on the economic architecture of the workplace repercussions of social comparisons among heterogeneous workers we analyze the impact on a firm s profits and optimal wage rates and on the distribution of workers earnings when workers compare their earnings with those of coworkers we consider a low productivity worker who receives lower wage earnings than a high productivity worker when the low productivity worker derives dis utility not only from his own effort but also from comparing his earnings with those of the high productivity worker his response to the sensing of relative deprivation is to increase the optimal level of effort consequently the firm s profits are higher its wage rates remain unchanged and the distribution of earnings is compressed

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

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

pricing claims under garch level dependent interest rate processes this article considers the pricing of interest rate sensitive claims when the underlying interest rate is driven by a two state variable garch process analytical solutions are established for the case when the innovations in the short rate are normal and or chi squared random variables and the volatility of rates take on a special garch form garch models that nest level dependent interest rate models including the cox ingersoll and ross model are also considered algorithms are provided that permit the efficient pricing of american style interest rate claims under a rather broad array of garch level dependent processes

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

migration for degrading work as an escape from humiliation this paper develops a model of voluntary migration into degrading work the essence of the model is a tension between two bads that which arises from being relatively deprived at home and that which arises from engaging in humiliating work away from home balancing between these two bads can give rise to an explicit voluntary choice to engage in humiliating work the paper identifies conditions under which a migrant will choose to engage in degrading work rather than being forced into it to work abroad as a prostitute say rather than on a farm the paper delineates the possible equilibria and finds that greater relative deprivation will make it more likely that the equilibrium outcome will be engagement in prostitution it is shown that under well specified conditions every individual will work as a prostitute yet every individual would be better off working on a farm put differently when specific conditions are satisfied there is a possibility of a coordination failure if individuals believe that everyone else will choose to be a prostitute this belief will be self fulfilling in this case all the individuals choose to engage in prostitution which renders each of them worse off the paper discusses various policy implications it is shown that a policy intervention a crackdown on migrants engagement in prostitution if implemented strictly can increase everyone s welfare but when the policy is implemented loosely cracking down on prostitution will only reduce individuals welfare without reducing their engagement in prostitution

a markovian framework in multi factor heath jarrow morton models we consider the general n factor heath jarrow and morton model 1992 and provide a sufficient condition on the volatility structure for the spot rate process to be markovian with 2 n state variables the price of a discount bond is also markovian with the same state variables and hence claims against the term structure can be efficiently priced using standard simulation techniques our results extend earlier works such as ritchken and sankarasubramanian 1995 where the one factor model is treated and carverhill 1994 where the volatility structure is non random numerical experiments show that our model can explain the volatility smile observed in the interest rate options market and also overcome the biases noted by flesaker 1993

testing the heath jarrow morton ho lee model of interest rate contingent claims pricing this paper presents empirical tests of the constant volatility version of the heath jarrow and morton model which is also the continuous time limit of the ho and lee model using a generalized method of moments gmm test on three years of daily data for eurodollar futures and futures options the model can be rejected for most subperiods various biases in the fitted option prices relative to the market prices are documented through a regression study the small sample properties and power of the gmm framework to this setting are also studied through simulations

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

integration social distress and policy formation i study the integration of regions in the form of a merger of populations which i interpret as a revision of people s social space and their comparison set i illustrate the way in which a merger can aggravate social distress and i consider policy responses specifically i view the merger of populations as a merger of income vectors i measure social distress by aggregate relative deprivation i demonstrate that a merger increases aggregate relative deprivation and i show that a social planner is able to reverse this increase by means of least cost post merger increases in individual incomes but is unable to counter it by relying exclusively on a self contained income redistribution that retains individual levels of wellbeing at their pre merger levels

endogenous selection of comparison groups human capital formation and tax policy this paper considers a setting in which the acquisition of human capital entails a change of location in social space that causes individuals to revise their comparison groups skill levels are viewed as occupational groups and moving up the skill ladder by acquiring additional human capital which in itself is rewarding leads to a shift in the individual s inclination to compare himself with a different and on average better paid comparison group which in itself is penalizing the paper sheds new light on the dynamics of human capital formation and suggests novel policy interventions to encourage human capital formation in the aggregate and at the same time reduce inter group income inequality

on correlation and default clustering in credit markets we establish markovian models in the heath jarrow and morton 1992 paradigm that permit an exponential affine representation of riskless and risky bond prices while offering significant flexibility in the choice of volatility structures estimating models in our family is typically no more difficult than in the workhorse affine family besides diffusive and jump induced default correlations defaults can impact the credit spreads of surviving firms allowing for a greater clustering of defaults numerical implementations highlight the importance of incorporating interest rate credit spread correlations credit spread impact factors and the full credit spread curve when building a unified framework for pricing credit derivatives the author 2010 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oxfordjournals org oxford university press

single factor heath jarrow morton term structure models based on markov spot interest rate dynamics this paper considers the class of heath jarrow morton term structure models where the spot interest rate is markov and the term structure at time t is a function of time maturity and the spot interest rate at time t a representation for this class of models is derived and i show that the functional forms of the forward rate volatility structure and the initial forward rate curve cannot be arbitrarily chosen i provide necessary and sufficient conditions indicating which combinations of these functional forms are allowable i also derive a partial differential equation representation of the term structure dynamics that does not require explicit modeling of both the market price of risk and the drift term for the spot interest rate process using the analysis presented in this paper a class of intertemporal term structure models is derived

dynamic models of the term structure in the past 25 years tremendous progress has been made in modeling the dynamics of the term structure of interest rates which play an instrumental role in determining prices and hedging portfolios of fixed income derivative securities this article reviews the theoretical development of the dynamic models of the default free term structure and their applications in pricing interest rate options classic models sometimes termed equilibrium models and their multifactor extensions are outlined these models provide clear economic intuitions connecting the term structure with economic fundamentals they also lay a foundation for the framework of the arbitrage models that price interest rate derivatives on the basis of the market prices of bonds this framework has been expanded and enriched by recent advances in directly modeling observable market rates through the market models and in incorporating an internally consistent correlation structure through the infinite dimensional models

the dynamics of inequality the past forty years have seen a rapid rise in top income inequality in the united states while there is a large number of existing theories of the pareto tail of the long run income distributions almost none of these address the fast rise in top inequality observed in the data we show that standard theories which build on a random growth mechanism generate transition dynamics that are too slow relative to those observed in the data we then suggest two parsimonious deviations from the canonical model that can explain such changes scale dependence that may arise from changes in skill prices and type dependence that is the presence of some high growth types these deviations are consistent with theories in which the increase in top income inequality is driven by the rise of superstar entrepreneurs or managers

aggregate demand and the top 1 percent there has been a large rise in us top income inequality since the 1980s we merge a widely studied model of the pareto tail of labor incomes with a canonical model of consumption and savings to study the consequences of this increase for aggregate demand our model suggests that the rise of the top 1 percent may have led to a large increase in desired savings and can explain a 0 45pp to 0 85pp decline in long run real interest rates this effect arises from both a wealth effect at the top and increased precautionary savings from declines lower in the income distribution

a theory of migration as a response to occupational stigma a theory is developed of labor migration that is prompted by a desire to avoid social humiliation in a general equilibrium framework it is shown that as long as migration can reduce humiliation sufficiently migration will occur even between two identical economies migration increases the number of individuals who choose to perform degrading jobs and consequently migration lowers the price of the good produced in the sector that is associated with low social status moreover the greater an individual s aversion to performing degrading jobs the more likely it is that he will experience a welfare gain when the economy opens up

the risk free rate in heterogeneous agent incomplete insurance economies abstract why has the average real risk free interest rate been less than one percent the question is motivated by the failure of a class of calibrated representative agent economies to explain the average return to equity and risk free debt i construct an economy where agents experience uninsurable idiosyncratic endowment shocks and smooth consumption by holding a risk free asset i calibrate the economy and characterize equilibria computationally with a borrowing constraint of one year s income the resulting risk free rate is more than one percent below the rate in the comparable representative agent economy

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

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