small transaction cost asymptotics and dynamic hedging abstract transaction costs are one of the major impediments to the implementation of dynamic hedging strategies we consider an alternative to utility maximization similar to the good deal pricing framework in incomplete markets we perform a dynamic risk reward analysis for a family of non self financing strategies of practical importance deterministic time hedging i e hedging at predetermined fixed times in the limit of small relative transaction costs we carry out the asymptotic analysis and find that transaction costs affect the hedge ratios and that the time between trades is related in a simple way to the local sensitivities of the replication target

motivations for aid to developing countries abstract this paper attempts to identify the underlying principles of aid allocation and particularly the balance of motivations as between the needs of recipient countries and the interests of donor countries two alternative models are fitted by cross country regressions to bilateral and multilateral aid flows to some 80 developing countries in 1969 1970 and 1978 1980 the first recipient need model assumes that all aid is given to compensate for shortfalls in domestic resources this model provides a reasonable explanation for the distribution of multilateral aid but it is clearly not applicable for bilateral aid flows the second donor interest model assumes that all aid serves only donor interests defined to cover political security investment and trade interests this model gives generally good explanations of bilateral aid but is a poor fit for multilateral aid the relative importance of the various donor interests differs sharply among donors the paper ends with an analysis of the shift in the balance of aid over the 1970s towards the recipient need element and with a reference to the sharp change in policy in the 1980s towards increasing emphasis on donor interest aid

on the mean variance tradeoff in option replication with transactions costs this paper analyzes the tradeoff between cost and risk of discretely rebalanced option hedges in the presence of transactions costs i present closed form solutions for expected hedging error transactions costs and variance of the cash flow from a time based hedging strategy similar to that analyzed by leland 1985 furthermore i characterize the cost and risk of a move based hedging strategy without resorting to monte carlo simulations all results are sufficiently general to accommodate the use of a transactions costs adjusted hedging volatility and an asset rate of return that differs from the risk free rate of return

option replication in discrete time with transaction costs option replication is discussed in a discrete time framework with transaction costs the model represents an extension of the cox ross rubinstein binomial option pricing model to cover the case of proportional transaction costs the method proceeds by constructing the appropriate replicating portfolio at each trading interval numerical values of these prices are presented for a range of parameter values the paper derives a simple black scholes type approximation for the option prices with transaction costs and demonstrates numerically that it is quite accurate for plausible parameter values

the human development index yet another redundant composite development indicator abstract in its human development report 1990 the united nations development program undp proposes yet another composite indicator of development levels the human development index hdi the hdi assesses intercountry development levels on the basis of three so called deprivation indicators life expectancy adult literacy and the logarithm of purchasing power adjusted per capita gdp using simple statistical analysis this paper questions both the composition of the hdi and its usefulness as a new index of development it concludes that the hdi is both flawed in its composition and like a number of its predecessors fails to provide insights into intercountry development level comparisons which preexisting indicators including gnp per capita alone cannot

the determinants of the geographical allocation of ec aid to the developing countries this paper examines the economic rationale of the ec s aid policy towards the ldcs a multiple linear regression is conducted on the ecs flows of aid to 62 ldcs during the 1975 80 period using two alternative models one trying to explain the ecs pattern of geographical allocation of aid using variables that assess the needs of the recipients and another using variables that asseses the interests of the ec the results show that the ec multilateral aid to the ldcs is more motivated by the needs of the recipients in terms of their current account balance of payments and their state of basic human needs as these are assessed by the physical quality of life index pqli an important consideration however is also given to community export interests and to a tendency not to allocate aid to security sensitive countries it is also demonstrated that in the second half of the 1970s an emphasis persited on francophone ldcs by comparison bilateral aid distributed by the ec member states has been motivated to a

optimal delta hedging under transactions costs this paper examines the problem of delta hedging portfolios of options under transactions costs by maximising expected utility or minimising a loss function on the replication error we extend the work of hodges and neuberger 1989 to study the optimal strategy under a general cost function with fixed and proportional costs a computational procedure for solving this problem is described and we develop an efficient computational method for the case of proportional transaction costs we examine the nature of the solution close to the expiry date and using simulation we compare the performance of the optimal strategies with other common strategies

reform of foreign aid policies the issue of inter country allocation in africa abstract the aim of this paper is to assess the inter country allocation of foreign aid by selected donors to 18 recipients in eastern and southern africa esa the five country cases discussed in this paper show that the aid environment has not been supportive of recipients reform efforts during the 1980s a comparison is made between international development agency ida allocation and other donors cross section and time series regressions demonstrate a variety of considerations influencing bilateral aid lastly in discussing present aid policies and coordination efforts three options are analyzed with respect to future aid policies it is suggested that new initiatives by ida in its allocation criteria and aid coordination efforts can yield some progress

some determinants of foreign aid to india 1960 1985 abstract using a unique data set of aid to india from all sources 1960 1985 we discuss the magnitude and composition of aid and present a principal components analysis of aid giving we then attempt to get at the underlying patterns and causes of aid giving using factor analytic techniques and explain the level of foreign aid by employing a partial adjustment model we find that latent motivations to classify the donor countries into four convenient groups each with different political and economic motivations we also find that the latent variables capturing the motivations of the united states western european countries eastern european countries as well as last year s aid and the balance of trade but not gdp growth are significant determinants of the level of aid

price policy and returns to soil conservation in semi arid kenya this paper develops an approach that uses relatively easily available data to examine empirically how policy induced price changes affect the incentives of farmers in developing countries to adopt soil conservation measures the model shows that there is no simple relationship between price distortions created by government policies and farmers incentives to adopt conservation measures policy induced price changes could lead to either more or less conservation depending on site specific conditions data from a semi arid region in kenya are used to illustrate the magnitude and direction of changes in price policy on returns to terracing and to show how results are affected by the nature of the conservation technology in the study area higher commodity prices increase incentives to adopt conservation measures on steep slopes but lower them on shallower slopes if terraces were to require more land to be taken out of production than assumed in the calculations higher commodity prices would tend to discourage farmers from adopting them

gain loss and asset pricing we develop an approach to asset pricing in incomplete markets that bridges the gap between the two fundamental approaches in finance model based pricing and pricing by no arbitrage we strengthen the absence of arbtrage assumption by precluding investment opportunities whose attractiveness to a benchmark investor exceeds a specified threshold in our framework the attractiveness of an investment opportunity is measured by the gain loss ratio we show that a restriction on the maximum gain loss ratio is equivalent to a restriction on the ratio of the maximum to minimum values of the pricing kernel by limiting the maximum gainloss ratio we can restrict the admissible set of pricing kernels which in turn allows us to restrict the set of prices that can be assigned to assets we illustrate our methodology by computing price bounds for call options in a black scholes economy without intermediate trading when we vary the maximum permitted gainloss ratio these bounds can range from the exact prices implie

do developing country wto members receive more aid for trade aft since the world trade organization wto doha development agenda dda negotiations started in 2001 the importance of aid for trade aft has been well recognised as a useful tool for facilitating trade economic growth and social development in developing countries at the wto hong kong ministerial conference in december 2005 the aft initiative was launched and many high income member countries pledged to increase their aft contributions particularly for the least developed member countries ldc this paper aims to assess whether and to what extent the wto s developing member countries have received more aft for this purpose a system generalised method of moments is applied to a sample of 118 recipient countries for the period 2001 10 we find evidence that while ldc wto members on average receive relatively more aft than other developing countries the difference has not increased since launch of the aft initiative among the three categories of aft the positive wto membership effect for ldc members increased for building productive capacity and for trade policy and regulation but declined for infrastructure

the political economy of foreign aid a model of the market for a public good what determines the type and quantity of overseas aid given by individual donor countries answers to this question in the existing literature are polarized into two groups one of them offers a theoretical treatment based on the theory of public goods which is not consistent with the available data and the other offers empirical correlations without any explanatory theory the first group for example pincus and olson and zeckhauser treats aid like defense as an international public good small countries on this approach are free riders spending relatively little themselves while deriving benefits from the expenditures of larger countries but this approach is not consistent with even a casual scrutiny of the oecd aid community in which broadly speaking the smallest countries are the most generous donors 2 the second group for example hoadley and beenstockdiscover correlations between a country s ratio of aid to gnp and certain independent variables which may be expected to influence it e g that country s gnp its dependence on foreign trade its government s position in the ideological spectrum and the state of the domestic economy 3 however these findings are not fitted into any theoretical framework so that it is difficult to work out what they really mean 4 the approach of this paper is to treat foreign aid as a public good for which there is a market albeit a highly imperfect one because the consumers donor country taxpayers are ignorant about the very nature let alone the price of the commodity they are buying on this view factors on the demand side i e taxpayers response to their country s aid program will help to determine the quantity of aid disbursed as well as factors on the supply side such as the donor government s desire to obtain strategic or trading benefits from aid this view

empirical results of aid motivations australia s bilateral aid program abstract this paper briefly surveys the existing literature on the motivations of overseas aid the emphasis is on the two competing models of recipient need and donor interest and the paper estimates these two models using data for australian bilateral aid both the recipient need model and the donor interest model are supported by the econometric analysis this is in stark contrast to the results of other studies for large states such as the united states and the united kingdom these prior studies show no support for the recipient need model whereas the donor interest model is supported the atypical result for the australian bilateral aid program requires further analysis in terms of non nested hypotheses

comparative advantage and bilateral foreign aid policy this paper formulates the problem of bilateral aid allocation in terms of the comparative advantage framework it is argued that the adaptability of this framework to foreign aid critically depends on the assumption that each donor s aid budget is spent to a large extent on its home market this assumption is not contradicted by empirical evidence an analysis of swiss foreign aid data then suggests that there is scope for considerable gains from specialization we conclude that donors should coordinate their behavior according to their comparative advantage to achieve an optimal allocation of global aid resources

option pricing and replication with transactions costs transactions costs invalidate the black scholes arbitrage argument for option pricing since continuous revision implies infinite trading discrete revision using black scholes deltas generates errors which are correlated with the market and do not approach zero with more frequent revision when transactions costs are included this paper develops a modified option replicating strategy which depends on the size of transactions costs and the frequency of revision hedging errors are uncorrelated with the market and approach zero with more frequent revision the technique permits calculation of the transactions costs of option replication and provides bounds on option prices

a two part sample selection model of british bilateral foreign aid allocation the allocation of british bilateral foreign aid among developing countries is simultaneously modelled focusing on allocations during the period 1980 87 two aid allocation decisions are analysed using a variant of the lee maddala econometric model the first decision concerns the determination of developing country eligibility for aid while the second concerns the amount of aid eligible countries are allocated given the implied two part decision making process sample selection techniques are employed it is hypothesized that british bilateral aid eligibility and amount decisions are based on bristain s humanitarian commercial and political interests in developing countries results obtained indicate that these decisions are generally consistent with each of these interests especially those relating to the political importance of commonwealth members

optimal replication of options with transactions costs and trading restrictions this paper analyzes the strategy that minimizes the initial cost of replicating a contingent claim in a market with transactions costs and trading constraints the linear programming and two stage backward recursive models developed are applicable to the replication of convex as well as nonconvex payoffs and to a portfolio of options with different maturities the paper s formulation conveniently accounts for fixed and variable transactions costs lot size constraints and position limits on trading the article shows that in the presence of trading frictions it is no longer optimal to revise one s portfolio in each period at the optimum cash flows in excess of the desired ones may be generated the optimal policy trades off the curvature of the payoff that is generated against the terminal slack

biases in the allocation of foreign aid some new evidence abstract the purpose of the paper is to examine the pattern of bilateral and multilateral foreign aid allocations during the 1970s cross section and pooled regressions for a set of roughly 90 countries where aid allocations have been relatively free of gross political overtones confirm the well known bias in per capita aid flows against populous countries butdo not provide evidence of a middle income bias instead regressions on 1976 1978 aid flows and per capita incomes of recipient countries seem to suggest a low income bias i e low income countries received more aid per capita than middle income countries yet there was asample of extremely poor countries which remained neglected in foreign aid allocations

beyond arbitrage good deal asset price bounds in incomplete markets one often wants to value a risky payoff by reference to prices of other assets rather than by exploiting full fledged economic models however this approach breaks down if one cannot find a perfect replicating portfolio we impose weak economic restriction to derive usefully tight bounds on asset prices in this situation the bounds assume that investors would want to buy assets with high sharpe ratios good deals as well as pure arbitrage opportunities we show how to calculate the price bounds in one period multiperiod and continuous time contexts we show that the multiperiod problem can be solved recursively as a sequence of one period problems we calculate bounds in option pricing examples including infrequent trading and an option written on a nontraded event and we use the bounds to explore the economic significance of option pricing predictions we find that much variation in s p 500 index option prices over time and across strike prices fits within the bounds

the systematic risk of discretely rebalanced option hedges this paper demonstrates that black scholes option pricing model hedge positions that are risk free when rebalanced continuously will frequently exhibit substantial systematic risk when rebalanced at finite intervals this systematic risk may have biased important empir ical tests of the option pricing model moreover this systematic risk means that the blackscholes option pricing model is inherently inconsistent with the discrete time version of the capital asset pricing model capm