pricing multiasset equity options how relevant is the dependence function abstract in this paper we test how different choices for the dependence function can affect the prices of a set of multiasset equity options we conduct the analysis for various 5 dimensional baskets of uk shares and a wide range of payoffs for the multiasset options consistent with the instruments traded on the market we also test the relevance of the dependence specification over both volatile and quiet market scenarios interestingly we find that in most circumstances the choice of a dependence structure richer than the standard linear correlation does not seem to affect option prices substantially however the dependence function becomes more relevant in particularly volatile market conditions

liberalization of capital movements and of the domestic financial system this paper analyzes the dynamic impact of a joint liberalization of capital movements and of the domestic financial sector both a simultaneous and a sequential liberalization are examined in an overlapping generations model with a q theory of investment a liberalization generally leads to an initial period of capital inflows followed by capital outflows it also increases investment and causes an overshooting in share prices furthermore the interest rate level before a liberalization will usually not indicate the direction of net capital flows copyright 1992 by the london school of economics and political science

international transfers the relative price of non traded goods and the current account this paper considers the role of the relative price of non traded goods and the current account in the adjustment of a small open economy to the receipt of an international transfer the paper shows that the economy s macroeconomic adjustment to the transfer depends upon the relative capital intensities of the traded and non traded sectors of the economy as well as on the duration of the transfer the paper provides a new interpretation of france s current account surplus in the 1870s that accompanied the payment of reparations to germany following the franco prussian war and of germany s trade deficit in the 1920s that accompanied reparations payments associated with the first world war

the costs and benefits of foreign borrowing a survey of multi period models this article surveys the literature on multi period models of foreign borrowing to shed light on the issue of how much a country should borrow and under what circumstances there is a role for public intervention it identifies the essential structural elements of multi period models and draws out the ramifications of the alternative specifications adopted it discusses the insights and shortcomings of three classes of models non optimising optimising borrower and jointly optimising borrower and lender

exchange rate policies and endogenous time preference a dynamic analysis of a small open economy abstract the effects of exchange rate policies are examined for a small open economy with endogenous rate of time preference using optimizing framework and introducing money into the utility function it is shown that a depreciation of the domestic currency generates a surplus in the current account it also leads to an increase in consumption and a decrease in the holdings of real balances in the long run

nonparametric conditional pricing of higher order multivariate contingent claims abstract this paper describes and applies a nonparametric model for pricing multivariate contingent claims multivariate contingent claims are contracts whose payoffs depend on the future prices of more than one underlying variable the pricing however of these kinds of contracts represents a challenge all known models are adaptations of earlier ones that have been introduced to price plain vanilla calls and puts they are imposing strong assumptions on the distributional properties of the underlying variables in contrast this study adopts a methodology that relaxes such restrictions following barone adesi g bourgoin f giannopoulos k 1998 don t look back risk 11 august 100 104 barone adesi g engle r mancini l 2004 garch options in incomplete markets mimeo university of applied sciences of southern switzerland long x 2004 semiparametric multivariate garch model mimeo university of california riverside multivariate pathways for a set of underlying variables are constructed before the option payoffs are computed this enables the covariances in addition to the means and variances to be modelled in a dynamic and nonparametric manner the model is particular suitable for options whose payoffs depend on variables that are characterised by high nonlinearities and extremes and on higher order multivariate options whose underlying variables are more unlikely to conform to a common theoretical distribution

anticipated policy and endogenous growth in a small open monetary economy abstract this paper analyzes the effects of a preannounced change in the growth rate of credit in a small open economy the model based on an endogenous growth model introduces the adjustment costs for investment and the role of money in the production function and highlights the dynamic behavior of an open economy we show that an increase in the rate of anticipated credit growth lowers the steady growth rate of capital real money balances and real output we also find that the rate of depreciation of the domestic currency will rise steadily toward its stationary level the anticipated domestic credit growth hence exhibits monetary nonsuperneutrality in both the rate and the level of output in the intermediate and the long run

fiscal policy in a simple two country dynamic model abstract this paper analyzes the national and international effects of labor and capital income taxes in a two country infinite horizon perfect foresight neoclassical model with endogenous labor supply and capital accumulation two polar regimes of capital income taxation are considered the source based and the residence based the qualitative effects of labor income taxes are shown to be independent of the taxation regime whereas the effects of capital income taxes are not

on savings and investment dynamics in a small open economy abstract this paper constructs a stochastic overlapping generations two country model of savings and investment under conditions of perfect international capital mobility the focus of the analysis is on the relationship between savings and investment dynamics in a small open economy in response to stochastic variations in domestic and or foreign production technologies the model is simulated under alternative specifications of the stochastic distribution governing both technologies this provides insight into the very complicated nature and rich diversity of possible relationships between savings and investment dynamics

long term spread option valuation and hedging this paper investigates the valuation and hedging of spread options on two commodity prices which in the long run are in dynamic equilibrium i e cointegrated the spread exhibits properties different from its two underlying commodity prices and should therefore be modelled directly this approach offers significant advantages relative to the traditional two price methods since the correlation between two asset returns is notoriously hard to model in this paper we propose a two factor model for the spot spread and develop pricing and hedging formulae for options on spot and futures spreads two examples of spreads in energy markets the crack spread between heating oil and wti crude oil and the location spread between brent blend and wti crude oil are analyzed to illustrate the results

inflationary finance in an open economy abstract models of inflationary finance that consider trade and capital flows generally conclude that openness curtails the ability of governments to impose the inflation tax due to currency substitution this paper models two channels that allow central banks to increase inflation tax revenue by opening the economy first central banks can open the capital account subject to a reserve requirement on capital inflows revenue maximization produces a smaller reserve requirement on foreign capital inflows that on domestic deposits second central banks can impose prior import deposits to broaden the monetary base in order to use the inflation tax on imports as an alternative to tariff revenue

risk aversion intertemporal substitution and the term structure of interest rates an equilibrium model of the term structure of interest rates is derived from a representative agent framework with recursive utility preferences a key ingredient is a time varying subjective discount factor which is linked to the short term rate of interest the proposed model incorporates a vector autoregression description of macroeconomic dynamics and links them to those of the term structure so that nominal bond yields are affine functions of observable state variables the model is estimated and compared to both a restricted expected utility version of the model and a reduced form no arbitrage model we find that all three models can fit the term structure equally well but that only the unrestricted non expected utility model can empirically account for the tent shaped pattern and magnitude of coefficients from predictive regressions of excess bond returns on forward rates documented by cochrane and piazzesi 2005 bond risk premia american economic review 95 138 160 the unrestricted equilibrium model fits the term structure and captures the important features of bond risk premiums with economically plausible values for the structural preference parameters

the current account in the macroeconomic adjustment process macroeconomic adjustments to changes in the economic environment are to a large extent conditioned by the intertemporal choices of economic agents when agents face an intertemporal budget constraint a decision to alter current indebtedness implies changes in future consumption possibilities and will be based on expectations of the entire future path of key variables and not only current variables a formal model to show how today s current account is a function of both current and future economic variables is presented the determination of the current account under classical assumptions of market clearing and continuous full employment is emphasized

a dynamic model of the open economy with sluggish output this paper incorporates sluggish output adjustment in a model simil ar to r dornbusch 1976 and explicitly considers the cases in which a real depreciation of the exchange rate is expansionary and contractionary it is shown that the exchange rate is likely to portray overshooting g in both cases when the real depreciation is expansionary the mode l generates comovements in prices and output that are opposite to those presente d by dornbusch in the contractionary depreciation case there is a unique stable equilibrium path and the economy is likely to experienc e cycles in output and the real exchange rate copyright 1988 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

domestic and foreign disturbances in an optimizing model of exchange rate determination abstract this paper analyzes the effects of various disturbances of domestic and foreign origin in a small open economy under imperfect capital mobility in which the behavioral relationships are divided from optimization by the private sector in this model the domestic economy jumps instantaneously to its new equilibrium following a change in either the domestic monetary growth rate or domestic fiscal policy in response to a disturbance in either the foreign interest rate or inflation rate the economy undergoes an initial partial jump towards its new equilibrium which it thereafter approaches gradually the implications of these results for exchange rate adjustments and the insulation properties of flexible exchange rates are discussed

on exchange rate stabilization abstract this paper extends calvo s 1986 and obstfeld s 1985 analyses of stabilization policies through predetermined exchange rates in a few directions the graphic and analytical techniques used here make it possible to perform a variety of policy experiments under a general utility function and in the presence of a consumer durable good or under time nonseparable preferences it also shows that the dynamic process of exchange rate stabilization exhibits hysteresis effects that is the steady state behavior of the economy depends on the initial condition and a temporary stabilization policy has a permanent effect on the economy

systematic jump risks in a small open economy simultaneous equilibrium valuation of options on the market portfolio and the exchange rate abstract the valuation of stock options and currency options has witnessed an explosion of new development in the past 20 years these models set up either in a partial equilibrium or a general equilibrium framework have certainly enriched our understanding of option valuation in one way or the other however the main drawback of these models is that stock options and currency options are analyzed in separate contexts the co movement of the stock market and the currency market is absent from the option valuation analysis such co movement is extremely important and is best illustrated by the southeast asian financial crisis to overcome this drawback this paper uses an equilibrium model to investigate the joint dynamics of the exchange rate and the market portfolio in a small open monetary economy with jump diffusion money supplies and aggregate dividends it is shown that the exchange rate and the market portfolio are strongly correlated since both are driven by the same economic fundamentals furthermore options on the exchange rate and the market portfolio are evaluated in the same equilibrium context the analysis shows that parameters describing the same economic fundamentals have very different effects on currency and stock options

monetary and commercial policy in a two country flexible exchange rate model with perfect capital mobility abstract a two country portfolio balance model is developed in this paper in order to analyse the international transmission of monetary and commercial policy disturbances under a flexible exchange rate regime particular emphasis is placed on the role of capital mobility differences in the asset demand functions across countries and national net asset positions in determining the effects of these policies on the macroeconomic variables of the two countries both the short and the long run effects are considered with expectations assumed to be formed rationally

dual exchange rate systems and capital controls an investigation abstract the welfare aspects of dual exchange rate systems are analyzed in this paper the requirement that domestic financial transactions with the rest of the world be undertaken at a special foreign exchange rate is found to be equivalent to levying a tariff on this class of international transactions hence a dual exchange rate system and capital controls are shown to be essentially identical in light of the above statements the dual exchange rate system should be regarded as a form of commercial policy and be evaluated in this context by applying the applicable standard real trade theorems

budget deficit external official borrowing and sterilized invertion policy in foreign exchange markets abstract i study the effect of a temporary budget deficit which is financed in the international capital market on the exchange rate first i show that the exchange rate depreciates both in the short and in the long run if the government finances the deficit by selling debt denominated in foreign currencies to nonresidents secondaly i show that the government can prevent an immediate depreciation of the exchange rate adopting a policy of sterilized intervation however the achievement of this short run exchange rate target implies a long run depreciation of the real exchange rate

currency substitution and the real exchange rate the utility maximization approach abstract this paper studies the currency substitution hypothesis with rational expectations in terms of a sidrauski type model where domestic and foreign money enter the utility function it shows that contrary to liviatan 1981 the approach does not necessarily contradict calvo and rodriguez 1977 furthermore the impact of monetary stabilization policy is fully characterized with flexible and pre fixed rates for an extension of dornbusch and mussa 1975 a brief analysis of the optimal quantity of money is also provided

budget deficits and the current account an intertemporal disequilibrium approach the objective of the present paper is to develop an intertemporal disequilibrium model of a monetary economy to explain the effects of fiscal policy on the current account we wish to emphasize the role of aggregate demand determined output fluctuations and flexible exchange rates within a microtheoretic optimizing framework furthermore the differing effects of monetary versus non monetary i e tax or bond finance of government expenditures are considered

extreme co movements and extreme impacts in high frequency data in finance abstract extreme co movement and extreme impact problems are inherently stochastic control problems since they will influence the decision taken today and ultimately influence a decision taken in the future extreme co movements among financial assets have been reported in the literature however extreme impacts have not been carefully studied yet in this paper we use the newly developed methodology to further explore extreme co movements and extreme impacts in financial market particularly two fx spot rates are studied based on the results of our analysis with fx returns we conclude that there exist extreme co movements and extreme impacts in fx returns and care has to be taken when we employ portfolio optimization models especially models without the ability of handling extreme dependencies

an explicit multi factor credit default swap pricing model with correlated factors with the recent significant growth in the single name credit default swap cds market has come the need for accurate and computationally efficient models to value these in struments while the model developed by duffie pan and singleton 2000 can be used the solution is numerical solving a series of ordinary differential equations rather than explicit in this paper we provide an explicit solution to the valuation of a credit default swap when the interest rate and the hazard rate are correlated by using the change of measure approach and solving a bivariate riccati equation cds transaction data for the period 2 15 2000 through 4 8 2003 for 60 firms are used to test both the goodness of fit of the model and provide estimates of the influence of economic variables in the market for credit risky bonds

macroeconomic dynamics in a multi country economy a dynamic optimization approach using a multicountry model with perfect foresight dynamic optimization by infinitely lived households the authors analyze the dynamics of macroeconomic nonmonetary and monetary variables the authors show that the most patient country initially accumulates foreign debt but eventually decumulates this debt and becomes a creditor it monotonically increases its consumption and experiences monotonic price and exchange rate appreciation the moderately patient country initially accumulates foreign assets but eventually decumulates them and becomes a debtor its consumption also follows a humped path the least patient country monotonically decumulates foreign assets lowers its consumption and experiences rising inflation and exchange rate depreciation copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

optimum responses of the current account when income is uncertain abstract how the current and capital accounts in the balance of payments should adjust when there are exogenous shocks has recently been examined in the context of optimal intertemporal choice of consumption and borrowing thus a fall in income will call forth a variety of responses depending on whether it is thought to be permanent or temporary long term or short term and on the form of the discount function in this paper uncertainty is introduced into the timing of the reversal of an income fall this being modelled by a poisson process phase diagrams are derived for the paths of consumption and debt

effects of inflation on the pattern of international trade this paper integrates a transactions based model of money with a real trade model and examines how steady state inflation affects the direction and size of international trade the effects of inflation work through changes in supplies of labour and capital which are chosen jointly with production and consumption by utility maximizing households if production exhibits constant returns to scale in domestically mobile factors then it is unlikely that the economy will produce both of the two traded goods for certain rates of inflation small changes can have dramatic effects on the direction of trade for other rates of inflation the volume of trade is affected when money is held for transactions purposes and factor supplies are endogenous changes in inflation can cause changes in the pattern of trade that do not reflect real underlying changes in comparative advantage

financial market models with levy processes and time varying volatility abstract asset management and pricing models require the proper modeling of the return distribution of financial assets while the return distribution used in the traditional theories of asset pricing and portfolio selection is the normal distribution numerous studies that have investigated the empirical behavior of asset returns in financial markets throughout the world reject the hypothesis that asset return distributions are normally distribution alternative models for describing return distributions have been proposed since the 1960s with the strongest empirical and theoretical support being provided for the family of stable distributions with the normal distribution being a special case of this distribution since the turn of the century specific forms of the stable distribution have been proposed and tested that better fit the observed behavior of historical return distributions more specifically subclasses of the tempered stable distribution have been proposed in this paper we propose one such subclass of the tempered stable distribution which we refer to as the kr distribution we empirically test this distribution as well as two other recently proposed subclasses of the tempered stable distribution the carr geman madan yor cgmy distribution and the modified tempered stable mts distribution the advantage of the kr distribution over the other two distributions is that it has more flexible tail parameters for these three subclasses of the tempered stable distribution which are infinitely divisible and have exponential moments for some neighborhood of zero we generate the exponential levy market models induced from them we then construct a new garch model with the infinitely divisible distributed innovation and three subclasses of that garch model that incorporates three observed properties of asset returns volatility clustering fat tails and skewness we formulate the algorithm to find the risk neutral return processes for those garch models using the change of measure for the tempered stable distributions to compare the performance of those exponential levy models and the garch models we report the results of the parameters estimated for the s p 500 index and investigate the out of sample forecasting performance for those garch models for the s p 500 option prices

real asset returns inflation and activity in a small open cash in advance economy abstract the effects of inflation are worked out for a small open economy with cash in advance cia constraints on bond purchases if all transactions are subject to cia constraints an increase in the inflation rate will reduce savings bringing about a current account deficit while the capital stock will be unaffected if investment is not subject to cia constraints an increase in the inflation rate will encourage investment and reduce savings bringing about a current account deficit numerical evaluation of the model gives rise to falls in real interest rates that are in line with recent empirical findings

an equilibrium model of exchange rate determination and asset pricing with nontraded goods and imperfect information this paper presents a two country model with maximizing households stochastic production stochastic money growth and perfect capital mobility because of the presence of nontraded goods households in different countries consume different goods analytic solutions are presented for the nominal exchange rate the real exchange rate nominal interest rates and real interest rates it is shown that the model is compatible with some important features of the real world behavior of exchange rates when households are imperfectly informed about the distribution of money growth the exchange rate exhibits patterns of overshooting and is more volatile than the ratio of the money stocks copyright 1987 by university of chicago press

government spending and the real exchange rate i study the effect of government spending on the real exchange rate in an open economy version of the sidrauski model with a time varying rate of time preference that introduces complementarity between consumption at different points in time i show that a balanced budget fiscal expansion causes a real depreciation and a current account surplus if the expansion falls on traded goods if the increase falls instead on nontraded goods both the stylized results of a real appreciation and a current account deficit and the perverse result of an appreciation and a surplus can occur

on the outcome of inconsistent programs under exchange rate and monetary rules abstract this paper studies the case of inconsistent programs of monetary policy that is programs incompatible in the long run with a given budget deficit so that at some point in the future there is an eventual crisis and demise of the program all of which is from the outset anticipated by the public the context is one of a small open economy with perfect foresight in which two sets of possibilities are analyzed i a monetary or an exchange rule for the conduct of monetary policy and ii presence or absence of capital mobility it is found that while the choice of the rule is unimportant restrictions on capital mobility determine a very different response for the case of either rule concerning side effects of the program on non monetary variables and on the post crisis level of country indebtedness

saving and investment in an open economy with non traded goods the authors examine a model of a small open economy in which there is free international mobility of financial capital investment in capital goods and a nontraded good such an environment is rich enough to explain several phenomena that are inexplicable in other models the authors explain why a high saving country may nonetheless borrow from abroad to finance investment they suggest an explanation of why saving and investment may be correlated even with no restrictions on trade in assets the authors also provide an optimizing model of stages in the balance of payments copyright 1989 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the rate of time preference and dynamic economic analysis strong restrictions on the structure of preferences are a central feature in the received theory of intertemporal allocation in fact most of the modern literature concerned with capital theoretic problems represents preferences by a functional in which an additive utility function is discounted by a constant rate of time preference this specification is attractive because it is analytically tractable in dynamic models and it clearly delineates how tastes and opportunities interact to determine an economy s household s paths of consumption and capital formation however its rigid structure constancy of time preference severely limits the conclusions and explanatory power of the corresponding models this paper considers a class of utility functionals in continuous time which have the appealing feature that the rate of time preference depends systematically on an index of aggregate future consumption the more flexible structure embodied in these functionals leads to important generalizations and

the price consumption puzzle of currency pegs abstract a defining stylized fact associated with exchange rate based stabilization programs is that their initial phase is characterized by several years of continuous expansion in private consumption and a gradual appreciation of the real exchange rate this paper shows that a large class of standard optimizing models is unable to account for this empirical regularity in particular models in this class predict that a gradual appreciation of the real exchange rate must necessarily be accompanied by a declining path of consumption the paper suggests several possible solutions to this problem and develops one in detail namely the relaxation of the assumption of time separability in preferences specifically it shows that under habit formation currency pegs induce a positive comovement between consumption and the real exchange rate the paper also establishes that habit formation provides an explanation for why in failed currency pegs a contraction in aggregate demand sets in before the collapse of the program

time series analysis for financial market meltdowns abstract there appears to be a consensus that the recent instability in global financial markets may be attributable in part to the failure of financial modeling more specifically it is alleged that current risk models have failed to properly assess the risks associated with large adverse stock price behavior in this paper we first discuss the limitations of classical time series models for forecasting financial market meltdowns then we set forth a framework capable of forecasting both extreme events and highly volatile markets based on the empirical evidence presented in this paper our framework offers an improvement over prevailing models for evaluating stock market risk exposure during distressed market periods

testing for multiple regimes in the tail behavior of emerging currency returns it is by now generally accepted that foreign exchange returns exhibit heavy tails as measured by the so called tail index however it is unclear whether the tail behavior remains stationary in the presence of recurrent switches in the exchange rate regime we therefore test the null hypothesis of tail index constancy by applying a single breaks test in rounds which enables the detection of multiple breakpoints we are able to identify multiple jumps in the tail index of currency returns moreover some breaks coincide with documented shifts in monetary and exchange rate policies

monetary policy in a small open economy with durable goods and differing cash in advance constraints abstract we consider the effects of inflation in a small open economy when expenditures on non durables are more heavily financed with money than expenditures on durables the distinctions between non durables and durables and asymmetric cash in advance constraints give rise to important dynamics

the dynamics of a small open economy in response to monetary fiscal and productivity shocks abstract this paper evaluates empirically the relative importance of monetary and fiscal versus technology shocks in an open economy characterized by perfect international capital mobility the variance covariance matrix of these shocks is estimated a stochastic model is used to perform numerical simulations the results show that persistent shocks to productivity can reproduce several empirical regularities including the puzzling high correlation between national saving and investment remarkably well and that monetary and fiscal shocks play a minor role

endogenous real exchange rate fluctuations in an optimizing open economy model abstract this paper constructs a simple intertemporal model of a small open economy inhabited by forward looking agents in which endogenous fluctuations in the real exchange rate can arise in equilibrium i e fluctuations that are not linked to movements in economic fundamentals the key condition for the main results is the assumption that the marshall lerner condition does not hold i e that the country s exports and imports are inelastic to its real exchange rate it is shown that given that the marshall lerner condition fails there exist periodic equilibria and or stationary sunspot equilibria in the neighborhood of the stationary state

time preference and capital asset pricing models abstract results of the theory of individual optimal consumption investment choice under uncertainty are extended to a class of intertemporally dependent preferences for consumption streams these results are then used to show that with intertemporally dependent preferences which are more realistic than the separable time additive preference structure merton s 1973 multi beta intertemporal capital asset pricing model is still valid but it can no longer be collapsed to breeden s 1979 single consumption beta model

a theory of time preference grant a taylor this article proposes that people generally prefer present consumption to future consumption because their expected utility from consumption eventually falls as their mental and physical abilities eventually decline with age moreover contrary to the ubiquitous intertemporal formulation with a constant rate of time preference and contrary to three recent theories of time preference that predict decreasing discounting as people age this article asserts that discounting increases over the life cycle this hypothesis is supported by data from the panel study of income dynamics as well as evidence from numerous previous studies jel d91 1 introduction despite the almost universal assumption of time preference in models of intertemporal choice an adequate explanation of why people discount the future has not been provided 1 olsen and bailey 1981 make a convincing case for positive time preference by contradiction i e without time preference models of intertemporal choice do not yield predictions consistent with observed behavior but they do not explain why individuals would rationally discount the future 2 three recent studies have attempted to provide the explanation rogers 1994 argues that societies that discount the future at a rate of about 2 will be the long run survivors in an evolutionary fitness situation 3 posner 1995 argues that discounting occurs because individuals have multiple selves that is people are weighting their present consumption far more heavily than their future consumption because the present self and the future self are in some meaningful sense separate persons 92 becker and mulligan 1997 argue that discounting occurs because of a rational defective recognition of future utilities 730 but as will be shown these three theories are inconsistent with empirical evidence on consumption over the life cycle in at least one important aspect this article constructs and empirically supports a new theory of time preference the hypothesis is that people do not have an intrinsic preference for present consumption relative to future consumption instead the instantaneous utility function also known as the felicity function is expected to vary with age just as people s physical and mental abilities vary with age in other words the ability to enjoy consumption eventually deteriorates over the life cycle along with other abilities this life cycle view of the expected utility function causes people to rationally devalue consumption in periods of low expected felicity that is discount future consumption perhaps this is what is meant by the cliche don t wait until you are too old to enjoy it moreover this causes individuals implicit discount rates to vary systematically with age 4 in fact this provides the testable implication of the theory the standard specification of intertemporal preferences holds the discount rate constant over th e life cycle 5 to be more precise in the early stage of the life cycle the capacity to enjoy consumption may be expected to rise hence a young individual s discount rate may be negative figure 1 illustrates this possibility with a hypothetical adult life cycle marginal felicity function for a given level of consumption u sub c c a c denotes consumption and a denotes age and its corresponding discount rate function rho a the vast majority of wealth is held by older people that is those in the declining stage of their abilities thus the preference for present consumption over future consumption appears to hold in the aggregate this view of intertemporal preferences may at first seem inconsistent with practically all dynamic analyses which are based on the notion of stationary utility on further consideration however the hypothesis is quite consistent with modern consumer theory since becker 1965 it has been widely accepted that households derive utility from commodities that are produced with market goods combined with household time and skills i

identifying monetary policy in a small open economy under flexible exchange rates abstract previous empirical study on the effects of monetary policy shocks in small open economies has generated puzzling dynamic responses in various macroeconomic variables this paper argues that these puzzles derive from an identification of monetary policy that is inappropriate for such economies to remedy this it is proposed that a structural model be estimated to explicitly account for the features of the small open economy such a model is applied to canada with tightly estimated results overall the dynamic responses to the identified monetary policy shock are consistent with standard theory and highlight the exchange rate as a transmission mechanism

extreme dependence with asymmetric thresholds evidence for the european monetary union abstract existing papers on extreme dependence use symmetrical thresholds to define simultaneous stock market booms or crashes such as the joint occurrence of the upper or lower one percent return quantile in both stock markets we show that the probability of the joint occurrence of extreme stock returns may be higher for asymmetric thresholds than for symmetric thresholds we propose a non parametric measure of extreme dependence which allows capturing extreme events for different thresholds and can be used to compute different types of extreme dependence we find that extreme dependence among the stock markets of ten initial emu member countries the united kingdom and the united states is largely asymmetrical in the pre emu period 1989 1998 and largely symmetrical in the emu period 1999 2010 our findings suggest that ignoring the possibility of asymmetric extreme dependence may lead to an underestimation of the probability of co booms and co crashes

an optimizing analysis of the effects of world interest disturbances on the open economy term structure of interest rates abstract this paper studies the effects of world interest rate disturbances on the real domestic term structure of interest rates an intertemporal optimizing representative agent framework with variable employment and endogenous terms of trade is developed the economy faces an external borrowing constraint the adjustment of the short and long term rates as well as the discount bond yield curve is distinguished with the long rate and the yield curve derived recursively from the short both permanent and temporary world interest shocks are considered a notable result is that the yield curve exhibits relative maxima and minima for temporary disturbances

monetary autonomy and exchange rate dynamics under currency substitution abstract this paper uses a two country model to demonstrate that currency substitution is a channel for the international transmission of monetary disturbances under flexible exchange rates in the long run the division of world real wealth and consumption and real exchange rates depend on the growth rates of both monies but inflation of prices denominated in a particular currency depends only on the rate of growth of that money in the short run currency substitution combined with perfect foresight can be responsible for overshooting in the exchange rate in both price levels in real exchange rates and in national levels of real wealth and consumption

a simple framework for analysing bull and bear markets bull and bear markets are a common way of describing cycles in equity prices to fully describe such cycles one would need to know the data generating process dgp for equity prices we begin with a definition of bull and bear markets and use an algorithm based on it to sort a given time series of equity prices into periods that can be designated as bull and bear markets the rule to do this is then studied analytically and it is shown that bull and bear market characteristics depend upon the dgp for capital gains by simulation methods we examine a number of dgps that are known to fit the data quite well random walks garch models and models with duration dependence we find that a pure random walk provides as good an explanation of bull and bear markets as the more complex statistical models in the final section of the paper we look at some asset pricing models that appear in the literature from the viewpoint of their success in producing bull and bear markets which resemble those in the data copyright 2002 john wiley sons ltd

speculative attack and the external constraint in a maximizing model of the balance of payments balance of payments models of speculative attack differ from non renewable resource models in that foreign exchange reserves may be borrowed from abroad this paper shows that in an idealized world where all private income is subject to lump sum taxation central bank reserves can become infinitely negative without violating the government s intertemporal budget constraint none the less a growth rate of domestic credit exceeding the world interest rate if maintained indefinitely leads to violation of the constraint in the paper s model given an assumed limit to official external borrowing the paper next analyses inevitable transitions between fixed and floating exchange rate regimes when individual preferences are explicitly specified in a discrete time deterministic model the collapse of a fixed rate may be characterized by two successive speculative attacks

pricing exotic options with l stable pade schemes abstract in this paper we develop a strongly stable l stable and highly accurate method for pricing exotic options the method is based on pade schemes and also utilizes partial fraction decomposition to address issues regarding accuracy and computational efficiency due to non smooth payoffs which cause discontinuities in the solution or its derivatives standard a stable methods are prone to produce large and spurious oscillations in the numerical solutions which would mislead to estimating options accurately the proposed method does not suffer these drawbacks while being easy to implement on concurrent processors numerical results are presented for digital options butterfly spread and barrier options in one and two assets in addition the methods are tested on the heston stochastic volatility model

the terms of trade the real exchange rate and economic fluctuations this paper examines the relationship between terms of trade and business cycles using a three sector intertemporal equilibrium model and a large multicountry database results show that terms of trade shocks account for nearly one half of actual gdp variability the model explains weak correlations between net exports and terms of trade the harberger laursen and metzler effect and produces large and weakly correlated deviations from purchasing power parity and real interest rate parity terms of trade shocks cause real appreciations and positive interest differentials although productivity shocks have opposite effects the puzzle that welfare gains of international asset trading are negligible is left unresolved copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

options on the maximum or the minimum of several assets using an intuitive approach that also provides new intuition concerning the black and scholes equation this paper extends the results of johnson and stulz to the pricing of options on the minimum or the maximum of several risky assets

crisis and risk dependencies abstract the knowledge of the multivariate stochastic dependence between the returns of asset classes is of importance for many finance applications such as asset allocation or risk management by means of goodness of fit tests we analyze for a multitude of portfolios consisting of different asset classes whether the stochastic dependence between the portfolios constituents can be adequately described by multivariate versions of some standard parametric copula functions furthermore we test whether the stochastic dependence between the returns of different asset classes has changed during the recent financial crisis the main findings are first whether a specific copula assumption can be rejected or not crucially depends on the asset class and the time period considered second different goodness of fit tests for copulas can yield very different results and these differences can vary for different asset classes and for different tested copulas third even when using various goodness of fit tests for copulas it is not always possible to differentiate between various copula assumptions fourth during the financial crisis copula assumptions are more frequently rejected however the results also raise some concerns over the suitability of goodness of fit tests for copulas as a diagnostic tool for identifying stressed risk dependencies

current account determination with traded capital goods abstract a model of real current account determination in a small open economy with many final goods sectors and traded capital goods is presented the model emphasizes the ambiguity of investment response and encourages sector specific empirical methods

temporary import quota and the current account this paper studies the effects of a temporary import quota on the real exchange rate and the current account response is determined by the interaction between two opposing forces the intertemporal relative price effect tends to improve the current account while the wealth the intertemporal relative price effect tends to improve the current account while the wealth effect contributes to a deterioration for a sufficiently low degree of intertemporal consumption substitution the wealth effect is shown to dominate in this event the current account deteriorates in response to a temporary quota and improves only after the quota is lifted

dynamic analysis in the viner model of mercantilism abstract this paper models the central theme of mercantilism in jacob viner s interpretation power vs plenty in a framework of modern theory of international finance it is shown that in the viner model of mercantilism a nation with strong mercantilist sentiment ends up with large foreign asset accumulation and high consumption in the long run an import tariff leads to more foreign asset holding and more total consumption furthermore in the viner model the harberger laursen metzler effect exists unambiguously a permanent terms of trade deterioration causes a current account deficit in the short run

business cycle durations and postwar stabilization of the u s economy average postwar expansions are twice as long as prewar expansions and contractions are one half as long this paper investigates three possible explanations the first explanation is that shocks to the economy have been smaller in the postwar period the second explanation is that the composition of output has shifted from very cyclical sectors to less cyclical sectors the third explanation is that the apparent stabilization is largely spurious and is caused by differences in the way that prewar and postwar business cycle reference dates were chosen by the national bureau of economic research the evidence presented in this paper favors this third explanation copyright 1994 by american economic association

precautionary saving and persistent current account imbalance abstract the neoclassical representative agent model attributes persistent current account imbalance to differences in time preference rates exogenous time preference yields corner solutions in which one country owns the world s wealth with endogenous time preference corners are avoided but at the cost of the intuitively unappealing assumption that wealthier agents are more impatient this paper shows that an agent with constant relative risk aversion utility subject to stochastic income shocks has a risk adjusted rate of time preference which is increasing in wealth precautionary saving falls as wealth rises allowing avoidance of corner solutions with an intuitively appealing assumption about behavior

optimum borrowing and the current account when there are fluctuations in income abstract current account issues are examined in a context in which expenditure and borrowing are chosen optimally permanent falls in income are first discussed and the analysis deals with fixed and endogenous discount rates and interest rates a smoothing response in consumption producing a current account deficit is shown to follow a short term income fall however a long term fall can call forth an adjustment response with consumption and debt first moving toward the equilibrium which would obtain if the income fall were permanent

the dark side of global integration increasing tail dependence abstract we measure stock market coexceedances using the methodology of cappiello gerard and manganelli 2005 ecb working paper 501 this method enables us to measure comovement at each point of the return distribution first we construct annual coexceedance probabilities for both lower and upper tail return quantiles using daily data from 1974 2006 next we explain these probabilities in a panel gravity model framework results show that macroeconomic variables asymmetrically impact stock market comovement across the return distribution financial liberalization significantly increases left tail comovement whereas trade integration significantly increases comovement across all quantiles decreasing exchange rate volatility results in increasing lower tail comovement the introduction of the euro increases comovement across the entire return distribution thereby significantly reducing the benefits of portfolio diversification within the euro area

optimal monetary growth with accommodating fiscal policy in a small open economy abstract this paper emphasizes how the choice of the optimal monetary growth rate in a small open economy under perfect capital mobility depends upon the accommodating policy chosen to maintain the overall budget constraint in the economy when this occurs through lump sum taxation the optimal monetary growth rate is shown to be the distorted friedman monetary rule if the adjustment occurs through the income tax rate the optimal monetary growth rate involves a phelps type tradeoff between the income tax rate and the inflation tax rate the framework is suited for analyzing optimal macroeconomic policy in general and the latter part of the paper considers an optimal monetary fiscal package

currency preferences purchasing power risks and the determination of exchange rates in an optimizing model most recent research on the theory of exchange rate determination treats the exchange rate as the relative price of two assets domestic money and foreign money the value of an asset depends on the distribution of its return however most of the research has dealt with models in which there is no uncertainty the present paper focuses on questions that cannot be addressed in a world of certainty because in such a world an asset is never risky it investigates how purchasing power risks affect the determination of exchange rates this investigation is pursued in a fairly general optimizing model the present research is related to some recent work in international economics and in financial economics it follows the approach of obstfeld 1981 and stockman 1980 in that it uses an optimizing model and takes into account the role of government transfers in the flow budget constraint of individuals as in calvo and rodriguez 1977 stockman 1980 and others the fact that holdings of foreign monies are useful to domestic individuals is taken into account finally the paper uses techniques developed in papers in the finance literature which build on merton s 1973 asset pricing model and use a concept of equilibrium developed in

on fiscal deficits the real exchange rate and the world rate of interest we use a full general equilibrium two country two period model with perfect capital markets and intertemporal optimization and perfect foresight underlying private consumer behaviour in both countries to analyse effects of pure fiscal policy we demonstrate that higher government budget deficits in one country caused by a cut in commodity taxes today balanced by an equal present value increase tomorrow will not be offset one for one by higher private savings because of pure substitution effects triggered by the change in the intertemporal terms of trade the tax change causes the country with the increased government deficit will therefore run a larger current account deficit which in turn unambiguously leads to higher world real interest rates whether a real appreciation results in the country with the higher deficit is shown to depend on the metzler condition for an undereffected transfer if we spend more on our goods than they spend on our goods on the margin government deficits will lead to an appreciation of the exchange rate of the country with the government deficit and vice versa

macroeconomic policy exchange rate dynamics and optimal asset accumulation the paper develops a model of exchange rate and current account determination for a small economy peopled by infinitely lived utility maximizing households in this setting a central bank purchase of foreign exchange has no real effects when central bank foreign reserves earn interest at the world rate and proceeds are returned to the public in contrast an increase in the monetary growth rate does have real effects even in the long run the model developed here implies that an increase in government spending may lead to a surplus on current account the external adjustment process predicted by the model is one in which consumption real balances and external assets all rise or fall simultaneously

government spending and capital accumulation with endogenous time preference this paper extends s djajic 1987 to allow for an endogenous rate of time preference and reexamines djajic s experiment how the optimal rates of private consumption and capital accumulation will respond to an unanticipated temporary expansion in government spending the key factors determining the adjustment patterns are the difference between the marginal utility of private consumption and that of public spending the timing of policy reversion and the relationship between private and public consumption in household utility if private and public consumption are edgeworth independent whether investment increases with the length of fiscal expansion depends on whether the marginal utility of private consumption exceeds that of public consumption

structural change test in duration of bull and bear markets abstract we propose a recursive test to analyze structural changes in duration of bull and bear markets using the dow jones industrial average index we detected a single structural break in the bull market duration in april 1942