minimum return guarantees with fund switching rights an optimal stopping problem abstract recently there is a growing trend to offer guaranteed products where the investor is allowed to shift her account investment value between multiple funds the switching right is granted a finite number of times per year i e it is american style with multiple exercise possibilities in consequence the pricing and the risk management is based on the switching strategy which maximizes the value of the guarantee put option we analyze the optimal stopping problem in the case of one switching right within different model classes and compare the exact price with the lower price bound implied by the optimal deterministic switching time we show that within the class of log price processes with independent increments the stopping problem is solved by a deterministic stopping time if and only if the price process is in addition continuous thus in a sense the black and scholes model is the only meaningful pricing model where the lower price bound gives the exact price it turns out that even moderate deviations from the black and scholes model assumptions give a lower price bound which is really below the exact price this is illustrated by means of a stylized stochastic volatility model setup

optimal management of renewable resources with growing demand and stock externalities abstract in an equilibrium framework optimal management of renewable resources in the presence of growing demand or externalities leads to steady states that differ from those characterized by rate of interest equals rate of change in growth plus rate of change in prices measures to reach an optimum with externalities other than direct controls are found to be critically mediated by the costs of harvesting

limit cycles in intertemporal adjustment models theory and applications this paper starts from well behaved i e concave one state variable optimal control models the crucial feature is that indigenous growth is present the replacement of the control by an adjustment process and presumably penalizing these adjustments may convert stable and only stable fixed point equilibria into limit cycles indeed given positive growth and proper externalities such that discounting exceeds growth one can generate stable limit cycles with ease e g for a separable framework examples from such diverse fields as renewable resources optimal saving and public choice highlight the economic applicability

introduction to the symposium on growth fluctuations and sunspots confronting the data the papers in this symposium demonstrate the theoretical as well as the empirical plausibility of indeterminacy and of sunspots in equilibrium models with infinitely lived agents they depart from the standard competitive framework because of the presence of externalities or of monopolistic competition some focus on business fluctuations while others address long run growth the second part of the introduction presents a general unifying framework to identify the structure that is common to the papers of the symposium journal of economic literature classification numbers e00 e3 o40 c 1994 academic press inc

on the economically optimal exploitation of a renewable resource the case of a convex environment and a convex return function we investigate optimal policies for the exploitation of a renewable resource subject to a concave growth function and a convex return function we prove an important result on the elasticity of the objective function and apply it to give a characterization of the optimal harvesting paths in this class of models in particular we derive conditions such that all optimal programs converge to a fixed point or to a cycle of finite period and hence result in the conservation of the resource we also show which assumptions guarantee that extinction of the stock is optimal that nonconvex preferences or technologies cause problems for economic theory is well known as our model can formally be interpreted as an optimal growth model with nonconcave utility function our results are a further contribution on the dynamics of optimal paths in the general class of economic models with nonconcavities journal of economic literatureclassification numbers c61 e32 q20

duration models and irr management a question of dimensions abstract this paper compares the immunization performance of alternative single and multiple factor duration models using spanish government bond data over 1 2 and 3 year horizons the aim is to assess whether the success of duration matching strategies is primarily attributable to the particular model chosen or to the number of risk factors considered empirical tests show that i traditional immunization is easily bettered by more realistic strategies ii the number of risk factors considered has a greater influence on the result than the particular model chosen and iii three factor immunization strategies offer the highest immunization benchmarks

interest rate volatility and the term structure a two factor general equilibrium model we develop a two factor general equilibrium model of the term structure the factors are the short term interest rate and the volatility of the short term interest rate we derive closed form expressions for discount bonds and study the properties of the term structure implied by the model the dependence of yields on volatility allows the model to capture many observed properties of the term structure we also derive closed form expressions for discount bond options we use hansen s generalized method of moments framework to test the cross sectional restrictions imposed by the model the tests support the two factor model there are essentially two approaches to the modeling of the term structure of interest rates in continuous time the equilibrium approach pioneered by

china s official rates and bond yields abstract recent research shows that bond yields are influenced by monetary policy decisions to learn how this works in a bond market that differs significantly from those in the us and europe we model chinese bond yields using the one year deposit interest rate as a state variable we also include the spread between the one year market interest rate and the one year deposit interest rate as another factor the model is developed in an affine framework and closed form solutions are obtained we then test the model empirically with a markov chain monte carlo simulation procedure the results show that the new model that incorporates the official rate in china characterizes the changing shape of the yield curve well

on conservation of renewable resources with stock dependent return and nonconcave production textabstractthis paper analyzes conservation and extinction of renewable resources when the production function is nonconcave and the return function depends on consumption and the resource stock the paper focuses on the efficiency of global conservation a safe standard of conservation and extinction which outcome obtains depends on the marginal rate of substitution between investment and the stock in addition to the discount factor and the marginal productivity of the resource conservation may be efficient even if the discounted intrinsic growth rate of the resource is less than 1 journal of economic literature classification numbers d90 q20

optimal portfolio policies with borrowing and shortsale constraints abstract we characterize optimal intertemporal portfolio policies for investors with crra utility facing either a borrowing constraint or shortsale restrictions or both the optimal constrained portfolios are identified as optimal unconstrained portfolios for a higher riskless rate or for a subset of the risky assets or for a combination of the two settings our characterization is based on duality results in cvitanic and karatzas 1992 annals of applied probability 2 767 818 for optimal portfolio investment when portfolio values are more generally constrained to a closed convex nonempty subset of r n

tariff design with varying degrees of commitment abstract this paper provides a novel perspective on the dynamics of infant industry protection trade policies are analyzed when the industrial sector generates positive externalities in production and there are adjustment costs to changing production between sectors if the government is able to precommit to its future tariff schedule the welfare maximizing policy is to maintain a positive tariff forever even after the steady state is reached however if no precommitment is possible the only time consistent policy is zero tariff always the case with precommitment for a limited period of time is also analyzed

constrained non concave utility maximization an application to life insurance contracts with guarantees abstract we study a problem of non concave utility maximization under a fair pricing constraint the framework finds many applications in for example the optimal design of managerial compensation or equity linked life insurance contracts deriving closed form solutions we observe that the fair pricing constraint will reduce the riskiness of the optimal strategies substantially in an extensive numerical section we analyze innovative retirement products that adapt the investment strategy of the premium pool according to the policyholder s preferences modeled as constant relative risk aversion crra such products are a response to the loss of attractiveness of traditional life insurance contracts with guarantees that are negatively affected by increasing solvency requirements for return guarantees and a general decrease in interest rate levels taking into account that retirement products are usually tax privileged we find that fairly priced guarantee contracts that follow this optimal investment strategy lead to a higher expected utility level than asset investments

why does junior put all his eggs in one basket a potential rational explanation for holding concentrated portfolios abstract empirical studies of household portfolios show that young households with little financial wealth hold underdiversified portfolios that are concentrated in a small number of assets a fact often attributed to behavioral biases we present a potential rational alternative we show that investors with little financial wealth who receive labor income rationally limit the number of assets they invest in when faced with financial constraints such as margin requirements and restrictions on borrowing we provide theoretical and numerical support for our results and identify the ratio of financial wealth to labor income as a useful control variable for household portfolio studies

twin picks disentangling the determinants of risk taking in household portfolios this paper investigates risk taking in the liquid portfolios held by a large panel of swedish twins we document that the portfolio share invested in risky assets is an increasing and concave function of financial wealth leading to different risk sensitivities across investors human capital which we estimate directly from individual labor income also affects risk taking positively while internal habit and expenditure commitments tend to reduce it our microfindings lend strong support to decreasing relative risk aversion and habit formation preferences furthermore heterogeneous risk sensitivities across investors help reconcile individual preferences with representative agent models

uniqueness and indeterminacy on the dynamics of endogenous growth abstract in this paper we study the dynamics of endogenous growth both in the model of lucas and in a generalization that incorporates a labor leisure choice we characterize the regions of the parameter space that give rise to unique equilibria as well as the regions that yield a continuum of equilibria with positive growth rates we find that such multiple equilibria exist for empirically very plausible parameters in particular when the lucas model is modified to incorporate endogenous labor journal of economic literature numbers e00 e3 o40

competitive inventory management in treasury markets abstract we decompose us treasury bid ask spreads into inventory adverse selection and order processing costs by using the fact that inventory trades have different effects on spreads than do proprietary trades we exploit this asymmetry and develop a technique to identify the three components of the spread in order to test three hypotheses dealers make larger changes to inventory 1 following macroeconomic announcements 2 at the start and toward the end of the new york trading hours and 3 when transaction sizes are relatively large we test these predictions using govpx data for on the run 2 year and 10 year treasury notes all three predictions are supported we also assess how primary dealers react to the federal reserve s open market operations omos our findings reveal interesting intraday patterns in the inventory component for both securities

dynamic mean variance portfolio selection with borrowing constraint abstract this paper derives explicit closed form solutions for the efficient frontier and optimal investment strategy for the dynamic mean variance portfolio selection problem under the constraint of a higher borrowing rate the method used is the hamilton jacobi bellman hjb equation in a stochastic piecewise linear quadratic plq control framework the results are illustrated on an example

who should buy long term bonds according to conventional wisdom long term bonds are appropriate for conservative long term investors this paper develops a model of optimal consumption and portfolio choice for infinite lived investors with recursive utility who face stochastic interest rates solves the model using an approximate analytical method and evaluates conventional wisdom as risk aversion increases the myopic component of risky asset demand disappears but the intertemporal hedging component does not conservative investors hold assets to hedge the risk that real interest rates will decline long term inflation indexed bonds are most suitable for this purpose but nominal bonds may also be used if inflation risk is low

the role of portfolio constraints in the international propagation of shocks we study the comovement among stock prices and exchange rates in a three good three country centre periphery dynamic equilibrium model in which the centre s agents face portfolio constraints we characterize equilibrium in closed form for a broad class of portfolio constraints solving for stock prices terms of trade and portfolio holdings we show that portfolio constraints generate wealth transfers between the periphery countries and the centre which increase the comovement of the stock prices across the periphery we associate this excess comovement caused by portfolio constraints with the phenomenon known as contagion the model generates predictions consistent with other important empirical results such as amplification and flight to quality effects copyright 2008 wiley blackwell

industrialization and substitutability a note abstract this paper analyzes the relationship between industrialization and technology in detail three main conclusions are obtained i the crucial factor for the existence of a poverty trap is the degree of substitutability among intermediate inputs ii the effects of technological progress in the manufactured good sector and the intermediate goods sector on industrialization differ with the degree of substitutability among intermediate inputs iii technological progress in the manufactured good sector and the intermediate goods sector weakens the lock in effect of historical events while strengthening the role of expectations these suggest that the degree of substitutability among intermediate inputs should be an important factor when we plan a development strategy

equilibrium cycling with small discounting abstract a misinterpretation of turnpike theorems suggests that persistent cyclic behavior in optimal growth models is only possible with large discount rates this paper shows that for any positive discount rate there exists a large family of standard cobb douglas technologies with three sectors which have optimal growth paths of persistent cycles

an intergenerational model of population growth the problem of population growth has been only partially formulated in an intertemporal context therefore a link between population theory and economic growth theory is still missing this paper attempts to provide such a link by analyzing an intergenerational model of optimum population growth the model accommodates the idea that decisions on increases in population should consider the new population s quality of life this concept is elaborated upon in a static framework by gary becker and gregg lewis dennis de tray and robert willis other literature on population growth such as harold votey disregards this consideration altogether 2 more explicitly this paper assumes that the utility of each generation is a function of the level of its consumption and the number and utility of the newly born people we are thus led to consider the utility of an infinite number of generations this model differs from paul samuelson s intergenerational model of pure consumption in which the utility of each generation depends only on that generation s own consumption recently philip neher 1971 analyzed a model of fertility in primitive economies it is based on the assumption that parents use children as investments to insure future consumption needs neher s analysis focuses entirely on the pension motive for having children 3 our model assumes that fertility is determined so as to balance the parents welfare derived from additional children against that derived from the children s quality of life we first outline a general model of optimum population growth in order to discuss explicitly various economic aspects of population we use a simple case in the analysis section i sets up the basic model

effectiveness of cppi strategies under discrete time trading abstract the paper analyzes the effectiveness of the constant proportion portfolio insurance cppi method under trading restrictions if the cppi method is applied in continuous time the cppi strategies provide a value above a floor level unless the price dynamics of the risky asset permit jumps the risk of violating the floor protection is called gap risk in practice it is caused by liquidity constraints and price jumps both can be modelled in a setup where the price dynamics of the risky asset are described by a continuous time stochastic process but trading is restricted to discrete time we propose a discrete time version of the continuous time cppi strategies which satisfies three conditions the resulting strategies are self financing the asset exposure is non negative and the value process converges we determine risk measures such as the shortfall probability and the expected shortfall and discuss criteria which ensure that the gap risk does not increase to a level which contradicts the original intention of portfolio insurance in addition we introduce proportional transaction costs and analyze their effects on the risk profile

a dynamic autoregressive expectile for time invariant portfolio protection strategies constant proportion portfolio insurance cppi is nowadays one of the most popular techniques for portfolio insurance strategies it simply consists of reallocating the risky part of a portfolio with respect to market conditions via a leverage parameter called the multiple guaranteeing a predetermined floor we propose to introduce a conditional time varying multiple as an alternative to the standard unconditional cppi method directly linked to actual risk management problematics this ex ante approach for the conditional multiple aims to diversify the risk model associated for example with the expected shortfall es or extreme risk measure estimations first we recall the portfolio insurance principles and main properties of the cppi strategy including the time invariant portfolio protection tipp strategy as introduced by estep and kritzman 1988 we emphasize the existence of an upper bound on the multiple for example to hedge against sudden drops in the market then we provide the main properties of the conditional multiples for well known financial models including the discrete time portfolio rebalancing case and levy processes to describe the risky asset dynamics for this purpose we precisely define and evaluate different gap risks in both conditional and unconditional frameworks as a by product the introduction of discrete or random time portfolio rebalancing allows us to determine and or estimate the density of durations between rebalancements finally from a more practical and statistical point of view due to trading restrictions we present the class of dynamic autoregressive expectile dare models for estimating the conditional multiple this latter approach provides useful complementary information about the risk and performance associated with probabilistic approaches to the conditional multiple

systemic risk and international portfolio choice returns on international equities are characterized by jumps moreover these jumps tend to occur at the same time across countries leading to systemic risk we capture these stylized facts using a multivariate system ofjump diffusion processes where the arrival of jumps is simultaneous across assets we then determine an investor s optimal portfolio for this model of returns systemic risk has two effects one it reduces the gains from diversification and two it penalizes investors for holding levered positions we find that the loss resulting from diminished diversification is small while that from holding very highly levered positions is large returns on international equities are characterized by jumps 1 moreover these jumps tend to occur at the same time across countries implying that conditional correlations between international equity returns tend to be higher in periods of high market volatility or following large downside moves 2 our objective in

are there limits to growth a simple theoretical model of pollution is developed that generates an inverted u shape relationship between per capita income and environmental quality this model is then used to study long run growth the same inverted u shape is shown to appear in time series and the prospects for sustained growth are shown to hinge on whether increasingly strict environmental regulation is compatible with a constant rate of return on capital implementation is also studied tax and voucher schemes are shown to have an advantage over direct regulation because they provide the correct incentives for capital accumulation copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

nutrition unemployment and international trade abstract this paper adopts the leibenstein hypothesis that there are increasing returns to nutrition over a range for an individual s ability to work this assumption generates unemployment in the models analyzed and allows a study of the effects of trade policy on employment and income distribution the effects of world price changes tariffs production subsidies cum employment taxes and production taxes cum employment subsidies are analyzed

the efficiency wage given long run employment and concave labor constraint abstract the purpose of this paper is to analyze determination of wage rate in a setting where health capital of labor accumulates over time our conclusions are 1 efficiency wage in a dynamic framework exceeds the static wage rate and 2 there is a possibility of multiple steady state equilibria and a low level equilibrium we have also made some comparative static exercises with respect to some key parameters

productive consumption and population dynamics in an endogenous growth model demographic trends and human development aid in developing economies abstract we find that by endogenizing the population growth rate a growth model under the productive consumption hypothesis is more tractable than models in previous studies and has interesting implications for population dynamics in the zero saving phase multiple saddle point stable steady states may exist and the population growth rate may rise or decline along a transition path in the positive saving phase such a steady state may exist uniquely and the population growth rate may decline with phase switching the population growth rate may follow an inverted u shaped curve human development aid may help an economy escape from an underdevelopment trap

nonparametric modeling of u s interest rate term structure dynamics and implications on the prices of derivative securities this paper develops a nonparametric model of interest rate term structure dynamics based on a spot rate process that permits only positive interest rates and a market price of interest rate risk that precludes arbitrage opportunities both the spot rate process and the mar ket price of interest rate risk are nonparametrically specified so that the model allows for maximal flexibility in fitting into the data marginal density of interest rates and historical term structure data are exploited to provide robust estimation of the nonparametric term structure model the model is implemented using u s data and the estimation results are compared to those in the available literature empirical results not only provide strong evidence that most traditional spot rate models and market prices of interest rate risk are misspecified but also confirm that the nonparametric model generates significantly differ ent term structures and prices of common derivatives

optimal consumption and portfolio policies when asset prices follow a diffusion process abstract we consider a consumption portfolio problem in continuous time under uncertainty a martingale technique is employed to characterize optimal consumption portfolio policies when there exist nonnegativity constraints on consumption and on final wealth we also provide a way to compute and verify optimal policies our verification theorem for optimal policies involves a linear partial differential equation unlike the nonlinear partial differential equation of dynamic programming the relationship between our approach and dynamic programming is discussed we demonstrate our technique by explicitly computing optimal policies in a series of examples in particular we solve the optimal consumption portfolio problem for hyperbolic absolute risk aversion utility functions when the asset prices follow a geometric brownian motion the optimal policies in this case are no longer linear when nonnegativity constraints on consumption and on final wealth are included by these examples one can see that our approach is much easier than the dynamic programming approach

savings and nutrition at low incomes while many development theorists assume saving propensities vary among different groups there has been limited theoretical justification for this view this paper analyzes two complementary theories stressing the effect on saving of physiological consequences of poor nutrition at low incomes one influence is on the probability of survival another is on workers productivity either effect means that the average propensity to save can rise with income issues considered include annuities exogenous changes in survival and efficiency implications for the efficiency wage theory of unemployment and distinctions between wage and nonwage income implications of nutritional effects for econometric specification of saving functions are stressed

anticipation effects of technological progress on capital accumulation a vintage capital approach abstract due to embodied technological progress new generations of capital goods are more productive therefore in order to study the effects of technological progress a model must be analyzed in which different generations of capital goods can be distinguished we determine in what way the firm adjusts current investments to predictions of technological progress in the presence of market power we show that a negative anticipation effect occurs i e current investments in recent generations of capital goods decline when faster technological progress will take place in the future because then it becomes more attractive to wait for new generations of capital goods in case that only investments in new machines are possible actually a whole wave of anticipation phases arises

modelling the term structure of interest rates an efficient nonparametric approach abstract we propose a new approach for estimating the coefficients of the term structure equation by means of the volatility of the interest rates and the slope of the yield curve one advantage of this approach consists in the fact that the drift and the market price of risk are jointly estimated and need not be individually specified we then generate trajectories in a test problem to investigate the finite properties of this approach our simulation results show that this new approach outperforms the classic nonparametric models in the literature finally an application to usa treasury bill data is also illustrated

partially segmented international capital markets and international capital budgeting abstract evidence suggests that international capital markets are neither fully integrated nor completely segmented there is however currently no general method available for computing the required return on corporate investments in such capital markets this paper uses a model of partially integrated international capital markets to derive optimal international capital budgeting rules we show how capital budgeting rules depend on the level of investor costs to cross border investment both directly and also indirectly through the portfolio specialization they induce we explain how required returns differ for different companies raising capital in such markets and how these costs of capital may be estimated we also explain how these differences in required returns can be consistent with general equilibrium and the effect they have on incentives for foreign direct investment

stability and limit cycles in competitive equilibria subject to adjustment costs and dynamic spillovers abstract this paper derives conditions for hopf bifurcations in a general class of competitive equilibria where individual actions i lead to a dynamic spillover or an externality that is found e g in environmental economics and in the endogenous growth literature and ii these actions can be only sluggishly adjusted it turns out that only one and particularly simple to check condition allows for a hopf bifurcation in both instances of perfect foresight and myopic expectations growth of the spillover at the steady state in fact this condition ensures the existence of a bifurcation if the adjustment costs are sufficiently convex

dynamic models of the term structure in the past 25 years tremendous progress has been made in modeling the dynamics of the term structure of interest rates which play an instrumental role in determining prices and hedging portfolios of fixed income derivative securities this article reviews the theoretical development of the dynamic models of the default free term structure and their applications in pricing interest rate options classic models sometimes termed equilibrium models and their multifactor extensions are outlined these models provide clear economic intuitions connecting the term structure with economic fundamentals they also lay a foundation for the framework of the arbitrage models that price interest rate derivatives on the basis of the market prices of bonds this framework has been expanded and enriched by recent advances in directly modeling observable market rates through the market models and in incorporating an internally consistent correlation structure through the infinite dimensional models

a geometric approach to multiperiod mean variance optimization of assets and liabilities we present a geometric approach to discrete time multiperiod mean variance portfolio optimization that largely simplifies the mathematical analysis and the economic interpretation of such model settings we show that multiperiod mean variance optimal policies can be decomposed in an orthogonal set of basis strategies each having a clear economic interpretation this implies that the corresponding multiperiod mean variance frontiers are spanned by an orthogonal basis of dynamic returns specifically in a k period model the optimal strategy is a linear combination of a single k period global minimum second moment strategy and a sequence of k local excess return strategies which expose the dynamic portfolio optimally to each single period asset excess return this decomposition is a multi period version of hansen and richard econometrica 1987 orthogonal representation of single period mean variance frontiers and naturally extends the basic economic intuition of the static markowitz model to the multiperiod context using the geometric approach to dynamic mean variance optimization we obtain closed form solutions in the i i d setting for portfolios consisting of both assets and liabilities al each modelled by a distinct state variable as a special case the solution of the mean variance problem for the asset only case in li and ng mathematical finance 10 2000 follows directly and can be represented in terms of simple products of some single period orthogonal returns we illustrate the usefulness of our geometric representation of multiperiods optimal policies and mean variance frontiers by discussing specific issues related to al portfolios the impact of taking liabilities into account on the implied mean variance frontiers the quantification of the impact of the rebalancing frequency and the determination of the optimal initial funding ratio

the impact of investment behaviour for individual welfare the industrialized world has experienced a demographic shift that is straining public pension systems employer sponsored pension plans change from defined benefit to defined contribution more emphasis is put on individually managed retirement funds one concern with this movement is the potential negative effect on individual welfare if households investment behaviour is suboptimal using micro level us data we compare the optimal utility computed using a lifecycle model with the actual utility as reflected in empirical asset allocation choices average estimated welfare costs are below 3 of households endowment assets and human capital yet specific population groups experience higher welfare costs

optimal dynamic trading with leverage constraints we solve for the optimal dynamic trading strategy of an investor who faces a leverage constraint i e a limitation on his ability to borrow for the purpose of investing in a risky asset we assume that the investor has constant relative risk aversion and that the value of the risky asset follows a geometric brownian motion in the absence of the leverage constraint the optimal strategy involves investing a fixed proportion of wealth in the risky asset we prove that in the presence of the leverage constraint the optimal investment also involves investing a fixed proportion of wealth in the risky asset when the leverage constraint is not binding however the two proportions are different reflecting the extent to which the investor alters his strategy even when the leverage constraint is not binding because of the possibility that the leverage constraint will become binding in the future

grading the performance of market indicators with utility benchmarks selected from footsie a 2000 case study the suitable choice of a benchmark portfolio is a critical problem prior to using the information ratio as the performance ranking of funds depends on this choice in this paper a method to optimize benchmark selection taking account of the investor s preferences is proposed and applied to a case study of performance for 29 market indicators on stock exchanges throughout the world the method that relies on recent results in optimization theory requires defining the opportunity set to select the benchmarks this set being footsie in the case study the computational process and numerical results are presented through tables and figures the accuracy of the method being also numerically tested