are firms successful at selective hedging we analyze the corporate risk management policies of 44 companies in the gold mining industry firms tend to decrease hedging as prices move against them behavior contrary to that predicted by risk management theory these results along with new survey evidence suggest that firms attempt to time market prices so called selective hedging although estimates show a statistically significant ability of producers to favorably adjust hedge ratios this can be attributed to sample specific negative autocorrelation in gold prices economic gains to selective hedging are small and no evidence suggests that selective hedging leads to superior operating or financial performance

natural gas futures bias predictive performance and the theory of storage this study reports several empirical findings concerning natural gas futures prices first spot and futures prices are non stationary and the observed trends are due to positive drifts in the random walk components of the prices rather than possible deterministic time trends second market forecast errors are stationary third futures are less than expected future spot prices so that futures are backwardated fourth the bias in the futures prices is time varying fifth futures have statistically significant market timing ability despite the bias in the magnitude forecasts finally the data lends partial support to the cost of carry theory of the basis determination

reputation in dynamic games abstract we analyze reputation in a game between a large player and a continuum of long lived small players in which state variables affect players payoffs the large player s type is private information we give conditions under which in every nash equilibrium a very patient large player will get almost the largest payoff consistent with the small players choosing a best response in a large finite truncation of the game while our results apply to the time inconsistency problem of optimal government policy we show that for the durable goods monopoly reputation may fail to improve the monopolist s payoff journal of economic literatureclassification numbers c72 c73

the returns and forecasting ability of large traders in the frozen pork bellies futures market using settlement prices and nine years of daily commitments for large reporting traders in the frozen pork bellies futures market the authors find that these traders generate significant profits and the distribution of trader returns over time is not random further analysis finds that a subset of large elite traders possesses significant forecasting ability indicating that they not only are able to consistently anticipate the direction of price changes but are also on the right side of the market when large price changes occur hence certain futures market traders accumulate trading experience and knowledge permitting them to accrue considerable wealth copyright 1994 by university of chicago press

credible public policy abstract credible public policy is defined in a way that incorporates competitive equilibrium behavior for households and subgame perfect nash equilibrium behavior for the government it is shown that the set of all equilibrium outcome paths for credible policies can be constructed by using arguments analogous to those of abreu 1988 for repeated games the results are then extended to systems with state variables simple models of monetary policy and capital taxation are studied by way of example

games with espionage abstract we consider normal form games in which two players decide on their strategies before the start of play and player 1 can purchase noisy information about his opponent s decisions concerning future response policies i e spy on his opponent we give a full characterization of the set of distributions over the players payoffs that can be induced by such equilibria as well as describe their welfare and pareto properties in 2 2 games we find three equilibrium phenomena i when the game is non degenerate the information purchased is independent of its cost the cost determines only whether information is purchased or not ii the player who spies treats his information as if it were deterministic even though it is correct only probabilistically and iii in chain store models espionage is used if and only if the perfect equilibrium payoff differs from the stackelberg equilibrium payoff with player 2 being the stackelberg leader

when are fixed exchange rates really fixed abstract this paper analyzes the sustainability of fixed exchange rates by extending the time inconsistency framework to a fully dynamic context in which the level of a state variable in this case debt determines the payoffs available to the government at each point in time the model yields the following results if debt is sufficiently low there is an equilibrium in which the government does not devalue for an intermediate range of debt levels the government devalues in response to an attack but not otherwise so that self fulfilling attacks can occur finally for yet another debt range there can also be sunspot equilibria in which an attack and the corresponding devaluation occurs with positive probability

hedgers funds and small speculators in the energy futures markets an analysis of the cftc s commitments of traders reports the commodity futures trading commission cftc s commitments of traders cot data are examined for crude oil unleaded gasoline heating oil and natural gas futures contracts the collection procedures for the cot data are first examined followed by granger causality tests to determine if relationships between trader positions and market prices exist a positive correlation between returns and positions held by noncommercial traders and a negative correlation between commercial positions and market returns are found furthermore positive returns result in an increase in noncommercial net positions in the following week whereas the net long positions held by commercial hedgers decline following price increases however traders net positions do not lead market returns in general

technical trading rules in the european monetary system abstract using genetic programming we find trading rules that generate significant excess returns for three of four ems exchange rates over the out of sample period 1986 1996 permitting the rules to use information about the interest rate differential proved to be important the reduction in volatility resulting from the imposition of a narrower band may reduce trading rule profitability our results cannot be duplicated by commonly used moving average rules filter rules or by two rules designed to exploit known features of target zone rates there is no evidence that the excess returns are compensation for bearing systematic risk

accuracy and efficiency in the u s department of energy s short term supply forecasts one step ahead forecasts of quarterly crude oil natural gas electricity and coal supplies are evaluated under two general approaches accuracy based measures and classification or directional based measures results suggest the u s department of energy doe supply forecasts for u s domestic energy products are generally more accurate than a naive alternative there is only limited evidence of bias and inefficiency in the forecasts although there is some evidence of error repetition directional forecasts for supply changes are statistically better than random but they generally do not outperform a naive forecast

money is an experience good competition and trust in the private provision of money the interplay between competition and trust as efficiency enhancing mechanisms in the private provision of money is studied with commitment trust is automatically achieved and competition ensures efficiency without commitment competition plays no role trust does play a role but requires a bound on efficiency stationary inflation must be non negative and therefore the friedman rule cannot be achieved the quality of money can be observed only after its purchasing capacity is realized in this sense money is an experience good

forecasting south african inflation using non linearmodels a weighted loss based evaluation abstractthe conduct of inflation targeting is heavily dependent on accurate inflation forecasts non linear models have increasingly featured along with linear counterparts in the forecasting literature in this study we focus on forecasting south african inflation by means of non linear models and using a long historical dataset of seasonally adjusted monthly inflation rates spanning from 1921 02 to 2013 01 for an emerging market economy such as south africa non linearities can be a salient feature of such long data hence the relevance of evaluating non linear models forecast performance in the same vein given the fact that 1969 10 marks the beginning of a protracted rising trend in south african inflation data we estimate the models for an in sample period of 1921 02 1966 09 and evaluate 1 4 12 and 24 step ahead forecasts over an out of sample period of 1966 10 2013 01 in addition using a weighted loss function specification we evaluate the forecast performance of different non linear mo

time varying risk premia volatility and technical trading rule profits evidence from foreign currency futures markets abstract this paper re examines the efficiency of foreign currency futures markets by evaluating the role of time varying risk premia and volatility in explaining technical trading rule profits the results show that large parts of the technical rule profits can be explained by the time varying risk premia estimated from a general model for the conditional capm the bootstrap distributions for the profits under the null model average one third to one half of the actual profits and enclose the actual profits well within the 90 confidence intervals time varying conditional volatility explains an additional 10 of the profits

the term structure of implied forward volatility recovery and informational content in the corn options market using a flexible method we develop the term structure of volatility implied by corn futures options with differing maturities and evaluate its ability to predict subsequent realized price volatility the implied forward volatilities anticipate realized volatility well for the nearby interval the implied forward volatilities provide unbiased forecasts and are superior to forecasts based on historical volatilities for more distant intervals early year options predict the direction and magnitude of future volatility changes about as well as a three year moving average and better than a naive forecast however later year options display less forecast power in part due to reduced trading activity

on the efficiency effects of private dis trust in the government abstract we consider a version of the seminal kydland prescott model where in each period some private agents believe the policy announcements made by the government the other agents follow a standard optimizing strategy the fraction of agents who believe the government changes over time according to a word of mouth learning process we show that the initial number of believers and the speed of learning can have drastic consequences for the policy followed and the losses experienced by the different agents in particular the utility of the private sector may jump upwards if the initial number of believers exceeds a given threshold

credible monetary policy in an infinite horizon model recursive approaches abstract this paper develops recursive methods to study optimal and time consistent policy in dynamic models we analyze a version of calvo s 1978 monetary model and show that its time consistent outcomes can be completely characterized as the largest fixed point of either of two operators recursive application of these operators provides a computing algorithm which always converges to the set of time consistent outcomes finally we obtain valuable information about the nature of time consistent outcomes it is discovered in particular that all such outcomes are markovian the methods obtained are intuitive and should be useful for many applications journal of economic literatureclassification numbers e61 e52 c61

sustainable plans and mutual default this paper presents a simple general equilibrium model of optimal taxation in which both private agents and the government can default on their debt as a benchmark we consider ramsey equilibria in which the government can precommit to its policies at the beginning of time but in which private agents can default we then consider sustainable equilibria in which both government and private agent decision rules are required to be sequentially rational we adapt abreu s 1988 optimal trigger strategies to completely characterize the entire set of sustainable equilibria in particular we show that when there is sufficiently little discounting and government consumption fluctuates enough the ramsey allocations and policies in which the government never defaults can be supported by a sustainable equilibrium by way of an example we show that the larger the variance of government consumption the easier it is to support good outcomes we also show for moderate discount factors that in the best sustainable equilibrium tax rates are more volatile and debt is smaller than in the ramsey equilibrium

the profitability of us intervention in the foreign exchange markets abstract using a formula for intervention profits in which profitability measured as of date t depends on how well intervention operations predict ex post deviations from interest parity this paper shows that us intervention since the beginning of generalized floating in 1973 has earned profits for the us monetary authorities fundamental explanations for the profitability of us intervention are difficult to isolate but statistical tests suggest that it is unlikely the profits are merely the outcome of chance or a normal return to bearing time invariant risk

reputation and time consistency recent work has shown that reputational arguments based on trigger strategies can sometimes be used to deal with the problem of time inconsistency in government policy this idea was exploited by robert barro and david gordon 1983 in a model of inflation and by v v chari and patrick kehoe 1988 in a model of capital taxation here it is shown that reputational arguments of this sort are widely applicable 2 a general policy model is developed based on an economy that is stationary over time contains identical households and has no endogenous state variables it is shown in general that the infinite horizon version of this model has equilibria in trigger strategies that yield outcomes strictly better than those attainable as equilibria in the one period model

market timing recent development and a new test abstract henriksson merton s market timing test suffers nontrivial size distortion when the event forecast is autocorrelated a new test is suggested to detect the dependence of two autocorrelated binary time series it complements the existing tests due to better test power

testing for market timing ability abstract in this paper we examine the henriksson merton test of market timing and its potential usefulness in evaluating investment advice the paper proposes a natural extension of the test that is valid under more general assumptions about the distribution of asset returns we show that the henriksson merton test and its more general counterpart are special cases of standard tests of market rationality and efficiency both tests are applied to a group of foreign exchange advisory services

financial returns and efficiency as seen by an artificial technical analyst abstract we introduce trading rules which are selected by an artificially intelligent agent who learns from experience an artificial technical analyst these rules restrict the data mining concerns associated with the use of simple technical trading rules as model evaluation devices and are good at recognising subtle regularities in return processes the relationship between the efficiency of financial markets and the efficacy of technical analysis is investigated and it is shown that the artificial technical analyst can be used to provide a quantitative measure of market efficiency we estimate this measure on the djia daily index from 1962 to 1986 and draw implications for the optimal behaviour of certain classes of investors it is also shown that the structure of technical trading rules commonly used is consistent with utility maximisation for risk neutral agents and in a myopic sense even for risk averse agents

which way the natural gas price an attempt to predict the direction of natural gas spot price movements using trader positions abstract this research provides a method of predicting direction of spot price movements in the natural gas market for the month succeeding from market participants positions in the futures market cumby and modest cumby r e modest d m 1987 testing for market timing ability a framework for forecast evaluation journal of financial economics 19 169 189 provide the backdrop for analyzing the futures market positions of large hedgers and speculators to arrive at conclusions of market price movements in the spot market this methodology is suggested as a means for municipalities entering the natural gas market to improve upon their ordering of quantities of gas for the ensuing months in order to take advantage of possibly foreseeable price trends

measuring investment performance in a rational expectations equilibrium model much research has been concerned with evaluating the performance of managed portfolios e g mutual funds and examining whether portfolio managers display in some sense superior performance superior performance would seemingly turn on the possession of superior information that is utilized in managing portfolios in general a fund s asset holdings or portfolio weights might not be observable to an outsider whether they are or not however they are likely to change over time this happens especially when better performance is a result of superior information since managers will change their portfolio composition on obtaining private information since such changes must be taken into account the problem of measuring performance of managed portfolios is inherently different from that of evaluating the performance of individual assets groups of assets or generally portfolios with constant and known composition

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

on credible monetary policy and private government information credible and optimal monetary policies are considered in environments in which the government observes a signal that is correlated with the state of the economy when the signal is public information it is optimal for monetary policy to be conditioned upon it the extent to which such conditioning should occur when the signal is the private information of the government depends upon the government s incentives to misrepresent information it is shown that in some cases the ramsey policy is incentive compatible in others it is not in the latter cases policy must be constrained to be incentive compatible this may result in penalty phases along the equilibrium path following apparent mistakes by the policy maker it may result in the optimal monetary policy making no use of the signal journal of economic literature classification numbers c73 e52 e58

pricing anomalies in the market for diamonds evidence of conformist behavior some goods are consumed not just for their intrinsic utility but also for the impression their consumption has on others we analyze the market for such a commodity diamonds we collect data on price and other attributes from the inventories of three large online retailers of diamonds we find that people are willing to pay premiums upward of 18 for a diamond that is one half carat rather than slightly less than a half carat and between 5 and 10 for a one carat rather than a slightly less than one carat stone since a major portion of larger gem quality diamonds are used for engagement rings such an outcome is consistent with bernheim s model of conformism where individuals try to conform to a single standard of behavior that is often established at a focal point in this case prospective grooms signal their desirability as a

anomalies foreign exchange most all behavior can be explained by assuming that agents have stable well defined preferences and make rational choices consistent with those preferences in markets that eventually clear an empirical result qualifies as an anomaly if it is difficult to rationalize or if implausible assumptions are necessary to explain it within the paradigm this column will present a series of such anomalies readers are invited to suggest topics for future columns by sending a note with some reference to or better yet copies of the relevant research comments on anomalies printed here are also welcome the address

federal funds rate prediction we examine the forecasting performance of a range of time series models of the daily us effective federal funds ff rate recently proposed in the literature we find that i most of the models and predictor variables considered produce satisfactory oneday ahead forecasts of the ff rate ii the best forecasting model is a simple univariate model where the future ff rate is forecast using the current difference between the ff rate and its target iii combining the forecasts from various models generally yields modest improvements on the best performing model these results have a natural interpretation and clear policy implications

review of sargent s the conquest of american inflation sargent s book provides a reinterpretation of the us inflation record over the last half century reflecting on how macroeconomic theory has evolved since the beginnings of the rational expectations revolution it is a basic reference on dynamic macroeconomic theory

luck versus forecast ability determinants of trader performance in futures markets statistical techniques are used to demonstrate that the fortunes of individual futures traders are determined by luck not forecast ability even though a large number of traders appear to exhibit significantly superior forecast ability the investigation strongly supports three conclusions there are fewer participants with significantly superior skill than expected if participants trade randomly there are more traders exhibiting no skill than expected if participants trade randomly and forecast ability is not correlated over time superior forecasters in the early period are only average forecasters in the later period therefore it is luck that determines trader performance copyright 1991 by university of chicago press

trading rule profits in european currency spot cross rates abstract the moving average ma trading rule is applied to six european spot cross rates jy bp dm bp jy dm sf dm sf bp and jy sf to see if opportunities for profitable trading exist the results suggest that ma trading rules are marginally profitable only for the jy dm and the jy sf cross rates while trading rules are not profitable for the other four cross rates bootstrapping and out of sample tests provide similar results examination of subsamples characterized by central bank intervention do not produce different results computation of box pierce statistics adjusted for heteroscedasticity show that daily returns for all six cross rates are serially uncorrelated overall the results suggests that cross rates are sufficiently transparent to eliminate ma trading rule profit

the value of public information in commodity futures markets abstract the informational value of u s department of agriculture usda corn and soybean production forecasts is investigated for the period 1971 1992 three tests of informational content are applied overall the results suggest usda corn and soybean forecasts provide valuable information to participants in commodity futures markets this value does appear to have declined especially since the mid 1980s

cheating for the common good in a macroeconomic policy game abstract this paper presents a simple repeated game model of interaction between an optimizing government and the private sector two polar cases are considered a the private sector is represented by a single agent and b there is a continuum of heterogenous atomistic private agents in both cases the government starts each repetition by making a non binding announcement about its future actions the players have complete and perfect information with one exception the private agents do not know whether or not the government will act as announced thus each private agent i either behaves with probability i as if it trusted the announcement or plays with probability 1 i as a stackelberg leader after observing the reaction of the private sector the government implements the actual policy measures finally the private agent s update i as a function of the payoffs received we show that although the government s announcements are never respected acting as if they were true leads to an outcome that simultaneously improves the situation of the government and of those players that trust it compared to the standard equilibrium solutions an overwhelming majority of private agents very rapidly learns to behave as if the announcements were true the other agents also experience higher payoffs due to an herding effect the fact that the announcements are always reneged is crucial for the solution to be pareto improving these results are in stark contrast to the conclusions usually presented in the related economic literature

induction and the ramsey policy abstract we examine the classic policy problem of ramsey 1927 modeled as an infinitely repeated game stokey 1991 between the government and the private sector where the private sector consists of a continuum of identical households we assume that the private sector is boundedly rational in the sense that its behavior is dictated by a forecasting scheme which is inductive instead of assigning a particular forecasting scheme to the players we let each player choose one from a class of inductive forecasting schemes by focusing on the actions dictated by forecasting schemes selected by the player we identify the ramsey policy as the unique solution of the game where players do not discount future payoffs when players discount future payoffs the ramsey policy is the only solution which is robust against small changes in the discount factor in the neighborhood of one kalai samet and stanford 1988 if we modify the model so that the private sector incurs memory costs in forecasting the action of the government we obtain that the only equilibrium outcome is to play the ramsey outcome every period

pitfalls in market timing test abstract henriksson and merton s market timing test suffers nontrivial size distortion when the observations are serially dependent sequences potential danger of finding spurious timing ability can be avoided by implementing a markov regression that includes the lagged dependent variables as additional explanatory variables

competitive pricing in markets with different overhead costs concealment or leakage of cost information this paper experimentally investigates how leaders and followers in a duopoly set prices for two product markets that have different overhead costs in a fully crossed two by two design we manipulate the participants private cost report quality as either low or high representing the extent to which these reports reveal that product markets have different overhead costs we show that when only the leader is given a high quality cost report private cost information of higher quality is better incorporated into market prices that are observable to participants both the leader and follower improve in profits and their prices better reflect the differences in overhead costs because the follower infers information from the leader s prices information leakage in contrast when only the follower receives a high quality cost report the leader s profits and prices do not improve this occurs because the follower conceals cost information when the leader has a low quality cost report

optimal cartel equilibria with imperfect monitoring abstract there exist optimal symmetric equilibria in the green porter model 4 8 having an elementary intertemporal structure such an equilibrium is described entirely by two subsets of price space and two quantities the only production levels used by firms in any contingency the central technique employed in the analysis is the reduction of the repeated game to a family of static games

adaptive behavior and economic theory the relationship between psychological and economic views of behavior once a subject of heavy dispute is now understood in a very similar way by practitioners of both these disciplines and of our sister social sciences in general terms we view or model an individual as a collection of decision rules rules that dictate the action to be taken in given situations and a set of preferences used to evaluate the outcomes arising from particular situation action combinations these decision rules are continuously under review and revision new decision rules are tried and tested against experience and rules that produce desirable outcomes supplant those that do not i use the term adaptive to refer to this trial anderror process through which our modes of behavior are determined if one is interested in modeling particular decisions in any very explicit way it is obviously necessary to think about rather narrow aspects of an individual s entire set of decision rules his or her personality experimental psychology has traditionally focused on the adaptive process by which decision rules are replaced by others in this tradition the influence of the subject s or as an economist says the agent s preferences this essay uses a series of examples to illustrate the use of rationality and adaptation in economic theory it is argued that these hypotheses are complementary and that stability theories based on adaptive behavior may help to narrow the class of empirically interesting equilibria in certain economic models an experiment is proposed to test this idea

central bank intervention and trading rule profits in foreign exchange markets abstract moving average trading rules are utilized in both futures and spot foreign currency markets to show that significant positive profits can be earned in four of five currencies examined the results are consistent for both in sample and forward simulation tests regression results demonstrate that central bank intervention is strongly associated with the profitability of trading returns for the three major currencies dm yen and pound and partially explains returns for the sf and cd consistent with conjectures in previous studies that news concerning intervention tends to be revealed over weekends we find that moving average trading rule returns are significantly positive on fridays and mondays and not significantly different from zero in the middle of the week

currency mismatches and monetary policy a tale of two equilibria we develop a model of a small economy whose residents choose whether to borrow in domestic or foreign currency the central bank in turn chooses fixed or flexible exchange rates taking the currency denomination of debts as given we characterize the simultaneous determination of portfolios and exchange rate regime both floating and fixed rates can occur as equilibrium outcomes fear of floating may emerge endogenously and in association with a currency mismatch in assets and liabilities if equilibria with both fixed rates and floating rates coexist the latter is pareto superior lessons for current de dollarization proposals are discussed

should fiscal policy be different in a non competitive framework abstract this paper studies if imperfections in the labor market justify a different fiscal policy we present a dynamic general equilibrium model with a ramsey planner deciding about public spending labor taxes and debt two different labor market setups are considered first we assume a competitive labor market and then we introduce a union with monopoly power both models reach the same conclusion as regards to the cyclical properties of the optimal policy it is not optimal to implement a countercyclical fiscal policy we also find that government spending should be larger under perfect competition these main results arise both under complete and incomplete markets for the debt

qualitative forecast evaluation a comparison of two performance measures agricultural producers and marketers often have access to several sets of forecasts on the same series decision makers must be able to evaluate the relative accuracy of the forecasts the ability to evaluate whether a series will move up or down is important for series related to futures options other asset prices and situations where processes can be modified according to changing economic conditions a measure of qualitative forecast accuracy from naik and leuthold is compared to a probability based measure developed by henriksson and merton the henriksson merton measure is shown to provide additional and more accurate information concerning a model s qualitative forecasting ability

the performance of exchange rate forecasting models an economic evaluation theoretical models of exchange rate determination have not proven useful as accurate predictors of movements in exchange rates however these conclusions are the result of evaluation on the basis of statistical criteria of performance implicitly assuming such criteria are optimal in the subsequent economic decision framework this assumption is suspect though because statistical criteria do not account for market timing is applied in this study to four forecasting models of both the canadian dollar us dollar and the west german mark us dollar exchange rates over the period 1976 11 1984 8 of these models only the unconstrained static and dynamic forecasting models exhibited significant markete timing value with respect to the canadian dollar and then only over a one month time horizon the constrained dynamic model had market timing abillity at the three month time horizon under decision rule i with respect to the west german mark the constrained static forecasting model showed market timing abilit

reputation and equilibrium selection in games with a patient player a single long run player plays a simultaneous move stage game against a sequence of opponents who play only once but observe all previous play let the stackelberg strategy be the pure strategy to which the long run player would most like to commit himself if there is positive prior probability that the long run player will always play the stackelberg strategy then his payoff in any nash equilibrium exceeds a bound that converges to the stackelberg payoff as his discount factor approaches one when the stage game is not simultaneous move this result must be modified to account for the possibility that distinct strategies of the long run player are observationally equivalent

nonparametric retrospection and monitoring of predictability of financial returns we develop and evaluate sequential testing tools for a class of nonparametric tests for predictability of financial returns that include in particular the directional accuracy and excess profitability tests our sequential methods consider in a unified framework both retrospection of a historical sample and monitoring newly arriving data to this end we focus on linear monitoring boundaries that are continuations of horizontal lines corresponding to retrospective critical values elaborating on both two sided and one sided testing we run a simulation study and illustrate the methodology by testing for directional and mean predictability of returns in young stock markets in eastern europe

sequential equilibria in a ramsey tax model this paper presents a full characterization of the equilibrium value set of a ramsey tax model more generally it develops a dynamic programming method for a class of policy games between the government and a continuum of households by selectively incorporating euler conditions into a strategic dynamic programming framework we wed two technologies that are usually considered competing alternatives resulting in a substantial simplification of the problem

shine bright like a diamond a hedonic model of grading and pricing an experience good diamonds are generally evaluated on the basis of sensory characteristics such as carat weight colour clarity and cut however given the experience goods nature of diamonds few consumers grasp how the sensory characteristics of these stones are evaluated by the gemological grading laboratories that independently issue diamond reports this study extends prior research by determining whether diamonds graded by certain gemological laboratories are subject to pricing premiums or discounts in online retail markets regression models employing a sample of 169 483 real time diamond offerings from online diamond retailers e g blue nile james allen and adiamor find significant price discounts attributable to diamonds graded by the european gemological laboratory usa in relation to diamonds graded by the gemological institute of america gia and significant price premiums attributable to diamonds graded by the american gem society in relation to diamonds graded by the gia

information and normal backwardation as determinants of trading performance evidence from the north sea oil forward market this paper utilizes transaction specific data on forward trading in the international petroleum market to test directly predictions from the theory of normal backwardation against information based predictions of trader performance with the ability to identify buyers and sellers the authors find that no traders make significant profits on interday measures within the day however traders likely to have superior information make significant profits the results are not supportive of normal backwardation but are consistent with the time pattern of information dissemination in this market deals made during the day are widely reported only at day s end copyright 1994 by royal economic society

estimation of a hedonic price equation for bordeaux wine does quality matter in this paper the hedonic price technique is applied to bordeaux wine in the hedonic price function we include not only the objective characteristics appearing on the label of the bottle but also the sensory characteristics of the wine our data come from an experimental study in which juries have evaluated and graded a sample of bordeaux wines the estimation of the hedonic price equation shows that the market price is essentially determined by the objective characteristics the estimation of a jury grade equation shows that quality unlike the market price is essentially determined by the sensory characteristics

information leakage forces cooperation abstract this paper considers a two person repeated game in which there is a small probability of espionage i e that one or both of the players will be informed of the other s supergame strategy and have a chance to revise his strategy on the basis of this information before the game begins it is shown that in such a game any subgame perfect equilibrium pair of payoffs is pareto efficient provided that the probability of espionage is sufficiently small different from preceding studies the present paper assumes neither collective deviation nor bounded rationality in deriving the result

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

differential information and performance measurement using a security market line an uninformed observer using the tools of mean variance and security market line analysis to measure the performance of a portfolio manager who has superior information is unlikely to be able to make any reliable inferences while some positive results of a very limited nature are possible e g when there is a riskless asset or when information is restricted to be security specific in general anything is possible in particular a manager with superior information can appear to the observer to be below or above the security market line and inside or outside of the mean variance efficient frontier and any combination of these is possible mean variance theory predicts that if we plot expected returns against beta coefficients all securities plot on a single line known as the security market line sml since fpi the beta coefficient for security i is interpreted as a measure of the riskiness of security i the market line is a graphical representation of the linear relationship between risk and return what are we to make of deviations from the sml i e of securities or managed portfolios that do not plot on such a line if we can retain our intuitive interpretation of fj as the riskiness of asset i and the market line as the appropriate expected return needed to reward agents taking on various degrees of risk then vertical deviations from the market line represent abnormal returns that differ from what is merited this paper and the companion piece dybvig and ross 10 explore in detail the validity of this intuition and the question of what sml deviations really measure the companion piece analyzes sml deviations caused by the choice of an inefficient market or reference portfolio in this paper we analyze sml deviations caused by superior performance based on superior information the intuitive explanation of deviations from the sml has motivated many

model free evaluation of directional predictability in foreign exchange markets we examine directional predictability in foreign exchange markets using a model free statistical evaluation procedure based on a sample of foreign exchange spot rates and futures prices in six major currencies we document strong evidence that the directions of foreign exchange returns are predictable not only by the past history of foreign exchange returns but also the past history of interest rate differentials suggesting that the latter can be a useful predictor of the directions of future foreign exchange rates this evidence becomes stronger when the direction of larger changes is considered we further document that despite the weak conditional mean dynamics of foreign exchange returns directional predictability can be explained by strong dependence derived from higher order conditional moments such as the volatility skewness and kurtosis of past foreign exchange returns moreover the conditional mean dynamics of interest rate differentials contributes significantly to directional predictability we also examine the co movements between two foreign exchange rates particularly the co movements of joint large changes there exists strong evidence that the directions of joint changes are predictable using past foreign exchange returns and interest rate differentials furthermore both individual currency returns and interest rate differentials are also useful in predicting the directions of joint changes several sources can explain this directional predictability of joint changes including the level and volatility of underlying currency returns copyright 2007 john wiley sons ltd

international lending with moral hazard and risk of repudiation in this paper i examine the constrained optimal pattern of capital flows between a lender and a borrower in an environment in which there are two impediments to forming contracts the first impediment to contracting arises from the assumption that lenders cannot observe whether borrowers invest or consume borrowed funds this assumption leads to a moral hazard problem in investment the second impediment arises from the assumption that the borrower as a sovereign nation may choose to repudiate his debts the optimal contract is shown to specify that the borrowing country experience a capital outflow when the worst realizations of national output occur this seemingly perverse capital outflow forms a necessary part of the optimal solution to the moral hazard problem in investment

stable classes of technical trading rules technical analysis includes a huge variety of trading rules this fact has always been a serious hindrance to the large number of market efficiency studies implemented either to demonstrate the profitability of market beating systems or to deny their operational feasibility for evident reasons it is practically impossible and theoretically weak to systematically analyse the entire body of all trading rules we therefore propose a novel method to form natural classes of trading rules which are found to be robust to changing market scenarios in particular groups are formed adopting a similarity measure based on the investing signals of the trading rules our clustering methodology adopts a markov chain bootstrapping technique to generate differentiated scenarios preserving volume and price joint distributional features an application is developed on a sample of 674 trading rules results show that six groups here identified as trading styles are sufficient to explain the large portion of the investing

the price of pretty characteristics of black tahitian pearls and their implicit values french polynesia s economy is largely dependent on the black pearl industry and associated export revenues accordingly there is a need to understand fully the factors that influence quality and p