measuring the affordability of home ownership typical measures of the affordability of home ownership are based on aggregate data that ignore the distribution of incomes and wealth and the range of house prices an analysis of household survey

a real options approach to the valuation of a forestry investment abstract the theory of real options is used to model the optimal tree harvesting decision the value of the option to harvest is estimated using a dynamic programming approach and a general numerical solution technique suitable for any type of stochastic process for prices the conditions under which the optimal harvest time is independent of price are examined in addition the impact of assuming future lumber prices are mean reverting is considered it is found that option value and optimal cutting time are significantly different under the mean reversion assumption compared to geometric brownian motion

the tree cutting problem in a stochastic environment the case of age dependent growth abstract harvest policies are derived for growing biological assets e g forests livestock subject to stochastic age dependent growth and price uncertainty the task posed is analyzed as a continuous time optimal stopping problem for diffusion processes both single and ongoing rotation problems are considered qualitative comparative static and numerical results are provided

a time series analysis of representative agent models of consumption andleisure choice under uncertainty this paper investigates empirically a model of aggregate consumption and leisure decisions in which utility from goods and leisure is nontime separable the nonseparability of preferences accommodates intertemporal substitution or complementarity of leisure and thereby affects the comovements in aggregate compensation and hours worked these cross relations are examined empirically using postwar monthly u s data on quantities real wages and the real return on the one month treasury bill the estimated values of the parameters governing preferences differ significantly from the values assumed in several studies of real business models several possible explanations of these discrepancies are discussed

spatial interactions in multiple use forestry and substitution and wealth effects for the single stand abstract forestry models often ignore spatial relationships between forest stands this paper isolates the effects of stand interactions in multiple use forestry through a straightforward extension of the single stand model effects of stand interactions decompose into wealth and substitution effects and may cause time varying patterns of resource use for a forest stand simulations illustrate that a stand s role even in steady state may alternate an emphasis on timber with an emphasis on nontimber optimal management plans differ substantially depending on whether the manager values nonmarket goods from neighboring stands the model offers insights for improving heuristic forest level optimization models in current usage

inflation forecast errors and time variation in term premia the expectations theory of the term strueture is well known to give wrong signals as to the future course of long term interest rates one explanation involves rational time varying term premia however the anomaly may also be due to inflation forecast errors we study survey forecasts of inflation it seems that the respondents forecasts are insufficiently adaptive interest rates reflect expectations similar to the inflation forecasts as a result past survey forecast errors reliably predict premia on u s government bonds

the pricing of forward contracts for foreign exchange this paper investigates the nature of observed deviations from the unbiased expectations hypothesis in the forward foreign exchange market if these deviations are due to risk premia then the same premia should be observed in nominal bonds denominated in different currencies this condition imposes testable restrictions on the parameters of a multivariate regression model the empirical results are consistent with a world in which time varying risk premia cause the observed deviations from unbiased expectations

can pay won t pay or economic principles of affordability the term afford ability has been gaining currency in housing policy debates but neither government nor academic researchers have given much consideration to defining it this paper considers what meanings have been given to the term affordability in practice and suggests a range of analytically more useful definitions it argues from economic first principles that it is more logical to use some form of residual income definition than one based on a prescribed ratio of housing costs to income most researchers have been using a ratio definition the paper then uses data from a household survey in the glasgow travel to work area in 1988 89 to examine the incidence of unaffordability of housing costs according to a variety of definitions

the impacts of borrowing constraints on home ownership in australia the analysis reported in this article incorporates direct measures of borrowing constraints into an otherwise standard model of the home ownership decision in australia borrowing constraints take into account mortgage underwriting criteria household incomes and wealth and the household s optimal level of consumption of housing services models containing borrowing constraint measures are estimated for households with heads ages 25 34 the age group that is most likely to be moving into home ownership consistent with previous findings in the us and canada borrowing constraints are significant determinants of the probability of ownership including borrowing constraints in the tenure choice model results in a reduction in the independent impacts of household income and the relative costs of owning and renting implying that in the standard model these variables are at least in part proxies for borrowing constraints as wealth is the binding constraint for most constrained renters the article concludes

the decision to conserve or harvest old growth forest abstract the decision to harvest or conserve old growth forest is formulated as a stochastic decision problem in continuous time uncertainty in future amenity values for standing forest and in future timber revenues for harvested forest are included in the model along with the risk of catastrophic destruction by fire pest infestation etc it is shown how the decision problem can be expressed as an optimal stopping problem which can be solved analytically the optimal decision rule is shown to depend on how the ratio of current timber value to the current expected present value of amenity benefits foregone through harvesting compares with some critical level the effects of changes in uncertainty and other parameters on the optimal rule are discussed also it is shown how the cost benefit analysis and certainty equivalence procedures lead to premature harvesting and the expected loss in survival time for these sub optimal procedures is calculated

simple foreign exchange market efficiency revisited abstract we present empirical evidence supporting the conjecture that rejections of the simple foreign exchange market efficiency hypothesis could result from the use of statistical tests that while asymptotically valid may have poor finite sample properties

asset retirement with infinitely repeated alternative replacements harvest age and species choice in forestry abstract at what age should productive assets be retired how should replacements be chosen when they differ in their uncertain ability to generate future incomes as a particular version of that problem we study the tree harvesting decision with two possible replacement species whose values as timber are stochastic and whose growth functions are deterministic in the single rotation wicksell problem starting with a bare piece of land an empty shop it is optimal to choose and plant one species immediately if its current value is sufficiently high relative to that of the other species the alternative equipment however if the species are insufficiently price differentiated it is preferable to leave the land vacant the shop empty despite the opportunity cost of doing so in the repeated version of the problem it is never optimal to leave the land bare provided the cost of replacement is null furthermore the optimal harvest tree retirement age not only depends on the price and current productivity of the trees in place but also on the price and productivity of the other species because it may replace the current one the harvest age reaches a peak at some critical threshold of the relative price that signals the necessity to switch to the alternative species indeed this is when the opportunity cost of choosing one alternative replacement over the other is the highest the land value and also the value of the firm is similar to an american option with free boundary infinite expiry period and endogenous payoff the paper highlights the opportunity cost of alternative replacement options and the central role of their volatility in both asset retirement and replacement choice decisions all results are derived analytically a numerical treatment by the penalty method completes the resolution

wicksellian theory of forest rotation under interest rate variability abstract we apply the wicksellian single rotation framework to cover the unexplored case of variable and stochastic interest rate we provide a mathematical characterization of the two dimensional optimal stopping problem and show in the presence of amenity valuation that increased interest rate volatility lengthens the optimal rotation period and increases the value of the optimal policy by modelling the interest rate as a mean reverting process and forest value as a geometric brownian motion and abstracting from amenity valuation we present an explicit solution for the problem numerical illustrations indicate that interest rate volatility has a significant and non linear impact on optimal rotation

taxation and rotation age under stochastic forest stand value abstract the paper uses both the single rotation and ongoing rotation framework to study the impact of yield tax lump sum tax and tax on interest rate earnings on the privately optimal rotation period when forest stand value is stochastic and forest owners are risk averse or risk neutral under risk aversion the optimal harvesting threshold is lower and therefore the expected rotation period shorter than under risk neutrality both in the single and ongoing rotation cases whether the forest owner is risk averse or risk neutral a higher yield tax a higher lump sum tax or a higher tax on interest rate earnings raise the optimal harvesting threshold numerical results indicate that the optimal harvesting threshold increases less rapidly under risk aversion than under risk neutrality with an increase in either a yield tax or the volatility of forest stand value

a stochastic analysis of the tree paradigm abstract the tree paradigm which is a problem in optimal stopping has important ramifications for human capital acquisition search behavior firm entry and in the theory of renewable resources our paper extends previous work in the stochastic literature on several fronts we exhibit a tractable solution to the rotation problem for the stochastic model analyze the effects of inputs which control the growth process and illustrate our results with a multi stage learning problem

regime switching in stochastic models of commodity prices an application to an optimal tree harvesting problem abstract this paper investigates whether a regime switching model of stochastic lumber prices is better for the analysis of optimal harvesting problems in forestry than a more traditional single regime model prices of lumber derivatives are used to calibrate a regime switching model with each of two regimes characterized by a different mean reverting process a single regime mean reverting process is also calibrated the value of a representative stand of trees and optimal harvesting prices are determined by specifying a hamilton jacobi bellman variational inequality which is solved for both pricing models using a implicit finite difference approach the regime switching model is found to more closely match the behavior of futures prices than the single regime model in addition analysis of a tree harvesting problem indicates significant differences in terms of land value and optimal harvest thresholds between the regime switching and single regime models

irreversible investment under interest rate variability some generalizations we study the impact of interest rate and revenue variability on the decision to carry out irreversible investment we provide a mathematical characterization of the two dimensional optimal stopping problem and show that interest rate variability has a decelerating or accelerating impact on investment depending on whether the current interest rate is below or above the long run steady state allowing for interest rate volatility decelerates investment by raising both the required exercise premium of the investment opportunity and the value of waiting finally increased revenue volatility is shown to strengthen the negative impact of interest rate volatility and vice versa

parental wealth and first time homeownership a cohort study of family background and young adults housing situation in sweden this paper investigates whether family background seems to have any influence on first time homeownership recent studies have indicated that it has become more difficult to become established in the housing market and such situations may increase the importance of parental wealth in this study parental wealth is estimated as family background information on parents homeownership father s socioeconomic status and single parenting unique cohort data for three birth cohorts suggest that there is a significant cohort effect in young adults tenure decision furthermore the results imply that parents homeownership has become a more important predictor of the transition to first time homeownership for those young adults facing increasing problems in the housing market

optimal forest rotation and land values under a borrowing constraint abstract this study relaxes the assumption of perfect capital markets in the classical faustmann forest rotation model a constraint on borrowing changes all the basic properties of optimal forest harvesting instead of a constant rotation period an infinite chain of rotations is determined by a nonlinear difference equation the rotation period evolves over time and approaches a stationary rotation in finite or infinite time the length of optimal rotation timber supply and the value of forest land depend on forest owner specific factors that are normally nonexistent in rotation problems the model explains several empirical findings that cause problems for the classical versions of the faustmann model

the valuation of forestry resources under stochastic prices and inventories a contingent claims approach to capital budgeting may be preferable to traditional methods where uncertainty and managers strategic reactions to changing conditions are impor tant as an example of such a case we solve the classical problem of the duration of an investment in forestry resources i e when to cut down the trees in the general case of stochastic output prices and stochastic natural growth rate and timber inventories a con tingent claims approach is used to value the forestry resources as a function of 1 sto chastic prices and inventories and 2 an asymmetric optimal production policy that incorporates the option to halt timber production temporarily i introduction classical capital budgeting techniques are based on the assumption that fu ture cash flows follow a rigid pattern and can be accurately predicted far into the future on the basis of such cash flow predictions the project is either accepted or rejected the uncertainty in the project and management s strategic reactions to changing conditions are dealt with only superficially at best a risk adjusted interest rate is employed and various deterministic scenarios are plotted out in situations where uncertainty and management s strategic reactions to it are im portant the classical technique is apt to lead to wrong decisions the technology needed to deal with such problems more accurately is becoming available the purpose of this paper is to present a stylized example of how it can be used our example is a general solution to the classical duration problem of the optimal control of a long term renewable resource investment such as forestry resources i e when to chop down a tree 1 if the prices and the natural growth rate of the inventory of forest timber are assumed to be deterministic the optimal control is very simple to derive but when both the price and inventory of timber are stochastic the problem becomes both stochastic and asymmetric the asym

bond and option pricing when short rates are lognormal this article describes a one factor model for bond and option pricing that is based on the short term interest rate and that allows the target rate mean reversion and local volatility to vary deterministically through time for any horizon the distribution of possible short rates is lognormal so the rate neither falls below zero nor reflects off a barrier at zero a model like this allows one to match the yield curve the volatility curve and the cap curve surprisingly adding to future local volatility lowers the volatility curve a conventional binary tree with probabilities of 0 5 but variable time spacing is used to value bonds and options when the inputs are constant the slope of the yield curve starts out positive and ends up negative while its curvature shifts from negative to positive even when mean reversion is zero the volatility curve has a negative slope the differential cap curve rises steeply through the effects of volatility and then falls steeply through the effects of discounting and a falling forward rate used as the strike price

forest taxation and rotation age under private amenity valuation new results abstract this paper studies the impact of harvesting property and profit taxes on private rotation age in an ongoing rotations model where the private landowner is interested not only in the present value of harvest revenue but also in the private amenity services provided by the forest stand the main finding of the paper is that conventional wisdom about the rotation effects of forest taxes distilled from the faustmann model predominantly ceases to hold this is because forest taxes distort the relative profitability of timber and amenity production in a way that is sensitive to the precise nature of amenity valuation therefore the design of forest tax policy necessitates good knowledge of the landowner s objective function concerning the type of amenity services

waiting to invest investment and uncertainty the textbook analysis that accepts all projections with positive net present values as positive is quite generally wrong the ability to delay a project means that almost every project competes with itself postponed with uncertain interest rates even the simplest of projects has an option value the effect of interest rate uncertainty on the optimal delay of investment is sizable this implies that the rate of aggregate investment will depend on both the level of the real interest rate and the degree of interest rate uncertainty furthermore it is not necessarily true that investment rises with a fall in interest rates copyright 1992 by university of chicago press

harvest decisions and asset valuation for biological resources exhibiting size dependent stochastic growth optimal harvest rules and preharvest valuation procedures are derived for biological assets with stochastic size dependent growth in a stochastic price environment these issues are analyzed as continuous time optimal stopping problems both the single rotation and ongoing rotations problems are addressed the sensitivity of harvest and valuation rules is assessed the results are compared with those derived from a myopic look ahead procedure and with the corresponding findings for age dependent growth copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

dynamic properties of energy affordability measures measures of affordability are applied in practice e g to assess the affordability of energy services water or housing they can be interpreted as measures of deprivation in a specific domain of consumption the large body of literature on affordability measure has little overlap with the existing literature on poverty measurement a comprehensive assessment of the response of affordability measures as a result of changes in the distribution of income or expenditure is missing this paper aims to fill this gap by providing a conceptual discussion on the dynamics of energy affordability measures several types of measures are examined in a microsimulation framework to assess their dynamic properties our results indicate that some measures exhibit odd dynamic behavior this includes measures used in practice such as the low income high cost measure and the double median of expenditure share indicator odd dynamic behavior is attributed to definitions made with respect to higher moments of the expenditure distribution definitions that rely on a percentage share of expenditure relative to income or an absolute or relative income poverty line fare well from a dynamic perspective

on the rationality of us macroeconomic forecasts evidence from a panel of professional forecasters asa nber survey data is used to check the rationality of us macroeconomic forecasts it is found that of 75 forecast series examined 51 are biased 25 are both unbiased and efficient and only two pass the null hypothesis of orthogonality this calls into question the validity of rational expectations hypothesis

optimal forest rotation when stumpage prices follow a diffusion process a key assumption in the faustmann rule for financial maturity is that stumpage prices are constant over time timber price series however exhibit wide fluctuations over time which this paper models as a lognormal diffusion process comparing the diffusion results modeled here to the fixed price faustmann results show 1 the prescribed rotation length is generally longer 2 computed stand values are higher using the diffusion model with the greatest divergence occurring when a stand is about the midpoint of a rotation 3 as the stumpage price volatility increases the gain in computed npv increases though in a nonlinear fashion

thinning and harvesting in stochastic forest models abstract this paper analyzes a stochastic forest growth model in which the manager is able to first thin the forest to promote better growth before harvesting both wicksell single thinning and harvesting cycle and faustmann on going rotation problems are considered the wicksell problem is analyzed by first restricting the class of decision times to thinning harvesting pairs that bound the growth away from infinity and imbedding the problem in an infinite dimensional linear program on a space of triplets of measures these measures capture the thinning and harvesting decisions along with the behavior of the growth process prior to harvest an auxiliary linear program then leads to a nonlinear optimization problem for which an optimal value and solution are determined the values of all the problems are be related through a set of inequalities the solution of the nonlinear problem determines random thinning and harvesting times for the single thinning and harvesting cycle which demonstrate the equality of the values of these various problems finally for the wicksell problem the unrestricted class of thinning and harvest times is shown to give the same value as the restricted class the faustmann on going thinning and harvesting rotation problem is reduced to a wicksell problem which then allows for the characterization of the value as the solution to a different nonlinear optimization problem the effects of the opportunity to thin the forest are illustrated on a mean reverting stochastic model

the unbiasedness hypothesis in the forward foreign exchange market a specification analysis with application to france italy japan the united kingdom and west germany abstract the purpose of this paper is to carry out a specification analysis of a test relation for the unbiasedness hypothesis using thirty day forward foreign exchange data from france italy japan the united kingdom and west germany the results indicate that econometric problems do exist for each country s test equation over the entire sample for each country there is at least one period which admits a statistically adequate regression equation results for these periods show that the null hypothesis of the unbiasedness of the forward rate is rejected for some countries but is retained for others

assessing the accessibility of the homeownership market in this paper an examination is made of the accessibility of the homeownership market using measures that include both supply and demand characteristics of regional housing markets these measures are applied empirically on an extensive dataset that covers the dutch housing market the analysis quantifies the extent to which the position of first time buyers on the homeownership market has weakened over time and identifies the driving factors of this change it is found that smaller portions of the housing market are becoming affordable due to financial constraints of young households however more importantly first time buyers today need to contend with a much larger group of competing bidders on every house that suits their financial situation than ever before

general properties of option prices when the underlying price process is a one dimensional diffusion as well as in certain restricted stochastic volatility settings a contingent claim s delta is bounded by the infimum and supremum of its delta at maturity further if the claim s payoff is convex concave the claim s price is a convex concave function of the underlying asset s value however when volatility is less specialized or when the underlying process is discontinuous or non markovian a call s price can be a decreasing concave function of the underlying price over some range increasing with the passage of time and decreasing in the level of interest rates much of the financial options literature derives precise option prices when the underlying asset price process is completely specified since it is empirically difficult to ascertain what the true underlying process is another part of that literature is concerned with deriving general properties of option prices when the underlying price process is not fully specified but instead is assumed to belong to some general class of stochastic processes merton 1973 cox and ross 1976 jagannathan 1984 in particular in the absence of arbitrage opportunities and assuming that the risk neutralized stock price follows a proportional stochastic process a risk neutral return distribution independent of price merton 1973 and jagannathan 1984 show that a call option s price is an increasing convex function of the stock price cox and ross 1976

what do economists know an empirical study of experts expectations for more than three decades economic columnist joseph a livingston has canvassed a panel of economists twice a year eliciting their six month and twelve month forecasts for more than a dozen key variables this study analyzes whether the experts predictions are unbiased and whether complete use was made of all relevant known information unbiasedness and completeness being necessary conditions for fully rational expectations little bias was found in either the half year or full year predictions but extensive underutilization of information particularly data on monetary growth occurred to prophecy is extremely difficult especially with respect to the future chinese proverb do economists expectations regarding key price and nonprice variables utilize all known relevant information in an unbiased efficient manner this is a worthy subject for research for several reasons properties of experts predictions likely form an upper bound for those of laymen further as john muth 14 has noted the character of dynamic processes is typically very sensitive to the way expectations are influenced by the actual course of events p 316 hence we need to know precisely how events do affect expectations finally the common practice of replacing a variable s generally unobserved expectation with a proxy based on its past values will be unbiased and will not cause bias in other

the stochastic rotation problem a generalization of faustmann s formula to stochastic forest growth abstract in the present paper we study the optimal cutting strategy 1 2 for an ongoing forest by using stochastic impulse control we show how faustmann s formula can be generalized to stochastic growing forests the paper extends and clarifies previous studies by miller and voltaire 1983 clarke and reed 1989 and reed and clarke 1990

explaining the spatial variation in homeownership rates results for german regions lerbs o w and oberst c a explaining the spatial variation in homeownership rates results for german regions regional studies this paper employs cross sectional data on ninety six german regions to investigate the interregional variability of homeownership rates among the explanatory variables the analysis includes important regional housing market indicators as well as regional socio demographic composition urbanization and labour market performance an estimation strategy is chosen which accounts for different forms of spatial dependence between the regional units it is found that regional differences in the relative price of owning versus renting and the affordability of owner occupied housing play a key role in explaining why homeownership rates vary so substantially across the country the results indicate significant neighbourhood effects for several variables

on solving the multirotational timber harvesting problem with stochastic prices a linear complementarity formulation this article develops a two factor real options model of the harvesting decision over infinite rotations assuming a known stochastic price process and using a rigorous hamilton jacobi bellman methodology the harvesting problem is formulated as a linear complementarity problem that is solved numerically using a fully implicit finite difference method this approach is contrasted with the markov decision process models commonly used in the literature the model is used to estimate the value of a representative stand in ontario s boreal forest both when there is complete flexibility regarding harvesting time and when regulations dictate the harvesting date