a simplified jump process for common stock returns the specification of a statistical distribution which accurately models the behavior of stock returns continues to be a salient issue in financial economics with the introduction of arithmetic and geometric brownian motion models much attention has recently focused on a poisson mixture of distributions as an appropriate specification of stock returns for example see 12 3 8 10 5 and 1 consistent with empirical evidence these models yield leptokurtic security return distributions and furthermore the specification has much economic intuition in particular one may always decompose the total change in stock price into normal and abnormal components the normal change may be due to variation in capitalization rates a temporary imbalance between supply and demand or the receipt of any other information which causes marginal price changes this component is modelled as a lognormal diffusion process the abnormal change is due to the receipt of any information which causes a more than marginal change in the price of the stock and is usually modeled as a poisson process

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

constant and variable returns to scale dea models for socially responsible investment funds abstract in order to evaluate the performance of socially responsible investment sri funds we propose some models which use data envelopment analysis dea and can be computed in all phases of the business cycle these models focus on the most crucial elements of an investment in mutual funds in the literature both constant and variable returns to scale dea models have been used to evaluate the performance of mutual funds we carry out an empirical investigation on european sri equity funds to test the presence of returns to scale rts another aspect taken into account by the empirical investigation is the measurement of the degree of social responsibility of sri equity funds in various european countries in addition we analyse the performance of the funds considered with the different dea models proposed which differ in the way the ethical objective is taken into account moreover the paper focuses on another crucial issue regarding socially responsible investing the comparison of the performances between sri and non sri funds the empirical study suggests that the ethical objective can be pursued without having to renounce financial rewards

the pricing of options on assets with stochastic volatilities one option pricing problem that has hitherto been unsolved is the pricing of a european call on an asset that has a stochastic volatility this paper examines this problem the option price is determined in series form for the case in which the stochastic volatility is independent of the stock price numerical solutions are also produced for the case in which the volatility is correlated with the stock price it is found that the black scholes price frequently overprices options and that the degree of overpricing increases with the time to maturity one option pricing problem that has hitherto remained unsolved is the pricing of a european call on a stock that has a stochastic volatility from the work of merton 12 garman 6 and cox ingersoll and ross 3 the differential equation that the option must satisfy is known the solution of this differential equation is independent of risk preferences if a the volatility is a traded asset or b the volatility is uncorrelated with aggregate consumption if either of these conditions holds the risk neutral valuation arguments of cox and ross 4 can be used in a straightfoward way this paper produces a solution in series form for the situation in which the stock price is instantaneously uncorrelated with the volatility we do not assume that the volatility is a traded asset also a constant correlation between the instantaneous rate of change of the volatility and the rate of change of aggregate consumption can be accommodated the option price is lower than the blackscholes b s 1 price when the option is close to being at the money and higher when it is deep in or deep out of the money the exercise prices for which overpricing by b s takes place are within about ten percent of the security price this is the range of exercise prices over which most option trading takes place so we may in general expect the b s price to overprice options this effect is exaggerated as the time to maturity increases one of the most surprising implications of this is that if the b s equation is used to determine the implied volatility of a near the money option the longer the time to maturity the lower the implied volatility numerical solutions for the case in which the volatility is correlated with the stock price are also examined the stochastic volatility problem has been examined by merton 13 geske 7 johnson 10 johnson and shanno 11 eisenberg 5 wiggins 16 and

value at risk estimation with the optimal dynamic biofuel portfolio abstract in the past petroleum companies only paid attention to hedging the variation in the crude oil price and volatility however they have now expanded their analysis to encompass renewable sources such as corn and soybeans under the current low carbon biofuel obligations this paper employs garch 1 1 and arji models to estimate the one day ahead value at risk var of the optimal dynamic biofuel portfolio which consists of crude oil corn and soybeans the optimal blended standard is subject to the dual limitations of minimum production costs and the lowest biofuel using requirements our empirical findings confirm that the arji model is more suitable than the garch 1 1 model and further captures the discontinuous jump behavior from the in the sample data the results of out of sample forecasts also are represented that our models play important roles in var estimation and risk management for biofuel portfolio we therefore suggest that the petroleum companies should simultaneously pay attention to jump risk in hedging material costs in the prices of energy related crops

jump risk of presidential election evidence from taiwan stock and foreign exchange markets this article employs jump diffusion models including the arji model and the garch jump model to examine jump intensity and volatility of taiwan stock and foreign exchange markets during a presidential election period the empirical results indicate that firstly the arji model fits data better than the garch jump model secondly the presidential election events enhance the jump intensity of both markets and the jump induced variance is higher than diffusion induced variance it reveals the importance of the discrete jump process during a presidential election period and might provide some implications for option pricing or hedging strategy due to the intervention of the central bank in the foreign exchange market during a presidential election period the results indicate that jump intensity and volatility of jump size are more moderate

pricing options on scenario trees abstract we examine valuation procedures that can be applied to incorporate options in scenario based portfolio optimization models stochastic programming models use discrete scenarios to represent the stochastic evolution of asset prices at issue is the adoption of suitable procedures to price options on the basis of the postulated discrete distributions of asset prices so as to ensure internally consistent portfolio optimization models we adapt and implement two methods to price european options in accordance with discrete distributions represented by scenario trees and assess their performance with numerical tests we consider features of option prices that are observed in practice we find that asymmetries and or leptokurtic features in the distribution of the underlying materially affect option prices we quantify the impact of higher moments skewness and excess kurtosis on option prices we demonstrate through empirical tests using market prices of the s p500 stock index and options on the index that the proposed procedures consistently approximate the observed prices of options under different market regimes especially for deep out of the money options

an equilibrium efficiency frontier data envelopment analysis approach for evaluating decision making units with fixed sum outputs abstract based on the minimal reduction strategy yang et al 2011 developed a fixed sum output data envelopment analysis fsodea approach to evaluate the performance of decision making units dmus with fixed sum outputs however in terms of such a strategy all dmus compete over fixed sum outputs with no memory that will result in differing efficient frontiers evaluations to address the problem in this study we propose an equilibrium efficiency frontier data envelopment analysis eefdea approach by which all dmus with fixed sum outputs can be evaluated based on a common platform or equilibrium efficient frontier the proposed approach can be divided into two stages stage 1 constructs a common evaluation platform via two strategies an extended minimal adjustment strategy and an equilibrium competition strategy the former ensures that original efficient dmus are still efficient guaranteeing the existence of a common evaluation platform the latter makes all dmus achieve a common equilibrium efficient frontier then based on the common equilibrium efficient frontier stage 2 evaluates all dmus with their original inputs and outputs finally we illustrate the proposed approach by using two numerical examples

some models for estimating technical and scale inefficiencies in data envelopment analysis in management contexts mathematical programming is usually used to evaluate a collection of possible alternative courses of action en route to selecting one which is best in this capacity mathematical programming serves as a planning aid to management data envelopment analysis reverses this role and employs mathematical programming to obtain ex post facto evaluations of the relative efficiency of management accomplishments however they may have been planned or executed mathematical programming is thereby extended for use as a tool for control and evaluation of past accomplishments as well as a tool to aid in planning future activities the ccr ratio form introduced by charnes cooper and rhodes as part of their data envelopment analysis approach comprehends both technical and scale inefficiencies via the optimal value of the ratio form as obtained directly from the data without requiring a priori specification of weights and or explicit delineation of assumed functional forms of relations between inputs and outputs a separation into technical and scale efficiencies is accomplished by the methods developed in this paper without altering the latter conditions for use of dea directly on observational data technical inefficiencies are identified with failures to achieve best possible output levels and or usage of excessive amounts of inputs methods for identifying and correcting the magnitudes of these inefficiencies as supplied in prior work are illustrated in the present paper a new separate variable is introduced which makes it possible to determine whether operations were conducted in regions of increasing constant or decreasing returns to scale in multiple input and multiple output situations the results are discussed and related not only to classical single output economics but also to more modern versions of economics which are identified with contestable market theories

the risk premium that never was a fair value explanation of the volatility spread abstract we present a new framework to investigate the profitability of trading the volatility spread the upward bias on implied volatility as an estimator of future realized volatility the scheme incorporates the first four option implied moments in a growth optimal payoff that is statically replicated using a portfolio of options removing the upward bias on implied volatility worsens the likelihood score of risk neutral densities obtained from s p 500 index options when they are used as forecasts of the underlying index return distribution it also results in negative expected capital growth when they are used in a volatility arbitrage scheme our empirical finding is that the upward bias on implied volatility does not represent a long term return premium rather it is required to mitigate the large losses associated with tail events when trading volatility in options markets

portfolio performance evaluation in a mean variance skewness framework abstract astronomical amounts of money are being invested in financial markets consequently the evaluation of portfolio performance has created a great deal of interest among practitioners as well as academic researchers the literature suggests that portfolio efficiency based on mean variance skewness is more desirable than the one based on mean variance however there are no well established procedures to measure efficiency in this framework mainly due to the computational difficulties the aim of this paper is to develop a portfolio performance measure based on mean variance skewness framework by utilizing a non parametric efficiency analysis tool namely data envelopment analysis

resampling dea estimates of investment fund performance abstract data envelopment analysis dea is attractive for comparing investment funds because it handles different characteristics of fund distribution and gives a way to rank funds there is substantial literature applying dea to funds based on the time series of funds returns this article looks at the issue of uncertainty in the resulting dea efficiency estimates investigating consistency and bias it uses the bootstrap to develop stochastic dea models for funds derive confidence intervals and develop techniques to compare and rank funds and represent the ranking it investigates how to deal with autocorrelation in the time series and considers models that deal with correlation in the funds returns

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

financial crashes as endogenous jumps estimation testing and forecasting abstract this paper provides an econometric approach for forecasting financial crashes based on diffusion processes with time varying parameters that are driven by market fundamentals under a polynomial drift function one obtains a cusp stochastic process that entails a generalized exponential stationary distribution this class of densities is quite convenient as it allows for skewness different tail shapes and even multimodality which corresponds to multiple equilibria movements from one equilibrium to another due to changes in the market fundamentals then relates to crashes methods for fitting and evaluating this sort of diffusion processes are proposed to enable the estimation and forecast of crash events finally an empirical assessment is carried out by tracking the likelihood of a crash during the swedish twin crises in the early 1990s

efficiency of mutual funds and portfolio performance measurement a non parametric approach abstract in finance portfolio performance assessment is an important area of research the two popular indices of performance are the jensen s alpha and the sharpe index however there are a number of shortcomings of the above measures that have been highlighted in the literature we propose a new measure of performance that seeks to address the limitations of the earlier indices the new index is calculated by employing a well known method in operations research called data envelopment analysis we show the benefits of the proposed approach and assess the performance of mutual funds we compare the results with traditional indices of performance an interesting result we obtain is that the mutual funds are all approximately mean variance efficient

multi stage product development with exploration value enhancing preemptive and innovation options abstract we provide a real options framework for the analysis of product development that incorporates research and exploration actions product attribute value enhancing actions with uncertain outcome as well as preemption and innovation options we derive two stage analytic formulas and propose a general multi period solution using a numerical lattice approach our analysis reveals that exploration actions are more important when the project is out or at the money near zero npv and less important for high project values in a multi stage setting exploration actions are important even for in the money projects when follow on actions exist that can enhance the expected value of the project with path dependency early actions are more valuable since they enhance the impact or reduce the cost of subsequent actions preemptive controls affecting rare event jump frequency and innovations that introduce positive jumps are more valuable for firms with higher frequency of competitive threats involving low volatility

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

frontier based vs traditional mutual fund ratings a first backtesting analysis we explore the potential benefits of a series of existing and new non parametric convex and non convex frontier based fund rating models to summarize the information contained in the moments of the mutual fund price series limiting ourselves to the traditional mean variance portfolio setting we test in a simple backtesting setup whether these efficiency measures fare any better than more traditional financial performance measures in selecting promising investment opportunities the evidence points to a remarkable superior performance of these frontier models compared to most but not all traditional financial performance measures

can a stochastic cusp catastrophe model explain stock market crashes this paper is the first attempt to fit a stochastic cusp catastrophe model to stock market data we show that the cusp catastrophe model explains the crash of stock exchanges much better than other models using the data of u s stock markets we demonstrate that the crash of october 19 1987 may be better explained by cusp catastrophe theory which is not true for the crash of september 11 2001 with the help of sentiment measures such as the index put call options ratio and trading volume the former models the chartists the latter the fundamentalists we have found that the 1987 returns are bimodal and the cusp catastrophe model fits these data better than alternative models therefore we may say that the crash has been led by internal forces however the causes for the crash of 2001 are external which is also evident in much weaker presence of bifurcations in the data in this case alternative models explain the crash of stock exchanges better than the cusp catastrophe model

changes in safety net use during the great recession abstract we examine how participation in social safety net programs differs by income to poverty levels and how that relationship changed after the great recession we define income to poverty based on the average of 2 years of merged cps data and investigate program participation among households with income less than 300 percent of poverty we find changes in both the level and distribution of safety net program participation during the great recession with snap expanding most at the bottom the eitc expanding most in the middle and ui expanding most at the top of the income ranges that we investigate tanf did not expand

the crash of ʼ87 was it expected the evidence from options markets transactions prices of s p 500 futures options over 1985 1987 are examined for evidence of expectations prior to october 1987 of an impending stock market crash first it is shown that out of the money puts became unusually expensive during the year preceding the crash second a model is derived for pricing american options on jump diffusion processes with systematic jump risk the jump diffusion parameters implicit in options prices indicate that a crash was expected and that implicit distributions were negatively skewed during october 1986 to august 1987 both approaches indicate no strong crash fears during the 2 months immediately preceding the crash attempts to explain what caused the stock market crashes around the world in october 1987 have suffered from the paucity of major economic developments occurring around that time that could have triggered the crashes shifting expectations regarding monetary policy foreign investors fears of a dollar decline increasing riskiness of assets none of these appeared major enough if present at all to explain the magnitude of the crashes and although portfolio insurance strategies could conceivably magnify the effects of a jump in fundamentals the initiating jump in fundamentals appears to be lacking

small dimension pde for discrete asian options abstract this paper presents an efficient method for pricing discrete asian options in presence of smile and non proportional dividends using an homogeneity property we show how to reduce an n 0 dimensional problem to a one or two dimensional one we examine different numerical specifications of our dimension reduced pde using a crank nicholson method interpolation method grid boundaries time and space steps as well as the extension to the case of non proportional discrete dividends using a jump condition we benchmark our results with quasi monte carlo simulation and a multi dimensional pde

data envelopment analysis of mutual funds based on second order stochastic dominance abstract although data envelopment analysis dea has been extensively used to assess the performance of mutual funds mf most of the approaches overestimate the risk associated to the endogenous benchmark portfolio this is because in the conventional dea technology the risk of the target portfolio is computed as a linear combination of the risk of the assessed mf this neglects the important effects of portfolio diversification other approaches based on mean variance or mean variance skewness are non linear we propose to combine dea with stochastic dominance criteria thus in this paper six distinct dea like linear programming lp models are proposed for computing relative efficiency scores consistent in the sense of necessity with second order stochastic dominance ssd the aim is that being ssd efficient the obtained target portfolio should be an optimal benchmark for any rational risk averse investor the proposed models are compared with several related approaches from the literature

pricing weather derivatives this article presents a general method for pricing weather derivatives specification tests find that a temperature series for fresno ca follows a mean reverting brownian motion process with discrete jumps and autoregressive conditional heteroscedastic errors based on this process we define an equilibrium pricing model for cooling degree day weather options comparing option prices estimated with three methods a traditional burn rate approach a black scholes merton approximation and an equilibrium monte carlo simulation reveals significant differences equilibrium prices are preferred on theoretical grounds so are used to demonstrate the usefulness of weather derivatives as risk management tools for california specialty crop growers

unemployment insurance takeup rates and the after tax value of benefits the recent decline in the unemployment insurance ui takeup rate has puzzled researchers using administrative data with accurate information on the potential level and duration of benefits we examine whether a separating employee receives ui we find a strong positive effect of the benefit level on takeup and smaller effects of the potential duration and the tax treatment of benefits simulations indicate that the recent inclusion of ui in the income tax base can account for most of the previously unexplained decline in ui receipt

adaptive expectations and stock market crashes a theory is developed that explains how stocks can crash without fundamental news and why crashes are more common than frenzies a crash occurs via the interaction of rational and naive investors naive traders believe that prices follow a random walk with serially correlated volatility their expectations of future volatility are formed adaptively when the market crashes naive traders sell stock in response to the apparent increase in volatility since rational traders are risk averse as well a lower price is needed to clear the market the crash is a self fulfilling prophecy frenzies cannot occur in this model

stochastic dominance and expected utility survey and analysis while stochastic dominance has been employed in various forms as early as 1932 it has only been since 1969 1970 that the notion has been developed and extensively employed in the area of economics finance agriculture statistics marketing and operations research in this survey the first second and third order stochastic dominance rules are discussed with an emphasis on the development in the area since the 1980s

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

short term market risks implied by weekly options we study short maturity weekly s p 500 index options which provide a direct way to analyze volatility and jump risks unlike longer dated options they are largely insensitive to the risk of intertemporal shifts in the economic environment adopting a novel seminonparametric approach we uncover variation in the negative jump tail risk which is not spanned by market volatility and helps predict future equity returns as such our approach allows for easy identification of periods of heightened concerns about negative tail events that are not always signaled by the level of market volatility and elude standard asset pricing models

jump processes in commodity futures prices and options pricing empirical evidence shows that log return relatives on commodity futures prices are not normally distributed this departure from normality seems to be caused by large price changes occurring in the commodity markets with the arrival of important new information this suggests that a jump diffusion model may be a plausible choice for modeling the stochastic process underlying commodity option prices merton 1976a develops a jump diffusion option pricing model assuming that jump risk is unsystematic however the jump diffusion model developed by bates 1991 is more appropriate for commodity option pricing since it allows jump risk to be systematic in this article recent transactions data on futures and futures options are used to test out of sample options using american versions of black s diffusion and bates s jump diffusion models the results show that bates s model performs considerably better than black s model jump diffusion asian option prices are also shown to differ considerably from geometric brownian motion asian option prices

implied exchange rate distributions evidence from otc option markets abstract this paper uses a rich new dataset of option prices on the dollar mark dollar yen and key ems cross rates to extract the entire risk neutral probability density function pdf over horizons of 1 and 3 months we compare three alternative smoothing methods cubic splines an implied binomial tree trimmed and untrimmed and a mixture of lognormals for transforming option data into the pdf despite their methodological differences the three approaches lead to a similar pdf clearly distinct from the lognormal benchmark and typically characterized by skewness and leptokurtosis we then document a striking positive correlation between skewness in these pdfs and the spot rate the stronger a currency the more expectations are skewed towards a further appreciation of that currency we interpret this finding as a rejection that innovations in these exchange rates are independent of the level or characteristic of a credible target zone explicit or implicit instead this positive correlation is consistent with target zones with endogenous realignment risk we discuss two interpretations of our results on skewness when a currency is stronger the actual probability of further large appreciation is higher or because of risk such states are valued more highly

diversification consistent data envelopment analysis with general deviation measures abstract we propose new efficiency tests which are based on traditional dea models and take into account portfolio diversification the goal is to identify the investment opportunities that perform well without specifying our attitude to risk we use general deviation measures as the inputs and return measures as the outputs we discuss the choice of the set of investment opportunities including portfolios with limited number of assets we compare the optimal values efficiency scores of all proposed tests leading to the relations between the sets of efficient opportunities strength of the tests is then discussed we test the efficiency of 25 world financial indices using new dea models with cvar deviation measures

option values under stochastic volatility theory and empirical estimates abstract this paper numerically solves the call option valuation problem given a fairly general continuous stochastic process for return volatility statistical estimators for volatility process parameters are derived and parameter estimates are calculated for several individual stocks and indices the resulting estimated option values do not differ dramatically from black scholes values in most cases although there is some evidence that for longer maturity index options black scholes overvalues out of the money calls in relation to in the money calls

dea frontier improvement and portfolio rebalancing an application of china mutual funds on considering sustainability information disclosure abstract data envelopment analysis dea has been a widely used methodology for evaluating the relative performance of portfolios extensive work has appeared for realizing the role of dea in the aspect of assessing portfolio performance and deriving the relative rankings however the role of providing realizable benchmarks is not fully explored in the existing literatures most importantly the dea based portfolio performance evaluation methods developed in the existing literatures can hardly provide support for fund managers in pursuing sustainability performance in this paper we first propose a dea frontier improvement approach under the mean variance framework this approach provides investor with a rebalancing strategy as well as an improved dea frontier which approximates the portfolio efficient frontier better than the traditional dea model does then this approach is extended to a general return risk framework our in sample simulation results verify the effectiveness of the proposed approach for a wide range of applications in addition the out of sample tests show that the rebalancing investment strategies can achieve higher sharpe ratios and sortino ratios than those of the original ones finally we apply the proposed approach to evaluate mutual fund performance in china with the consideration of sustainability information disclosure we construct a disclosure index to indicate the extent of sustainable information disclosure of each mutual fund the results show that the proposed approach provides not only investment recommendations but also references for constructing sustainable green funds

dynamic hedging under jump diffusion with transaction costs if the price of an asset follows a jump diffusion process the market is in general incomplete in this case hedging a contingent claim written on the asset is not a trivial matter and other instruments besides the underlying must be used to hedge in order to provide adequate protection against jump risk we devise a dynamic hedging strategy that uses a hedge portfolio consisting of the underlying asset and liquidly traded options where transaction costs are assumed present due to a relative bid ask spread at each rebalance time the hedge weights are chosen to simultaneously i eliminate the instantaneous diffusion risk by imposing delta neutrality and ii minimize an objective that is a linear combination of a jump risk and transaction cost penalty function because reducing the jump risk is a competing goal vis a vis controlling for transaction cost the respective components in the objective must be appropriately weighted hedging simulations of this procedure are carried out and our results indicate that the proposed dynamic hedging strategy provides sufficient protection against the diffusion and jump risk while not incurring large transaction costs

should central banks burst bubbles some microeconomic issues anti bubble policy is examined in a finite horizon greater fool bubble model with rational agents asymmetric information and short sales constraints this permits the use of standard tools of welfare economics to analyse bubble policies policy is modelled as deflating overpriced assets by revealing information about this overpricing if the central bank is following such a policy then the market interprets inaction as an implicit endorsement of asset prices which raises these prices also the central bank can deflate overpriced assets even if it has no informational advantage over any investors about this overpricing however unless it has such an informational advantage a bubble bursting rule may only make things worse

option arbitrage and strategy with large price changes abstract arbitrage pricing theorems are derived for options on stocks with jumps as a well as local movements the resulting valuation formulas depend on observable variables only closed form valuation expressions are obtained in the case of large positive and negative jumps these results translate into a simple algebra for characterizing the risk of arbitrage and investment portfolios a continuous time formulation of the infinite variance hypothesis leads to isomorphic pricing expressions

exchange market mayhem the antecedents and aftermath of speculative attacks exchange market mayhem the antecedents and aftermath of speculative attacks this paper evaluates the causes and consequences of episodes of turbulence in foreign exchange markets using data from 1959 through 1993 for twenty oecd countries we consider the antecedents and aftermath of devaluations and revaluations flotations fixings and speculative attacks which may not be successful we find that realignments of fixed exchange rates are alike devaluations are preceded by political instability budget and current account deficits and fast growth of money and prices revaluations are mirror images of devaluations speculative attacks resemble devaluations but money growth and inflation are more endemic and there is no last minute attempt to tighten monetary policy in contrast few consistent correlations link regime transitions like flotations or fixings to macroeconomic or political variables transitions between exchange rate regimes are largely idiosyncratic and are neither consistently provoked ex ante by systematic imbalances nor typically justified ex post by subsequent changes in policy we conclude that there are no clear early warning signals of many speculative attacks and no easy solutions for policy makers barry eichengreen andrew k rose and charles wyplosz

the relation between forward prices and futures prices abstract this paper consolidates the results of some recent work on the relation between forward prices and futures prices it develops a number of propositions characterizing the two prices these propositions contain several testable implications about the difference between forward and futures prices many of the propositions show that equilibrium forward and futures prices are equal to the values of particular assets even though they are not in themselves asset prices the paper then illustrates these results in the context of two valuation models and discusses the effects of taxes and other institutional factors

valuation of american futures options theory and empirical tests this paper reviews the theory of futures option pricing and tests the valuation principles on transaction prices from the s p 500 equity futures option market the american futures option valuation equations are shown to generate mispricing errors which are systematically related to the degree the option is in the money and to the option s time to expiration the models are also shown to generate abnormal risk adjusted rates of return after transaction costs the joint hypothesis that the american futures option pricing models are correctly specified and that the s p 500 futures option market is efficient is refuted at least for the sample period january 28 1983 through december 30 1983 futures option contracts now trade on every major futures exchange and on a wide variety of underlying futures contracts the chicago mercantile exchange the chicago board of trade the new york futures exchange and the commodity exchange now collectively have more than twenty options written on futures contracts where the underlying spot commodities are financial assets such as stock portfolios bonds notes and eurodollars foreign currencies such as west german marks swiss francs and british pounds precious metals such as gold and silver livestock commodities such as cattle and hogs and agricultural commodities such as corn and soybeans moreover new contract applications are before the commodity futures trading commission and should be actively trading in the near future with the markets for these new contingent claims becoming increasingly active it is appropriate that the fundamentals of futures option valuation be reviewed and tested black 5 provides a framework for the analysis of commodity futures options although his work is explicitly directed at pricing european options on forward contracts it applies to european futures contracts as well if the riskless rate of interest is constant during the futures option life 1 the options currently

stochastic dominance and expected utility while stochastic dominance has been employed in various forms as early as 1932 it has only been since 1969 1970 that the notion has been developed and extensively employed in the area of economics

general equilibrium pricing of options on the market portfolio with discontinuous returns when the price process for a long lived asset is of a mixed jump diffusion type pricing of options on that asset by arbitrage is not possible if trading is allowed only in the underlaying asset and a risk less bond using a general equilibrium framework we derive and analyze option prices when the underlying asset is the market portfolio with discontinuous returns the premium for the risk of jumps and the diffusion risks forms a significant part of the prices of the options in this economy an attempted replication of call and put options by the black scholes type of trading strategies may require substantial infusion of funds when jumps occur we study the cost and risk implications of such dynamic hedging plans article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

data envelopment analysis models of investment funds abstract this paper develops theory missing in the sizable literature that uses data envelopment analysis to construct return risk ratios for investment funds it explores the production possibility set of the investment funds to identify an appropriate form of returns to scale it discusses what risk and return measures can justifiably be combined and how to deal with negative risks and identifies suitable sets of measures it identifies the problems of failing to deal with diversification and develops an iterative approximation procedure to deal with it it identifies relationships between diversification coherent measures of risk and stochastic dominance it shows how the iterative procedure makes a practical difference using monthly returns of 30 hedge funds over the same time period it discusses possible shortcomings of the procedure and offers directions for future research

portfolio selection in multidimensional general and partial moment space abstract this paper develops a general approach for the single period portfolio optimization problem in a multidimensional general and partial moment space a shortage function is defined that looks for possible increases in odd moments and decreases in even moments a main result is that this shortage function ensures sufficient conditions for global optimality it also forms a natural basis for developing tests on the influence of additional moments furthermore a link is made with an approximation of an arbitrary order of a general indirect utility function this non parametric efficiency measurement framework permits to differentiate mainly between portfolio efficiency and allocative efficiency finally information can in principle be inferred about the revealed risk aversion prudence temperance and other higher order risk characteristics of investors

forward and futures prices evidence from the foreign exchange markets empirical studies of the treasury bill markets have revealed substantial differences between the futures price and the implied forward price these differences have been attributed to taxes transaction costs and the settling up procedure employed in the futures market this paper examines the forward and futures prices in foreign exchange in an attempt to distinguish between the competing explanations empirical studies of the treasury bill market have revealed differences between the futures price or rate and the implicit forward price derived from the term structure of interest rates 1 these differences have generally been attributed to market imperfections such as taxes and transaction costs see for example arak 1 capozza and cornell 2 and rendelman and carabini 6 recently however cox ingersoll and ross 3 henceforth cir derived a model in which forward and futures prices need not be equal even in perfect markets without taxes as long as interest rates are stochastic the significance of the cir effect may be hard to investigate using only data from the bill market because of the potentially complicating effects of taxes and transaction costs unique to this market by using data from the foreign exchange market we are able to eliminate the tax effect and reduce the impact of transaction costs the question we address is whether the discrepancies observed in the treasury bill market are also observed in the foreign exchange market if they are then we have evidence that the differences are due to a combination of the cir effect and the transaction costs common to both markets if they are not then either the magnitude of the cir effect is much less in the foreign exchange market or the treasury bill results are due to the unique tax treatment and transaction costs of that market this paper is organized as follows in section i the trading mechanics of the forward and futures markets in foreign exchange are discussed section ii reviews the explanations for the discrepancies between the forward and futures prices for treasury bills the institutional differences between the foreign exchange and bill markets are also summarized to show which of these explanations cannot apply to the foreign exchange market in section iii the data are decribed and the empirical results are presented the conclusions are summarized in the final section

the more things change the more they stay the same the safety net and poverty in the great recession much attention has been given to the large increases in safety net spending during the great recession we examine the relationship between poverty the safety net and business cycles historically and test whether there has been a significant change in this relationship we find that post welfare reform temporary assistance for needy families did not respond during the great recession and extreme poverty is more cyclical than in prior recessions food stamps and unemployment insurance are providing more protection or no less protection in the great recession and there is some evidence of less cyclicality for 100 poverty

market timing with option implied distributions a forward looking approach we address the empirical implementation of the static asset allocation problem by developing a forward looking approach that uses information from market option prices to this end we extract constant maturity s p 500 implied distributions and transform them to the corresponding risk adjusted ones then we form optimal portfolios consisting of a risky and a risk free asset and evaluate their out of sample performance we find that the use of risk adjusted implied distributions times the market and makes the investor better off than if she uses historical returns distributions to calculate her optimal strategy the results hold under a number of evaluation metrics and utility functions and carry through even when transaction costs are taken into account not surprisingly the reported market timing ability deteriorated during the recent subprime crisis an extension of the approach to a dynamic asset allocation setting is also presented this paper was accepted by wei xiong finance