of the horizons considered among financial market instruments we find that federal funds futures dominate all the other securities in forecasting monetary policy at horizons out to six months for longer horizons the predictive power of many of the instruments we consider is very similar in addition we present evidence that monetary policy shocks computed using the current month federal funds futures contract are influenced by changes in the timing of policy actions tha

unions employers associations and wage setting institutions in northern and central europe 1950 1992 the eight countries examined in this study austria belgium denmark finland germany the netherlands norway and sweden have long been viewed as exemplifying corporatist industrial relations

the effect of financial development on convergence theory and evidence we introduce imperfect creditor protection in a multicountry schumpeterian growth model the theory predicts that any country with more than some critical level of financial development will converge to the growth rate of the world technology frontier and that all other countries will have a strictly lower long run growth rate we present evidence supporting these and other implications in the form of a cross country growth regression with a significant and sizable negative coefficient on initial per capita gdp relative to the united states interacted with financial intermediation in addition we find that other variables representing schooling geography health policy politics and institutions do not affect the significance of the interaction between financial intermediation and initial per capita gdp and do not show any independent effect on convergence in the regressions our findings are robust to removal of outliers and to alternative conditioning sets estimation procedures and measures of financial development

implied volatility functions in arbitrage free term structure models abstract we test six term structure models in the heath jarrow and morton 1992 class using eurodollar futures and options data from 1987 1992 we study the time series of implied interest rate volatilities from these models using one day lagged implied volatilities our one and two parameter models simultaneously price an average of 18 5 options each day with an average absolute error of one and a half to two basis points although the models fit well we document systematic strike price and time to maturity biases for all models we also implement simple trading strategies to test whether the models identify genuine biases

labor markets production strategies and wage bargaining institutions the swedish employer offensive in comparative perspective transformed patterns of labor market governance occupy a central place in the study of contemporary west european political economies here detailed analysis of the dramatic decentralization of wa

monetary union and wage bargaining institutions in the eu extrapolating from some member state experiences this article considers the question of how monetary union in the eu is likely to impact the preferences of governments employers and unions regarding the organization of wage bargaining european monetary union involves a decentralization of wage bargaining centered at the national level in relation to monetary policy centralized at the european level drawing on recent literature and on the experience of two member states italy and spain which prior to emu underwent periods of intense bargaining fragmentation the author argues that the imposition of restrictive monetary policy in a fragmented wage bargaining context in which workers nonetheless have substantial bargaining rights tends to have perverse effects these effects ultimately led governments and bargaining actors in italy and spain to seek a reorganization of bargaining that gave national actors greater control over wage setting the article considers to what extent a similar dynamic might play out in the euro zone

real and nominal interest rates a discrete time model and its continuous time limit i provide a general equilibrium theory of the term structure of real interest rates in a discrete time economy i derive the prices for one period and two period real bonds and a simple recursive formula for general k period bonds and prove that the price formula with appropriately specified parameters converges to that of the cox ingersoll and ross model 1985 in addition i consider the behavior of nominal bond prices in a partial equilibrium setting in which an exogenous price level process is correlated with the real economy finally i provide an illustrative empirical investigation of the model the results indicate a significant correlation between the price level and the growth rate of consumption which does not support the money nuetrality assumption underlying cox ingersoll and ross s nominal bond prices and related empirical studies such as gibbons and ramaswamyu 1992 heston 1991 and pearson and sun 1991 article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

pricing interest rate derivative securities this article shows that the one state variableinterest rate models of vasicek 1977 and cox ingersoll and ross 1985b can be extended sothat they are consistent with both the current termstructure of interest rates and either the currentvolatilities of all spot interest rates or the currentvolatilities of all forward interest rates theextended vasicek model is shown to be very tracta ble analytically the article compares option pricesobtained using the extended vasicek model withthose obtained using a number of other models