re examining the buffer stock model of money this paper critically examines recent papers in the buffer stock or supply side disequilibrium models of money the paper first investigates the assumptions at the m icroeconomic level and concludes that even with these assumptions aggregate behavior does not necessarily follow buffer stock models in which excess cash balances are held involuntarily in a simple model with uncertain cash flows it is shown that in the aggregate short run involuntary cash holdings are negligible if the buffer stock story is applicable it is to a broader definition of money than used in most empirical work the second part of the paper examines empirical work and argues that the buffer stock idea cannot be implemented using single equation techniques and that when viewed appropriately current empirical result s refute the buffer stock idea as it is currently modeled copyright 1987 by royal economic society

the influence of taiwan s stock market on bitcoin s price under taiwan s monetary policy threshold this study uses a smooth transition autoregressive model with exogenous variables starx to investigate whether there is a nonlinear relationship between bitcoin and taiwan s stock market taking i

speculation and hedging in segmented markets we analyze a model in which traders have different trading opportunities and learn information from prices the difference in trading opportunities implies that different traders may have different trading motives when trading in the same market some trade for speculation and others for hedging and thus they may respond to the same information in opposite directions this implies that adding more informed traders may reduce price informativeness and therefore provides a source for learning complementarities leading to multiple equilibria and price jumps our model is relevant to various realistic settings and helps to understand a variety of modern financial markets

delegated portfolio management abstract a problem of screening agents with privately known forecasting abilities and reservation utilities and then eliciting truthful information from these agents once they are employed is considered for the case of risk averse agents and large principals an approximately optimal solution is constructively characterized under the assumption that payoffs are normally distributed a significant extension of the definnetti savage probability elicitation result is developed under this extension knowledge of agent preferences is not required when the underlying conditional distributions are symmetric and this fact is exploited to solve the screening problem in a mean variance formulation

the role of farmers behavioral attitudes and heterogeneity in futures contracts usage the relationship between farmers behavioral attitudes and use of futures contracts is examined taking into account non directly observable variables and the heterogeneity of farmers the relationships are tested on a stratified data sample of 440 farmers cluster analysis and covariance structure equation models are used to validate the relationships farmers are found not to be homogenous regarding the factors influencing their use of futures heterogeneity at the segment level masked important effects at the aggregate level notably risk attitude furthermore several psychological constructs for farmers related to market orientation risk exposure market performance and entrepreneurial behavior play important roles in their use of futures contracts

the effects of derivatives on firm risk and value using a large sample of nonfinancial firms from 47 countries we examine the effect of derivative use on firm risk and value we control for endogeneity by matching users and nonusers on the basis of their propensity to use derivatives we also use a new technique to estimate the effect of omitted variable bias on our inferences we find strong evidence that the use of financial derivatives reduces both total risk and systematic risk the effect of derivative use on firm value is positive but more sensitive to endogeneity and omitted variable concerns however using derivatives is associated with significantly higher value abnormal returns and larger profits during the economic downturn in 2001 2002 suggesting that firms are hedging downside risk

tests for parameter instability in regressions with i 1 processes this article derives the large sample distributions of lagrange multiplier lm tests for parameter instability against several alternatives of interest in the context of cointegrated regression models the fully modified estimator of phillips and hansen is extended to cover general models with stochastic and deterministic trends the test statistics considered include the supf test of quandt as well as the lm tests of nyblom and of nabeya and tanaka it is found that the asymptotic distributions depend on the nature of the regressor processes that is if the regressors are stochastic or deterministic trends the distributions are noticeably different from the distributions when the data are weakly dependent it is also found that the lack of cointegration is a special case of the alternative hypothesis considered an unstable intercept so the tests proposed here may also be viewed as a test of the null of cointegration against the alternative of no cointegration the tests are applied to three data se

efficient selection of insured currency positions protective puts vs fiduciary calls we examine the empirical results from implementation of portfolio insurance strategies employing currency spot and futures options hypotheses are generated from ogden and tucker s 1988 generalizations concerning the relative values of american spot currency options and currency futures options we find that protective puts using futures options are generally dominated by both protective puts that use options on spot currencies and by fiduciary calls on futures contracts this suggests that the prices of puts on foreign currency futures contracts are too high relative to foreign currency futures calls and to puts on spot currencies

social demand for electricity from forest biomass in spain does payment periodicity affect the willingness to pay in this article we analyze social preferences for a partial substitution programme of electricity generated by conventional energy sources for energy generated from a local renewable energy source such as forest biomass this analysis sets arguments in favour of accelerating the introduction of this renewable technology in the spanish electricity system simultaneously two methodological goals concerning the contingent valuation method are discussed in the first one we analyze if there are statistical differences in the willingness to pay wtp when a single or a double bounded format is employed to ask the valuation question results show that wtp estimates from single and double bounded significantly differ in the second one we analyze the effect of the periodicity of the payment vehicle on the estimates of welfare change the timeframe specification of the payment vehicle has been scarcely studied and this fact constitutes the main contribution of this paper to the specialized literature results show that periodicity influences upon the probability to favour the proposed change the periodicity does not affect to the mean wtp obtained in the single bounded format but there are statistical differences in the double bounded format these results might be explained by the presence of yea saying and payment scale bias

how are derivatives used evidence from the mutual fund industry we investigate investment managers use of derivatives by comparing return distributions for equity mutual funds that use and do not use derivatives in contrast to public perception derivative users have risk exposure and return performance that are similar to nonusers we also analyze changes in fund risk in response to prior fund performance changes in risk are substantially less severe for funds using derivatives consistent with the explanation that managers use derivatives to reduce the impact of performance on risk we provide new evidence regarding the implications of cash flows and managerial gaming for the relation between performance and risk

modeling the demand for narrow money in the united kingdom and the united states abstract despite the importance of well specified empirical money demand functions for inference forecasting and policy problems in modeling have arisen concerning the economic theories of money demand the data institutional frameworks financial innovation and econometric implementation by developing constant data coherent m 1 demand equations for the u k and the u s we investigate these issues and explain such puzzles as missing money the great velocity decline and the recent explosion in m 1 the endogeneity of money the lucas critique and the non invertibility of our m 1 models are also discussed

on the determinants of corporate hedging finance theory indicates that hedging increases firm value by reducing expected taxes expected costs of financial distress or other agency costs this paper provides evidence on these hypotheses using survey data on firm s use of forwards futures swaps and options combined with computstat data on firm characteristics of 169 firms in the sample 104 firms use hedging instruments in 1986 the data suggest that firms which hedge face more convex tax functions have less coverage of fixed claims are larger have more growth options in their investment opportunity set and employ fewer hedging substitutes

asymmetric information and the lack of portfolio diversification there is pervasive evidence that individuals invest primarily in local stocks and thus hold poorly diversified portfolios the present article develops a theoretical model in which the presence of informational asymmetries introduces home equity bias the main departure from previous theoretical work is the assumption that local investors outperform nonlocal investors in identifying the correct ranking of local investment opportunities instead of possessing superior information about the aggregate performance of the local stock market the second key assumption is based on the evidence that short selling is a costly activity

shortfall as a risk measure properties optimization and applications motivated from second order stochastic dominance we introduce a risk measure that we call shortfall we examine shortfall s properties and discuss its relation to such commonly used risk measures as standard deviation var lower partial moments and coherent risk measures we show that the mean shortfall optimization problem unlike mean var can be solved e7ciently as a convex optimization problem while the sample mean shortfall portfolio optimization problem can be solved very e7ciently as a linear optimization problem we provide empirical evidence a in asset allocation and b in a problem of tracking an index using only a limited number of assets that the mean shortfall approach might have advantages over mean variance 2003 elsevier b v all rights reserved

derivative use fund flows and investment manager performance abstract prior literature which examines the use of derivatives by investment managers does not discern between different types of derivative trading strategies this study is the first to examine and gather data on a particular type of derivative trading strategy undertaken by investment managers we examine the extent to which equity fund managers use index futures to manage fund flows and the effect this has on their alpha and market timing measures of performance our results show that funds that do not use derivatives exhibit lower returns and negative market timing skills when they experience fund flow the performance of funds that use derivatives however is independent of investor s liquidity demands in fact the unconditional performance of the average user fund is statistically equivalent to the performance of the average non user fund conditional on zero fund flow our results provide evidence that derivatives can be beneficial for mutual fund holders under certain conditions

relative performance incentives and price bubbles in experimental asset markets we study experimental markets in which participants face incentives modeled upon those prevailing in markets for managed funds each participant s portfolio is periodically evaluated at market value and ranked by relative performance as measured by short term paper returns those who rank highly attract a larger share of new fund inflows in an environment in which prices are typically close to intrinsic value the effect of these incentives is mild however in an environment in which markets are prone to bubble mispricing is greatly exacerbated by relative performance incentives and becomes even more pronounced with experience

on designing constructed markets in valuation surveys in this paper i consider some of the methodological issues involvedin designing valid contingent valuation cv scenarios i identifythe several parts of these scenarios and the design issues particularto those parts although my principal example is the scenario i andothers used in the exxon valdez oil spill study of the naturalresource damages to prince william sound alaska i generalize toother types of cv scenarios

investigating stability and linearity of a german m1 money demand function starting from a linear error correction model ecm the stability and linearity of a german m1 money demand function are investigated applying smooth transition regression techniques using seasonally unadjusted quarterly data from 1961 1 to 1990 2 it is found that the money demand equation considered is both linear and stable after extending the sampling period until 1995 4 a clear structural instability due to the monetary unification on 1 july 1990 is found and subsequently modelled a non linear specification for the extended period is presented and discussed copyright 1999 john wiley sons ltd

incentive fees who wins who loses 1987 incentive fees who wins who loses financial analysts journal vol 43 no 1 pp 27 38

the demand for m1 in the u s a 1960 1988 estimated u s m1 demand functions appear unstable regularly breaking down over 1960 1988 e g missing money great velocity decline m1 explosion we propose a money demand function whose arguments include inflation real income long term bond yield and risk t bill interest rates and learning curve weighted yields on newly introduced instruments in m1 and non transactions m2 the model is estimated in dynamic error correction form it is constant and with an equation standard error of 0 4 variance dominates most previous models estimating alternative specifications explains earlier breakdowns showing the model s distinctive features to be important in accounting for the data

option portfolio strategies measurement and evaluation it is well known that options can increase the flexibility of returns available from investment strategies papers by ross 1976 breeden and litzenberger 1978 and arditti and john 1980 point toward spanning opportunities which increase the efficiency of the financial markets in meeting the investment objectives of investors while these and other studies have demonstrated the potential of option portfolio strategies in molding the return distribution to better fit risk preferences a number of other studies have used simulation techniques to give an empirical view of just what effect particular option stock and option bond strategies will have in altering risk return patterns a major study in this area is that of merton scholes and gladstein 1978 1982 their study presented in two papers one on call option portfolio strategies hereinafter msgl and the other on put option portfolio strategies hereinafter msg2 presents a broad and insightful discussion of many of the implications of combining options with stock portfolios the msg study employs a 12 5 year period for simulations in the first paper on portfolios using call options and a 14 year simulation period in the second paper on portfolios using put options as they are careful to point out their results depend on market trends which may not match ex ante expecta

performance fee contract change and mutual fund risk abstract we examine the effect that an exogenously specifically governmentally required change in compensation contract had on a managerial decision we find that a group of mutual funds changed their portfolio risk levels after they were forced to change their performance fee schedules their portfolio risk choices differed predictably from a randomly selected group of nonperformance fee funds and a group of performance fee funds that were not required to change their compensation contracts in addition the affected mutual funds lost both shareholders and assets around the time of the imposition of the restriction while the other funds exhibited little change or gained assets and shareholders

the value of water supply reliability in urban water systems abstract reliability is an important dimension of urban water supply while out of pocket losses appear small water customers place high values on reliability this demand for reliability can be measured by contingent valuation methods while the costs of providing various levels of reliability can be estimated through hydrologic simulation a framework for optimizing reliability is presented and the contingent valuation survey is described results from three colorado towns are presented

modeling the demand for u k broad money 1871 1913 in this paper the author obtains and interprets estimates of short and long run demand for money in the united king dom in the period 1871 1913 utilizing high quality data on broad money and its determinants and applying recent econometric techniques a unique theoretically consistent long run function is estimated as well as a short run dynamic demand function that is formally superio r to a number of previous estimates copyright 1993 by mit press

changes to mutual fund risk intentional or mean reverting an empirical issue is whether a mutual fund s change in intertemporal risk is intentional or arises from risk mean reversion our methodology uses actual fund trades to identify funds that actively change risk funds that are statistically identified as trading to change return variance or tracking error variance do not exhibit risk mean reversion mostly funds trade to reduce risk and in particular tracking error variance this is most evident for funds that previously attained a low tracking error variance we find no evidence of a relation between past performance and intended changes to return variance or tracking error variance

of tournaments and temptations an analysis of managerial incentives in the mutual fund industry we test the hypothesis that when their compensation is linked to relative performance managers of investment portfolios likely to end up as losers will manipulate fund risk differently than those managing portfolios likely to be winners an empirical investigation of the performance of 334 growth oriented mutual funds during 1976 to 1991 demonstrates that mid year losers tend to increase fund volatility in the latter part of an annual assessment period to a greater extent than mid year winners furthermore we show that this effect became stronger as industry growth and investor awareness of fund performance increased over time

long run income and interest elasticities of money demand in the united states econometric techniques designed to accommodate nonstationary data are used to reexamine the stability of interest and income elasticities of money demand in the united states estimates based on postwar monthly data reveal a stable relationship between m1 velocity and various measures of interest rates that proxy the opportunity cost of holding money balances tests for the existence of cointegration and methods used to estimate the income and interest elasticities are based on procedures prescribed by soren johansen 1988 corresponding error correction estimates offer insight as to the dynamics of the process that maintains the equilibrium relation between velocity and interest rates copyright 1991 by mit press

inflation bets on the long bond the liquidity premium theory of interest rates predicts that the treasury yield curve steepens with inflation uncertainty as investors demand larger risk premiums to hold long term bonds by using the dispersion of inflation forecasts to measure this uncertainty we find the opposite since the prices of long term bonds move more with inflation than short term ones investors also disagree and speculate more about long maturity payoffs with greater uncertainty shorting frictions measured by using treasury lending fees then lead long maturities to become overpriced and the yield curve to flatten we estimate this inflation betting effect using time variation in inflation disagreement and treasury supply

myopic risk taking in tournaments abstract there is a common notion that incentive schemes in the financial industry trigger myopia and risk taking in some sense this contrasts with the concept of myopic loss aversion mla which implies that myopia mitigates risk taking a number of experimental studies support the mla hypothesis by showing that people take less risk the more frequently their investments are evaluated in this paper we show experimentally that if subjects are exposed to tournament incentives the standard mla effect disappears rather there is a tendency towards more risk taking the more frequently investments are evaluated

microfoundations for a stable demand for money function scientific revolutions seldom occur when the prevailing theories appear to be performing well it is only when the accepted theory fails to offer a satisfactory explanation of events that new and more robust theories are proposed of these new theories the one which can explain the successful performance of the previous theory and also the events which led to its demise becomes the replacement so it is in the history of modern monetary economics the failure of the partial adjustment model in the mid s is well documented in the united kingdom and the united states and the search for a replacement has been the main point on the agenda since that time there are many contending theories some of which are advocated by the other contributors to this controversy but the mark of a truly better theory which can be claimed to supersede the partial adjustment model is one that can explain the success and the breakdown of the previous theory as well as the events subsequently central to the argument of this paper is the importance of individual behaviour in the context of a market for monetary assets only by means of careful investigation of the microeconomic behaviour underpinning monetary economics at the individual and the market level can the stability of the money demand function be restored it is the purpose of this paper to suggest that the buffer stock approach has gone further than other approaches in dealing with the fundamental micro foundations of the demand for money it does not suggest that other approaches have no microfoundations but they tend to concentrate exclusively on specific aspects of the micro structure such as separability and ignore others relating to the behaviour of individual optimisers in a monetary market the buffer stock model has firm micro foundations which can explain the events both before and after the breakdown of the partial adjustment model section i provides an historical background to the debate and section ii gives a brief overview of buffer stock models which shows that unlike other approaches they have been able to reconcile the past success of the partial adjustment model with its present failure the nature of the microfoundations of buffer stock models are the source of the success and are discussed in more detail in section iii the final section evaluates the buffer stock approach in the light of the other alternatives

the returns and risk of alternative put option portfolio investment strategies this paper is the second in a series of analyses we have prepared based on simulations of a variety of portfolio strategies over a significant period of time the first of these analyses examined the fully covered call option writing strategy and the buying strategy which combines purchase of call options and commercial paper in the study presented here we examine the uncovered put writing strategy and the buying strategy which combines the purchase of put options and the underlying stocks as a preface to the simulations we analyze the quantitative discrepancies between the parity model of put pricing and a model which takes into account the possibility of early exercise of the put in connection with this analysis we simulate the returns to the conversion strategy which combines the purchase of put options and the underlying stocks with the simultaneous sale of the corresponding call options as in our earlier paper on call option strategies we find in this study that investors can use uncovered putoption writing and protective put optionbuying strategies to produce patterns of returns for investment portfolios not reproducible by any simple strategy of combining stock with fixed income securities put options are viewed as term insurance insuring against a loss in value of underlying stock investors sell insurance by using the uncovered put writing strategies and investors buy insurance protecting the value of stocks within a portfolio by using protective put optionbuying strategies no put strategy or call strategy can dominate any other strategy if options are priced correctly although there is no single best strategy for all investors they are not indifferent among strategies because the patterns of returns differ we therefore show these important patterns of returns on put option strategies not only using single stocks but also using portfolios of stocks this research was financed in part by grants from donaldson lufkin jenrette new york the center for research in security prices university of chicago and the national science foundation washington d c 1 merton scholes and gladstein 1978 in the present paper all references to our earlier paper are to this study

understanding index option returns this paper studies the returns from investing in index options previous research documents significant average option returns large capm alphas and high sharpe ratios and concludes that put options are mispriced we propose an alternative approach to evaluate the significance of option returns and obtain different conclusions instead of using these statistical metrics we compare historical option returns to those generated by commonly used option pricing models we find that the most puzzling finding in the existing literature the large returns to writing out of themoney puts is not even inconsistent with the black scholes model moreover simple stochastic volatility models with no risk premia generate put returns across all strikes that are not inconsistent with the observed data at the money straddle returns are more challenging to understand and we find that these returns are not inconsistent with explanations such as jump risk premia peso problems and estimation risk

tournament behavior in hedge funds high water marks fund liquidation and managerial stake we analyze whether risk shifting by a hedge fund manager is related to the manager s incentive contract personal capital stake and the risk of fund closure we find that the propensity to increase risk following poor performance is significantly weaker when incentive pay is tied to the fund s high water mark and when funds face little immediate risk of liquidation risk shifting is also less prevalent when a manager has a significant amount of personal capital invested in the fund overall high water mark provisions managerial stake and low risk of fund closure appear to make a hedge fund manager more conservative with regard to risk shifting

sequencing and valuing public goods abstract this paper establishes several propositions concerning the importance of context in valuing public goods it first provides necessary and sufficient conditions for the value of a public good to be independent of context utility constant valuation sequences are considered where public goods are systematically made available or taken away for the case of strict hicksian substitutes willingness to pay for an increase in one of the public goods is strictly decreasing the farther out in a sequence it is valued for the destruction of public goods the reverse is true for willingness to accept compensation sequencing has opposite implications for the assessment of the benefits of providing public goods than for the assessment of the damage from destroying them

the equilibrium relationship among money income prices and interest rates evidence from a threshold cointegration test the long run equilibrium relationship among money income prices and interest rates in japan is investigated by the threshold cointegration test which allows for asymmetric adjustment introduced by enders and siklos 2001 the threshold cointegration approach provides clear evidence of the cointegration relationship characterized by asymmetric adjustment by allowing for asymmetric adjustment results are obtained showing the stability of the money demand function similar to lucas 1988 who pointed out that the money demand function is stable if unit income elasticity is imposed in particular the estimated results show that the adjustment process toward equilibrium is highly persistent above an appropriately estimated threshold whereas the adjustment process toward equilibrium quickly converges below it this finding indicates that deviations from equilibrium resulting from increases in money or decreases in income and prices are highly persistent

a stable us money demand function 1874 1975 we apply recent econometric techniques to the demand for money in the united states over a period of some hundred years using data previously analyzed by friedman and schwartz 1982 our results parallel those of hendry and ericsson s 1991 uk study we find evidence of a unique long run money demand function and of a stable short run demand function which passes a range of diagnostic tests and exhibits parameter constancy also parameter non constancy in an inverted equation where prices appear as the dependent variable is inconsistent with the hypothesis of exogenous money determining prices through the money demand function

the demand for money a dynamic rational expectations model macroeconomic modelling generally has widely adopted the use of forwardlooking variables in behavioural relationships studies of the demand for money being something of an exception the aim of this paper is to provide preliminary empirical results of a model which explicitly incorporates expectations of the future into the demand function for narrow money the approach adopted is the modelling of the demand for money within a multi period costs of adjustment framework under the assumption of rational expectations agents are assumed to pursue a target or long run level of money balances which is itself a function of prices income and interest rates this results in an empirical specification which consists of both backwardlooking and forward looking components the model is estimated using uk data for the period i963i i983iii the remainder of the paper is divided into four sections in section i we outline the framework in which our model is derived in the following section we discuss the econometric techniques used and in section iii we present our empirical results a final section concludes

adverse risk incentives and the design of performance bases contracts this paper uses option pricing theory to value and analyze many performance based fee contracts that are currently in use a potential problem with some of these contracts is that they may induce portfolio managers to adversely alter the risk of the portfolios they manage the paper is prescriptive in that it presents conditions for contract parameters that provide proper risk incentives for classes of investment strategies for buy and hold and rebalancing strategies adverse risk incentives are avoided when the penalties for poor performance outweigh the rewards for good performance

implications of the sharpe ratio as a performance measure in multi period settings we study efiects of using sharpe ratio as a performance measure for compensating money managers in a dynamic and frictionless market setting first we demonstrate that with such a performance measure the manager s focus on the short horizon performance is detrimental to the investor s long horizon performance numerical experiments illustrate that when returns are iid the performance loss is signiflcant even when the investor s investment horizon is not much longer than the manager s when expected returns are mean reverting the performance loss is exacerbated second we show that sharpe ratio maximization strategies tend to increase decrease the risk in the later part of the optimization period after a bad good performance in the earlier part of the optimization period as illustrated by a simulation exercise this prediction is in agreement with empirical observations and it presents a rational expectations alternative to the prevalent tournament theory explanation

adopt a hypothetical pup a count data approach to the valuation of wildlife the willingness to pay wtp for a coyote conservation program is estimated using a novel payment vehicle based on how many problem coyotes respondents would be willing to sponsor for a year this hypothetical scenario mimics an increasingly popular type of actual market data from a phone survey conducted in prince edward island are analyzed using count data models that consider different processes explaining zero responses and the level of positive responses this is particularly important in the case of coyotes often regarded as an economic bad estimates of wtp per coyote per year around 18 22 and annual wtp per contributor of about 46 57 are obtained

on the reinterpretation of money demand regressions a stylized fact concerning estimated money demand relationships is that lagged dependent variables have high explanatory power and large estimated coefficients which is hard to explain at a theoretical level marvin s goodfriend 1985 suggests that this may be due to the presence of serially correlated measurement errors in the independent variables the author demonstrates how consistent estimates of the short run demand function can be obtained even if the goodfriend hypothesis is accepted and also how the hypothesis might be tested application of the suggested test using the goldfeld 1973 data set leads to decisive rejection of the hypothesis copyright 1994 by ohio state university press

contingent valuation controversies and evidence contingent valuation cv has become one of the most widely used non market valuation techniques cv s prominence is due to its flexibility and ability to estimate total value including passive use value its use and the inclusion of passive use value in benefit cost analyses and environ mental litigation are the subject of a contentious debate this paper discusses key areas of the debate over cv and the validity of passive use value we conclude that many of the alleged problems with cv can be resolved by careful study design and implementation we further conclude that claims that empirical cv findings are theoretically inconsistent are not generally supported by the literature the debate over cv however has clarified several key issues related to nonmarket valuation and can provide useful guidance both to cv practitioners and the users of cv results

sequencing and nesting in contingent valuation surveys abstract the term embedding is ill defined and has been applied to distinct phenomena some predicted by economic theory and others not this paper lays out a theoretical framework for looking at these phenomena and provides a set of well defined terms included is a discussion of survey design problems which may induce spurious evidence in favor of the hypothesis that respondents are insensitive to the scope of the good being valued an empirical example of the component sensitivity is provided this test rejects the hypothesis that respondents are insensitive to the scope of the good being valued

modeling the demand for m3 in the unified germany an error correction model for the demand for real m3 money is constructed for the period of 1976 1994 with real gnp the gnp deflator as well as a short term and a long term interest rate as explanatory variables quarterly seasonally unadjusted data are used in estimating the model it is found that there is a clear structural break due to the german unification in 1990 on the other hand once this structural break is accounted for a stable relation is found which resists a series of specification tests these include a number of recent tests of parameter constancy and linearity our specification is at variance with findings reported by some other researchers notably the deutsche bundesbank

revisiting the us money demand function an application of the lagrange multiplier structural break unit root test and the bounds test for a long run relationship in this article we examine the issue of a levels relationship and stability of the us money demand function over the period 1959 01 to 2004 02 we use the lagrange multiplier structural break unit root test and the bounds testing approach to a long run relationship in levels of the variables namely real money demand nominal interest rate and real income we find greater evidence for a long run relationship in levels and stability of the us money demand function when we use m2 as a proxy for money demand however we find little evidence for a long run relationship between m1 and m2 with their determinants for the recent period spanning the last decade or so

long run money demand in taiwan revisited evidence from a cointegrating str approach previous studies on the nonlinearity of the money demand function focus only on short run dynamics and assume that the long run cointegrated relationship is linear which according to economic theory need not be the case thus this article focuses on the variables that make up the long run money demand function in taiwan and their determinants by using the cointegrating smoothing transition regression cstr test developed by choi and saikkonen 2004 this model is more general than the previous str model in that it may contain several transition functions and has more than a single transition variable we demonstrate our empirical results for robustness and adopt two models to ascertain whether or not the stock price should be added as a determinant of the demand for money our empirical results show the existence of a stationary long run relationship among real money demand functions for the period from 1976q1 to 2005q1 and the robustness test covers the 1980q1 2005q1 period in taiwan by comparing

optimal option portfolio strategies deepening the puzzle of index option mispricing traditional methods of asset allocation such as mean variance optimization are not adequate for option portfolios because the distribution of returns is non normal and the short sample of option returns available makes it difficult to estimate their distribution we propose a method to optimize a portfolio of european options held to maturity with a myopic objective function that overcomes these limitations in an out of sample exercise incorporating realistic transaction costs the portfolio strategy delivers a sharpe ratio of 0 82 with positive skewness this performance is mostly obtained by exploiting mispricing between options and not by loading on jump or volatility risk premia

nonlinear equilibrium correction in u s real money balances 1869 1997 several theoretical models of money demand imply nonlinear functional forms for the aggregate demand for money characterized by smooth adjustment toward long run equilibrium in this paper we propose a nonlinear equilibrium correction model of u s money demand that is shown to be stable over the sample period from 1869 to 1997

non linear error correction and the uk demand for broad money 1878 1993 in this paper we reconsider an error correction model of uk broad money demand by ericsson hendry and prestwich their model is non linear in both variables and parameters and it can be viewed as an approximation to a smooth transition regression str type specification the corresponding str model when specified and estimated fits the data better than the original model adopting a somewhat more general modelling approach leads to another str model this model variance dominates the other two and the encompassing tests performed in this paper indicate that it is an improvement over the other two specifications copyright 2001 john wiley sons ltd

incentives and endogenous risk taking a structural view on hedge fund alphas hedge fund managers are subject to several nonlinear incentives performance fee options call equity investors redemption options put and prime broker contracts allowing for forced deleverage put the interaction of these option like incentives affects optimal leverage ex ante depending on the distance of fund value from the high water mark we study how these endogenous effects influence performance measures used in the literature we show that reduced form measures that do not account for these features are subject to economically significant false discovery biases the result is stronger for low quality funds we propose an alternative structural methodology for conducting performance attribution in hedge funds

measuring producers risk preferences a global risk attitude construct in applied agricultural economic research various risk attitude elicitation techniques are used here we investigate whether risk attitude measures rooted in the expected utility framework are related to measures rooted in the multi item scale framework using a second order factor analytical model and data obtained from personal computer guided interviews with 373 farmers we investigate whether the common variance among the latent risk attitude measures can be accounted for by a global risk attitude construct we find that the different risk attitude measures are related and that the global risk attitude construct is significantly related to farmers intention to use futures contracts our research suggests that farmers risk attitude is a higher order characteristic that cannot be effectively extracted by a single measure in empiricalstudies deal ing with risk risk attitudes and producers market behavior various risk attitude measures are used two major approaches to quantify directly farmers risk attitudes can be distinguished measures derived from the expected utility framework and measures derived from responses to multi item scales e g antle chavas and holt goodwin and schroeder saha shumway and talpaz smidts the purpose of this research is to test whether risk attitude measures rooted in the expected utility framework are related to the risk attitude scales rooted in the multiitem scale approach and if so whether these risk attitude measures share a common

when in peril retrench testing the portfolio channel of contagion abstract the impact of past gains and losses on international investors risk aversion is an important factor in the propagation of financial shocks across countries we first present a stylized model illustrating how changes in investors risk aversion affect portfolio decisions and stock prices we then examine empirically the behavior of international mutual funds when funds returns are below average they reduce their exposure to countries in which they were overweight and vice versa an index of financial interdependence that reflects the extent to which countries share overexposed funds helps explain the pattern of stock market comovement across countries and the pattern of contagion during crises

results of a study of the stability of cointegrating relations comprised of broad monetary aggregates abstract we find strong evidence of a stable money demand relationship for mzm and m2m through the 1990s though the m2 relation breaks down somewhere around 1990 evidence has been accumulating that the disturbance is well characterized as a permanent upward shift in m2 velocity which began around 1990 and was largely over by 1994 taken together our results support the hypothesis that households permanently reallocated a portion of their wealth from time deposits to mutual funds although this reallocation may have been induced by depository restructuring we argue that the substitution could be explained by appropriately measured opportunity cost

the stability of long run money demand in five industrial countries abstract this study provides strong evidence for the stability of long run demand functions for narrowly defined money m1 in five industrial countries u s japan canada u k and west germany using post war quarterly data evidence of stability is examined using two different estimation techniques and through a formal test of parameter constancy designed specifically for cointegrating vectors in the majority of these countries the key to stability is the imposition of a unitary long run income elasticity that is rarely rejected by the data

currency substitution and nonlinear error correction in taiwan s demand for broad money we modify the conventional money demand function by including a real exchange rate variable to reflect the effect of currency substitution empirical evidence indicates that the variable is crucial to the long run stability of taiwan s money demand after finding the failure of a linear error correction model ecm in describing the dynamics of taiwan s money demand we apply a nonlinear ecm to examine its dynamics and support the appropriateness of the nonlinear model empirically

the demand for money from the great depression to the present myths and legends about the great depression have dominated the public s perception of the business cycle they have shaped government policy and until recently they have even held powerful sway among economists in the immediate aftermath of the great depression many economists came to question the fundamental concept of economic equilibrium velocity was thought to be highly unstable as in the case of the liquidity trap so that the quantity of money supplied was consistent with any level of nominal income in the real sector there was the frightening specter of underemployment

smooth adjustment econometrics and inventory theoretic money management abstract a growing number of empirical papers use miller orr s s money management as economic motivation for application of non linear smooth adjustment models this paper shows such models are not implied by the miller orr economy instead the miller orr economy implies non standard smooth adjustment as derived in the neglected and misinterpreted work of milbourne et al 1983 remarkably this function includes a varying weight on the lagged dependent variable capturing static not dynamic effects interpretations of these apparent dynamics are presented some of which may be useful in non monetary s s contexts results imply a new agenda for applied smooth adjustment modeling of money

optimal contracts in a continuous time delegated portfolio management problem this article studies the contracting problem between an individual investor and a professional portfolio manager in a continuous time principal agent framework optimal contracts are obtained in closed form these contracts are of a symmetric form and suggest that a portfolio manager should receive a fixed fee a fraction of the total assets under management plus a bonus or a penalty depending upon the portfolio s excess return relative to a benchmark portfolio the appropriate benchmark portfolio is an active index that contains risky assets where the number of shares invested in each asset can vary over time rather than a passive index in which the number of shares invested in each asset remains constant over time fund managers compensation schemes in a delegated portfolio management setting have been of special interest to both academics and practitioners academic interest stems in part from the rapid growth of managed funds over the last two decades gompers and metrick 1998 report that by december 1996 mutual funds pension funds and other financial intermediaries held discretional control over more than half of the u s equity market it is thus of importance to study the impact of institutional trading on asset prices and to integrate into one model both asset pricing and delegated portfolio management compensation as advocated by brennan 1993 allen and santomero 1997 and allen 2001 it is also important to understand the relationship between a manager s trading strategies and his implicit incentives or career concerns see e g brown harlow and starks 1996 brown goetzmann and park 1997 chevalier and ellison 1999 and chen and pennacchi 2000 these concerns include internal promotion from a small to a large fund higher outside offers and the flow of money through the fund under management 1 the importance of fund manager compensation is also underscored by congressional passage in 1970 of the amendment to

investment incentives debt and warrants abstract this paper models and characterizes investment incentive problems associated with debt financing the decision problem of residual claimants is explicity formulated and their investment policies are characterized the paper also analyzes the use of conversion features and warrants to control distortionary incentives these claims reverse the convex shape of levered equity over the upper range of the firm s earnings and this mitigates the incentive to take risk it is shown that under certain conditions such claims can be constructed to restore net present value maximizing incentives and simultaneously meet the financing requirements of the firm

money growth and inflation a regime switching approach abstract we develop a markov switching model for inflation with time varying transition probabilities inflation is characterized by two regimes high and low inflation and the probability of regime changes depends on money growth using bayesian techniques we apply the model to the euro area germany the us the uk and canada for data from the 1960s up to the present our estimates suggest that a smoothed measure of broad money growth corrected for real time estimates of trend velocity and potential output growth has important leading indicator properties for switches between inflation regimes thus money growth provides an important early warning indicator for risks to price stability

asset float and speculative bubbles we model the relationship between asset float tradeable shares and speculative bubbles investors with heterogeneous beliefs and short sales constraints trade a stock with limited float because of insider lockups a bubble arises as price overweighs optimists beliefs and investors anticipate the option to resell to those with even higher valuations the bubble s size depends on float as investors anticipate an increase in float with lockup expirations and speculate over the degree of insider selling consistent with the internet experience the bubble turnover and volatility decrease with float and prices drop on the lockup expiration date

maximum likelihood estimates of a partial adjustment adaptive expectations model of the demand for money now predicted correctly with respect to the win for carter it is not clear however that much confidence should be placed on this result each election has special features and without too much work one could rig the equation to predict most of the observations perfectly within sample third the editor3 has expressed concern about the number of coefficient estimates in say equation 6 that are insignificant by conventional standards given the small number of observations this is not necessarily surprising and my general procedure is to retain insignificant vafiables if their coefficient estimates are of the right sign i would rather risk the loss of some efficiency by incorrectly including a variable than risk the loss of consistency by incorrectly excluding it in the present case there is no question that the likelihood function is fairly flat in the vicinity of the estimate of x although the size of the estimate seems reasonable the only observations that really matter for the estimate of x are those in which at least one of the candidates has run before and so the number of observations involved in estimating a is very small there is also considerable collinearity among the estimates of a and the coefficients of dpert and i the coefficient of 1 is merely the constant term in the definition of the measure of performance see fair 1978 p 164 and it is not very important there is also some collinearity between the time trend and the inflation variable equation 9 is the same as equation 6 except that the time trend i and x have been excluded the main change is that the estimate of the coefficient of dper has increased from 0 0493 to 0 0637 the results are otherwise quite similar the 0 0637 estimate of the coefficient of dper in equation 9 seems somewhat high to me and i am inclined to stay with equation 6 even though there are insignificant estimates tastes differ on this however and there is clearly no right answer as a final exercise equation 6 was used to predict the 1984 election for alternative values of g and p2 j the results are in table 2 for an inflation rate of say 8 0 the break even point 0 5 corresponds to a growth rate of about 0 0 one standard deviation 0 0352 below 0 5 corresponds to a growth rate of slightly more than 3 0 for an inflation rate of 8 0 if reagan does not run the republicans do not have the person advantage and the break even points are less fivunrnhk1 for the m

incentive fees some problems and some solutions 1987 incentive fees some problems and some solutions financial analysts journal vol 43 no 1 pp 21 26

an analysis of the use of derivatives by the canadian mutual fund industry in this paper we examine the use of derivatives by mutual funds in canada first both the incidence and extent of derivatives usage are low second larger growth oriented domestic equity funds are more likely to use derivatives we then compare returns and risks between derivative users and non users with the following findings 1 there exist no differences between users and non users for foreign equity funds 2 for fixed income funds users have higher returns and risks than non users 3 for domestic equity funds users have lower returns but higher risks than non users however the differentials disappear if warrants are excluded from the definition of derivatives