interest organizations and distributive politics small business subsidies in mexico summary politicians often use distributive programs to build and maintain electoral linkages with interest organizations this project analyzes the factors that lead mexican state governments to allocate distributive benefits to small business organizations sbos rather than directly to entrepreneurs or to other groups theoretically i address how electoral threats to the ruling party shape the incentives of politicians to deliver benefits to core and non core interest organizations using an original dataset of decentralized small business subsidies i deploy a novel subnational design comparing states governed by parties with different relationships to sbos facing different levels of electoral threat i find that electoral competition shapes politicians incentives for incorporating organizations in distributive spending governors from the pro small business pan increase allocations to sbos when they are electorally strong while governors from the centrist pri allocate more to these organizations when they face an electoral threat case studies provide additional evidence that ruling politicians allocate benefits to sbos when linkages with these groups contribute to their most pressing electoral objectives

coping with change a study of local irrigation institutions in taiwan abstract this paper examines how taiwan s local irrigation institutions have evolved and changed amid rapid political economic development in the last decade based upon the literatures of institutional analysis and common pool resource management i discuss and compare how local irrigation institutions in three areas in the country have responded or failed to respond to the changing environment a major finding is that local self governing irrigation institutions are not doomed to fail amid economic development several variables affect the incentives and capacity of farmers to redesign their local institutions to cope with the changes in the macro setting particularly flexible status quo institutions and a conductive governance regime can better facilitate farmers rule crafting efforts

lp modeling for asset liability management a survey of choices and simplifications dynamic linear programming lp models for asset liability management alm are quite powerful and flexible but face two challenges 1 many modeling choices not all consistent with one another or with finance theory and 2 solution difficulties due to the large number of scenarios obtained from standard interest rate models we first survey these modeling choices with a view to help researchers make self consistent choices next we review how the dynamic lp model for alm and the representation of uncertainty therein have been simplified in the past to motivate new or hybrid models emphasizing tractability to this end we review existing static lp models as extreme modeling simplifications and aggregation as a simplification of uncertainty

the valuation of options on yields abstract many contingent claims incorporate options on yield levels i derive closed form expressions for european yield option prices using a general equilibrium model in which the underlying yield is the relevant state variable the properties of these options differ markedly from those of conventional options on traded assets for example yield call values can be less than their intrinsic value and can be decreasing functions of the underlying yield these features have important hedging implications i examine the empirical implications of the model using price data for the 13 week t bill options traded on the chicago board options exchange

on the valuation of an option to exchange one interest rate for another abstract this paper studies the problem of pricing a european option on the difference of two interest rates which is analogous to an option to exchange one asset for another studied in margrabe 1978 it is first shown that such option may be valued as exchanging two interest rates implied in relevant futures prices through an extended black 1976 model and then by a two factor heath jarrow morton hjm model which shows that introduction of imperfect interest rates movements is essential for pricing such options for which a one factor model such as ho and lee 1986 should not be applied

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

is devolution democratization abstract recent attempts at introducing new forms of governance in forest management in india have focused on devolution to user groups or village level participatory committees success or failure is attributed to the presence or absence of social capital among these groups these groups have never existed outside the state however and social relations including social capital are continually being transformed by administrative and market forces this paper argues that what matters is not the degree of government intervention i e more or less devolution or the degree of social capital among local communities but state accountability this can only be ensured through addressing questions of political reform

poverty vulnerability and social protection in a period of crisis the case of indonesia before the financial crisis of mid 1997 estimates of consumption poverty in indonesia were based on rather modest poverty line thresholds when seen in relation to estimates of capability poverty the reasons behind this discrepancy are identified and alternative estimates of consumption poverty for the pre crisis period proposed during the crisis the behavior of consumption poverty can be described as transient in nature and is relevant in understanding the notion of vulnerability that is the risk that individuals and households can experience temporary episodes of poverty vulnerability could have worsened however in the absence of government intervention entailing macroeconomic stabilization measures and social protection initiatives based on this experience a fiscally sustainable social safety net that is able to reinforce household coping mechanisms and social capital is recommended as part of the country s medium term strategy to combat poverty

on the identity of social capital and the social capital of identity in contemporary economics social capital is identified by some with norms and networks that enhance trust reciprocity and cooperation for the production of public goods but critics claim that social capital is principally of individualist origin and provides solid ground for the subordination of labour by capital we argue that despite neoclassical mis treatments more socialised conceptions of social capital address individuals capacities to share a sense of social obligation and common identity and pursue joint strategies for public welfare we attempt to reinstate the social in social capital via the concept of social embeddedness where individuals freely engage in processes of reflection social mobilisation and political debate to assess different and often conflicting values and objectives across multiple collective agencies choices thus depend not only on personal utility but also on personal identity i e what kind of person one wants to be and what kind of society one wishes to have copyright oxford university press

long forward and zero coupon rates can never fall in frictionless markets having no arbitrage the asymptotic zero coupon rate never falls the same is true of the long forward rate the long par coupon rate can rise and fall due to forward rate movements at short maturities this article relates the three types of interest rates and formalizes and proves the impossibility results for falling asymptotic rates these results can be tested in a parametric term structure specification that is rich enough to identify a time series of long rates the results show that it is not possible to specify arbitrarily the long forward or zero coupon rate process copyright 1996 by university of chicago press

bond pricing and the term structure of interest rates a new methodology for contingent claims valuation this paper presents a unifying theory for valuing contingent claims under a stochastic term structure of interest rates the methodology based on the equivalent martingale measure technique takes as given an initial forward rate curve and a family of potential stochastic processee for its subsequent movements a no arbitrage condition restricts this family of processes yielding valuation formulae for interest rate sensitive contingent claims which do not explicitly depend on the market prices of risk examples are provided to illustrate the key results in relation to the term structure of interest rates arbitrage pricing theory has two purposes the first is to price all zero coupon default free bonds of varying maturities from a finite number of economic fundamentals called state variables the second is to price all interest rate sensitive contingent claims taking as given the prices of the zero coupon bonds this paper presents a general theory and a unifying framework for understanding arbitrage pricing theory in this context of which all existing arbitrage pricing models are special cases in particular vasicek 1977 brennan and schwartz 1979 langetieg 1980 ball and torous 1983 ho and lee 1986 schaefer and schwartz 1987 and artzner and delbaen 1988 the primary contribution of this paper however is a new methodology for solving the second problem i e the pricing of interest rate sensitive contingent claims given the prices of all zero coupon bonds the methodology is new because i it imposes its stochastic structure directly on the evolution of the forward rate curve ii it does not require an inversion of the term structure to eliminate the market prices of risk from contingent claim values and iii it has a stochastic spot rate process with multiple stochastic factors influencing the term structure the model can be used to consistently price and hedge all contingent claims american or european on the term structure and it is derived from necessary and more importantly sufficient conditions for the absence of arbitrage the arbitrage pricing models of vasicek 1977 brennan and schwartz 1979 langetieg 1980 and artzner and delbaen 1988 all require an iformerly titled bond pricing and the term structure of interest rates a new methodology

on arbitrage free pricing of interest rate contingent claims unlike most interest rate claim models the ho lee model utilizes full information on the current term structure unfortunately the model has a major deficiency in that negative interest rates can occur this article modifies the model such that interest rates are well behaved

an equilibrium model of bond pricing and a test of market efficiency in two previous and related papers 3 4 the authors have reported the results of estimating a particular equilibrium model of bond pricing using quarterly data on canadian government bonds for the period 1964 to 1979 this paper reports the results of applying a similar model to the pricing of u s government bonds for the period 1958 1979 using data from the crsp government bond file the paper also extends the previous empirical analysis by evaluating the ability of the pricing model to detect underpriced and overpriced bonds the data reveal a strong relation between price prediction errors and subsequent bond returns

women s participation in local organizations conditions and constraints abstract civic organizations have a capacity to contribute to economic growth and an equitable distribution of welfare by reducing information asymmetries and transaction costs while donors increasingly recognize that group based projects are a means to advocate organizational capacities of target groups it is not clear whether group based organizations always increase efficiency and equity this article analyses the determinants of participation in local development groups ldgs using data from two projects funded by undp in kashmir and gtz in chad a major result of the empirical analysis is the identification of a middle class effect of participation the exclusion of the majority of the poor can be explained by high opportunity costs to join the group especially for income earning women in addition it can be shown that an existing social network is a pre condition for participation finally the assumption has been confirmed that bargaining power of the members is important for their decision to participate in groups

a nonlinear general equilibrium model of the term structure of interest rates abstract we derive and test an alternative closed form general equilibrium model of the term structure within the cox ingersoll and ross theoretical framework in which yields are nonlinear functions of the risk free rate we show that equilibrium bond prices and the risk free rate are not always inversely related and that bond risk need not be strictly increasing in maturity using hansen s generalized method of moments to obtain parameter estimates this nonlinear model outperforms the cox ingersoll and ross square root model in describing actual treasury bill yields for the 1964 1986 period

exchange intervention policy in a multiple country world abstract intervention policy is examined in a three country model employment and output in each country depend upon the domestic currency value of a natural basket of currencies called the sally each country will find it desirable to intervene to stabilize its sally rate if capital movements are more volatile than trade flows this is a natural generalization of well known small country results however in this general equilibrium setting it is clear that such a policy can destabilize employment in another country and lead to retaliation currency unions are also examined and found to have similar spillover problems

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

an international study of tax effects on government bonds it is shown that coupon bonds alone are not sufficient to span time dated claims on ordinary income capital gains and non taxable wealth in an incomplete bond market where the pure dated claims are not spanned by existing bonds marginal rates of substitution between present consumption and pure dated claims on ordinary income capital gains income and non taxable wealth respectively can differ across bondholders however the relative pricing of coupon bonds in each of these countries is shown to be consistent with the tax status of the major non tax exempt holders of government debt

unspanned stochastic volatility and fixed income derivatives pricing we propose a parsimonious unspanned stochastic volatility model of the term structure and study its implications for fixed income option prices the drift and quadratic variation of the short rate are affine in three state variables the short rate its long term mean and variance which follow a joint markov vector process yet bond prices are exponential affine functions of only two state variables independent of the current interest rate volatility level because this result holds for an arbitrary volatility process such a process can be calibrated to match fixed income derivative prices furthermore this model can be extended by relaxing the time homogeneity to fit any arbitrary term structure in its hjm form this model nests the analogous stochastic equity volatility model of heston 190 heston s l 1993 a closed form solution for options with stochastic volatility review of financial studies 6 327 343 in particular if the volatility process is specified to be affine closed form solutions for interest rate options obtain we propose an efficient algorithm to compute these prices an application using data on caps and floors shows that the model can capture very well the implied black spot volatility surface while simultaneously fitting the observed term structure c 2005 elsevier b v all rights reserved

implications of implicit credit spread volatilities on interest rate modelling abstract we test seven term structure models in the heath jarrow and morton 1992 class in order to find the best representation of the libor rate in interest rate markets after the credit crunch of 2007 the libor rate is considered as a risky rate subject to the credit risk of a generic counterparty whose credit quality is refreshed at each fixing date we study the volatilities of the credit spreads implicitly obtained from libor time series in order to understand how assumed volatility functions affect interest rate curve modelling and asset pricing we develop a model to estimate basis swap prices through the monte carlo simulations we compare obtained results and individuate systematic relations existing between the basis spread forecast error and both the accuracy in volatility modelling and the accuracy of the monte carlo estimates we analyse and document these relations by defining appropriate pricing error measures

a dynamic model for the forward curve this article develops and estimates a dynamic arbitrage free model of the current forward curve as the sum of i an unconditional component ii a maturity specific component and iii a date specific component the model combines features of the preferred habitat model the expectations hypothesis et and affine yield curve models it permits a class of low parameter multiple state variable dynamic models for the forward curve we show how to construct alternative parametric examples of the three components from a sum of exponential functions verify that the resulting forward curves satisfy the heath jarrow morton hjm conditions and derive the risk neutral dynamics for the purpose of pricing interest rate derivatives we select a model from alternative affine examples that are fitted to the fama bliss treasury data over an initial training period and use it to generate out of sample forecasts for forward rates and yields for forecast horizons of 6 months or longer the forecasts of this model significantly outperform those from common benchmark models jel c53 e43 e47 the structure of forward rates for fixed maturity loans to begin at various dates in the future can be inferred from the prices of treasury securities or directly observed from the extremely active eurodollar futures market the constellation of these rates or of the related yields plays a central role intheallocationofcapital therandombehaviorofthis yieldcurve or the relationship between the yields and the term to maturity is a subject of considerable theoretical and empirical study

discretized reality and spurious profits in stochastic programming models for asset liability management in the literature on stochastic programming models for practical portfolio investment problems relatively little attention has been devoted to the question how the necessarily approximate description of the asset price uncertainty in these models influences the optimal solution in this paper we will show that it is important that asset prices in such a description are arbitrage free descriptions which have been suggested in the literature are often inconsistent with observed market prices and or use sampling to obtain a set of scenarios about the future we will show that this effectively introduces arbitrage opportunities in the optimization model for an investor who cannot exploit arbitrage opportunities directly because of market imperfections and trading restrictions we will illustrate that the presence of such arbitrage opportunities may cause substantial biases in the optimal investment strategy

stable coalition structures with externalities this paper argues that the sign of external effects of coalition formation provides a useful organizing principle in examining economic coalitions in many interesting economic games coalition formation creates either negatie externalities or posi tie externalities for nonmembers examples of negative externalities are research coalitions and customs unions examples of positive externalities include output cartels and public goods coalitions i characterize and compare stable coalition structures under the following three rules of coalition formation the open

term structure movements and pricing interest rate contingent claims this paper derives an arbitrage free interest rate movements model ar model this model takes the complete term structure as given and derives the subsequent stochastic movement of the term structure such that the movement is arbitrage free we then show that the ar model can be used to price interest rate contingent claims relative to the observed complete term structure of interest rates this paper also studies the behavior and the economics of the model our approach can be used to price a broad range of interest rate contingent claims including bond options and callable bonds

between state markets and households a neoinstitutional analysis of local organizations and institutions abstract the current and foreseeable trend toward a diminished role of the state in most economic activities including rural development activities offers new opportunities for local organizations and institutions lois at the same time many of the problems and shortcomings to which states and their activities have been vulnerable are also potentially applicable to lois to be successful in themselves as well as in fostering rural economic development rural lois and their activities must be carefully designed and appropriately integrated with markets other lois and the state this paper reviews the relevant literature on conditions for success and then goes on to derive from this review including some relevant experience some suggestions for policy and practice

institutional regime shift in intellectual property rights and innovation strategies of firms in china this study develops a novel conceptual framework to understand the differential impact of formal institutional regime shift in intellectual property rights on the innovation and patenting strategies of chinese and western firms operating in china we argue that to the extent that chinese firms have been deeply embedded in china s informal institutions they are less responsive to formal institutional changes than western firms operating in china using the major china patent law reform of 2001 as an exogenous event we find results consistent with our key arguments with the strengthening of the previously weak utility model patent protection chinese firms are less likely to apply for such patents to safeguard their innovations than western firms however this difference becomes less pronounced in regions with higher quality intellectual property rights and legal institutions that foster research and development and innovation and when western firms gain longer operational experience in china this s

the pricing of options on default free bonds recent developments in the finance literature dealing with the valuation of contingent claims have been triggered by black and scholes 2 with their valuation of european options on corporate stocks the type of valuation model derived by black and scholes is attractive because it is independent of preferences this independence is possible due to the fact that the contingent claims are usually assumed to be contingent on traded assets or traded state variables for example a european call option is a claim contingent on the value of the corresponding stock to maintain the independence of the claim from preferences however some variables have to be discarded and considered as constants for example the rate of interest which is not a traded state variable is considered a constant in most of the literature see black and scholes 2 merton 11 and ingersoll 9 though this approximation might not cause important discrepancies in the case of corporate liabilities and options on corporate liabilities the effect of such an approximation on the value of default free bonds and options on default free bonds is more important since these liabilities depend only on the rate of interest

state led land reform and local institutional change land titles land markets and tenure security in mexican communities summary this article focuses on the interactions between state and community mechanisms in the design and delivery of a titling program and a land market reform in rural mexico whereas the titling program did provide a greater sense of tenure security among landholders legalizing transactions has unexpectedly generated an informal land market resulting in tenure insecurity for the corresponding buyers these contrasting outcomes are not a matter of technical failure unaffordable fees or rent seeking rather they can be traced back to differentiated processes of policy delivery by the administration officials with regard to acknowledging prevailing local institutions and managing local information

the difficult transition from clientelism to citizenship lessons from mexico author s fox jonathan a abstract electoral competition is necessary but not sufficient for the consolidation of democratic regimes not all elections are free and fair nor do they necessarily lead to actual civilian rule or respect for human rights if there is more to democracy than elections then there is more to democratization than the transition to elections but in spite of the rich literature on the emergence of electoral competition the dynamics of political transitions toward respect for other fundamental democratic rights is still not well understood political democracy is defined here in classic procedural terms free and fair electoral contestation for governing offices based on universal suffrage guaranteed freedoms of association and expression accountability through the rule of law and civilian control of the military although analyses of democratization typically acknowledge that these are all necessary criteria most examine only electoral competition this study however develops a framework for explaining progress toward another necessary condition for democratization respect for associational autonomy which allows citizens to organize in defense of their own interests and identities without fear of external intervention or punishment

trust in a rent seeking world health and government transformed in northeast brazil abstract this article draws lessons from a set of innovative programs carried out by a state government in brazil now widely acclaimed for excellence in public management key to the high performance was strong worker commitment to the job and what the state did to elicit a topic of little note in the development literature but of central importance in the literature of industrial performance and workplace transformation in the industrialized countries the state created an unusual sense of calling among the program s workers new prestige in the communities where they worked and an informed citizenry that both monitored the workers and trusted them

tales of dissemination in small farm agriculture lessons for institution builders abstract this article describes patterns that are discernible across a dozen cases of good micro performance in agricultural research and extension in poverty stricken northeast brazil research meant to contribute toward a more grounded approach to remedying the problem of mediocre performance of these institutions elsewhere the good performances involved the presence of demanding user agencies outside extension and research shorter time horizons and more focused tasks localized credit subsidies with automatic sunset provisions and penalties for nonperformance a strong presence of municipal elites normally avoided in the design of such programs and an equally strong and complementary presence of more centralized public sector actors

designing domestic institutions for international monetary policy cooperation a utopia abstract in a wide variety of international macroeconomic models monetary policy cooperation is optimal non cooperative policies are inefficient but optimal policies can be attained non cooperatively by optimal design of domestic institutions contracts we show that given endogenous institutional design inefficiencies of non cooperation cannot and will not be eliminated we model the delegation stage explicitly and show that subgame perfect credible contracts chosen by governments based on individual rationality are non zero but are different from optimal contracts and hence lead to inefficient equilibria optimal contracts require cooperation at the delegation stage which is inconsistent with the advocated non cooperative nature of the solution a general solution method for credible contracts and an example from international monetary policy cooperation are considered our results feature delegation as an equilibrium phenomenon explain inefficiencies of existing delegation schemes and hint to a potentially stronger role for supranational authorities in international policy coordination

time dependent variance and the pricing of bond options in this paper we develop a model for valuing debt options that takes into account the changing characteristics of the underlying bond by assuming that the standard deviation of return is proportional to the bond s duration the resulting model uses the bond price as the single state variable and thus preserves much of the simplicity and robustness of the black scholes approach the paper provides comparisons between option prices computed using this model and those using the black scholes and brennan and schwartz models the last decade has seen a dramatic increase in the volatility of bond markets leading to a growing interest in financial instruments that can be used to hedge this risk thus in the u s canada and the u k there has been a proliferation of new interest rate dependent securities such as bond futures options on bonds options on bond futures swap agreements and bonds with option features such as callability putability retractability and so forth with the development of these markets the problems of valuation and the derivation of the hedging strategies have become subjects of increasing importance to both practitioners and academics several valuation methods have been suggested in the literature but so far no consensus has emerged as to the best solution to these problems the simplest approach to the valuation of debt options and probably the most widely used in practice is the black scholes model 3 this method originally developed for the valuation of stock options assumes that the variance of the rate of return on the underlying security is constant while this assumption is plausible for common stocks it is clearly unreasonable for bonds with a finite maturity the distinctive feature of the problem of debt option valuation is that the characteristics of the underlying asset change over time because the price is constrained to converge to the face value of the bond at maturity a second drawback of the black scholes approach is that it assumes a constant short term interest rate an assumption that is clearly inconsistent with stochastic returns on bonds in spite of these problems the black scholes model has been frequently used in practice to value debt options because of its overwhelming simplicity in comparison with other available methods

one factor interest rate models and the valuation of interest rate derivative securities this paper compares different approaches to developing arbitrage free models of the term structure it presents a numerical procedure that can be used to construct a wide range of one factor models of the short rate that are both markov and consistent with the initial term structure of interest rates

the intersection of market and credit risk abstract economic theory tells us that market and credit risks are intrinsically related to each other and not separable we describe the two main approaches to pricing credit risky instruments the structural approach and the reduced form approach it is argued that the standard approaches to credit risk management creditmetrics creditrisk and kmv are of limited value when applied to portfolios of interest rate sensitive instruments and in measuring market and credit risk empirically returns on high yield bonds have a higher correlation with equity index returns and a lower correlation with treasury bond index returns than do low yield bonds also macro economic variables appear to influence the aggregate rate of business failures the creditmetrics creditrisk and kmv methodologies cannot reproduce these empirical observations given their constant interest rate assumption however we can incorporate these empirical observations into the reduced form of jarrow and turnbull 1995b drawing the analogy risk 5 63 70 model here default probabilities are correlated due to their dependence on common economic factors default risk and recovery rate uncertainty may not be the sole determinants of the credit spread we show how to incorporate a convenience yield as one of the determinants of the credit spread for credit risk management the time horizon is typically one year or longer this has two important implications since the standard approximations do not apply over a one year horizon first we must use pricing models for risk management some practitioners have taken a different approach than academics in the pricing of credit risky bonds in the event of default a bond holder is legally entitled to accrued interest plus principal we discuss the implications of this fact for pricing second it is necessary to keep track of two probability measures the martingale probability for pricing and the natural probability for value at risk we discuss the benefits of keeping track of these two measures

coalition formation in international monetary policy games abstract this paper analyses coalition formation in monetary policy coordination games between n countries we show that some but not all countries may join if the decision to be a member of the coalition is incentive compatible for the individual country positive spillovers of the coalition formation process and the resulting free rider problem limit the stable coalition size since the coalition members are bound by the union s discipline an outsider can successfully export inflation without fearing that the insiders will try to do the same these gains from staying out arise even in the case of symmetric shocks

an empirical comparison of forward rate and spot rate models for valuing interest rate options our main goal is to investigate the question of which interest rate options valuation models are better suited to support the management of interest rate risk we use the german market to test seven spot and forward rate models with one and two factors for interest rate warrants for the period from 1990 to 1993 we identify a one factor forward rate model and two spot rate models with two factors that are not significantly outperformed by any of the other four models further rankings are possible if additional criteria are applied

natural resources and the tradeoff between authoritarianism and development abstract why do african and middle eastern countries seem cursed by an abundance of natural resources yet usa australia and norway seem blessed a growing literature has argued that the benevolence or malignance of natural resources depends upon the quality of institutions this paper offers a new explanation based on associational freedom and its interaction with the political system the model predicts that natural resources have an adverse impact on economic performance and transition to democracy in authoritarian regimes but not in democracies it also predicts that repression of associational freedom will be increasing in natural resources in authoritarian regimes i test the model s predictions using fixed effects regressions on an international panel from 1975 to 2000 and find support

valuation of american call options on dividend paying stocks empirical tests abstract this paper examines the pricing performance of the valuation equation for american call options on stocks with known dividends and compares it with two suggested approximation methods the approximation obtained by substituting the stock price net of the present value of the escrowed dividends into the black scholes model is shown to induce spurious correlation between prediction error and 1 the standard deviation of stock return 2 the degree to which the option is in the money or out of the money 3 the probability of early exercise 4 the time to expiration of the option and 5 the dividend yield of the stock a new method of examining option market efficiency is developed and tested

a conceptual framework for community based health insurance in low income countries social capital and economic development summary the international policy model linking community based health insurance cbhi and universal coverage for health care in low income countries is implicitly determined by the development of mutual health insurance in 19th century europe and japan the economic and health system frameworks employed in cbhi policy have not sufficiently taken into account contextual considerations social capital theories could contribute to understanding why generally cbhi does not achieve significant and sustainable levels of population coverage a framework of social capital and economic development is used to organize and interpret existing evidence on cbhi this suggests that solidarity trust extra community networks vertical civil society links and state society relations affect the success of cbhi aligning schemes to social determinants of cbhi could result in structures that differ from those proposed by current analytic frameworks

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

risk management of non maturing liabilities abstract risk management of non maturing liabilities is a relatively unstudied issue of significant practical importance non maturing liabilities include most of the traditional deposit accounts like demand deposits savings accounts and short time deposits and form the basis of the funding of depository institutions therefore the asset and liability management of depository institutions depends crucially on an accurate understanding of the liquidity risk and interest rate risk profile of these deposits in this paper we propose a stochastic three factor model as general quantitative framework for liquidity risk and interest rate risk management for non maturing liabilities it consists of three building blocks market rates deposit rates and deposit volumes we give a detailed model specification and present algorithms for simulation and calibration our approach to liquidity risk management is based on the term structure of liquidity a concept which forecasts for a specified period and probability what amount of cash is available for investment for interest rate risk management we compute the value the risk profile and the replicating bond portfolio of non maturing liabilities using arbitrage free pricing under a variance minimizing measure the proposed methodology is demonstrated by means of a case study the risk management of savings accounts

impact of human capital on joint venture investment in vietnam abstract commitments of joint venture investment in vietnam expanded rapidly during 1988 93 as foreign firms eagerly took advantage of the economy s opening this investment concentrated heavily in the metropolitan core regions nevertheless investors remained sensitive to human capital considerations controlling for income they committed greater capital to provinces with higher levels of literacy and poorer provinces outside the core also gained disproportionately the nuanced locational choices for joint venture investments suggest that vietnamese partners provided sophisticated environmental scans to take advantage of high quality labor regardless of income level projected investments favor the south somewhat disproportionately contributing to disparity in development

currency option pricing with mean reversion and uncovered interest parity a revision of the garman kohlhagen model abstract we consider a model for the pricing of currency options where the logarithm of the exchange rate exhibits mean reversion i e follows the omstein uhlenbeck process we mention reasons why exchange rates could exhibit mean reversion the domestic and foreign short interest rates are related to the logarithm of the exchange rate through uncovered interest parity under these assumptions we derive formulas for the value of a european currency option from the point of view of both domestic and foreign investors we also derive formulas for options on forward and futures contracts we compare option values computed by means of the garman kohlhagen model with corresponding results from our model it appears that our model cannot explain all instances of mispricing of currency options by the garman kohlhagen model which have been reported by previous authors the main virtue of our paper however is that we derive a simple model which incorporates clear theoretical relationship between the exchange rate and the domestic and foreign interest rates

local capacity village governance and the political economy of rural development in indonesia summary this paper develops a framework for conceptualizing local capacity to address village level livelihood and governance problems the framework is based on an analysis of asset distribution combined with an explicit analysis of the links between processes of state formation state business linkages and local forms of social capital the framework is used to discuss findings from recent research on village capacity in rural indonesia the discussion suggests that it is possible to link a political economic approach to rural development with recent conceptualizations of social capital such an analysis can illuminate the forms taken by and the effectiveness of village level collective action in ways that either purely political economy or social capital approaches do not

single factor heath jarrow morton term structure models based on markov spot interest rate dynamics this paper considers the class of heath jarrow morton term structure models where the spot interest rate is markov and the term structure at time t is a function of time maturity and the spot interest rate at time t a representation for this class of models is derived and i show that the functional forms of the forward rate volatility structure and the initial forward rate curve cannot be arbitrarily chosen i provide necessary and sufficient conditions indicating which combinations of these functional forms are allowable i also derive a partial differential equation representation of the term structure dynamics that does not require explicit modeling of both the market price of risk and the drift term for the spot interest rate process using the analysis presented in this paper a class of intertemporal term structure models is derived

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

a cyclical square root model for the term structure of interest rates this paper presents a cyclical square root model for the term structure of interest rates assuming that the spot rate converges to a certain time dependent long term level this model incorporates the fact that the interest rate volatility depends on the interest rate level and specifies the mean reversion level and the interest rate volatility using harmonic oscillators in this way we incorporate a good deal of flexibility and provide a high analytical tractability under these assumptions we compute closed form expressions for the values of different fixed income and interest rate derivatives finally we analyze the empirical performance of the cyclical model versus that proposed in cox et al 1985 and show that it outperforms this benchmark providing a better fitting to market data

participation in a currency union in any voluntary cooperative agreement the potential gain from deviation should determine the minimum influence required over common decision making this paper begins by observing that a highly asymmetric distribution of power between two partners is not sustainable if the choice variables are strategic substitutes it then studies a simple general equilibrium model of a monetary union and shows that a small economy will not take part in the agreement unless it can secure influence that is more than proportional to its size and a transfer of seigniorage revenues in its favor copyright 1992 by american economic association

bond pricing and the term structure of interest rates a discrete time approximation this paper studies the binomial approximation to the continuous trading term structure model of heath jarrow and morton 1987 the discrete time approximation makes the original methodology accessible to a wider audience and provides a computational proce dure necessary for calculating the contingent claim values derived in the continuous time paper this paper also extends and generalizes ho and lee s 1986 model to include multiple random shocks to the forward rate process and to include an analysis of continu ous time limits the generalization provides insights into the limitations of the existing empirical implementation of ho and lee s model

pricing contingent claims under interest rate and asset price risk this paper presents a general framework for pricing contingent claims under interest rate and asset price uncertainty the framework extends ho and lee s 1986 valuation framework by allowing not only future interest rates but also future asset prices to depend on the current term structure of interest rates the approach is shown to provide risk neutral valuation relationships that are consistent with the initial term structure of interest rates and can be applied to valuation of a broad class of assets including stock options convertible bonds and junk bonds

changing customary marine resource management practice and institutions the case of sasi lola in the kei islands indonesia summary sasi the spatial and temporal closure of fields forests reefs and fishing grounds is a conspicuous feature of many moluccan societies despite increasing domestic and international awareness and praise of what is considered by many analysts to be an exemplary indigenous resource conservation tradition the practice is in decline in many parts of the thousand island province and in many villages has disappeared altogether this study examines the practice of managing trochus niloticus topshell harvests in ohoirenan a village on the eastern coast of kei besar in the district of southeast maluku trochus is one of the most important sources of cash income for kei villagers and until recently for the district government as well since 1987 trochus has been classified as a protected species in indonesia and regulations have been issued to regulate the cultivation harvest and transport of this and other protected species this article briefly introduces kei customary law and property relations followed by a description of sasi and its application to reef habitats and trochus harvests examining a territorial conflict between ohoirenan and a neighboring village and more recent contention arising from government eaorts to protect the species the article explores issues of society nature and state society relations as pertain to natural resource management in indonesia sasi continues to function as an exemplary common property resource cpr management institution in ohoirenan assuring equitable distribution of the benefits deriving from controlled extraction of a local resource but erratic and uneven enforcement of one size fits all centralized conservation policy and law combined with collusion and self interest on the part of various parties combine to threaten both the resource and the institutions that have successfully and sustainably managed it in this region within the context of a centralized state led natural resource management system the national species protection precludes the establishment of sensible mutually beneficial co management regimes that could serve the interests and employ the inherent knowledge and capabilities of local communities traders and government agents 2000 published by elsevier science ltd all rights reserved

impact of state and civil institutions on the operation of rural market and nonmarket configurations abstract the approach undertaken in this study is based on the concept of configurations configurations are shaped by specific combinations of characteristics of the following elements the item transacted the actors and the underlying physical technological cultural and policy environment configurations can be either market or nonmarket configurations in turn transactions are endogenously determined within given configurations the impact of government intervention on the performance of a number of prototypical rural configurations and agrarian institutions such as the food and cash crops market configurations the farm household sharecropping and the rural official and unofficial credit markets is evaluated critically

democratic governance and sectoral policy reform tracing linkages and exploring synergies abstract effective democratic governance influences how societies and economies progress and prosper for many people in developing and post socialist countries the action and impact of democratic governance happens through sectoral reforms efforts to improve democratic governance can have strong impacts on sectoral reforms how these are implemented who participates in them at various stages and what outcomes are achieved conversely sectoral policy reforms and program interventions can serve to promote and enhance democratic governance this article discusses these linkages and provides selected examples of the synergies among them it raises the political dimension of democratic governance and offers several suggestions regarding where when and how donor agencies can intervene both to promote democratic governance and to advance sectoral policy reforms

the fruits and fallacies of neoliberalism the case of irrigation policy abstract neoliberal doctrine provides the analytic basis for a convincing explanation and critique of irrigation policy in the third world there is a strong case for subjecting capital and recurrent decisions to the discipline of scarcity pricing however it is rarely practicable to apply scarcity pricing rigorously because of the economic and technical infeasibility of volumetric water pricing in most third world irrigation schemes the taiwanese experience illustrates that political and institutional mechanisms for promoting managerial performance can be effective where the neoliberal prescription fails

attracting and retaining investments in uncertain times singapore in south east asia this paper takes a political economy approach in evaluating the state s role in investment promotion using the asian financial crisis as an opportunity to study regulatory mechanisms the paper examines both state society relations as well as relations between singapore and its neighbours indonesia and malaysia the difficult policies which singapore enacted during the crisis namely a wage cut as well as the drive to recruit foreign skilled labour in the midst of a depressed economy cannot be understood except in terms of an institutional context involving agencies interest groups and segments of society and the state s continuing ideological work and specifically within an embedded autonomy position where the state was able to fend off lobbying efforts while at the same time using its position with the unions to push for wage cuts and skilled foreign labour such embedding or nestedness was also apparent in singapore s regional relations the incorporation of the riau islands in indonesia in sub re

participation games and international environmental agreements a non parametric model abstract we examine the size of stable coalitions in a participation game that has been used to model international environmental agreements cartel formation rd based on these examples a consensus has emerged that in this kind of game the equilibrium coalition size is small except possibly when the potential benefits of cooperation are also small in this paper we develop a non parametric approach to the problem and demonstrate that the conventional wisdom is not robust in a general setting we identify conditions under which the equilibrium coalition size can be large even when potential gains are large contrary to previously examined leading special cases we show that reductions in marginal abatement costs in an international environmental game can increase equilibrium membership and we provide a measure of the smallest reduction in costs needed to support a coalition of arbitrary size

making reform work institutions dispositions and the improving health of bangladesh we examine whether local governance can improve social development empirically using good and bad cases of public health outcomes in bangladesh we explore the institutional underpinnings of service provision digging down beneath the rules of the game to analyze the beliefs understandings and dispositions that drive social behavior changes in deep social attitudes led to improvements in social indicators regional variation in health outcomes is explained by the presence or absence of a dense web of relationships that enmeshed reformers in local systems of authority and legitimacy strengthening their actions and making local society more susceptible to change

government action social capital and development reviewing the evidence on synergy abstract instead of assuming a zero sum relationship between government involvement and private cooperative efforts the five preceding articles argue for the possibility of state society synergy that active government and mobilized communities can enhance each others developmental efforts this article draws on these articles to explore the forms and sources of state society synergy i argue that synergy usually combines complementarity with embeddedness and is most easily fostered in societies characterized by egalitarian social structures ard robust coherent state bureaucracies i also argue however that synergy is constructable even in the more adverse circumstances typical of third world countries

from local strongman to facilitator institutional incentives for participatory municipal governance in latin america efforts to engage citizens in democratic forms of governance in developing societies are complicated by deeply rooted socioeconomic and political inequalities in this article the authors analyze

social capital as obstacle to development brokering land norms and trust in rural india summary based on a study of how rural land brokers mediate the arrival of a special economic zone in rural rajasthan this paper argues that theories of collective social capital cannot explain how networks norms and trust interact in a process of economic change it then reconstructs bourdieu s distinct theory of individual social capital by showing how better connected farmers are able to broker land and capture profits at the expense of fellow villagers undermining trust norms and collective action it argues that social capital is most plausibly seen as an aspect of social inequality that hinders inclusive development

a cointegration study of the efficiency of the us treasury strips market one theoretical implication of cointegration according to granger 1986 is that asset prices in an efficient market cannot be cointegrated using price data on us treasury strips with maturities from 2 15 1997 to 8 15 2015 it is found that a set of three strips series is often cointegrated in addition by setting up a costless hedge portfolio from three strips with three different maturities it is found that the hedge portfolio is often stationary and thus arbitrage opportunities are likely to occur that is because the hedge portfolio is costless and stationary cash in can be done when the value of the hedge portfolio is either positive or negative however when taking liquidity tax effects and transaction costs into consideration these arbitrage profits would be unlikely hence it is concluded that the us treasury strips market is efficient

free riding convergence and two speed monetary unification in europe this paper shows that two speed monetary unification carries a danger low inflation countries in europe have an interest in delaying entry of the high inflation country because it would raise the average inflation rate however this country might refuse to join when the first group find it qualified to that is when convergence has taken place this is because the high inflation country can employ its monetary policy to stabilize against shocks given that the currency union members have optimally chosen a lower inflation rate hence a tradeoff exists between the necessity for convergence and the free rider problem

seeking the local state gender caste and the pursuit of public services in post tsunami india summary how do ordinary citizens access the state in the world s largest democracy this paper examines a critical case from india exploring the channels formal and informal through which residents of two tsunami affected villages pursued public services following the 2004 disaster external shocks such as the proliferation of aid and ngos created moments in which individuals interacted differently with public agencies different village level groups attempted to access state resources through distinct sets of intermediaries marginalized groups women and caste minorities appeared most willing and likely to utilize formal government channels while men from the locally dominant caste turned to informal non state channels

microcredit social capital and common pool resources abstract the paper presents a conceptual scheme for understanding the impact of microcredit small loans to poor borrowers on common pool resources impacts on common pool resources are posited to occur through changes in household production and consumption the focus on women and the social capital created from group training decision making and risk bearing with the group lending techniques characteristic of many microcredit programs enhanced human and social capital can improve environmental outcomes a nonrandom survey of microfinance organizations suggests increased environmental awareness and potential cpr stewardship through microcredit but empirical research is needed to demonstrate actual impacts

learning unlearning and forgetting processes in industrial districts this paper proposes a conceptual framework on knowledge accumulation and depletion in industrial districts ids the framework introduces three types of endogenous cognitive processes namely learning forgetting and unlearning affected by internal and external dynamics such processes determine the reconfiguration of the id cognitive structure based on the expansion and contraction of local knowledge we apply the framework to three empirical cases the stoke on trent ceramic id the prato textile id and the macerata fermo footwear ids the empirical analysis describes the reconfiguration of the id cognitive structure in relation to different cross boundary relations such as the introduction of a new policy technological change and internationalisation the results inform us that the contraction of some productive specialisations through forgetting may not be just the prelude of decline but rather a condition fostering the exploration of new learning opportunities within paths of manufacturing recovery

group inequalities and the nature and power of collective action case studies from peru summary the paper explores collective action in peru through community level case studies it asks why extreme inequality between groups has persisted for so long and whether a weak propensity to collective action is part of the answer significant evidence of constructive meso level collective action is found but it is restricted by a corrupt self seeking political system the analysis shows how in relatively fragile institutional systems the poor find collective action more difficult and costly while the relatively well endowed with capabilities can manage it better shedding light on why inequality is often long lasting when only modest gains are achieved frustration is to be expected

pricing interest rate derivatives a general approach the relationship between affine stochastic processes and bond pricing equations in exponential term structure models has been well established we connect this result to the pricing of interest rate derivatives if the term structure model is exponential affine then there is a linkage between the bond pricing solution and the prices of many widely traded interest rate derivative securities our results apply to m factor processes with n diffusions and l jump processes the pricing solutions require at most a single numerical integral making the model easy to implement we discuss many options that yield solutions using the methods of the article

the market for public office why the indian state is not better at development abstract how and why officials are transferred from one post to another can in india does have far reaching consequences for the effectiveness of public service organizations such as irrigation agriculture forestry and soil conservation departments the transfer mechanism used in many departments of indian states involves a kind of internal labor market a truer market than in the way that term is often used by labor market economists it allows pressures for corrupt behavior to bear down on the incumbents of certain posts and itself amplifies those pressures frequently the pressures on officials to be corrupt cause them to behave in ways contrary to the ostensible objectives of their departments why is the indian state not better at promoting development to an important degree because of the corruption transfer mechanism and its effects on bureaucratic initiatives

pricing interest rate derivative securities this article shows that the one state variableinterest rate models of vasicek 1977 and cox ingersoll and ross 1985b can be extended sothat they are consistent with both the current termstructure of interest rates and either the currentvolatilities of all spot interest rates or the currentvolatilities of all forward interest rates theextended vasicek model is shown to be very tracta ble analytically the article compares option pricesobtained using the extended vasicek model withthose obtained using a number of other models