static mean variance analysis with uncertain time horizon we generalize markowitz analysis to the situations involving an uncertain exit time our approach preserves the form of the original problem in that an investor minimizes portfolio variance for a given level of the expected return however inputs are now given by the generalized expressions for mean and variance covariance matrix involving moments of the random exit time in addition to the conditional moments of asset returns although efficient frontiers in the generalized and the standard markowitz case may coincide under certain conditions we demonstrate that by means of an example in general that is not true in particular portfolios efficient in the standard markowitz sense can be inefficient in the generalized sense and vice versa as a result an investor facing an uncertain time horizon and investing as if her time of exit is certain would in general make suboptimal portfolio allocation decisions numerical simulations show that a significant efficiency loss can be induced by an improper use of standard mean variance analysis when time horizon is uncertain

premia for correlated default risk abstract using data on corporate default experience in the u s and market rates of cdx index and tranche swaps of various maturities we estimate reduced form models of correlated default timing in the cdx high yield and investment grade portfolios under actual and risk neutral probabilities the striking contrast between the estimated processes followed by the actual and risk neutral arrival intensities of defaults and between the parameters governing the actual and risk neutral dynamics of the risk neutral intensities indicates the presence of substantial default risk premia in cdx swap market rates the effects of risk premia on swap rates covary strongly across maturities and depend on general stock market volatility and several measures of credit spreads large moves in the effects of these premia on swap rates have natural interpretations in terms of economic and financial market developments during the sample period april 2004 to october 2007 our results suggest that a large portion of the movements in cdx swap market rates observed during the sample period may be caused by changing attitudes toward correlated default risk rather than changes in the economic factors affecting the actual risk of clustered defaults which ultimately governs swap payoffs

the pricing of options on assets with stochastic volatilities one option pricing problem that has hitherto been unsolved is the pricing of a european call on an asset that has a stochastic volatility this paper examines this problem the option price is determined in series form for the case in which the stochastic volatility is independent of the stock price numerical solutions are also produced for the case in which the volatility is correlated with the stock price it is found that the black scholes price frequently overprices options and that the degree of overpricing increases with the time to maturity one option pricing problem that has hitherto remained unsolved is the pricing of a european call on a stock that has a stochastic volatility from the work of merton 12 garman 6 and cox ingersoll and ross 3 the differential equation that the option must satisfy is known the solution of this differential equation is independent of risk preferences if a the volatility is a traded asset or b the volatility is uncorrelated with aggregate consumption if either of these conditions holds the risk neutral valuation arguments of cox and ross 4 can be used in a straightfoward way this paper produces a solution in series form for the situation in which the stock price is instantaneously uncorrelated with the volatility we do not assume that the volatility is a traded asset also a constant correlation between the instantaneous rate of change of the volatility and the rate of change of aggregate consumption can be accommodated the option price is lower than the blackscholes b s 1 price when the option is close to being at the money and higher when it is deep in or deep out of the money the exercise prices for which overpricing by b s takes place are within about ten percent of the security price this is the range of exercise prices over which most option trading takes place so we may in general expect the b s price to overprice options this effect is exaggerated as the time to maturity increases one of the most surprising implications of this is that if the b s equation is used to determine the implied volatility of a near the money option the longer the time to maturity the lower the implied volatility numerical solutions for the case in which the volatility is correlated with the stock price are also examined the stochastic volatility problem has been examined by merton 13 geske 7 johnson 10 johnson and shanno 11 eisenberg 5 wiggins 16 and

financial intermediation and endogenous growth an endogenous growth model with multiple assets is developed agents who face random future liquidity needs accumulate capital and a liquid but unproductive asset the effects of introducing financial intermediation into this environment are considered conditions are provided under which the introduction of intermediaries shifts the composition of savings toward capital causing intermediation to be growth promoting in addition intermediaries generally reduce socially unnecessary capital liquidation again tending to promote growth

portfolio selection with uncertain exit time a robust cvar approach abstract in this paper we explore the portfolio selection problem involving an uncertain time of eventual exit to deal with this uncertainty the worst case cvar methodology is adopted in the case where no or only partial information on the exit time is available and the corresponding problems are integrated into linear programs which can be efficiently solved moreover we present a method for specifying the uncertain information on the distribution of the exit time associated with exogenous and endogenous incentives numerical experiments with real market data and monte carlo simulation show the usefulness of the proposed model

the new pattern of regional unemployment causes and policy significance in common with most oecd countries unemployment in britain has differed significantly between regions but the persistence of relative regional unemployment rates in britain has been until recently particularly striking however during the i990 93 recession the relative regional unemployment pattern changed significantly for the first time in seventy years our primary purpose here is to understand these recent changes and to examine what might be learned about the contribution of economic policies to the amelioration of both regional unemployment rate differentials and the amplitude of regional unemployment cycles finally we ask whether there are any policy lessons to be drawn from the recent cycles in regional unemployment patterns which might provide insight into the amplitude of macro economic cycles

what explains the industrial revolution in east asia evidence from the factor markets this paper presents dual estimates of total factor productivity growth tfpg for east asian countries while the dual estimates of tfpg for korea and hong kong are similar to the primal estimates they exceed the primal estimates by 1 percent a year for taiwan and by more than 2 percent for singapore the reason for the large discrepancy for singapore is because the return to capital has remained constant despite the high rate of capital accumulation indicated by singapore s national accounts this discrepancy is not explained by financial market controls capital income taxes risk premium changes and public investment subsidies jel o11 o16 o47 o53

on optimal portfolio choice under stochastic interest rates abstract in an economy where interest rates and stock price changes follow fairly general stochastic processes we analyze the portfolio problem of an investor endowed with a non traded cash bond position he can trade on stocks the riskless asset and a futures contract written on the bond so as to maximize the expected utility of his terminal wealth when the investment opportunity set is driven by an arbitrary number of state variables the optimal portfolio strategy is known to contain a pure preference free hedge component a speculative element and merton breeden hedging terms against the fluctuations of each and every state variable while the first two components are well identified and easy to work out the implementation of the last ones is problematic as the investor must identify all the relevant state variables and estimate their distribution characteristics using the martingale approach we show that the optimal strategy can be simplified to include in addition to the pure hedge and speculative components only two merton breeden type hedging elements however large is the number of state variables the first one is associated with interest rate risk and the second one with the risk brought about by the co movements of the spot interest rate and the market prices of risk the implementation of the optimal strategy is thus much easier as it involves estimating the characteristics of the yield curve and the market prices of risk only rather than those of numerous a priori unknown state variables moreover the investor s horizon is shown explicitly to play a crucial role in the optimal strategy design in sharp contrast with the traditional decomposition finally the role of interest rate risk in actual portfolio risk management is emphasized

valuation of mortality risk via the instantaneous sharpe ratio applications to life annuities we develop a theory for valuing non diversifiable mortality risk in an incomplete market by assuming that the company issuing a mortality contingent claim requires compensation for this risk in the form of a pre specified instantaneous sharpe ratio we apply our method to value life annuities one result of our paper is that the value of the life annuity is identical to the upper good deal bound of cochrane and saa requejo 2000 beyond arbitrage good deal asset price bounds in incomplete markets journal of political economy 108 79 119 and of bjork and slinko 2006 towards a general theory of good deal bounds review of finance 10 221 260 applied to our setting a second result of our paper is that the value per contract solves a linear partial differential equation as the number of contracts approaches infinity one can represent the limiting value as an expectation with respect to an equivalent martingale measure and from this representation one can interpret the instantaneous sharpe ratio as an annuity market s price of mortality risk

a theory of employment unemployment and sickness beatty c fothergill s and macmillan r 2000 a theory of employment unemployment and sickness reg studies 34 617 630 this paper explains how the measurement of unemployment is distorted by the way that sickness is defined and counted by social security systems drawing on the concepts of hidden sickness the queue for jobs and hidden unemployment and on empirical observations from the uk it shows how job loss can result in increased recorded sickness rather than recorded unemployment it also shows how this process may vary between localities and countries the argument has profound implications for perceptions of the true extent of unemployment and of labour market disparities between regions beatty c fothergill s et macmillan r 2000 l emploi le chomage et la maladie une theorie reg studies 34 617 630 cet article chercheaexpliquer comment la mesure du chomage s avere fausseeacause de la fac on dont la secu definit maladie et la comptabilise puisant dans des notions de

dynamic asset pricing theory with uncertain time horizon abstract this paper addresses the problem of pricing and hedging a random cash flow received at a random date in a general setup with a random time that is not a stopping time of the filtration generated by asset prices we first provide an explicit characterization of the set of equivalent martingale measures we also present price bounds consistent with perfect replication in the absence of arbitrage as is often the case such bounds are too wide to be of any practical use and we consider several choices for narrowing down to one the number of equivalent martingale measures

systematic equity based credit risk a cev model with jump to default we use equity as the traded primitive for a detailed analysis of systematic default risk default is parsimoniously represented by equity value hitting the zero barrier so that unlike in reduced form models the explicit linkage to the firm s capital structure is preserved but unlike in structural models restrictive assumptions on the structure are avoided default risk is either jump like or diffusive the equity price can jump to default in line with recent empirical evidence on the jump to default risk price we highlight how reasonable choices of the pricing kernel can imply remarkable differences in the equity price dependent status between the objective default intensity and the risk neutral intensity as equity returns experience negative diffusive shocks their cev type local variance increases and boosts the objective and risk neutral probabilities of diffusive default a parsimonious version of our general model simultaneously enables analytical credit risk management and analytical pricing of credit sensitive instruments easy cross asset hedging ensues

a study in structural change relative earnings in wales since the 1970s the welsh economy has undergone rapid structural change in recent years this paper uses data from the new earnings survey to examine how earnings in wales changed relative to those of great britain between 1975 and 1994 there are five main findings first earnings of workers in wales have declined relative to those in great britain second the shift away from full time men has been an important factor in the fall in average relative earnings third the decline in the relative earnings of full time men is mostly explained by falling relative earnings in construction distribution and transport as well as the failure of workers in banking and financial services in wales to keep up with their counterparts in great britain fourth the shift in full time employment to health education and other services has tended to support relative earnings fifth the decline in full time men s earnings relative to great britain seems to have been caused by long run factors that are unlikely to naturally reverse the

option pricing with stochastic volatility information time vs calendar time empirical evidence has shown that subordinated processes represent well the price changes of stocks and futures using either transaction counts or trading volume as a proxy for information arrival it supports the contention that volatility is stochastic in calendar time because of random information arrival and thus becomes stationary in information time this contention has also been supported later in theoretical models in this paper we investigate the implication of this contention to option pricing first we price the option in calendar time where the return of the underlying asset follows a jump subordinated process we extend rubinstein s rubinstein m 1976 the valuation of uncertain income streams and the valuation of options bell j econom management sci 7 407 425 and ross s ross s 1989a information and volatility the no arbitrage martingale approach to timing and resolution irrelevancy finance44 1 17 martingale valuation methodology to incorporate the pricing of volatility risk the resulting equilibrium formula requires estimating seven parameters upon implementation we then make a stochastic time change from calendar time to information time in order to obtain a stationary underlying asset return process to price the option we find that the isomorphic option has random maturity because the number of information arrivals prior to the option s calendar time expiration date is random we value the option using dynkin s dynkin e b 1965 markov processes vols i and ii springer verlag berlin and new york version of the feynman kac formula that allows for a random terminal date the resulting information time formula requires estimating only one additional parameter compared to the black scholes s in practical application in this regard the time change has reduced the computational complexity of the option pricing problem simulations show that the formula may outperform the black scholes black f m scholes 1973 the pricing of options and corporate liabilities political econom 81 637 659 and merton merton robert c 1976a option pricing when underlying stock returns are discontinuous financial econom 3 125 143 models in pricing currency options as a first attempt to derive valuation relationships in the information time economy this investigation may suggest that the information time approach is a functional alternative to the current calendar time norm it is especially suitable for deriving volatility free portfolio insurance strategies

international risk sharing and economic growth international risk sharing which diversifies away income risk will reduce saving with constant relative risk aversion if growth arises from the external effects of human capital accumulation then reducing saving will reduce growth welfare also may fall with risk sharing because endogenous growth with external effects of capital accumulation typically implies a competitive equilibrium growth rate already less than the optimal growth rate we demonstrate these results in a standard representative agent economy diversifying away rate of return risk also will reduce saving and growth rates if relative risk aversion exceeds one but this diversification always increases welfare this paper studies the effects of international risk sharing portfolio diversification in a world economy in which growth rates of income are endogenous growth is based upon the spillover effects of human capital accumulation as in lucas 1988 and romer 1986 there are positive economy wide spillovers of human capital intensity on individual labour productivity in section 2 we construct a multi country growth model with an infinitely lived representative agent in each country each country faces income risk but there is no aggregate uncertainty at the world level we focus on two market structures in the first structure there are no markets which allow for international diversification of country specific income risk in the second structure there are complete international markets for risksharing with no aggregate world uncertainty this completeness allows full diversification of country specific risk the paper has two central results first growth rates in all countries are lower in the equilibrium with full diversification second in this same structure welfare of each country may be lower than in an equilibrium without risk sharing the reasoning is as follows with external effects of capital accumulation the compet

communication commitment and growth abstract we study the effect on the growth of an economy of alternative financing opportunities in a stochastic growth model with incentive constraints efficient accumulation mechanisms are designed and computed for economies that differ in their incentive structure we show that when borrowing is subject to information constraints there is a computable efficient transfer mechanism that does not affect capital accumulation and investment patterns even though consumption patterns and the distribution of wealth are affected in contrast enforcement constraints can severely reduce the outside financing opportunities and affect investment patters and economic growth we adapt numerical algorithms for obtaining numerical solutions of these models

hidden unemployment among men a case study the debate about the extent of hidden unemployment is central to understanding the contemporary uk labour market this paper provides a detailed case study of one area barrow in furness where major industrial job losses have co existed with falling claimant unemployment among men using aggregate statistics and new survey evidence it argues that these trends mask extensive hidden unemployment especially among men on sickness related benefits comparisons are also made with areas covered by similar surveys the paper concludes that the claimant and international labour organization measures of unemployment both appear deeply flawed in the uk context because of the diversion from unemployment to sickness benefits le debat sur l importance du chomage cache est essentiel a la comprehension du marche du travail contemporain au royaume uni cet article cherche a fournir une etude de cas detaillee d une zone barrow in furness ou d importantes suppressions d emplois ont coexiste avec une baisse du nomb

pricing derivatives on financial securities subject to credit risk this article provides a new methodology for pricing and hedging derivative securities involving credit risk two types of credit risks are considered the first is where the asset underlying the derivative security may default the second is where the writer of the derivative security may default we apply the foreign currency analogy of jarrow and turnbull 1991 to decompose the dollar payoff from a risky security into a certain payoff and a spot exchange rate arbitrage free valuation techniques are then employed this methodology can be applied to corporate debt and over the counter derivatives such as swaps and caps the purpose of this article is to provide a new theory for pricing and hedging derivative securities involving credit risk two sources of credit risk are identified and analyzed the first is where the asset underlying the derivative security may default paying off less than promised this is the case for example with imbedded options on corporate debt the second is the credit risk introduced by the writer of the derivative security who may also default examples include over the counter writers of options on eurodollar futures swaps and swaptions for pricing derivative securities involving credit risk there are currently two approaches the first views these derivatives as contingent claims not on the financial securities themselves but as compound options on the assets underlying the financial securities this is the case for example with the pricing of imbedded options on corporate debt see merton 1974 1977 black and cox 1976 ho and singer 1982 chance 1990 and kim ramaswamy and sundaresan 1993 or the pricing of vulnerable options see johnson and stulz 1987 in practice however this valuation methodology is difficult to use first the assets underlying the financial security are often not tradeable and therefore their values are not observable this makes application of the theory and estimation of the relevant parameters problematic second as in the case of corporate debt all of the other liabilities of the firm senior to the corporate debt must first and simultaneously be valued this generates significant computational difficulties as a result this approach has not

on efficient distribution with private information this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with many consumers each of whom is subject to private idiosyncratic taste shocks we propose a recursive method for finding feasible allocations that are incentivecompatible and that are pareto optimal within this set the method is applied to several parametric examples we find that in an efficient allocation the degree of inequality continually increases with a diminishing fraction of the population receiving an increasing fraction of the resources we discuss the extent to which these allocations can be decentralized via market arrangements this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with private information the economy we study has a constant endowment flow of a single non storable consumption good which is to be allocated each period among a large number of consumers each period these consumers experience unpredictable idiosyncratic privately observed taste shocks affecting their marginal utility of current consumption efficiency dictates that more resources be allocated to those consumers who in any given period have a high marginal utility of current consumption

the role of non convex costs in firms investment and financial dynamics abstract this paper shows that non convex costs of financial adjustment are quantitatively relevant for explaining firm dynamics first empirically financial activity is lumpy more than investment activity second non convex costs are necessary in the context of a dynamic investment and financing model to rationalize this lumpiness two versions of the model with and without non convex costs are compared only the non convex costs version replicates the dynamics in the data generating financial lumpiness higher than investment lumpiness other predictions of the model with respect to investment and finance are discussed

optimal contracts under costly state falsification we examine an exchange economy with two agents one risk neutral with a certain endowment and a second risk averse with a random endowment the realization of the endowment is public but can be falsified by the second agent at a cost for a broad class of falsification cost functions the optimal no falsification contract is noncontingent on a left hand interval and strictly increasing with a slope strictly less than one on a right hand interval under a mild further restriction optimal no falsification contracts are in addition piece wise linear optimal contracts may in general require falsifying the state but for a set of the highest endowment realizations there is no falsification we find simple conditions under which the optimal contract is a no falsification contract the model has applications that include financial insurance and employment contracts and tax policy

term structures of credit spreads with incomplete accounting information we study the implications of imperfect information for term structures of credit spreads on corporate bonds we suppose that bond investors cannot observe the issuer s assets directly and receive instead only periodic and imperfect accounting reports for a setting in which the assets of the firm are a geometric brownian motion until informed equityholders optimally liquidate we derive the conditional distribution of the assets given accounting data and survivorship contrary to the perfect information case there exists a default arrival intensity process that intensity is calculated in terms of the conditional distribution of assets credit yield spreads are characterized in terms of accounting information generalizations are provided

repeated principal agent relationships with lending and borrowing abstract it is shown optimal long term contracts are strictly better than a series of unrelated short term contracts for two reasons long term contracts allow risk to be spread over time and the agent s intertemporal choices provide information about the unobservable random variable

the dynamic benchmarking of labour markets jones m k 2004 the dynamic benchmarking of labour markets reg studies 38 495 506 this paper investigates the potential role of benchmarking labour market performance at the regional level it focuses on how labour market comparison can be simplified using a single composite measure of performance whilst capturing the multi dimensional nature of labour market performance the issues that surround the development of a composite measure are discussed including the selection of domains indicators an appropriate benchmark and weights the possibilities of dynamic benchmarking for monitoring labour market performance are illustrated through a benchmark of the welsh labour market and the localities currently receiving objective 1 funding

regional earnings inequality in great britain a decomposition analysis this paper investigates the degree of earnings inequality in great britain over the period 1975 96 using individual based data it finds that the contribution of within group inequality to both earnings inequality cross sectionally and to its trend over time is substantially more important than the contribution of between group inequality thus the primary source of increasing inequality in the overall earnings distribution is increasing inequality within regions and not differences in average earnings between regions a decomposition of the gini coefficient is also adopted to illustrate how regional convergence in average earnings has been accompanied by increasing overall earnings inequality in the uk a partir des donnees aupres des particuliers cet article cherche a examiner l importance de l inegalite des revenus regionaux en grande bretagne de 1975 a 1996 il en resulte que la contribution de l inegalite a l interieur du groupe a l inegalite des revenus par echantillon et sur le temps s avere nett

overeducation undereducation and the british labour market this paper addresses the issue of overeducation and undereducation using for the first time a british dataset which contains explicit information on the level of required education to enter a job across the generality of occupations three key issues within the overeducation literature are addressed first what determines the existence of over and undereducation and to what extent are over and undereducation substitutes for experience tenure and training second to what extent are over and undereducation temporary or permanent phenomena third what are the returns to over and undereducation and do certain stylized facts discovered for the us and a number of european countries hold for britain

general equilibrium pricing of options on the market portfolio with discontinuous returns when the price process for a long lived asset is of a mixed jump diffusion type pricing of options on that asset by arbitrage is not possible if trading is allowed only in the underlaying asset and a risk less bond using a general equilibrium framework we derive and analyze option prices when the underlying asset is the market portfolio with discontinuous returns the premium for the risk of jumps and the diffusion risks forms a significant part of the prices of the options in this economy an attempted replication of call and put options by the black scholes type of trading strategies may require substantial infusion of funds when jumps occur we study the cost and risk implications of such dynamic hedging plans article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

investor protection optimal incentives and economic growth does investor protection foster economic growth to assess the widely held affirmative view we introduce investor protection into a standard overlapping generations model of capital accumulation better investor protection implies better risk sharing because of entrepreneurs risk aversion this results in a larger demand for capital this is the demand effect a second effect the supply effect follows from general equilibrium restrictions better protection i e higher demand increases the interest rate and lowers the income of entrepreneurs decreasing current savings and next period s supply of capital the supply effect is stronger the tighter are the restrictions on capital flows our model thus predicts that the positive effect of investor protection on growth is stronger for countries with lower restrictions cross country data provide support for this prediction as does the detailed examination of the growth experiences of south korea and india