a minimum wage can be welfare improving and employment enhancing abstract we examine whether minimum wages can fulfill a useful role as part of an optimal tax transfer scheme the government cannot observe household abilities only their incomes and is constrained to ensure that those working are at least as well off as those not working a minimum wage combined with the institutional features of typical welfare systems allows the incentive constraint to be severed at the ability level associated with the minimum wage if such a scheme can be enforced the government can increase the amount of redistribution from those working to those not working and possibly lower the number of unemployed

how investible is bitcoin analyzing the liquidity and transaction costs of bitcoin markets abstract we examine the investibility of bitcoin by exploring the trading dynamics and market microstructure of bitcoin on three us cryptocurrency exchanges using high frequency intraday data of individual trades and quotes although all exchanges offer continuous trading we find that the highest trading activity highest volatility and lowest spreads coincide with us market trading hours suggesting that most trades are non algorithmic and executed by retail investors we further find that average quoted and effective spreads for bitcoin are lower than spreads on major equity exchanges implying that bitcoin is highly investible for retail size transactions

intraday technical trading in the foreign exchange market this paper examines the out of sample performance of intraday technical trading strategies selected using two methodologies a genetic program and an optimized linear forecasting model when realistic transaction costs and trading hours are taken into account we find no evidence of excess returns to the trading rules derived with either methodology thus our results are consistent with market efficiency we do however find that the trading rules discover some remarkably stable patterns in the data

trading patterns and prices in the interbank foreign exchange market the behavior of quote arrivals and bid ask spreads is examined for continuously recorded deutsche mark dollar exchange rate data over time across locations and by market participants a pattern in the intraday spread and intensity of market activity over time is uncovered and related to theories of trading patterns models for the conditional mean and variance of returns and bid ask spreads indicate volatility clustering at high frequencies the proposition that trading intensity has an independent effect on returns volatility is rejected but holds for spread volatility conditional returns volatility is increasing in the size of the spread there is a growing body of theoretical studies on the pattern of trading activity in financial markets with implications for the time series behavior of transactions prices and intensity of trading the empirical literature addressing similar concerns using intraday market data appropriate for such tasks is sparse particularly in the area of the trading of currencies the purpose of this paper is to examine both international patterns of intraday trading activity and the time series properties of returns and bid ask spreads for the deutsche mark dollar exchange rate in the interbank foreign exchange market the goal is to provide information useful in the further development of market microstructure models of trading and to compare empirical findings against theoretical results already in existence the foreign exchange market is in operation twenty four hours a day seven

heterogeneous information arrivals and return volatility dynamics uncovering the long run in high frequency returns recent empirical evidence suggests that the interdaily volatility clustering for most speculative returns are best characterized by a slowly mean reverting fractionally integrated process meanwhile much shorter lived volatility dynamics are typically observed with high frequency intradaily returns the present article demonstrates that by interpreting the volatility as a mixture of numerous heterogeneous short run information arrivals the observed volatility process may exhibit long run dependence as such the long memory characteristics constitute an intrinsic feature of the return generating process rather than the manifestation of occasional structural shifts these ideas are confirmed by our analysis of a one year time series of fiveminute deutschemark u s dollar exchange rates among the most puzzling issues is the behavior of volatility while the general properties of volatility remain elusive perhaps the most intriguing feature revealed by empirical work on volatility is its long persistence such behavior has sparked a search almost akin to that for the holy grail for the perfect garch model but the underlying question of why such volatility persistence endures remains unanswered we conjecture that the ability to analyze higher frequency data may be particularly useful in pursuing this issue goodhart and o hara 1997 the pronounced volatility clustering is arguably one of the most striking features of financial price series recorded at daily or weekly intervals and a large body of literature seeking to characterize this aspect of speculative returns has emerged over the past decade 1 at the same time convincing theoretical explanations for the underlying sources of long run persistence in volatility remain elusive the recent advent of comprehensive high frequency andersen is from the j l kellogg graduate school of management of northwestern university bollerslev is from the university of virginia and is a research associate at the national bureau of economic research we gratefully acknowledge the financial support provided by a research grant from the institute for quantitative research in finance the q group special thanks are due to olsen and associates for making the intradaily exchange rate quotes and reuter s news tape available we have received valuable comments from wake epps clive w j granger stephen f gray j huston mcculloch as well as seminar participants at the december 1996 triangle econometrics workshop the 1997 afa meetings in new orleans academia sinica the wharton school usc and georgetown and york universities we remain fully responsible for the content 1 see bollerslev chou and kroner 1992 for a survey of this literature using arch type

every minute counts in financial markets abstract this paper represents an introductory study of ultra high frequency minuute by minute data for forex spot rates bid ask reuters quotes on three days autumn 1987 the frequency of price revision size of spread and statistical characteristics are measured the series exhibit time varying leptokurtosis unit roots and first order negative correlation the latter especially in disturbed jumpy markets the effect of time aggregation on these characteristics is examined and variance ratios are analyzed multivariate analysis revealed significant relationships between lagged exchange rates both the own rate and the key deutsche mark us dollar rate and the current spot rate

jumps cojumps and macro announcements we use recently proposed tests to extract jumps and cojumps from three types of assets stock index futures bond futures and exchange rates we then characterize the dynamics of these discontinuities and informally relate them to us macroeconomic releases before using limited dependent variable models to formally model how news surprises explain co jumps nonfarm payroll and federal funds target announcements are the most important news across asset classes trade balance shocks are important for foreign exchange jumps we relate the size frequency and timing of jumps across asset classes to the likely sources of shocks and the relation of asset prices to fundamentals in the respective classes

changes in the financial market welfare and price effects and the basic theorems of value conservation this paper analyzes the impact on both welfare and equilibrium prices of changes in the financial market in a general equilibrium two period context previous papers have focussed on the securities effect tending to essentially ignore the equally important endowment effect that arises when market structure changes are implemented two forms of endowment neutrality and market structure changes which either preserve expand or shift allocational feasibility differentiate the main theorems which are based on arbitrary preferences and beliefs and substantially extend and modify extant results in particular earlier statements identified with value conservation are sharply moderated very roughly the paper yields the following implications for some of the more common changes in the market nonsynergistic corporate spinoffs and the opening of option markets have on balance strongly positive welfare effects nonsynergistic mergers tend to have strong negative welfare effects while the welfare effects of alternative risky debt structures tend to be ambiguous all of the preceding however may under plausible conditions be redistributive changes in the structure of the financial market have long been of interest to financial economists while such changes may take many forms it is perhaps surprising that only a few of the more common ones have been systematically studied foremost among these are changes which involve the firm s capital structure the relative amounts of debt and equity mergers and other special recapitalizations this paper analyzes the impact on both welfare and equilibrium prices of changes in the financial market in a two period context it differs from previous studies primarily in that it is based on a fully integrated general equilibrium approach similar to that employed in international trade analysis thus while the resulting mosaic contains previous studies as clearly recognizable fragments such as the classic paper of modigliani and miller 33 it also provides the necessary framework and tools for an evaluation of market structure changes of any type such as changes involving subordinated debt convertibles warrants mergers spinoffs and the opening of option markets

calibrating an algorithm for estimating transactions from fxfx exchange rate quotes abstract in this paper we investigate the efficiency of a class of transaction generating algorithms originally suggested in bollerslev and domowitz 1993 our comparison utilizes real transaction data recorded over reuters d2000 2 electronic broking system for 7 h in june 1993 and transaction data generated from fxfx quotations over an identical period results suggest that at this high frequency data sampling the performance of these transaction generating algorithms is poor with the most likely explanation of this outcome due to the high frequency characteristics of fxfx spreads and quotation intensity

round the clock market efficiency and home bias evidence from the international japanese government bonds futures markets abstract this paper examines how information is processed between almost identical international futures markets london liffe and tokyo tse jgb futures in these markets variations in open to open changes are virtually the same as those of close to close changes suggesting that information is transmitted efficiently across markets with small opening pricing errors the overall results confirm market efficiency around the clock yet the intraday u shaped patterns in volume volatility of the london jgb futures suggest home bias in international investments indicating a less global view of trading than expected specifically at the liffe open london investors rush to rebalance portfolios instead of doing so at the tse close which is only one hour before the liffe opens

the intra day impact of communication on euro dollar volatility and jumps abstract in this paper we examine the intra day effects of verbal statements and comments on the fx market uncertainty using two measures continuous volatility and discontinuous jumps focusing on the euro dollar exchange rate we provide empirical evidence of how these two sources of uncertainty matter in measuring the short term reaction of exchange rates to communication events talks significantly trigger large jumps or extreme events for approximately an hour after the news release continuous volatility starts reacting prior to the news intensifies around the release time and stays at high levels for several hours our results suggest that monetary authorities generally tend to communicate with markets on days when uncertainty is relatively severe and higher than normal disentangling the us and euro area statements we also find that abnormal levels of volatility are mostly driven by the communication of the euro area officials rather than us authorities

news effects in a high frequency model of the sterling dollar exchange rate this paper uses an extremely high frequency data set on the dollar sterllng exchange rate to investigate the impact of news events on the very short term movements in exchange rates the data set is a continuous record of the quoted price for the exchange rate on the reuters screen as such it records some 130 000 observations over an 8 week period the paper investigates the time series properties of the data using orthodox regression models and then by making allowance for a time varying conditional variance the conclusions vary significantly in moving to this more sophisticated model the exercises are repeated now incorporating news announcement effects letting these affect the level of the exchange rate and then the conditional variance process again it is found that the conclusions are radically altered in moving to the increasingly sophisticated model

imperfections in the economics of public policy imperfections in markets and climate change the economics of public policy has suffered from collective amnesia we have forgotten or ignored much of the tradition of public policy in imperfect economies whose foundations were laid by james meade and paul samuelson this has been associated with a period of around two decades from the early 1980s to the early 2000s where the economics of public policy has bent to political winds and has fed arguments for government to get out of the way and leave everything to the markets to self interest and to self regulation this has manifested itself via the choice of models those which imply often directly from assumptions passive government patterns of teaching the marginalisation of public economies in imperfect economics and compartmentalisation examples in climate change where this amnesia has misled include approaches to discounting and the failure to make non marginal change central to analysis on the other hand creative application of modern public economics gives interesting results such as the possibility of making both current and future generations better off and of informed discussion complementing economic instruments there are strong formal analogies between policy on climate change and on behavioural economics indeed there seems to be great potential in the combination of these two fields jel a10 a12 d61 d62 d63

the interaction between the frequency of market quotations spread and volatility in the foreign exchange market there is an empirical relationship between volatility average spread and number of quotations in the foreign exchange spot market the estimation procedure involves two steps in the first one the optimal functional form between these variables is determined through a maximization procedure of the unrestricted var involving the box cox transformation the second step uses the two stage least squares method to estimate the transformed variables in a simultaneous equation system framework the results indicate that the number of quotations successfully approximates activity in the spot market furthermore the number of quotations and temporal dummies reduce significantly the conditional heteroskedasticity e ect we also discuss information aspects of the model as well as its implications for financial informational theories inter and intra day patterns of the three variables are also revealed

the inefficiency of reuters foreign exchange quotes abstract reuters foreign exchange fxfx page is the world wide predominant information source to foreign exchange traders in this study we compare the indicative spot exchange rate quotes from reuters with their matching futures exchange rates from the chicago mercantile exchange we find that the indicative quotes on reuters fxfx page are inefficient and could be improved by incorporating information from the futures market this casts doubt on the way banks determine these quotes as well as on the informational content of these quotes as an indicator of the current exchange rate

viewpoint innovations in the theory and practice of redistribution policy we present a survey of key results from second best optimal redistribution theory and their implications for tax transfer policy the core results include the corlett hague theorem the deaton conditions the production efficiency theorem the atkinson stiglitz theorem and the mirrlees saez characterization of the optimal non linear income tax system these have been augmented in recent years by optimal participation tax rates the implications of involuntary unemployment the use of unconventional instruments such as minimum wages in kind transfer and workfare and the optimal taxation of capital income and bequests l auteur presente un survol des principaux resultats theoriques de la redistribution optimale de second ordre et de leurs implications pour les politiques d imposition et de transferts les resultats fondamentaux incluent le theoreme de corlett hague les conditions de deaton les theoremes d efficacite en production le theoreme d atkinson stiglitz ainsi que la caracterisation du systeme optimal d imposition non lineaire du revenu a la mirrlees saez ces derniers resultats ont ete enrichis au cours des dernieres annees par certains autres portant sur les taux d imposition decoulant des allocations conditionnelles les implications du chomage involontaire l usage d instruments non conventionnels tels que le salaire minimum les transferts en nature le workfare ainsi que l imposition optimale des revenus du capital et des legs ces resultats sont exposes et leurs implications pour les politiques d imposition et de transferts sont discutees

equity and efficiency in rationed labor markets the social welfare implications of income tax policy are shown to critically depend on whether or not labor markets are rationed i e on the existence of involuntary unemployment with rationed labor markets raising taxes on the employed and transfers to the unemployed might improve both equity and efficiency it improves equity by redistributing income from the employed to the unemployed it improves efficiency as it encourages people with a small utility surplus of employment to exit the labor market leaving their jobs for people with a higher utility surplus i derive conditions under which this result continues to hold when only part of the labor market is rationed when there is both frictional and rationing unemployment and when rationing endogenously follows from trade unions monopoly power

taxes and employment subsidies in optimal redistribution programs this paper explores how to optimally set taxes and transfers when taxation authorities 1 are uninformed about individuals value of time in both market and non market activities and 2 can observe both market income and time allocated to market employment we show that optimal redistribution in this environment involves distorting market employment upwards for low wage individuals through decreasing wage contingent employment subsidies and distorting employment downwards for high wage individuals through positive and increasing marginal income tax rates in particular we show that whether a person is taxed or subsidized depends primarily on his wage with the optimal program involving a cut off wage whereby workers above the cutoff are taxed as they increase their income while workers earning a wage below the cutoff receive an income supplement as they increase their income finally we show that the optimal program transfers zero income to individuals who choose not to work

minimum wage legislation and unemployment insurance as instruments for redistribution the use of minimum wages and unemployment insurance as instruments for redistributing income is analyzed the government is assumed to be able to implement an optimal income tax in an economy consisting of two types of individuals who differ in ability the effect of introducing a minimum wage which induces involuntary unemployment will be to improve social welfare under weak conditions circumstances under which combining unemployment insurance with the minimum wage will be welfare improving are also considered

predictive ability of asymmetric volatility models at medium term horizons using realized volatility to estimate conditional variance of financial returns we compare forecasts of volatility from linear garch models with asymmetric ones we consider horizons extending to 30 days forecasts are compared using three different evaluation tests with data from an equity index and two foreign exchange returns we show that asymmetric models provide statistically significant forecast improvements upon the garch model for two of the datasets and improve forecasts for all datasets by means of forecasts combinations these results extend to about 10 days in the future beyond which the forecasts are statistically inseparable from each other

fx trading and exchange rate dynamics i examine the sources of exchange rate dynamics by focusing on the information structure of fx trading this structure permits the existence of an equilibrium distribution of transaction prices at a point in time i develop and estimate a model of the price distribution using data from the deutsche mark dollar market that prroduces two striking results 1 much of the short term volatility in exchange rates comes from sampling the heterogeneous trading decisions of dealers in a distribution that under normal market conditions changes comparatively slowly 2 public news is rarely the predominant source of exchange rate movements over any horizon copyright the american finance association 2002

real time effects of central bank interventions in the euro market abstract this paper investigates the real time effects of sterilized foreign exchange intervention using official intraday intervention data provided by the danish central bank our analysis employs a two step weighted least squares estimation procedure we control for macro surprises address the issue of endogeneity and carry out an array of robustness tests only when the direction of intervention is consistent with the monetary policy stance do we find that intervention exerts a significant influence on exchange rate returns

news from the u s and japan which moves the yen dollar exchange rate abstract intra daily movements in the yen dollar exchange rate are examined in four non overlapping segments within each business day from january 1980 to september 1985 the results indicate that the dollar tended to appreciate in the new york segment and depreciate in the european segment in three of the four subsamples considered the tokyo segment made virtually no contribution to annual yen dollar rate movements the volatility of the exchange rate also differed across markets finally in examining the relative effects of news from the u s and japan explicitly u s money announcement surprises had the most consistent effects

the effect of options on stock prices 1973 to 1995 i show that the effect of option introductions on underlying stock prices is best described by a two regime switching means model whose optimal switch date occurs in 1981 in accordance with previous studies i find positive abnormal returns for options listed during 1973 to 1980 by contrast i find negative abnormal returns for options listed in 1981 and later possible causes for this switch include the introduction of index options in 1982 the implementation of regulatory changes in 1981 and the possibility that options expedite the dissemination of negative information an increasingly important issue in the study of financial markets is the extent to which options interact with their underlying stocks although black and scholes 1973 view options as redundant securities ross 1976 theorizes that stock prices in incomplete markets are generally affected by the

the price effect of option introduction this paper examines the price effect of option introduction from 1974 to 1980 the introduction of individual options causes a permanent price increase in the underlying security beginning approximately three days before introduction the price effect appears to be associated with introduction and not announcement throughout the sample period excess returns volatility declines with option introduction systematic risk is unchanged there is a positive relation between the price increase and a measure of activity in the options market copyright 1989 by american finance association

deutsche mark dollar volatility intraday activity patterns macroeconomic announcements and longer run dependencies this paper provides a detailed characterization of the volatility in the deutsche mark dollar foreign exchange market using an annual sample of five minute returns the approach captures the intraday activity patterns the macroeconomic announcements and the volatility persistence arch known from daily returns the different features are separately quantified and shown to account for a substantial fraction of return variability both at the intraday and daily level the implications of the results for the interpretation of the fundamental driving forces behind the volatility process is also discussed the efficient market hypothesis contends that financial asset prices provide rational assessments of fundamental values and future payoffs by implication price changes should reflect the arrival and processing of all relevant new information however the proportion of return variability that can be ascribed to public news announcements is low for example cutler poterba and summers 1989 find that even the largest daily price changes in the stock market generally cannot be associated with any significant economic news 1 moreover proxies for the flow of public information e g the number of news items released by reuter s news service berry and hiowe 1994 or dow jones company mitchell and mulherin 1994 explain little of the overall variation thus if private information is ruled out proponents of rational price formation have to assert the existence of important news items

optimal linear income taxation with general equilibrium effects on wages abstract the paper argues that the endogeneity of wages may make a considerable difference to optimal linear tax rates in this case there is not only the usual direct redistribution via the fiscal system but also the general equilibrium redistribution due to the change in wages depending on the elasticity of substitution of the production function and the labour supply elasticities these may be reinforcing or opposing it is shown that the general equilibrium effect may plausibly outweigh the direct effect so that net redistribution to the lower paid involves a wage subsidy financed by a lump sum tax

segmentation and time of day patterns in foreign exchange markets abstract this paper sheds light on a puzzling pattern in spot foreign exchange markets domestic currencies appreciate depreciate systematically during foreign domestic working hours this phenomenon spans many years and several exchange rates and overrides calendar effects we argue that it is mainly due to liquidity and inventory patterns that emerge from the combination of two factors domestic agents tend to be net buyers of foreign currency and to trade mostly in their country s working hours the prevalence of domestic foreign traders demanding the counterpart currency during domestic foreign working hours implies sell price buy price pressure on the domestic currency during domestic foreign working hours

is a minimum wage an appropriate instrument for redistribution textabstractwe analyze the redistributional dis advantages of a minimum wage over income taxation in competitive labor markets without imposing assumptions on the in efficiency of labor rationing compared to a distributionally equivalent tax change a minimum wage increase raises involuntary unemployment but also raises skill formation as some individuals avoid unemployment a minimum wage is an appropriate instrument for redistribution if and only if the public revenue gains from additional skill formation outweigh both the public revenue losses from additional unemployment and the utility losses of inefficient labor rationing we show that this critically depends on how labor rationing is distributed among workers a necessary condition for the desirability of a minimum wage increase is that the public revenue gains from higher skill formation outweigh the revenue losses from higher unemployment we write this condition in terms of measurable sufficient statistics our empirical analysis suggests that a minimum wage increase is undesirable in nearly all oecd countries a reduction in the minimum wage along with tax adjustments that keep net incomes constant would yield a pareto improvement

tobin tax and trading volume tightening a reassessment this article extends the previous literature on the tobin tax and financial transaction tax we investigate the linkages between trading volumes and transaction costs using both a linear and a nonlinear methodology in stark contrast with previous studies we consider the possibility that our model may exhibit threshold effects or regime dependency by estimating a markov switching ms model this paper is the first contribution to specify the trading volume of the forex through different low and high volatility regimes our empirical investigation looks at the eur usd currency market our results show evidence of nonlinear patterns for trading volumes and transaction costs on the forex the tobin tax would not have a monotonic impact on trading activity across market conditions however the change in elasticity between low and high volatility regimes is slight 0 17 versus 0 21 we may suggest that the low variance regime might be the fundamentalist regime and the high variance regime lower tobin tax elasticity might be the chartist regime this study is a first step towards understanding which categories of agents dominate the market under the various market regimes and how they would react to the introduction of a tax this means our results are consistent with tobin s underlying thinking 1974 1978 1996 since a tax would penalize chartists more than fundamentalists it could reduce exchange rate volatility

the intraday bid ask spread behaviour of the jpy usd exchange rate in the ebs electronic brokerage system using a sophisticated tool of the periodic generalized autoregressive conditional heteroscedastic p garch model this article investigates the market institutional effects of the determining role of trading activities and exchange rate volatility on the intraday behaviour of the 15 minute jpy usd exchange rate bid ask spreads in the electronic broking service ebs of electronic brokerage market for the period from 1 january 2003 to 31 december 2005 we find that the exchange rate volatility both significantly and positively affects the bid ask spreads while the number of deals and quotation changes negatively affect the bid ask spreads these results are similar to those of past studies we also find that a u shaped pattern exists in the tokyo trading hours and an inverted u shaped pattern in the london trading hours in addition to a round clock inverted u shaped pattern of spread volatility this inverted u shaped pattern may be caused by unexpected news arrivals the spread behaviour of the ebs glo

optimal minimum wage policy in competitive labor markets this paper provides a theoretical analysis of optimal minimum wage policy in a perfectly competitive labor market and obtains two key results first we show that a binding minimum wage while leading to unemployment is nevertheless desirable if the government values redistribution toward low wage workers and if unemployment induced by the minimum wage hits the lowest surplus workers first importantly this result remains true in the presence of optimal nonlinear taxes and transfers in that context a binding minimum wage enhances the effectiveness of transfers to low skilled workers as it prevents low skilled wages from falling through incidence effects second when labor supply re sponses are along the extensive margin only the co existence of a minimum wage with a positive tax rate on low skilled work is always second best pareto ineffcient a pareto improving policy consists of reducing the pre tax minimum wage while keeping constant the post tax minimum wage by increasing transfers to low skilled workers and financing this reform by increasing taxes on higher paid workers overall our results imply that the minimum wage and subsidies for low skilled workers are complementary policies pa

does anonymity matter in electronic limit order markets we develop a model in which limit order traders possess volatility information we show that in this case the size of the bid ask spread is informative about future volatility moreover if volatility information is in part private we establish that i the size of the bid ask spread and ii its informativeness about future volatility should change in the same direction when limit order traders identifiers stop being disclosed we test these predictions using data from the paris bourse as expected we find that the average quoted spread and its informativeness are significantly smaller when limit order traders identifiers are concealed these findings suggest that the limit order book is a channel for volatility information

redistribution and employment policies with endogenous unemployment abstract we study optimal redistribution policy in an economy with three types of unemployed persons those unable to work the voluntarily unemployed and the involuntarily unemployed both voluntary and involuntary unemployment are endogenous voluntary unemployment arises because individuals have different preferences while involuntary unemployment results from frictions in the labour market or from an efficiency wage we consider the employment policies of a well informed government when it can and cannot commit to its policies the model is simple yet rich enough to reflect real world policies including transfers to the disabled welfare for non working employables unemployment insurance employment subsidies and taxes on workers and firms

an investigation of transactions data for nyse stocks using transactions data the behavior of returns and characteristics of trades at the micro level is examined a minute by minute market return series is formed and tested for normality and autocorrelation evidence of differences in return distributions is found among overnight trades trades during the first 30 minutes following the market opening trades at the close and trades during the remainder of the day the latter distribution is found to be normal unusually high returns and standard deviations of returns are found at the beginning and the end of the trading day when the beginningand end of the day effects are omitted autocorrelation in the market return series is reduced substantially a number of patterns in trading are reported this paper empirically investigates the nature of the return generating process and the characteristics of trade size price changes trading frequency and trading interval at the level of individual trades for a large sample of nyse stocks previous studies of market indices have used daily weekly or monthly

the genealogy of modern theoretical public economics from first best to second best abstract the development of second best modelling in the seventies has shaped modern theoretical economics the paper discusses some key changes in the economists conceptions the first two sections examine the efficiency equity dilemma the study of non convexities has shown that counterintuitive efficiency enhancing income redistribution might occur the introduction of asymmetric information has shed doubts on virtues of lump sum compensation the last sections focus on the intricate geometry of second best optimisation and the ambiguous value of the signals provided by the price system outside a first best world

the microeconomics of market making this paper examines the influence of risk aversion on the pricing policies of a market maker for securities it is shown that a market maker s bid ask spread can be decomposed into a portion for the known limit orders a risk neutral adjustment for expected market orders and a risk adjustment for market order and inventory value uncertainty it is dem onstrated that a risk averse market maker may set a smaller spread than a risk neutral specialist finally this paper demonstrates the pervasive role of inventory in affecting both the placement and size ofthe spread

trade execution costs and market quality after decimalization this study assesses trade execution costs and market quality for nyse and nasdaq stocks before and after the 2001 change to decimal pricing several theoretical predictions are confirmed quoted bid ask spreads declined substantially on each market with the largest declines for heavily traded stocks the percentage of shares receiving price improvement increased on the nyse but not on nasdaq however those trades completed at prices within or outside the quotes were improved or disimproved by smaller amounts after decimalization and trades completed outside the quotes saw the largest reductions in trade execution costs as a class effective bid ask spreads as a percentage of share price arguably the most relevant measure of execution costs for smaller trades averaged 0 33 on a volume weighted basis after decimalization for both nyse and nasdaq stocks there is no evidence of systematic intraday reversals of quote changes on either market as would be expected if decimalization had damaged liquidity supply

forecasting bankruptcy more accurately a simple hazard model i argue that hazard models are more appropriate than single period models for forecasting bankruptcy single period models are inconsistent while hazard models produce consistent estimates i describe a simple technique for estimating a discrete time hazard model i find that about half of the accounting ratios that have been used in previous models are not statistically significant moreover market size past stock returns and idiosyncratic returns variability are all strongly related to bankruptcy i propose a model that uses both accounting ratios and market driven variables to produce out of sample forecasts that are more accurate than those of alternative models copyright 2001 by university of chicago press

negative autocorrelation around large jumps in intra day foreign exchange data abstract this paper addresses the issue of first order negative autocorrelation around large changes in high frequency foreign exchange rate data this phenomenon is found to exist at smaller time horizons and disappear at larger horizons

minimum wage legislation as a second best policy mass unemployment is a striking phenomenon of the present economic situation of european market economies although the profession of economists has been criticized for not providing satisfactory cures it has produced a number of different explanations either complementary or contradictory for the occurrence of mass unemployment in this paper we examine the argument that unemployment is the consequence of minimum wage legislation which is socially desirable the observation of current wage legislations suggests that the above argument is broadly at least partly accepted by policy makers curiously enough a defence of this argument meeting the rigorous requirements of modern theory seems to be missing symmetrically attacks against minimum wage legislation often rely upon reasonings of dubious relevance i e the obvious remark that unemployment is a waste with first best efficiency criteria the present paper proposes a second best analysis where second best stems from informational asymmetries which prevent the implementation of lump sum transfers needed for a first best redistribution policy the question under scrutiny can be reformulated in a more precise way as follows does a second best optimal redistribution policy lead to minimum wage legislation and unemployment our elements of answer are gathered in 3 sections in section 2 the principles of the analysis of the desirability of quantity controls and existing results are recalled in section 3 the analysis of section 2 is specified to a simple prototype model for the study of linear income taxation in section 4

price discovery in the foreign exchange market an empirical analysis of the yen dmark rate abstract using reuters exchange rate data we investigate the dynamic relations between the direct quotes of the yen dmark rate and the rate implied by yen dollar and dmark dollar rates since these high frequency data are observed at irregular intervals technical problems arise in calculating auto correlations and cross correlations we propose a covariance estimator for irregularly spaced data the empirical results show lagged adjustment of the direct yen dmark cross rate to changes in the dollar implied rate however since the dollar implied rate is extremely noisy substantial price discovery takes place through the direct yen dmark market especially during the most busy parts of the day

the use of technical analysis in the foreign exchange market abstract technica or chartist analysis of financial markets involves providing forecasts or trading advice on the basis of largely visual inspection of past prices without regard to any underlying economic or fundamental analysis this paper reports the results of a questionnaire survey conducted on behalf of the bank of england among chief foreign exchange dealers based in london in november 1988 amongst other findings it is revealed that at least 90 per cent of respondents place some weight on this form of non fundamental analysis when forming views at one or more time horizons there is also a skew towards reliance on technical as opposed to fundamentalist analysis at shorter horizons which becomes steadily reversed as the length of horizon considered is increased a very high proportion of chief dealers view technical and fundamental analysis as complementary forms of analysis and a substantial proportion suggest that technical advice may be self fulfilling jel f31

age differentiated minimum wages in developing countries abstract the fact that minimum wages seem especially binding for young workers has led some countries to adopt age differentiated minimum wages we develop a dynamic competitive two sector labor market model where workers with heterogeneous initial skills gain productivity through experience we compare two equally binding schemes of single and age differentiated minimum wages and find that although differentiated minimum wages result in a more equal distribution of income such a scheme creates a more unequal distribution of wealth by forcing less skilled workers to remain longer in the uncovered sector we also show that relaxing minimum wage solely for young workers reduces youth unemployment but harms the less skilled ones

how does public information affect the frequency of trading in airline stocks abstract this paper examines how firm specific and macroeconomic announcements affect transaction rates in u s airline stocks using a version of the autoregressive conditional hazard framework of hamilton and jorda 2002 that incorporates market microstructure variables we show that on average trading intensity spikes prior and consequent to macroeconomic announcements but decreases around firm specific releases further when we use intraday crude oil futures returns as a proxy for industry relevant and globally important news we find that their effects are statistically significant with higher oil futures returns increasing the probability of trade

is it legitimate to encourage work sharing a generalization of mirrlees income taxation model is formulated in which qualifications of workers are both endogenous and observable by the government individuals differ by their unobservable abilities which simultaneously affect their disutility of labor and their cost of training in general the optimal tax schedule depends not only on income but also on its components i e wage rate or qualification and labor supply we find conditions under which it is optimal to subsidize lower qualifications or to encourage work sharing

optimal taxes and the structure of preferences if optimal tax theory is to be the basis for calculating tax rates a close understanding is required of the relationship between the structure of preferences and the configuration of optimal tax rates otherwise hypotheses chosen by the econometrician for practical convenience may completely determine the results independently of measurement this paper explores the relationship between various types of separability particularly weak and implicit separability and optimal tax rates in the various models discussed in the literature the use of distance functions and the antonelli matrix provides a significant unification of previously disparate results in the final analysis optimal tax theory should be the basis for actual calculation of tax rates although recently there have been great advances in theoretical results and in our understanding of their meaning we are still some way from a working knowledge of whether uniform commodity taxes are in practice optimal or if not which commodities should be discriminated against present theoretical formulae do not yield clear cut results except in special cases and it has recently become clear that optimal rates depend crucially on the detailed structure of consumer preferences for example atkinson and stiglitz 3 show that with an optimal nonlinear income tax discriminatory commodity taxes are only necessary to the extent that individual commodities are not weakly separable from leisure more recently deaton 6 has shown that a similar result holds for what is perhaps the most interesting of the standard models that where there are many consumers and only a linear income tax and proportional commodity taxes are allowed in this case separability between goods and leisure together with linear engel curves for goods removes the need for differential commodity taxation in consequence nothing can be learned about commodity taxes from consumer demand studies in which commodity demands are explained conditionally on total expenditure and commodity prices and which assume linear engel curves all such studies require separability from leisure as a maintained hypothesis and so are consistent with uniform commodity taxation these results suggest that the prospects for meaningful empirical calculations of tax rates are bleak econometricians estimating commodity demand and labor supply equations make generous use of separability assumptions to enable estimation at all in consequence it is likely that empirically calculated tax rates based on econometric estimates of parameters will be determined in structure not by the measurements actually made but by arbitrary untested and even unconscious hypotheses chosen by the econometrician for practical convenience to remedy this situation and as a prelude to fruitful empirical work it is necessary to have a more explicit understanding of how preference structure affects optimal tax rates such is the object of this paper three different

central bank forex internvention assessed in continous time abstract this paper looks at some of the principal characteristics of foreign exchange intervention by central banks the approach is novel in that virtually continous time data have been exploited using reuters screen information jel f31

how do exchanges select stocks for option listing we investigate the factors influencing the selection of stocks for option listing exchanges tend to list options on stocks with high trading volume volatility and market capitalization but the relative effect of these factors has changed over time as markets have evolved we observe a shift from volume toward volatility after the moratorium on new listings ended in 1980 using control sample methodology designed to correct for the endogeneity of option listing we find no evidence that volatility declines with option introduction in contrast to previous studies that do not use control samples beginning with a handful of options listed on the chicago board options exchange cboe in april 1973 the exchange traded option market has since matured into a thriving industry in the united states options trade on five exchanges with contracts on stock indices exchange traded funds currencies interest rates and over 3 000 stocks total equities options volume traded on u s exchanges has risen from 5 7 million contracts in 1974 to over 722 million contracts in 2001 options clearing corporation http www optionsclearing com option markets have also thrived in western europe and other economies with well developed capital markets in this paper we study the listing choices made by option exchanges in the united states in an effort to better understand what determines the success of financial innovation and how derivative markets develop understanding this process has important implications for the continuing development of new securities markets domestically and globally in the new century innovation

minimum wage unemployment and growth abstract this paper shows that in an overlapping generations model with endogenous growth minimum wage legislation does not necessarily has negative consequences on economic performance such legislation can have positive effects on growth by inducing more human capital accumulation more precisely a low demand for unskilled labor induced by a minimum wage may create an incentive for workers to accumulate human capital moreover it is possible that a decrease in the minimum wage lowers the welfare of each agent in the economy

options short sale constraints and market efficiency a new perspective this paper undertakes a new investigation of the potential for options to mitigate short sale constraints i find that option introduction alleviates 79 of the price adjustment efficiency disparity between short sale constrained and unconstrained stocks in relation to negative news no significant improvement in adjustment efficiency is found in response to positive information these results are robust to controls for endogeneity biases associated with the option introduction selection process further i find evidence that post option improvement in efficiency is similar in relation to private and public information this suggests that short sale constraint effects stem at least in part from an irrational optimism bias or another behavioral source as suggested theoretically by miller 1977 collectively these results suggest that options act as an effective substitute to short sales significantly contributing to the informational efficiency of the market

forecasting daily exchange rate volatility using intraday returns abstract this study investigates whether intraday returns contain important information for forecasting daily volatility whereas in the existing literature volatility models for daily returns are improved by including intraday information such as the daily high and low volume the number of trades and intraday returns here the volatility of intraday returns is explicitly modelled daily volatility forecasts are constructed from multiple volatility forecasts for intraday intervals it is shown for the dem usd and the yen usd exchange rates that this results in superior forecasts for daily volatility

unemployment and labor market reform a contract theoretic approach why do many democracies fail to reform their labor market institutions to answer this question we study the feasibility of reforms that include compensation to insiders for the removal of labor market regulations under asymmetric information a reformer who wants to buy the approval of voters has to pay them an informational rent in addition to the pure costs of compensation that would arise under symmetric information in this setting unemployment may be constrained pareto efficient labor market reforms may fail politically because none of the reform packages proposed wins the approval of a majority of voters we also discuss the role of capital taxation in a reform program jel classification d70 e61 j68

meteor showers or heat waves heteroskedastic intra daily volatility in the foreign exchange market this paper seeks to explain the causes of volatility clustering in exchange rates careful examination of intra daily exchange rates provides a test of two hypotheses heat waves and meteor showers the heat wave hypothesis is that the volatility has only country specific autocorrelation alternatively the meteor shower is a phenomenon of intra daily volatility spillovers from one market to the next using the garch model to specify the heteroskedasticity across intra daily market segments we find that the empirical evidence is generally against the null hypothesis of the heat wave using a volatility type of vector autoregression we examine the impact of news in one market on the time path of per hour volatility in other markets

reassessing the impact of option introductions on market quality a less restrictive test for event date effects prior research concludes that option introductions improve the average liquidity of the underlying stocks we develop an improved generalizable test to assess whether market quality changes occur on or near an event date applying this method to option listing events we conclude that options do not systematically improve the market quality of the underlying security rather the market quality of the underlying security improves before the listing decision hazard model tests indicate that improving liquidity is a selection criterion in the option listing decision moreover these tests suggest that the size of a stock s bid ask spread is the single most important option listing determinant this study reexamines the impact of equity option introductions on stock market liquidity previous studies find an improvement in market quality charac teristics after option introductions and conclude that options improve the quality of the underlying market 1 in this paper we make several new contributions first we present and adopt a more flexible empirical tool for identifying regime shifts when event selection may be endogenously determined second using this method we reverse two major findings of the existing literature that option in troductions reduce spreads and increase volume finally we find that the bid ask spread is an important and perhaps the most important determinant of the option

minimum wage policy with optimal taxes and unemployment abstract using a search model i derive a formula that links the welfare gains from the minimum wage to its effect on low skilled labor force participation and employment this formula shows that the minimum wage is welfare improving if pushing the low skilled labor market tightness downwards brings it closer to its efficient level i estimate the causal effect of the minimum wage on low skilled labor force participation and employment using federal and state minimum wage variation i discuss the policy implications of my estimates when viewed through the lens of the marginal welfare gain formula

flexible exchange rates a closer look abstract the stochastic properties of flexible exchange rates are investigated by looking at a sample of intradaily sfr quotes for 231 trading days in 1983 estimated moments of the distribution of returns over five minute intervals often exhibit large changes which are mostly unpredictable even from one day to the next autocorrelation in returns is generally absent even inside a given day specific days of the week do not exhibit any special characteristics during a single day both relative changes in exchange rates as well as their volatility show some distinct patterns

trading activity dealer concentration and foreign exchange market quality abstract we study the relation between foreign exchange market quality and both trading activity and dealer concentration by considering two currency pairs with significant differences along both dimensions the euro us dollar and canadian dollar us dollar a variance ratio test reveals over reaction in currency prices but that this is smallest when trading activity is high and dealer concentration at its peak a garch model shows that over reaction declines as trading activity and dealer concentration increase with the results being stronger for the euro our results confirm that trading activity is an important determinant of market quality but also point to a significant role for dealer concentration

inter jurisdictional competition for firms regions inhabited with an immobile population of disabled and able individuals compete to attract mobile firms that provide jobs the redistributive goal of regional governments is to support the disabled who cannot work able individuals may work be involuntary unemployed because of frictions in the labor market or choose to be voluntary unemployed labor force participation decisions depend on regional redistributive policies both the size of workforce and tax on firms affect profits and therefore firms location decisions allowing regions to engage in tax competition may be efficient if regions cannot tax firms they compete by implementing inefficient redistributive policies

options short sales and market completeness this paper presents empirical evidence that trading in options contributes to both transactional and informational efficiency of the stock market by reducing the effect of constraints on short sales the significantly higher average level of short interest exhibited by optionable stocks supports the argument that options facilitate short selling we also find significant effects on option prices related to the short interest in the underlying stock we then present evidence that options also increase information efficiency earlier work that is replicated and extended here has suggested that short sale constraints cause stock prices to underweight negative information options appear to reduce that effect

do announcements of wto dispute resolution cases matter evidence from the rare earth elements market abstract rare earth elements rees have gained increasing attention recently for several key reasons 1 they are vital to many strategic industries 2 they are relatively scarce 3 they frequently exhibit high price fluctuations 4 china holds a quasi monopoly on their mining and 5 china s ree policy which was overly restrictive and led to a formal complaint from the u s japan and the eu at the world trade organization wto in 2012 this paper investigates whether the announcement of a wto dispute resolution case has the power to fundamentally change market dynamics we find empirical support for this notion because ree prices exhibit a structural break around the announcement of the wto dispute and show lower variance ratios for all tested rees afterward this indicates a tendency toward efficiency although ree prices still do not follow a random walk similarly we find that stock price informativeness of companies in the ree industry increases after the announcement reflecting more firm specific than marketwide information and less governmental influence finally we show that model uncertainty for option pricing models decreases which we measure by the lower pricing differences among them

a note on intraday foreign exchange volatility and the informational role of quote arrivals abstract the conditional variance for five different hourly foreign exchange rates is modeled using a garch model with the number of incoming quotes as a regressor in the conditional variance equation we find that the number of quotes is positively and significantly related to the volatility of all rates examined the empirical findings support the conjecture of a time consuming information process

volatility in the foreign currency futures market we examine the volatility implications of around the clock foreign exchange trading with transaction data on futures contracts from the chicago mercantile exchange and the london international financial futures exchange we find higher u s european and u s japanese exchange rate volatilities during u s trading hours and higher european cross rate volatilities during european trading hours while the diclosure of private information through trading may partly explain these volatility patterns we conclude that the increased volatility is more likely driven by macroeconomic news announcements an analysis of inter and intraday data also reveals that volatility increases at times that coincide with the release of u s macroeconomic news article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

a pareto improving minimum wage this paper shows that a graduated minimum wage in contrast to a constant minimum wage can provide a strict pareto improvement over what can be achieved with an optimal income tax the reason is that a graduated minimum wage requires high productivity workers to work more to earn the same income as low productivity workers which makes it more difficult for the former to mimic the latter in effect a graduated minimum wage allows the low productivity workers to benefit from second degree price discrimination which increases their income

seasonality in foreign exchange volatility the paper reports further empirical evidence on seasonality in foreign exchange volatility using high frequency data using a basis of the signal plus noise framework the approach decomposes tick by tick reuters fxfx quotes into a random walk and a stationary component termed the efficient price and the pricing error respectively the efficient price is not directly observable and is an approximation of the true value the pricing error captures the deviation between the observed indicative quote and the efficient price under the proposed model daily and intraday volatilities of the efficient price are estimated a pronounced pattern of volatility is uncovered and appears related to the daily activity cycle of major organized stock exchanges it is argued that seasonality in volatility is a symptom of foreign exchange markets results confirm andersen and bollerslev s findings that significant seasonal effects are one important determinant of overall volatility at high frequencies

utilitarianism and horizontal equity the case for random taxation this paper establishes that far from being able to derive the principle of horizontal equity from utilitarianism the principle is actually in consistent with utilitarianism in a variety of circumstances we derive conditions under which a it is optimal to impose random tax schedules ex post randomization and b it is optimal to randomize the tax schedules imposed on a set of otherwise identical individuals ex ante randomization the implications for optimal tax theory are discussed more generally it is shown that there are a number of potentially important economic situations with which the principle of horizontal equity may be inconsistent not only with utilitarianism but even with pareto optimality this abstract was borrowed from another version of this item

the price variability volume relationship on speculative markets this paper concerns the relationship between the variability of the daily price change and the daily volume of trading on the speculative markets our work extends the theory of speculative markets in two ways first we derive from economic theory the joint probability distribution of the price change and the trading volume over any interval of time within the trading day and second we determine how this joint distribution changes as more traders enter or exit from the market the model s parameters are estimated by fiml using daily data from the 90 day t bills futures market the results of the estimation can reconcile a conflict between the price variability volume relationship for this market and the relationship obtained by previous investigators for other speculative markets this paper concerns the relationship between the variability of the daily price change and the volume of trading on speculative markets previous empirical studies 2 3 6 12 14 16 of both futures and equity markets always find a positive association between price variability as measured by the squared price change ap2 and the trading volume 2 there are two explanations for the relationship clark s 2 explanation which is secondary to his effort to explain why the probability distribution of the daily price change is leptokurtic emphasizes randomness in the number of within day transactions in clark s model the daily price change is the sum of a random number of within day price changes the variance of the daily price change is thus a random variable with a mean proportional to the mean number of daily transactions clark argues that the trading volume is related positively to the number of within day transactions and so the trading volume is related positively to the variability of the price change the second explanation is due to epps and epps 6 their model examines the mechanics of within day trading the change in the market price on each within day transaction or market clearing is the average of the changes in all of the traders reservation prices epps and epps assume there is a positive relationship between the extent to which traders disagree when they revise their reservation prices and the absolute value of the change in the market price that is an increase in the extent to which traders disagree is associated with a larger absolute price change the price variability volume relationship arises then because the volume of trading is positively related to the extent to which traders disagree when they revise their reservation prices

heteroskedasticity in stock return data volume versus garch effects this paper provides empirical support for the notion that autoregressive conditional heterqskedasticity arch in daily stock return data reflects time dependence in the process generating information flow to the market daily trading volume used as a proxy for information arrival time is shown to have significant explanatory power regarding the variance of daily returns which is an implication of the assumption that daily returns are subordinated to intraday equilibrium returns furthermore arch effects tend to disappear when volume is included in the variance equation the autoregressive conditiqnal heteroskedasticity arch process of engle 1982 has been shown to provide a good fit for many financial return time series 1 arch imposes an autoregressive structure on conditional variance allqwing volatility shocks to persist over time this persistence captures the propensity of returns of like magnitude to clu ter in time and can explain the well documented nonnormality and nonstability of empirical asset return distributions see especially fama 1965 an appealing explanation for the presence of arch is based upon the hypothesis that daily returns are generated by a maiture of distributions in which the rate of daily information arrival is the stochastic mixing variable as suggested by diebold 1986 gallant hsieh and tauchen 1988 and stock 1987 1988 arch might capture the time series properties e g serial correlation of this mixing variable hqwever this linkage has not been broadly documented with the datia the objective of this study is to examine the validity of this explanation for daily stock returns the empirical strategy exploits the implication of the mixture model that the variance of daily price increments is heteroskedastic specifically positively related to the rate of daily information arrival using daily trading volume as a proxy for the mixing variable we show that for a sample of 20 common stocks arch effects vanish when volume is included as an explanatory variable in the conditional variance equation

intra day and inter market volatility in foreign exchange rates four foreign exchange spot rate series recorded on an hourly basis for a six month period in 1986 are examined a seasonal garch model is developed to describe the time dependent volatility apparent in the percentage nominal return of each currency hourly patterns in volatility are found to be remarkably similar across currencies and appear to be related to the opening and closing of the worlds major markets robust lm tests designed to deal with the extreme leptokurtosis in the data fails to uncover any evidence of misspecification or the presence of volatility spillover effects between the currencies or across markets

risk aversion market liquidity and price efficiency a model of a noncompetitive speculative market is analyzed in which privately informed traders and market makers are risk averse market liquidity is found to be nonmonotonic in the number of informed traders their degree of risk aversion and the precision of their information it is also shown that increased liquidity trading leads to reduced price efficiency and that under endogenous information acquisition market liquidity may also be nonmonotonic in the variance of liquidity trades article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

on the optimality of a minimum wage new insights from optimal tax theory we build a theoretical model to study whether a minimum wage can be welfare improving if it is implemented in conjunction with an optimized nonlinear income tax we consider this issue in a framework where search frictions on the labor market generate unemployment workers differ in productivity the government does not observe workers productivity but only their wages hence the redistributive policy solves an adverse selection problem we show that a minimum wage is optimal if the bargaining power of the workers is relatively low however if the government controls the bargaining power then it is preferable to set a sufficiently high bargaining power