how useful are the forecasts of intergovernmental agencies the imf and oecd versus the consensus this study compares the accuracy and information content of economic forecasts for g7 countries made in the 1990s by the oecd and imf the benchmarks for comparison are the average forecasts of private sector economists published by consensus economics with few exceptions the private sector forecasts are less biased and more accurate in terms of mean absolute error and root mean square error formal tests show these differences are statistically significant for forecasts of real growth and production less so for forecasts of inflation and unemployment overall there appears little information in the oecd and imf forecasts that could be used to reduce significantly the error in the private sector forecasts

on jumps in common stock prices and their impact on call option pricing the black scholes call option pricing model exhibits systematic empirical biases the merton call option pricing model which explicitly admits jumps in the underlying security return process may potentially eliminate these biases we provide statistical evidence consistent with the existence of lognormally distributed jumps in a majority of the daily returns of a sample of nyse listed common stocks however we find no operationally significant differences between the black scholes and merton model prices of the call options written on the sampled common stocks

biases in option prices abstract this paper examines a european call model of option pricing over a data set which does not suffer from the early exercise problems that have plagued earlier studies of call options on common stocks we specifically examine a data set of american call prices on spot foreign exchange for which it is plausible to apply an adjusted version of the garman kohlhagen 1983 and grabbe 1983 european call option model we make adjustments for interest rate risk and find that the model is nearly unbiased in the valuation of foreign currency options we conclude that the geske roll 1984 conjecture about dividend uncertainty creating biases in stock option prices holds analogously in the foreign currency option market interest rate differential risk analogous to risky dividends thus appears to be an important element in the valuation of foreign currency options

birth rates and the vietnam draft during the vietnam conflict over 8 million americans served in the armed forces and almost 3 5 million were deployed to southeast asia department of veterans affairs the war is considered by some to be the defining event of that generation not just because of the number of troops deployed the largest since the second world war but because of how it affected all men of that generation those who served as well as those who were able to avoid service while a large literature has examined effects of the draft on postwar outcomes for veterans effects of the wartime mobilization on family formation during the time of the conflict have been largely ignored the mobilization led to the absence of a large number of young men from local marriage markets and this shock to sex ratios could have significantly disrupted normal family formation patterns including assortative matching and fertility behavior 1 in this paper we exploit variation across states and over time on vietnam era inductions to analyze the effects of the wartime mobilization on

search and the efficient assignment of workers to jobs in a model in which different types of workers form matches with different types of employers a method of calculating opportunity costs of workers and jobs is derived these are shown to differ systematically from the reservation wages and profits used by workers and employers to determine whether matches should be formed ex ante differences among workers and among jobs then generate externalities in the labor market resulting in inefficient assignments of workers to jobs and multiple equilibria intervention in the labor market by altering the assignment can increase aggregate output but may cause regressive redistribution copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

on complicated dynamics in simple monetary models we provide a complete characterization of stationary and nonstationary deterministic equilibria in search models of liquidity with indivisible assets two formulations are considered the usual one with random search and bargaining and a less common but arguably better one with directed search and posting also we consider general meeting technologies this is interesting because some results are easy with the particular technologies in previous studies but not in general as is known these models have equilibria where endogenous variables change over time as self fulfilling prophecies more surprisingly we prove there are no equilibria where they cycle in the long run

option pricing when the variance is changing the monte carlo method is used to solve for the price of a call when the variance is changing stochastically

individual expectations limited rationality and aggregate outcomes recent studies suggest that the type of strategic environment or expectation feedback can have a large impact on whether the market can learn the rational fundamental price we present an experiment where the fundamental price experiences large unexpected shocks markets with negative expectation feedback strategic substitutes quickly converge to the new fundamental while markets with positive expectation feedback strategic complements do not converge but show underreaction in the short run and overreaction in the long run a simple evolutionary selection model of individual learning explains these differences in aggregate outcomes

education matching and the allocative value of romance societies are characterized by customs governing the allocation of non market goods such as marital partnerships we explore how such customs affect the educational investment decisions of young singles and the subsequent joint labour supply decisions of partnered couples we consider two separate matching paradigms for agents with heterogeneous abilities one where partners marry for money and the other where partners marry for romantic reasons orthogonal to productivity or debt these generate different investment incentives and therefore have a real impact on the market economy while marrying for money generates greater investment efficiency romantic matching generates greater allocative efficiency since more high ability individuals participate in the labour market the analysis offers the possibility of explaining cross country differences in educational investments and labour force participation based on matching regimes

does competition solve the hold up problem in an environment in which heterogeneous buyers and sellers undertake ex ante investments the presence of market competition for matches provides incentives for investment but may leave inefficiencies namely hold up and coordination problems this paper shows using an explicitly non cooperative model that when matching is assortative and investments precede market competition buyers investments are constrained efficient while sellers marginally underinvest with respect to what would be constrained efficient however the overall extent of this inefficiency may be large multiple equilibria may arise one equilibrium is characterized by efficient matches but there can be additional equilibria with coordination failures

nonparametric tests of alternative option pricing models using all reported trades and quotes on the 30 most active cboe option classes from august 23 1976 through august 31 1978

valuation of american call options on dividend paying stocks empirical tests abstract this paper examines the pricing performance of the valuation equation for american call options on stocks with known dividends and compares it with two suggested approximation methods the approximation obtained by substituting the stock price net of the present value of the escrowed dividends into the black scholes model is shown to induce spurious correlation between prediction error and 1 the standard deviation of stock return 2 the degree to which the option is in the money or out of the money 3 the probability of early exercise 4 the time to expiration of the option and 5 the dividend yield of the stock a new method of examining option market efficiency is developed and tested

decentralized matching and social segregation social segregation is a ubiquitous feature of human life people segregate along the lines of income religion ethnicity language and other characteristics this study provides the first experimental examination of decentralized matching with search frictions and institutionalized segregation the findings indicate that without a segregation institution high types over segregate relative to the equilibrium prediction we observe segregation attempts even when equilibrium suggests that everyone should accept everyone else in the presence of a segregation institution we find that while the symmetric segregation institution increases matching success rate and efficiency in one environment it has weak or no effect in a steep incentive environment by adding an entry cost to a flat incentive market however the asymmetric segregation institution leads to an increased matching success rate and efficiency in both environments which underscores the importance of a coordination device

option pricing when the variance changes randomly theory estimation and an application in this paper we examine the pricing of european call options on stocks that have vari ance rates that change randomly we study continuous time diffusion processes for the stock return and the standard deviation parameter and we find that one must use the stock and two options to form a riskless hedge the riskless hedge does not lead to a unique option pricing function because the random standard deviation is not a traded security one must appeal to an equilibrium asset pricing model to derive a unique option pricing function in general the option price depends on the risk premium associated with the random standard deviation we find that the problem can be simplified by assuming that volatility risk can be diversified away and that changes in volatility are uncorrelated with the stock return the resulting solution is an integral ofthe black scholes formula and the distribution function for the variance of the stock price we show that accurate option prices can be computed via monte carlo simulations and we apply the model to a set of actual prices

analyst forecasts and herding behavior the use of analyst forecasts as proxies for investors earnings expectations is commonplace in empirical research an implicit assumption behind their use is that they reflect analysts private information in an unbiased manner as demonstrated here this assumption is not necessarily valid there is shown to be a tendency for analysts to release forecasts closer to prior earnings expectations than is appropriate given their information further analysts exhibit herding behavior whereby they release forecasts similar to those previously announced by other analysts even when this is not justified by their information these results are shown to have interesting empirical implications article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

cities matching and the productivity gains of agglomeration abstract the striking geographical concentration of economic activities suggests that there are substantial benefits to agglomeration however the nature of those benefits remains unclear in this paper we take advantage of a new data set to quantify the role of one of the main contenders the matching of workers and jobs we show that thicker urban labor markets are associated with more assortative matching in terms of worker and firm quality when we estimate establishment level production functions we also find evidence of complementarities between worker and firm quality putting together the production and matching relationships we show that production complementarity and assortative matching is an important source of the urban productivity premium

unravelling of dynamic sorting we consider a two sided finite horizon search and matching model with heterogeneous types and complementarity between types the quality of the pool of potential partners deteriorates as agents who have found mutually agreeable matches exit the market when search is costless and all agents participate in each matching round the market performs a sorting function in that high types of agents have multiple chances to match with their peers however this sorting function is lost if agents incur an arbitrarily small cost in order to participate in each round with a sufficiently rich type space the market unravels as almost all agents rush to participate in the first round and match and exit with anyone they meet copyright 2005 wiley blackwell

household formation inequality and the macroeconomy this paper examines how family structure can influence the macroeconomy it uses a simple model where the key features are taken as exogenous and shows that the sorting of individuals into families can have important quantitative effects on human capital formation inequality and income it then discusses how these features can be endogenized and suggests avenues

the effect of price targets on the composition of ceo pay abstractthis article analyzes the impact of price targets from the ibes detail price history target database on ceo compensation retained from execucomp the two databases are merged at fiscal year frequency and an ols regression with fixed effect is used to analyze the impact of price target on ceo compensation the analysis reveals that analysts price targets affect top executives compensation when analysts predict a growth in the share price for a company the compensation package tilts towards stock options when analysts forecast a drop in the share price the compensation package tilts towards cash based compensation and restricted stocks i argue that the result is more aligned with the managerial power model of compensation which assumes the board of directors maximizes managers compensation than with the arm s length bargaining model that states that managers compensation is set to maximize shareholders profit

fiscal space and sovereign risk pricing in a currency union abstract we examine how membership in a currency union affects public debt sustainability and market assessments of default risk in eurozone countries we argue that there exist offsetting effects expectations of bailouts tend to make a given level of debt more sustainable lowering bond yields and cds rates but constraints on the use of monetary policy would tend to have the opposite effect pushing rates up especially as room for fiscal maneuver gets exhausted we develop a formal concept of fiscal space which takes account of the notion of fiscal fatigue under which there are limits to the government s ability to raise the primary surplus in response to higher debt and apply it to the eurozone countries investigating in particular how currency union membership affects cds and bond rates during both quiet and turbulent times for a given amount of fiscal space we find that in quiet times cds and bond rates for eurozone members were below what would be expected given their fiscal space a bonus from currency union membership but when the crisis erupted cds and bond yields rose more sharply for eurozone members than would be predicted based on their available fiscal space our interpretation is that sovereign bailouts did not occur with the hoped for alacrity in euro crisis countries generating sharper penalties for sovereigns that belong to a currency union

truthtelling in matching markets we analyze a search and matching model with non transferable utility and asymmetric information randomly paired agents go through an evaluation phase at the end of which they discover each other s types and choose to match or not before deciding to enter this phase agents can communicate through cheap talk we provide conditions for this communication to be informative and we examine how it affects agents welfare we show that communication is pareto improving only when the matching is assortative in the absence of communication and left unchanged by information transmission

what drives spreads in the euro area government bond market spreads between euro area government bond yields are related to short term interest rates which are in turn related to market liquidity to cyclical conditions and to investors incentives to take risk in theory lower interest rates are associated with lower degrees of risk aversion and smaller government bond spreads empirically the eurosystem s short term interest rates are positively related to those spreads which our econometric model finds to include significant and policy relevant default risk and liquidity risk components simone manganelli and guido wolswijk

targeted search with horizontal differentiation in the marriage market abstract we develop a search matching model in the marriage market with heterogeneous men a continuum of types and heterogeneous women a finite number of types the model has two distinguishing features first men and women are also horizontally differentiated second the search is targeted each type of woman constitutes a distinctive submarket and men are able to choose beforehand in which submarkets to participate but the search is random within each submarket we show that there is always a unique equilibrium in which men are endogenously segmented into different submarkets and that the equilibrium matching pattern is weakly positive assortative we then explore how the equilibrium marriage pattern changes horizontally and vertically as some exogenous shocks occur in particular we show that an internet induced increase in search efficiency would make the marriage pattern overall more assortative while an increase in the dispersion of the horizontal match fitness could make the marriage pattern overall less assortative

a spillover based theory of credentialism i propose a model in which credentials such as diplomas are instrumentally valuable to workers the model avoids an important criticism of standard job market signalling models by tying a worker s wage to their output a worker s productivity is influenced by the skills of their co workers where such skills arise from an ability augmenting investment that is made prior to matching with co workers credentials allow workers to demonstrate their investment to the labour market thereby allowing them to match with high skill co workers in equilibrium despite the positive externality associated with a worker s investment i show how overinvestment is pervasive in equilibrium

the valuation of american call options and the expected ex dividend stock price decline abstract this study focuses on the ex dividend stock price decline implicit within the valuation of american call options on dividend paying stocks the roll 1977 american call option pricing formula and the observed structure of cboe call option transaction prices are used to infer the expected ex dividend stock price decline as a proportion of the amount of the dividend the relative decline is shown to be not meaningfully different from one confirming some recent evidence from studies which examined stock prices in the days surrounding ex dividend

marriage and class here we consider a matching model where agents are heterogeneous and utilities nontransferable we utilize this framework to study how equilibrium sorting takes place in marriage markets we impose conditions that guarantee the existence of a steady state equilibrium and then characterize it several examples are developed to illustrate the richness of equilibria the model reveals an interesting sorting externality that can support multiple steady state equilibria even with constant returns to matching excerpt

matching with noise and the acceptance curse abstract this paper explores matching with both search and information frictions specifically everyone observes only a noisy signal of the true type of any potential mate in this context matching decisions must incorporate not only information about a partner s attribute conveyed by the noisy signal but also as in the winner s curse in auction theory information about a partner s type contained in his or her acceptance decision we show that there exists an equilibrium exhibiting a stochastic positive assorting of types generalizing becker j polit economy 81 1973 813 846 in equilibrium selection is adverse being accepted reduces an agent s estimate of a potential partner s type a phenomenon that we call the acceptance curse effect

transplants and implants the economics of self improvement this article examines equilibrium self improvement and marriage proposal strategies in a two sided search model with nontransferable utility singles are vertically differentiated some make better marriage partners than others a complete characterization of equilibrium is provided it is shown there are two externalities to self improvement decisions further these externalities may support multiple pareto rankable equilibria by encouraging everybody to self improve society can create a situation where everybody is forced to improve to remain acceptable but a preferred equilibrium may exist where there is less costly self improvement

inefficient sorting under output sharing abstract i study sorting in a frictional market asset owners post their terms then workers direct their search when the owners switch from prices to shares the competition between workers is handicapped the unique equilibrium features inefficient positive assortative matching the queue lengths are distorted even though the hosios efficiency condition holds for every pair of types for any distribution of types all workers pair up with better assets the best workers suffer while the weakest workers gain the opposite occurs on the asset side competition drives the asset owners to post flatter contracts it leads to constrained efficiency whenever prices are feasible otherwise handicapped competition results in inefficient sorting

matching and sorting in online dating using data on user attributes and interactions from an online dating site we estimate mate preferences and use the gale shapley algorithm to predict sta ble matches the predicted matches are similar to the actual matches achieved by the dating site and the actual matches are approximately efficient outof sample predictions of offline matches i e marriages exhibit assortative mating patterns similar to those observed in actual marriages thus mate pref erences without resort to search frictions can generate sorting in marriages however we underpredict some of the correlation patterns search frictions may play a role in explaining the discrepancy

stable marriages and search frictions stable matchings are the primary solution concept for two sided matching markets with nontransferable utility we investigate the strategic foundations of stability in a decentralized matching market towards this end we embed the standard marriage markets in a search model with random meetings we study the limit of steady state equilibria as exogenous frictions vanish the main result is that convergence of equilibrium matchings to stable matchings is guaranteed if and only if there is a unique stable matching in the underlying marriage market whenever there are multiple stable matchings sequences of equilibrium matchings converging to unstable inefficient matchings can be constructed thus vanishing frictions do not guarantee the stability and efficiency of decentralized marriage markets

price changes of related securities the case of call options and stocks this paper tests the hypothesis that option prices contain information not reflected in con temporaneous stock prices an options transactions data base is used for the purpose the evidence suggests that the magnitude of anticipation of stock prices by option prices is insufficient to overcome the bid ask spread for intra day holding periods implications of the profits in the overnight holding periods are discussed

learning forecasting and optimizing an experimental study rational expectations re models have two crucial dimensions i agents on average correctly forecast future prices given all available information and ii given expectations agents solve optimization problems and these solutions in turn determine actual price realizations experimental tests of such models typically focus on only one of these two dimensions in this paper we consider both forecasting and optimization decisions in an experimental cobweb economy we report results from four main experimental treatments 1 subjects form forecasts only 2 subjects determine quantity only solve an optimization problem 3 they do both and 4 they are paired in teams and one member is assigned the forecasting role while the other is assigned the optimization task all treatments converge to rational expectation equilibrium ree but at different speeds we observe that performance is the best in treatment 1 and the worst in treatment 3 we further find that most subjects use adaptive rules to forecast prices given a price forecast subjects are less likely to make conditionally optimal production decisions in treatment 3 where the forecast is made by themselves than in treatment 4 where the forecast is made by the other member of their team which suggests that two heads are better than one in term of the speed of finding the ree

inflation and the fiscal limit abstract we use a rational expectations framework to assess the implications of rising debt in an environment with a fiscal limit the fiscal limit is defined as the point where the government no longer has the ability to finance higher debt levels by increasing taxes so either an adjustment to fiscal spending or monetary policy must occur to stabilize debt we give households a joint probability distribution over the various policy adjustments that may occur as well as over the timing of when the fiscal limit is hit one policy option that stabilizes debt is a passive monetary policy which generates a burst of inflation that devalues the existing nominal debt stock the probability of this outcome places upward pressure on inflation expectations and poses a substantial challenge to a central bank pursuing an inflation target the distribution of outcomes for the path of future inflation has a fat right tail revealing that only a small set of outcomes imply dire inflationary scenarios avoiding these scenarios however requires the fiscal authority to renege on some share of future promised transfers

a theory of self selection in a market with matching frictions an application to delay in refereeing times in economics journals abstract a matching market with imperfect information is studied with imperfect information it is shown that friction in a meeting process can facilitate self selection and thus may improve the matching outcome as an application the effect of delay in refereeing time on publication outcome is analyzed in a publication process in economics journals though the delay causes efficiency loss by postponing the dissemination of new research it will better sort the papers to each journal by their qualities by preventing mediocre papers from being submitted to a prestigious journal and published by luck if an assortative outcome good papers in prestigious journals and mediocre papers in less prestigious journals is efficient the delay may actually improve the publication outcome other matching market examples are also discussed

why dowry payments declined with modernization in europe but are rising in india in contrast to most dowry oriented societies in which payments have declined with modernization those in india have undergone significant inflation over the last five decades this paper explains the difference between these two experiences by focusing on the role played by caste the theoretical model contrasts caste and non caste based societies in the former there exists an inherited component to status caste that is independent of wealth and in the latter wealth is the primary determinant of status modernization is assumed to involve two components increasing average wealth and increasing wealth dispersion within status or caste groups the paper shows that in caste based societies the increases in wealth dispersion that accompany modernization necessarily lead to increases in dowry payments whereas in non caste based societies increased dispersion has no real effect on dowry payments and increasing average wealth causes the payments to decline

a strategy experiment in dynamic asset pricing this study presents a strategy experiment in a simple dynamic asset pricing model where the current market equilibrium asset price is determined by aggregated individual expectations of next period s price after participating in an introductory laboratory experiment on expectation formation participants formulate a complete forecasting strategy these strategies are programmed and markets are simulated participants receive feedback from the results of these simulations and can adapt their strategy four rounds are played and the entire experiment lasts eight weeks a final laboratory experiment compares predictions of participants with the predictions of the submitted strategy we find that most of the participants submit complicated strategies and that strategies become more complicated over the rounds most markets converge to a steady state price only after many periods if at all the number of converging price sequences increases over the rounds these results suggest in general slow convergence and learning of the subjects over the rounds even in a stationary environment learning the correct fundamental price level turns out to be difficult an important part of the non convergence seems to be caused not by individual strategies but by the interaction of several strategies from the final experiment we conclude that the strategies are a good representation of what participants do in a laboratory experiment

sorting and decentralized price competition we investigate the role of search frictions in markets with price competition and how it leads to sorting of heterogeneous agents there are two aspects of value creation the match value when two agents actually trade and the probability of trading governed by the search technology we show that positive assortative matching obtains when complementarities in the former outweigh complementarities in the latter this happens if and only if the match value function is root supermodular that is its nth root is supermodular where n reflects the elasticity of substitution of the search technology this condition is weaker than the condition required for positive assortative matching in markets with random search

bargaining in dynamic markets abstract we study non stationary markets in which traders are randomly matched to bargain over the price of a heterogeneous good or the terms of a partnership the economy consists of a continuum of players drawn from a finite set of types players exogenously enter the market over time and exit upon trading at every date matching probabilities for each pair of types are determined by the endogenous distribution of trader types in the market the balance of bargaining power at any stage depends on variations in potential gains from trade the inflows of new traders the structure of agreements at future dates and the induced frequency of trading opportunities we establish that an equilibrium always exists moreover all equilibria that lead to the same evolution of the economy are payoff equivalent however we show that multiple self fulfilling expectations about the trajectory of the economy generating distinct equilibrium dynamics and payoffs may coexist

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

matching with interviews abstract this paper explores how interviews affect the matching process when worker productivity is private information wages are determined by a single round of strategic bargaining after the worker is interviewed the implications of this hiring process for the efficiency of matching and the incidence and severity of statistical discrimination are considered the better are firms at identifying productive workers the worse the average quality of the unemployment pool so interviewing tends to slow down matching for every one multiple pareto rankable equilibria are possible such that any social group in a bad equilibrium faces stricter hiring standards longer spells of unemployment and lower welfare

information externalities and intermediaries in frictional search markets in frictional matching markets with heterogeneous buyers and sellers sellers incur discrete showing costs to show goods to buyers who incur discrete inspection costs to assess the suitability of the goods on offer we study how brokers can help reduce these costs by managing the level and mix of goods in their inventory intermediaries emerge and improve social welfare when there is sufficient heterogeneity in the types of goods and preferences learning and inventory management enable search intermediaries to internalize information externalities generated in unintermediated private search resume externalites informationnelles et intermediaires dans des marches frictionnels de recherche dans des marches frictionnels d arrimage ou acheteurs et vendeurs sont heterogenes les vendeurs doivent encourir des couts separes pour montrer leurs produits aux acheteurs qui doivent pour leur part encourir des couts separes d inspection pour s assurer que les biens offerts leur conviennent on etudie comment des courtiers peuvent aider a reduire ces couts en gerant le niveau et la mixite des biens dans leurs inventaires des intermediaires emergent qui ameliorent le bien etre social quand il y a heterogeneite suffisante des types de biens et de preferences l apprentissage et la gestion des inventaires permettent aux intermediaires de recherche d internaliser les externalites informationnelles engendrees dans le processus de recherche privee sans l aide d intermediaires

how do experts forecast sovereign spreads this paper assesses how forecasting experts form their expectations about future government bond spreads using monthly survey forecasts for france italy and the united kingdom between january 1993 and october 2014 we test whether respondents consider the expected evolution of the fiscal balance and other economic fundamentals to be significant drivers of the expected bond yield differential over a benchmark german 10 year bond our main result is that a projected improvement of the fiscal outlook significantly reduces expected sovereign spreads this suggests that credible fiscal plans affect market experts expectations and reduce the pressure on sovereign bond markets in addition we show that expected fundamentals generally play a more important role in explaining forecasted spreads compared to realized spreads

multiple equilibria and minimum wages in labor markets with informational frictions and heterogeneous production technologies it is often argued that a mandatory minimum wage is binding only if the wage density displays a spike at it in this article we analyze a model with search frictions and heterogeneous production technologies in which imposition of a minimum wage affects wages even though after imposition the lowest wage in the market exceeds the minimum wage the model has multiple equilibria as a result of the fact that the reservation wage of the unemployed and the lowest production technology in use affect each other imposition of a minimum wage may improve social welfare

sorting through search and matching models in economics toward understanding assortative matching this is a self contained introduction to research on search and matching we first explore the nontransferable and perfectly transferable utility matching paradigms and then a unifying imperfectly transferable utility matching model motivated by some unrealistic predictions of frictionless matching we flesh out the foundational economics of search theory we then revisit the original matching paradigms with search frictions we finally allow informational frictions that often arise such as in college student sorting

frictional assignment i efficiency abstract this paper examines the two sided matching problem where the agents on each side of the market are heterogeneous and the matching process is time consuming this is cast in a labor market setting where workers of different skills match with different machine qualities i characterize the efficient allocation and then show that it can be decentralized by a market mechanism the efficient assignment is not always positively assortative despite the fact that machine qualities and skills are complementary in production to decentralize the efficient allocation the market mechanism requires the firms to post wages and commit each machine quality to a particular skill implications on wage inequality are briefly examined journal of economic literature classification numbers j31 e24 j64

too good to fire non assortative matching to play a dynamic game abstract we model stable non assortative labor market matchings we endogenize how transferable utility is a matched firm and worker play an infinite horizon game with one sided moral hazard becker s 1973 result that complementarity yields positively assortative matching fails because increasing match quality harms dynamic incentives a firm cannot credibly threaten to fire a worker who is productive even with low effort thus firms may prefer lower type workers who will exert more effort we offer a new interpretation of efficiency wages committing to a high wage improves effort incentives indirectly by increasing the firm s willingness to walk away we also show that the set of stable outcomes has a lattice structure

the value of early exercise in option prices an empirical investigation previous studies in the valuation of american options apparently undervalue the right of early exercise this study uses actual prices from the cboe s s p 100 option instead of model generated values deviations from the theoretical put call parity relationship are caused by the possibility of early exercise these deviations are used to infer the value of early exercise the actual value of early exercise is both statistically and economically significant as expected from theoretical considerations the value of early exercise for put options is greater than for call options

testing the rationality of price forecasts new evidence from panel data this paper tests the rationality of individual price forecasts in a panel of professional forecasters here unlike in most previous studies rationality is not rejected the results here differ because 1 using individual forecasts avoids aggregation bias 2 comparison of forecasts to initial data avoids bias due to data revision 3 the professional forecasters have economic incentives to state their expectations accurately and 4 a new covariance matrix estimator consistent when forecast errors are correlated across individuals is used copyright 1990 by american economic association

valuation of american options on foreign currency abstract pricing models for american call and put options on foreign currency are derived herein these models are used to investigate the efficiency of the market for foreign currency options the evidence presented here indicates that market prices for these options deviate substantially from their corresponding model prices in addition it is shown that a hedging strategy executed at transaction prices can be used to translate an observed deviation of market from model prices into positive excess profits however these profits are eliminated if the strategy is executed at bid and offer prices

dynamics of international integration of government securities markets abstract this paper investigates the dynamics of international government bond market integration in six of the g7 economies over two decades leading up to the global crisis it examines whether such integration had been significant the extent to which integration at the short and long end of the yield curve differed the nature of such integration and the extent of the decoupling of the long rates from short rates these issues are investigated using the rigorous smooth transition copula garch model framework the results show that integration at the long end of the yield curve had been increasing had become pronounced and was significantly greater than at the short end decoupling between the short and long end of the yield curve was notable with important implications for the efficacy of monetary policy in the period before the crisis

gains from trade and the sovereign bond market abstract increasing international flows of goods services and financial assets have been shown to increase a country s welfare through various channels this paper studies how a country s access to a bond market affects its welfare gains from international trade we do so by incorporating a sovereign bond market into a simple armington 1969 s trade model while standard trade models suggest surprisingly small gains from trade our model implies that introducing channels through a sovereign bond market greatly magnifies the gains from trade key mechanisms in the model are confirmed by data and the results are found to be robust to a variety of considerations

structural estimation of marriage models a structural approach is used to examine who matches with whom a two sided matching model that allows for marital sorting in response to marriage market flexibility and agents preferences is utilized estimation is based on imbedding the numerical solution of a matching model within a maximum likelihood procedure results indicate that wage is more desirable than education in predicting marriageability for white men education is more desirable for black men the marriage market for white men is more flexible both marriage market flexibility and the chance of being classified correctly using agents wage and education decrease with age for white men

call option pricing and replication under economic friction in this paper we incorporate multiple transactions costs in the option pricing formula of black and scholes 1972 the effect of introducing economic friction in the equilibrium equation is studied and summarized in some central propositions the analysis provides part of the results needed for capturing the economic effects of transactions costs in the pricing process

on valuing american call options with the black scholes european formula empirical papers on option pricing have uncovered systematic differences between market prices and values produced by the black scholes european formula such biases have been found related to the exercise price the time to maturity and the variance we argue here that the american option variant of the black scholes formula has the potential to explain the first two biases and may partly explain the third it can also be used to understand the empirical finding that the striking price bias reverses itself in different sample periods the expected form of the striking price bias is explained in detail and is shown to be closely related to past empirical findings the black scholes european option pricing model tends to exhibit systematic empirical biases when used to value american call options the reported biases

over the counter option market dividend protection and biases in the black scholes model a note most options are traded over the counter otc and are dividend protected the exercise price decreases on the ex date by an amount equal to the dividend this protection completely inhibits the early exercise of american call options nevertheless otc protected options have market values which differ systematically from blackscholes values for european options on non dividend paying stocks the pricing difference is related to both the variance of the underlying stock return and to time until expiration of the option but it is quite small in dollar amount

sorting and long run inequality many social commentators have raised concerns over the possibility that increased sorting in society may lead to greater inequality to investigate this we construct a dynamic model of intergenerational education acquisition fertility and marital sorting and parameterize the steady state to match several basic empirical endings we end that increased sorting will signiecantly increase income inequality four factors are important to our endings a negative correlation between fertility and education a decreasing marginal effect of parental education on children s years of education wages that are sensitive to the relative supply of skilled workers and borrowing constraints that affect educational attainment for some low income households

option pricing and implicit volatilities abstract this paper demonstrates that black scholes implied volatilities can be used to value options in many situations where the assumptions of the black scholes model are violated including i alternative stock processes ii stochastic interest rates and iii market frictions given its computational simplicity this procedure provides an attractive alternative to the more complex models with a direct estimation procedure

sovereign credit ratings in the european union a model based fiscal analysis abstract we present a model based measure of sovereign credit ratings derived solely from the fiscal position of a country a forecast of its future debt liabilities and its potential to use fiscal policy to repay these we use this measure to calculate credit ratings for 14 european countries over the period 1995 2012 this measure identifies a european sovereign debt crisis almost two years before the official ratings of the credit rating agencies

an empirical test of a valuation model for american options on futures contracts pricing models for american call and put options on futures contracts are derived herein these models are used to investigate the efficiency of the market for options on standard poor 500 and german mark futures the evidence presented here indicates that market prices for these options deviate substantially from their corresponding model prices in addition it is shown that a hedging strategy originated at prices that indicate a deviation of market from model is successful in translating the observed mispricing into excess profits after transactions costs however these net profits are eliminated if the origination of the strategy is delayed by one trade or if bid ask spreads are accounted for

aspirations segregation and occupational choice this paper examines the steady states of an overlapping generations economy with a given distribution of household locations over a one dimensional interval parents decide whether or not to educate their children educational decisions are affected by location there are local complementarities in investment incentives stemming from aspirations formation learning spillovers or local public goods at the same time economy wide wages endogenously adjust to bring factor supplies into line with demand the model therefore combines local social interaction with global market interaction the paper studies steady state configurations of skill acquisition both with and without segregation the model is used to compare macroeconomic and welfare properties of segregated and unsegregated steady states jel d31 o15 d85

tests of two models for valuing call options on stocks with dividends roll has recently formulated an option pricing model which allows dividend payments on the underlying stock this paper compares the performance of the exact roll model with a modified but inexact black scholes model the results indicate that the roll model prices are significantly closer to actual market prices

education segregation and marital sorting theory and an application to the uk abstract this paper presents a model of the intergenerational transmission of education and marital sorting parents matter both because of their household income and because their human capital determines the distribution of a child s disutility from making an effort to become skilled we show that an increase in segregation has potentially ambiguous effects on the proportion of individuals that become skilled in the steady state and hence on marital sorting the personal and household income distribution and welfare we calibrate the steady state of our model to uk statistics we find that an increase in the correlation of spouses in their years of education will bring about a small increase in the proportion of skilled individuals when the relative supply of skilled individuals is variable at the family level and a decrease when this supply is fixed ex ante utility of an unborn individual increases in the first case and decreases in the second the welfare effect of increased sorting is negative for unskilled individuals and positive for skilled individuals increased segregation always leads to an increase in welfare inequality between skilled and unskilled individuals

comparative performance of the black scholes and roll geske whaley option pricing models the original black scholes bs 2 european call option pricing model does not take account of divided payments on the underlying stock and does not allow for the possibility of early exercise that may be optimal when the stock pays dividends black 1 has suggested that the original bs model can be modified to take account of dividends and sharpe 14 predicts that this modified or pseudo american bs approach while not exact is probably sufficient for many listed options

further results on the constant elasticity of variance call option pricing model the black scholes 4 call option model is a member of the class of constant elasticity of variance call option models proposed by cox 6 while the black scholes model assumes that the volatility or instantaneous variance of return is constant through time the other members of the class allow the volatility to change with the stock price this property is of interest because empirical evidence suggests that returns to common stock are heteroscedastic and also that volatilities implied from the black scholes model and market prices of call options are not constant

yield spreads on emu government bonds government bond spreads we provide evidence that the movements in yield differentials between euro zone government bonds explained by changes in international risk factors as measured by banking and corporate risk premiums in the united states are more pronounced for bonds issued by italy and spain liquidity factors play a smaller role so policies meant to increase financial market efficiency do not appear sufficient to deliver a seamless bond market in the euro area the risk of default is a small but important component of yield differentials movements which signal market perceptions of fiscal vulnerability impose market discipline on national fiscal policies and may be reduced only by further convergence in debt ratios lorenzo codogno carlo favero and alessandro missale

option pricing with stochastic volatility information time vs calendar time empirical evidence has shown that subordinated processes represent well the price changes of stocks and futures using either transaction counts or trading volume as a proxy for information arrival it supports the contention that volatility is stochastic in calendar time because of random information arrival and thus becomes stationary in information time this contention has also been supported later in theoretical models in this paper we investigate the implication of this contention to option pricing first we price the option in calendar time where the return of the underlying asset follows a jump subordinated process we extend rubinstein s rubinstein m 1976 the valuation of uncertain income streams and the valuation of options bell j econom management sci 7 407 425 and ross s ross s 1989a information and volatility the no arbitrage martingale approach to timing and resolution irrelevancy finance44 1 17 martingale valuation methodology to incorporate the pricing of volatility risk the resulting equilibrium formula requires estimating seven parameters upon implementation we then make a stochastic time change from calendar time to information time in order to obtain a stationary underlying asset return process to price the option we find that the isomorphic option has random maturity because the number of information arrivals prior to the option s calendar time expiration date is random we value the option using dynkin s dynkin e b 1965 markov processes vols i and ii springer verlag berlin and new york version of the feynman kac formula that allows for a random terminal date the resulting information time formula requires estimating only one additional parameter compared to the black scholes s in practical application in this regard the time change has reduced the computational complexity of the option pricing problem simulations show that the formula may outperform the black scholes black f m scholes 1973 the pricing of options and corporate liabilities political econom 81 637 659 and merton merton robert c 1976a option pricing when underlying stock returns are discontinuous financial econom 3 125 143 models in pricing currency options as a first attempt to derive valuation relationships in the information time economy this investigation may suggest that the information time approach is a functional alternative to the current calendar time norm it is especially suitable for deriving volatility free portfolio insurance strategies

a simple linear weighting scheme for black scholes implied volatilities a note abstract this study presents a piecewise linear weighting function for implied volatilities calculated from black scholes call and put prices a sensitivity analysis is conducted to compare black scholes prices calculated using the weighted implied volatilities to american model prices the analysis indicates that a relatively simple european model can provide close approximations to american prices

bid ask spreads and volatility estimates the implications for option pricing abstract this paper re examines the variance related mispricing exhibited by the black scholes model by accounting for the effects of bid ask spreads on the estimation of the variance of returns on a security it is shown that volatility estimates based on observed sequences of transaction prices overestimate the true volatility of returns on a security with the magnitude of the overestimation being an increasing function of the level of the volatility the paper then provides empirical tests of the proposition that the variance related bias exhibited by the black scholes model is due to this misestimation of volatility the results indicate that although the misestimation is systematically related to the variance it is not of sufficient magnitude to explain the volatility bias exhibited by black scholes model

social norms savings behavior and growth we argue that many goods and decisions are not allocated or made through markets we interpret an agent s status as a ranking device that determines how well he or she fares in the nonmarket sector the existence of a nonmarket sector can endogenously generate a concern for relative position in for example the income distribution so that higher income implies higher status moreover it can naturally yield multiple equilibria it is thus possible to explain differences in growth rates across countries without recourse to differences in underlying preferences technologies or endowments different social organizations lead to different reduced form preferences which lead to different growth rates

how does liquidity affect government bond yields the paper explores the determinants of yield differentials between sovereign bonds using euro area data there is a common trend in yield differentials which is correlated with a measure of aggregate risk in contrast liquidity differentials display sizeable heterogeneity and no common factor we propose a simple model with endogenous liquidity demand where a bond s liquidity premium depends both on its transaction cost and on investment opportunities the model predicts that yield differentials should increase in both liquidity and risk with an interaction term of the opposite sign testing these predictions on daily data we find that the aggregate risk factor is consistently priced liquidity differentials are priced for a subset of countries and their interaction with the risk factor is in line with the model s prediction and crucial to detect their effect

tests of an american option pricing model on the foreign currency options market this paper tests the ability of the american option pricing model proposed by parkinson 18 or mason 14 to explain the pricing of the foreign currency options traded on the philadelphia stock exchange from february 28 1983 to march 26 1985 we find that the model underprices out of the money options relative to at the money and in the money options this relative underpricing is driven by an underpricing of out of the money call options of short maturity in addition the degree of relative mispricing for most categories of options is shown to be a decreasing function of the time to maturity of the options longer maturity options appear to trade at similar levels of implied volatility whether they are in at or out of the money most of these biases appear consistent with the fact that the underlying spot currency rate follows a mixed jump diffusion process as described in 17

on the striking price bias of the black scholes formula with an estimated variance rate abstract the use of an estimated variance rate in the black scholes formula produces biased estimates of the theoretical price this study analytically examines the bias with respect to moneyness of the option

long term partnership formation marriage and employment of course marriage and employment are different nevertheless a worker looking for a job a rm looking for worker or a single person looking for a marriage partner face similar problems as all are seeking a long term partner indeed forming long term partnerships is a common occurrence in life there are many other examples business people search for other business people to form a pro table relationship bridge players seek to nd a suitable partners students search for a good university we would all like to nd a good friend etc the problem becomes signi cant if there are substantial differences in the return obtained from forming a partnership with different partners for example employers differ in the wages they offer or in the work environment they provide in such a situation a worker may reject some job offers similarly as many have learned to their cost some make better marriage partners than others the problem is two sided while a worker is evaluating a potential employer the employer is also evaluating the worker it is this two sided aspect of the problem that generates a signi cant interest a worker s willingness to accept employment at a rm depends not only on the characteristics of the rm but also the other possible options open to the worker the better an individual s opportunities elsewhere the more selective he or she will be in evaluating a potential partnership an academic who believes harvard may make an offer in the near future will be more selective in evaluating offers from lesser universities in this way expectations play a role if a single man believes that few if any women will nd him an acceptable marriage partner then he may accept the rst opportunity that presents itself partnership formation typically does not comply with a classic market situation where all participants know everything and all trades take place at zero cost finding a job nding a husband or wife or nding a business partner is a time consuming activity where opportunities typically arrive over time at uncertain intervals of time of course we can act in ways that in uence the arrival rate of potential partner workers go to employment agencies or read help wanted advertisements in newspapers singles of a certain age go to discos or join tennis clubs the literature on search and matching sm see mortensen 1982 and pissarides 1990 for early examples 1 provides an excellent framework for the economic journal 109 june f307 f334 royal economic society 1999 published by blackwell publishers 108 cowley road oxford ox4 1jf uk and 350 main street malden ma 02148 usa

marriage and the city search frictions and sorting of singles this paper develops and tests a model where cities play an important role as marriage markets the idea is simple cities are dense areas where singles can meet more potential partners than in rural areas to enjoy those benefits they are willing to pay a premium in terms of higher housing prices once married the benefits from meeting more potential partners vanish and married couples move out of the city attractive singles benefit most from a dense market and are therefore more likely to move to the city those predictions are tested and confirmed with a unique danish data set

competitive search equilibrium with multidimensional heterogeneity and two sided ex ante investments abstract we analyze a competitive price taking search model where workers and firms make costly investments e g in education and physical capital respectively before they enter the labor market the environment features transferable utility and symmetric information a key novelty with respect to existing work is that we allow for multidimensional heterogeneity on both sides of the market the probabilities of finding and filling different jobs and the corresponding wages are determined endogenously in equilibrium we show that constrained efficient allocations can be determined as optimal solutions to a linear programming problem whereas the prices supporting these allocations and the associated expected payoffs for workers and firms correspond to the solutions of the dual of that linear program we use this characterization to show that an equilibrium exists and is constrained efficient under very general conditions the fact that linear programming techniques are used for the structural estimation of frictionless matching models suggests that our framework is potentially useful for empirical studies of labor markets and other markets where search frictions are prevalent

on the valuation of american call options on stocks with known dividends both the roll and the geske equations for the valuation of the american call option on a stock with known dividends are incorrectly specified this note presents the corrected valuation formula explains the misspecifications and provides a numerical example

uncertain fiscal consolidations the paper explores the macroeconomic consequences of fiscal consolidations whose timing and composition are uncertain drawing on the evidence in alesina and ardagna 2010 we emphasize whether or not the fiscal consolidation is driven by tax rises or expenditure cuts we find that the composition of the fiscal consolidation its duration the monetary policy stance the level of government debt and expectations over the likelihood and composition of fiscal consolidations all matter in determining the extent to which a given consolidation is expansionary and or successful in stabilizing government debt

to each according to markets tournaments and the matching problem with borrowing constraints we compare the performance of markets and tournaments as allocative mechanisms in an economy with borrowing constraints the economy consists of a continuum of individuals who differ in their initial wealth and ability level these must be assigned to a continuum of investment opportunities or inputs of different productivity with perfect capital markets matching is efficient under both mechanisms markets however generate higher aggregate consumption because of the waste associated with the production of signals under tournaments when borrowing constraints are present tournaments dominate markets in terms of matching efficiency and for sufficiently powerful signalling technologies also in terms of aggregate consumption